Commodity Analysis

Govt holds key to sugar prices

Prerna Sharma | Updated on January 15, 2018 Published on March 26, 2017

PO27_Sugar

It’s not yet clear whether the government will go for import duty cut

The year 2016 saw sugar prices reaching multi-year highs (₹42-43/kg) on supply deficit in contrast with 2015, when prices plunged to a record low (₹20/kg) on excess supply.

The scaling down of production forecast for 2016/17 sugar season (October-September) by the Indian Sugar Mills Association (ISMA) for the second time, and the BJP’s clean electoral sweep in India’s largest sugar producing State (UP) have raised hopes for a favourable resolution of the issue of cane arrears. This has added to the positive sentiment for the sector.

Production deficit

ISMA, in its latest forecast, has further reduced the production estimate by 10 per cent to 20.3 million tonnes (mt) for the 2016-17 sugar season against 25.1 mt in 2015-16.

With cane crushing coming to an end (barely two of 150 mills still operating), Maharashtra’s sugar output is expected at 4.2 mt — half of last year’s production.

Karnataka, likewise, is not expected to produce more than 2.15 mt against 4 mt a year before.

Quite in contrast, the adoption of high-yielding and high-sugar recovery cane variety CO0232 by UP farmers and enhanced acreage has led to the State surpassing Maharashtra as India’s largest sugar producing State.

UP is likely to produce 8.5 mt — up 24 per cent from its 2015-16 level but still not sufficient to make up for the production deficit in drought-affected States.

Tracking the firm sentiments and to check speculation, NCDEX has increased special cash margin for all long positions to 45 per cent, taking the total margin to trade at 55 per cent.

There are increasing odds for a possible El Nino (50-55 per cent chance) flagged by Australia’s weather bureau towards the second half of 2017 and that may affect India’s sugarcane crop due for harvest in the next season.

If that happens, it will dampen the production prospects of cane and in turn sugar in 2017-18, increasing dependency on imports.

However, the IMD says that El Nino may miss the monsoon season and arrive late in India, but things will be clear only by April-May.

Demand factors

Approaching summer and the wedding season are likely to push up sugar demand, with bulk buying from the food and beverages industry, especially cold drink, juice and sweet makers. Also, the early arrival of festivals by 15 days is expected to put pressure over the running year’s stocks and thus on prices in the latter half of 2017.

On the other hand, the withdrawal of PDS sugar subsidy by the Centre to the States is likely to reduce the consumption demand this year to 24-25 mt against 25.6 mt in 2015-16.

With a consumption demand of 24.5 mt and opening stock of 7.7 mt, even if India manages to produce 20.3 mt, the current season would end with an opening stock of 3.5 mt for 2017-18.

That will not be enough to meet two months’ (October-November) consumption requirements at 4.2 mt before the new season sugar comes to market.

It’s not yet clear whether the government will go for import duty cut — though even that would help little given the not so attractive global sugar prices. However, with huge sell-offs in New York sugar futures in the last one month, import could be an option if government slashes duty or lets domestic sugar prices go up from the current levels i.e. ex-mill ₹37-38/kg.

Global factors

Raw sugar futures touched a 10-month low to trade at 17.3 cents/pound following the prospects of a record Brazilian crop and no clarity on whether India would import or not. Brazil is expected to produce 36 mt, up 4 per cent from 2015-16 as a result of diversion of more cane towards sugar (than ethanol).

This year, Russia also enters the world market as an exporter that would check sugar prices. Forecasts say the world output is set to exceed expected consumption to result in a surplus of 2 mt, subject to no significant impact from El Nino. However, Chinese supply will fall short of its demand by 1.87 mt, which will support global sugar prices.

Outlook

The domestic prices would have been higher tracking domestic supply deficit situation had the government not forced increased stock releases by the mills.

The government has also pressurised mills with threats of import duty cut and banning future trading to keep the ex-mill prices within the comfort level (below ₹40/kg). Thus, it is safe to assume prices will remain broadly range-bound with an upside of ₹2-3/kg due to approaching summer and early festival demand.

Any rise above this level is expected to induce the government to go for reduction (if not altogether removal) in import duty that will keep the upside limited.

The writer is Vice-President and Head, Agriculture, Food and Retail at Biznomics Consulting

Published on March 26, 2017

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