Not much upside for sugar from here

Fear of stock limits on mills and ban on futures will check price spikes

Sugar with over 32 per cent Y-o-Y growth in its wholesale prices has been one of the major culprits behind a sharp rise in food inflation by 11.82 per cent in July from 8.18 per cent in June. Sugar future prices have gained almost 50 per cent from a year before. The main reasons for the sugar price surge have been the expectation of production shortfalls and higher exports incentivised by the government. Diversion of more sugar for ethanol blending, and the forecast of global supply deficits have made a bad situation worse.

However, the upside in prices seems to have halted since April. Sugar prices have remained at ₹3,600-3,850 per quintal on account of need-based demand and sufficient stocks.

With the festive season approaching fast, the government is keeping a close watch on sugar prices. Also, NCDEX has raised buying margin for sugar futures to 45 per cent to reduce the speculative long positions. The extent of rise in sugar prices seems to be driven more by the panic created out of supply shortage caused by back to back droughts, which have severely impacted the cane plantings in major cane producing regions of Maharashtra (Solapur, Nashik and Marathwada) and northern Karnataka in 2015-16 growing season.

ISMA estimates sugar production to remain at 25.1 million tonnes (mt) for the 2015-16 sugar season with total supply being 34.1 mt (opening stock of 9 mt) against the domestic demand of 25.5 mt and export of 1.6 mt, thereby leaving a surplus of 7 mt for sugar season 2016-17.

However, the expectation of good cane yields due to above- normal monsoon till now should reduce the fear of supply shortage. The opening balance of 7 mt and expected production of 23.26 mt take the total sugar availability to 30.26 mt for 2016-17 — enough to meet the expected domestic sugar demand of 26 mt. The Government’s decision to re-impose excise duty of 12.36 per cent on ethanol (increased burden of ₹5/litre for mills) may divert more sugarcane for sugar production in the upcoming season.

However, we may face minor supply shocks in 2017-18 because of the reduced sugarcane acreage to 4.99 MHa by June end, 5.5 per cent, lower than that of 2015-16. Increased acreage in UP and Tamil Nadu has somewhat compensated the acreage loss of Maharashtra and Karnataka. The estimated opening stock of 3 mt for sugar season 2017-18 may create supply deficit in meeting the monthly demand of 2.2 mtduring the initial starting months of the crushing season.

Developments in Brazil

Global sugar prices have hardened because of expectations of demand outstripping supply in 2016 and 2017 on reduced production numbers from drought-affected India and Thailand as well as harvest interruptions in Brazil due to heavy rains. As per USDA’s latest biannual report for 2016-17, global consumption is forecast at a record 173.6 mt, exceeding production at 169.3 mt.

With the return of favourable dry weather in Brazil and mills’ preference for sugar production over ethanol, the total sugar output during April-July ‘16 has been at 16.9 mt, higher by 26 per cent Y-o-Y. Brazil is expected to produce 37.1 mt for 2016-17, 2.4 mt higher than 2015-16. Weak real, ample sugar production and expectation of continuity in Brazil’s supply will put a check on global sugar prices.

Trade policy developments

In view of the unprecedented price hike in sugar, triggered by the fall in production for 2015-16 and projection of a further decline in output for the 2016-17 season, India imposed an export duty of 20 per cent to curb exports and improve net domestic supply. Though India still maintains a prohibitive import duty of 40 per cent on sugar, the option of decreasing it to allow imports remains.

Sugar prices are not likely to rally much from the existing levels (retail: ₹42/kg; ex-mill: ₹36-37/kg), prices will remain firm in general. The festive season demand and supply crunch scenario of sugar season 2017-18 may influence millers to hold stocks and we may see temporary spikes in prices. However, with elections due in UP (leading producer) and Punjab, the Centre will try its best to control further price hike in sugar.

Thus, the fear of stock limits on mills, fixation of open market sales quota for mills, the option of reduction in import duty, and ban on futures will check price spikes. Higher sugar production from Brazil and the EU is expected to compensate for shortfalls from India and Thailand. Helped by a cheaper currency and higher domestic production, Brazil is expected to keep its supply to the world market robust.

The UP Government, eyeing elections, may go for an upward revision in State Advised Price of sugarcane that may push sugar prices a bit from the cost side.

The writer is VP and Head, Agriculture, Food and Retail at Biznomics Consulting

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