Sugar prices have been marching northwards for some time now, giving a high to sugar manufacturing companies. But with the sugarcane crushing season expected to peak over the next couple of months and Assembly elections in Uttar Pradesh and Punjab around the corner, prices can taper.

The high prices offered for sugarcane relative to paddy and wheat over the last six years through fair and remunerative pricing (FRP) favoured both sugarcane and sugar production. The FRP of sugarcane increased from about ₹139 per quintal in 2010-11 to ₹230 per quintal in 2015-16, an annualised growth rate of 10.6 per cent. But between 2013-14 and 2015-16, the rise in FRP has cooled to an annualised rate of 4.6 per cent per annum.

Along with the lower FRP, inadequate rains during the south-west monsoon, especially in the vital sugarcane growing regions such as Maharashtra, Uttar Pradesh and Karnataka, took a toll on sugar production over the last couple of years. Indian Sugar Mills Association (ISMA) estimates on domestic production fell from 28 million tonnes at the end of 2014-15 to about 25 million tonnes in 2015-16. ISMA estimates close to 234 lakh tonnes of sugar production in the 2016-17 season that began on October 1, 2016, around 6 per cent lower than last year.

These low production levels are expected to impact the year-end sugar inventories. With the carry-forward sugar stocks at the end of 2016-17 expected to be at a six-year low of 52 lakh tonnes, supply could be tight. Assuming that the annual demand for sugar remains flat around 250 lakh tonnes, the stock to use (opening stock to expected demand) ratio for 2016-17 and 2017-18 is expected to be 28 and 20 per cent, respectively. This is far lower than the stock to use ratio of 30 and 38 per cent maintained over the last two years. This low stock level at the start of the 2017-18 season is expected to support prices in the initial two months before the peak crushing season at the end of November cools prices.

High retail prices

Currently, according to data from the consumer affairs department, the average all-India price of sugar at the end of November 2016 is ₹41 per kg, nearly a third higher than ₹31 per kg at the end of November 2015. The average retail price per kg of sugar for November in Mumbai (₹41), Chennai (₹42.5) and Delhi (₹42) is at its all-time highs.

The poor monsoon over the last two years and a drop in harvest have sustained the consistent increase in the price of sugar. This is despite the Centre’s 20 per cent export duty levy to discourage sugar exports in June 2016.

But with the upcoming Punjab and Uttar Pradesh Assembly elections in 2017, coupled with an increase in sugar production towards the end of November, prices may be expected to cool, albeit temporarily.

Global prices too up

A similar rise in price is mirrored in global sugar prices. The benchmark sugar future contract no 11 saw a steep run-up in prices over the last year. Sugar prices nearly doubled from 12 cents per pound in September 2015 to 24 cents per pound in October 2016 before ending around 19.5 cents per pound currently. This drop in price from its peak, according to data from UNICA, the Brazillian sugarcane industry association, is due to more than 30 per cent increase by Brazil’s sugar exports during April-October 2016 and a sharp drop in Brazilian ethanol consumption in 2016.

However, as per the international sugar organisation, the 2015-16 season is expected to see the steepest fall in sugar production, around 4.3 per cent (7.3 million tonnes) compared to the year earlier. At the end of 2014-15, there was a total global sugar inventory close to 25 million tonnes. The world production for 2015-16 is estimated around 164 million tonnes. With estimates for consumption for 2015-16 at 170 million tonnes, prices could move higher. However, the 2015-16 sugar consumption growth of 1.8 per cent, lower than the 10-year average growth rate of 1.9 per cent, can provide some relief.

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