Will sugar retain its sweetness in 2016-17?

Strong domestic demand will limit the extent of price correction

Sugar prices surged in March and touched a 17-month high at 4.6 cents/lb at the ICE, US, after the International Sugar Organization (ISO) revised the figures for global production deficit upward. With domestic demand being relatively stable in India, sugar prices in the country are largely a function of net domestic availability (domestic production – export + import if any) and change in global supply situations or any perception about that.

Given a 14 per cent monsoon deficit and near-drought conditions (that adversely affected cane crops in Maharashtra and Karnataka), India was estimated to produce 28 million tonnes (MT) in the 2015-16 sugar season starting from October to September. However, till March end, Indian sugar mills have produced 23.7 million tonnes, down 1.1 million tonnes from last year. As on March 31, out of 366 sugar mills only 215 mills were operating, with adverse implications for overall sugar production.

With only 58 out of 135 mills operating, Maharashtra (largest producing State) has produced 8. 2 MT against last year’s 9.36 MT. Another key producing State, Karnataka has produced only 4.01 MT against 4.24 MT last year.

According to revised government estimates and ISMA, sugar production for the current year will be 25.6 MT and 26 MT, respectively, compared to 28.3 MT produced in 2014-15 — i.e. a shortfall of 2.7 to 2.3 MT.

ISMA estimates that sugar stocks at the end of sugar season 2015-16 will be 7.5 MT compared to 9.1 MT a year back. Sugar analysts opine that lower-than-average rainfall will adversely affect sugarcane production in 2016-17 in major parts of Maharashtra and Karnataka. But this shortage is likely to be well compensated by higher production from UP and Tamil Nadu. UP has increased acreage under CO 0238 variety, which gives a much higher yield and sugar recovery.

Export prospects

Besides production deficit, things started looking brighter for sugar export as international sugar prices soared by over $50/tonne. The Maharashtra government has waived the 3 per cent tax on cane purchase for mills that are able to export 12 per cent of their sugar output in the October 2015-September 2016 period.

However, the relative strengthening of the rupee vis-à-vis currencies of Brazilian real (against $) has been playing spoilsport. Moreover, since September, domestic sugar prices surged by as high as 35-40 per cent, thereby reducing the attractiveness of export markets. Since October 1, India has shipped just 1.3 million tonnes of sugar against the target of 3.2 million tonnes. Thus, the prospect of sugar exports in the near future is bleak. Government sources say that at the end of 2015-16 sugar season (October 2015-September 2016), it won’t be surprising if India’s sugar export doesn’t cross the two MT mark.

International situation

Because of unfavourable weather condition, analysts have slashed their production estimates for most sugar producing regions, including India, Thailand, EU and north-east Brazil.

A dry El Nino has reduced agricultural yield and sugar recoveries in Thailand, which is estimated to produce 10.3 million tonnes in 2015-16, in the best case scenario — a shortage of over 6,00,000 tonnes. This trend is likely to continue in 2016-17.

Again, analysts have slashed their previous estimates for Chinese sugar production by over 3,00,000 MT, from 9.5 MT to 9.2 MT. A substantial portion of India’s sugar exported to Myanmar finds its way into China informally. Hardening domestic prices mean that there will be less export of Indian sugar to China via Myanmar. On the other hand, ISO has raised its global (sugar) deficit forecast to 5 MT for 2015-16 on expectations of lower production from India, Thailand, north-east Brazil and the European Union. This is more than its November forecast of 3.5 MT. However, Brazil’s centre-south region (which accounts for over 90 per cent of the country’s production) is expected to have bumper cane production in 2016-17. Moreover, a depreciated real will make export attractive and lead to more cane diverted for sugar production than for ethanol.

El Nino-induced dry weather is expected to recede by May. A climate management company, Weather Risk Management Services has predicted above-normal and well-distributed monsoon for India after two successive droughts that will improve prospects for cane planting in 2016-17.

Outlook

Thus, prices are likely to see some correction on expectations of improved supply from Brazil, and forecast of above-normal monsoon for India in the 2016-17 sugar season. However, strong domestic demand will limit the extent of price correction. The IMD’s forecast, expected on April 20, will provide a clearer picture on the June-September rainfall and help in arriving at a more accurate estimate for next season’s sugar production.

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

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