India, the world’s second-largest sugar producer, has been struggling with high inventories, depressed prices and a series of regulatory flip flops.

The sweetener’s prices have fallen from ₹35-36 a kg since the start of 2017-18 sugar season to ₹30/kg now, which is lower than the cost of operations for sugar mills, ₹35 per kg, leading to a build-up of cane arrears of ₹180 billion.

None of the government measures aimed at soaking up excess sugar supplies from the market seem to be working.

The recent measure of controlled sugar sale has provided some support to domestic sugar prices by squeezing supply, but that’s not enough, and the future doesn’t look bright, either, amidst global supply glut.

Global glut

Due to large increases in the output in top producing regions — India, the EU, Thailand and China in particular — the world is likely to witness an all-time high sugar production, estimated at 187.6 MMT (million metric tonnes) in 2017-18.

This will substantially exceed the estimated consumption requirements at 170.6 MMT, thereby leaving an all-time high inventory, according to the Food and Agriculture Organization. On the other hand, global sugar trade is expected to contract to 55.5 MMT in 2017-18 due to sufficient local supplies and import restrictions in major consuming markets such as China. Another contributing factor to the supply glut is the return of the EU as one of the top four exporters, following the end of EU sugar quota regime.

The benchmark sugar prices traded in New York touched a 2.5-year low in April 2018, and are still running below the cost of production, even for the most cost-efficient producers such as Brazil and Australia.

According to the Indian Sugar Mills Association (ISMA), as of June 30, the country’s sugar production stood at 32.2 MMT, which is likely to end the current sugar season with an inventory of over 10 MMT by September 2018 compared with 3.8 MMT a year ago. Uttar Pradesh and Maharashtra contributes over 70 per cent to the country’s total sugar output. Favourable monsoon, sufficient water availability in reservoirs, increased acreage and improved productivity have led these States to achieve their highest ever productivity rate of 79.2 tonnes/hectare and 108 tonnes/hectare, respectively.

The bigger worry is that the glut in the sugar sector is likely to worsen in 2018-19 as India’s sugar production is pegged at 35.5 MMT by ISMA in its preliminary report.

The government’s latest announcement to increase the fair and remunerative price (FRP) of sugarcane to ₹275 per quintal at a sugar recovery rate of 10 per cent will further incentivise the farmers to grow more sugarcane.

Yet, there are factors which can limit the slump: supportive government actions in this highly regulated sector, and monsoon getting adverse; though the latter seems unlikely if the predictions of India Meteorological Department are to be believed. However, support from the government to lift the sugar prices by another ₹4-5 per kg cannot be ruled out in the run-up to crucial State and national elections.

The government is trying hard to divert the excess sugar through export and has been successful in pushing 0.4 MMT of sugar to West Asian countries, though weak global prices will limit India’s export prospects.

Outlook

Favourable government interventions will keep the downside in sugar prices under check. But as things stand today, there’s no scope for any significant upside, especially in the short term.

Rather, higher production in the next sugar season (2018-19) will keep sugar prices under pressure, subject to the extent of government support measures and the ability of the mills to deal with increased production cost post the hike in FRP and cane payment arrears.

The writer is Vice-Presidentand Head of Agriculture,Food and Retail atIndianomics Consulting.

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