Sugar prices tend to rise just before the festival season in India which starts from late August and continues till the end of the year. In anticipation of the rise, the government generally releases extra sugar in the market to control prices. This year too it did the same.
Earlier this month 400,000 tonne of additional non-levy sugar was released, which is over and above the previous allocation of 4.766 million tonne. The quantity of non-levy sugar also called as free sale sugar is the quota that is given to millers by the government every quarter.
Despite this rise in supply, sugar prices have been rising from Rs 27 a kg levels in June to over Rs 34 a kg currently. Two factors have contributed to this rise. First is the lack of rain in sugarcane growing belts of Maharashtra and Karnataka. These areas have received 15 per cent lower rains than normal.
Second is the government’s policy of exports. In spite of knowing that the country has received lower rainfall, the government has continued with its policy of exports. Sugar exports were freed and put under the Open General Licence (OGL) only in May 2012. Since then the country has exported 1.35 million tonne and exports are expected to touch 3.5 million tonne for the sugar marketing year ending September.
Food Minister KV Thomas has now said that this sugar year (October to September), sugar production is expected to be 23 million tonne. This compares poorly with the Indian Sugar Mills Association’s (ISMA) forecast of production of 25 million tonne for 2012-13 and end the season at 26 million tonne.
What is worrying is that continued exports and lower production will result in a lower inventory level for the next year. This will keep prices of sugar higher with the role of monsoon being extremely critical next year. Domestic sugar prices have already risen so fast that they are now higher than international prices. Fortunately, this has prevented millers from exporting further.
But news from Brazil, the main exporter of sugar is not too encouraging either with reports of a delay in harvest. This can again push up international sugar prices, especially since the US is going through one of the worst drought in recent years. There is a sharp reduction of cane production in the US, which is used mainly to produce ethanol. In order to overcome this demand, analysts feel Brazilian sugarcane will be diverted to produce ethanol rather than sugar.
With higher international sugar prices, exports can resume once again. With domestic demand in the country at 22 million tonne and production at 23 million tonne, carry forward inventory will be very low. While the food minister does not seem to be worried over current year’s demand and has ruled out imports, he was not sure about exports for the next year.
Sugar companies will thus benefit from this quarter as realisations have shot up considerably and fundamentally there is little that can dampen prices.
However, the key element that will decide future sugar prices is the total quantity that will be exported which will decide the closing stock of the current year. If there is enough buffer, price rise will be arrested, if not the government will be staring at rising sugar prices and a possibility of imports on the eve of elections.
In any case sugar companies will have much better realisations than they have had over the last two years. Sugar company stocks have started moving over the past month in anticipation of better times, but could be bought on declines.