Sugar stockpile to put pressure on prices, sector banking on export subsidy

Even as analysts predict continued pressure on domestic sugar prices owing to projections of record opening stock for next crushing season (October-September), the industry is banking on the export subsidy announced by the Centre yesterday to bailout the beleaguered sector.

ICRA on Thursday said despite expected decline in sugar output, the pressure on sugar prices and consequent operating margins would remain in 2019-20 in the backdrop of robust sugar surplus scenario. India's ability to export sugar and policy support to divert cane production towards ethanol will be key to sustaining the health of industry, ICRA note said.

"We expect domestic sugar production in 2019-20 to decline by 14% to around 28.2 million tonnes (MT) MT from 32.9 MT last season. This will be driven by the lower production in key sugar-producing states like Maharashtra and Karnataka. In these states, the cane area has declined due to lower rainfall," ICRA Rating senior vice president and group head Sabyasachi Majumdar said.

To aid sugar industry battling falling prices, export squeeze and mounting arrears, the Cabinet Committee on Economic Affairs (CCEA) had in July 2019 approved creation of 4 MT of sugar buffer stock for a year, which was pegged to incur expenditure of Rs 1,674 crore. The reimbursement, under the scheme, would be met on quarterly basis to mills, which would be directly credited to the farmers’ account against cane dues and subsequent balance, if any, would be credited to mills.

However, sugar industry is counting on the sugar export subsidy scheme to bailout mills against the dual spectre of glut and payment commitments.

The union cabinet Wednesday approved export subsidy of Rs 10.44 per kg of sugar to enable mills ship 6 MT of sugar in next season, when the opening sugar stock is pegged at 14.5 MT. The subsidy component is likely to cost about Rs 6,268 crore and majorly aid mills to settle outstanding, which currently stand firm at about Rs 12,000 crore, including almost Rs 7,000 crore on Uttar Pradesh based mills.

“It is a big relief to sugar industry, since 6 MT would translate into sugar value of Rs 18,000 crore even if we sell at Rs 30 per kg. It reduces the stock and carrying cost accordingly, while mills get vacant storage space for new sugar,” Indian Sugar Mills Association (ISMA) director general Abinash Verma told Business Standard.

Thanking the government for acknowledging the need of domestic sugar industry, he said the expected higher cash flow to mills would result in prompter payments to farmers in the coming season. “When sugar inventory goes down, the pressure on mills to sell is also lower, while it generates cash flow for settling arrears.”

However, with internationalprices depressed, some mills have raised doubt about viabiity of the exports. Last year out of the quota of 5 million tonnes, only 3.8 million tonnes was exported. This year, though some exports should help reduce domestic availability which will help reducing glut.

The opening stock of 14.5 MT in next season is pegged at almost three times ‘normative requirement’ of 5 MT in carryover stock. Since, annual sugar requirement is around 2.65 MT, ISMA had long been demanding for allowing sugar exports to insulate industry from losses arising out of unsold inventories.

ISMA has estimated domestic cane acreage at 4.93 million hectares (MH) in 2019-20, roughly 11% lower compared to 5.50 MH last year.

Meanwhile, UP, the country’s top sugarcane and sugar producer, is estimated to have cane area of 2.36 MH, 2% lower than 2.41 MH in 2018-19. However, the state is projected to record better yield per hectare due to high yielding varieties. Sugar mills in UP are expected to start crushing by the end of October 2019.