When sugar companies report their results for the December quarter, investors will be more interested on their outlook for sugar prices. Companies are expected to do well as rising sugar prices contribute to higher profits. In recent weeks, sugar has been in the news as prices touched new highs. The share prices of producers such as Bajaj Hindusthan Ltd and Balrampur Chini Mills Ltd have been rising, up by 6% and 5%, respectively, in a week’s time.
Sugar mill delivery prices have risen by nearly 100% over a year ago, and are up nearly 40% since October. In the 2009-10 sugar marketing season (Oct-Sep), India’s sugar production is estimated to improve a bit over the previous year’s level of 15 million tonnes (mt), but still fall short of the 23 mt needed to meet domestic consumption. The International Sugar Organisation has estimated sugar production to increase by 4.5% to about 160 mt, about 7 mt short of demand. The full effect of this deficit is being felt on sugar prices.
But sugar prices may be entering volatile territory. In the industry, production plays a bigger role in determining price expectations. India and Brazil were the two main reasons for production slumping. Some years ago, Indian farmers shifted from cane to other crops such as wheat or paddy, as they got better prices. In addition, a poor monsoon played havoc with output. Brazil, too, suffered from bad weather. Higher prices will lead to more cane being planted in India and perhaps in other countries too.
The monsoon’s effect cannot be predicted, however. A tight market will put a floor under sugar prices but factors such as government intervention and forecasts on next year’s output will start reflecting in prices. That could mean more volatility in sugar prices and shares of sugar companies in fiscal 2011. Sugar mills will be sitting on sugar inventory produced by purchasing cane at much higher prices than in the previous year, so a moderation in prices will make investors nervous.
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