Government intervention a potential risk for sugar producers
The government’s intention is to ensure that speculation does not drive up prices once cane crushing ends in April
The government appears to have disagreed with the sugar industry’s contention on imports. While sugar output is now estimated at 20.3 million tonnes (mt), compared with initial estimates of 23.4 mt, the industry had opening stock of 7.75 mt. Consumption is expected to be lower due to the effect of demonetisation. Also, once crushing in the new season (beginning October) commences, supplies will improve.
The government is unwilling to take that chance. A surge in sugar consumption could see a higher-than-expected drawdown of sugar. It does not want prices to crash either, explaining why it has allowed a relatively small limit of 500,000 tonnes. If prices increase even after this measure, it may allow more imports.
As of 4 April, sugar prices were up by 8.8% over January; but they fell by 4.5%, as of 6 April, after this announcement. Shares of sugar mills weakened last week at the prospect of lower prices. That may be a premature reaction. One, mills had expected this development. Also, since crushing season is coming to a close, a Crisil Ratings note rightly points out that mills have already benefited from higher prices.
The government’s intention is to ensure that speculation does not drive up prices once cane crushing ends in April. In the current season, lower output in Maharashtra and Karnataka and the southern states was the main reason for lower output. Uttar Pradesh mills’ output is higher. However, the new sugar season (starting October) is expected to see higher cane output.
Still, a balanced market even in the next season (due to a shortfall in the current season) augurs well for sugar prices and for sugar mills.
What are the concerns?
India’s interest in imports could send global prices up. Raw sugar prices rose by 4% last week after the import announcement, and could increase further if traders expect India to import more.
That is a tricky situation for the government as higher landed costs could mean imports lose their deterrent value. It may then resort to non-tariff measures to quell rising prices, which is a risk for the sugar producers.
A new government in Uttar Pradesh is another factor to be watched. It has cracked down hard on mills defaulting on paying arrears to cane farmers. It has also called for a probe into the sale of government-owned sugar mills in 2010-11, according to news reports.
The party manifesto had also said it will seek to introduce direct ethanol production from cane. That may reduce cane availability for sugar. Its view on cane pricing will be watched for.
UP has traditionally fixed a higher price for cane, compared with the central government-determined price. That creates problems for mills, especially when sugar prices trend lower. If the new government implements a more stable pricing and operational environment, it can improve the longer-term outlook for UP-based sugar mills.
But for now, the centre’s stance on sugar pricing is the main risk that investors need to watch out for.