The times are good for sugar companies. The global sugar demand-supply situation supports firm prices in the foreseeable future, which is good for profits. The fly in the ointment could be the Indian government’s eagerness to keep food inflation under check.

Wholesale data for May shows a 22% increase in sugar prices over a year ago. Globally, sugar output has been less than forecast. Of course, India is a major producer. Its sugar output has been less than expected, as dry weather affected the crop. Poor forecasting too should be to blame, as actual output was much less than originally anticipated.

As of 30 April, sugar output was down by 11% during this season at 24.6 million tonnes with only 48 mills still crushing cane. In January 2016, the Indian Sugar Manufacturers’ Association revised downwards its earlier forecast of sugar output to 26 million tonnes, from 27 million tonnes. The final number is set to fall short by another 1 million tonnes.

The government has taken some measures already. A production subsidy given to mills has been withdrawn. Stock holding limits have been imposed to improve supplies and limit hoarding. There is talk of an export duty on sugar, as exports rose sharply in FY16. More measures can follow.

Rising sugar prices have seen the performance of sugar mills improve, clearly visible in their March quarter results. This is set to continue as sugar prices continue to rule in their favour and their shares have risen in anticipation. In the past six months, Balrampur Chini Mills Ltd’s share is up by 62%, that of Bajaj Hindustan Sugar Ltd is up by 28%, and Shree Renuka Sugars Ltd’s share is up by 39%.

Government measures to control prices are a near-term risk. Good rainfall could also see the next season’s sugar output (beginning October) improve. Still, the shortfall in this season is likely to keep the balance in favour of sugar mills. Right now, global market conditions are favouring sugar prices. The next sugarcane crop may change that, so output in countries such as Brazil and Thailand should be watched. Sugar mills have not had it so good for years now. A more gradual increase in prices would have been overlooked. If beating food inflation down becomes a priority, sugar makes for a soft target.