India’s sugar cane-crushing season will begin in about a month. The monsoon had underperformed initially but has picked up momentum—the latest weather bureau data shows it to be only 1% below normal.

Sugar cane cultivation has shown a healthy trend. Relatively lower average cane procurement prices in the previous sugar season (October-September) have not affected enthusiasm among farmers for the crop.

Cane has been planted in 5.11 million hectares as of 5 August, and is up by 6% year-on-year (y-o-y), according to government data. If sugar production increases in the same proportion, then sugar produced from cane could reach a level of around 26 million tonnes (mt). It could vary, depending on the actual harvest and the sugar yield.

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Production will be one key determinant of where sugar prices could head. Considering India’s estimated sugar consumption of around 22-23 mt, this could leave a surplus of around 3-4 mt, considerably higher than last year. That alone should eliminate expectations of a runaway increase in sugar prices in the domestic market.

Another factor affecting prices will be the cane procurement cost, which sets a floor for sugar prices. Millers will negotiate for less, saying sugar prices are low and there is abundant cane, while farmers will agitate for more saying their costs are going up. The government usually interferes and works out a compromise. If the cost is stable, or lower, compared with last year’s, it will be a positive.

Exports can balance the projected glut in sugar supplies, and is, perhaps, the most important factor. Of late, the government has become more lenient in allowing exports. A freeing of exports may not happen, but export quotas may be announced more frequently.

Domestic sugar prices are down by around 8% since January, and the supply overhang may see prices turn weak. The government will not mind the situation as it helps counterbalance inflation in commodities it does not have control over, such as fruits and vegetables.

The government’s fight on inflation may overshadow the sugar sector’s prospects in fiscal (FY) 2012 as well.

Internationally, the situation appears to favour higher sugar prices. Brazil’s Unica, a sugar cane industry association, said it expects FY12 sugar production to be 6% below the previous year’s. International raw sugar futures are up by around 50% y-o-y.

As a result, exports have become more profitable for Indian companies. Ironically, a freeing of exports from India may also dampen prices. Also, if it is perceived that the government is unofficially freeing exports, prices could turn bearish.

As is often the case with India’s sugar sector, its outlook is tinged with shades of grey. Compared with the FY11 season, the situation may not worsen. Sharply higher cane output should ensure that the contribution from production dependent sources such as cogeneration of power and alcohol will go up.

Higher interest rates are a worry for the sector as they increase the carrying costs for the sector. Most sugar companies’ shares have shown a steady decline since October last. For sentiment to improve significantly, exports should be liberalized, domestic prices should remain stable, international prices should trend upwards, and the cane cost should either decline or remain stable.

That’s a tall order, and reflects in weak investor sentiment.

Graphic by Sandeep Bhatnagar/Mint

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