Sugar glut bad news for industry, farmers
Already, the domestic market is feeling the heat with ex-mill prices at Rs3,000 per quintal, which ISMA says is Rs500 to Rs600 per quintal below the cost of production
The lack of a market-linked procurement mechanism for sugarcane is coming back to haunt the government, industry and investors. Excess output in India has coincided with higher output in Thailand, bringing down global prices. That has meant that even as domestic prices have turned weak, exports are not looking viable either. What’s worse is that state-mandated prices may mean that next season (starting October) may be no better, what with a normal monsoon forecast.
The Indian Sugar Mills Association (ISMA) had revised its sugar output estimate for 2017-18 season (starting October) up to 29.5 million tonnes. Even that may get breached it appears, as sugar output was 28.2 million tonnes as of 31 March, or a 2.4 million tonne jump over a fortnight, ISMA said 331 out of 523 sugar mills were operational, of which 187 were in Maharashtra and 111 in Uttar Pradesh.
Already, the domestic market is feeling the heat with ex-mill prices at Rs3,000 per quintal, which ISMA says is Rs500 to Rs600 per quintal below the cost of production. The government has mandated a 2 million tonne minimum export quota but global prices have fallen, due to surpluses in countries such as India and Thailand. A recent Rabobank Research report on sugar says that current world prices imply a $130-150 per tonne loss on exports, so it does not expect exports to happen. Pressure could mount on the government to provide a subsidy.
This pressure may come as farmers will be unhappy at the sizeable cane purchase arrears that are building up, between Rs16,000 crore to Rs17,000 crore as of 31 March, says ISMA. The government will not want to anger farmers when elections are on the horizon. It may have to give some financial sops for mills to export sugar from the current season’s output.
While the export quota will ease domestic supply in the current season, the industry wants a quota for the next season too. The same elections will see the government move cautiously. While it will want to ensure farmers are paid in time, it will also not want prices to spike as that will upset consumers. That can cap any increase in prices in future.
What does this mean for sugar mills in the near-to-medium term? Depressed sugar prices will see their sugar division make losses but higher volumes also mean that their distillery operations and co-generation of power will yield higher returns. Still, losses in sugar may negate those benefits to a large extent. An export subsidy from the government will become crucial as it will improve export profits and support domestic prices.
Rabobank has projected a surplus of 7.6 million tonnes of sugar (raw value) for 2017-18 and then 4.4 million tonnes for 2018-19. That signals surplus sugar for a longer period, said the report.
In the long run, there is no better substitute to a market price-linked cane price (including profits from by-products). Government intervention should be rare. Sugar mills’ shares have crashed in the past few months as investors brace for the worst. Surprises could come from by-product divisions doing better than expected, or from a substantial export subsidy supporting realizations.
Editor's Picks »
- SBI puts on sale Essar Steel loan of Rs 15,431 crore
- London copper rises on weaker dollar, China stimulus hopes
- From airport closure to IPOs, how partial shutdown is upsetting US economy
- RBI governor Shaktikanta Das to meet industry chambers tomorrow
- Singapore’s low-cost airline Scoot to expand service in India
- Why Tata Motors’ Project Charge at JLR is failing to recharge its shares
- Outlook on global profit growth worst since 2008 financial crisis
- Q3 results: ICICI Securities loses its retail broking crown
- High drug approvals to keep up pricing pressure for pharma firms
- Roads sector: Toll collections set to surge, but risks loom for developers