Sugar companies will be looking forward to a brighter outlook in the October 2010 to September 2011 period after the drubbing they got last year.

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Around this time last year, sugar producers were sitting pretty as sugar prices were shooting through the roof on predictions of a lower cane crop. Sugar prices crossed Rs40 per Kg level in January. But they subsequently crashed, as the industry had underestimated the actual cane output, which turned out to be nearly 50% higher than expected. Besides, the government clamped down on sugar firms through several policy measures to keep sugar prices under check.

This time around, sugar producers are more cautious and so are investors, who burnt their fingers last year on sugar stocks. Sugar companies are being cautious about procuring cane at a higher price and then watch sugar prices fall off the chart.

Recent news reports talk about how sugar mills in Uttar Pradesh and Karnataka, two key sugar producing states, are going slow on crushing, due to a disagreement on the procurement price for cane. Last year, cane farmers were paid as high as Rs60-270 per quintal in Uttar Pradesh, despite a state advised price of Rs165 per quintal.

This year, the price has risen to Rs205, and even as farmers are holding out for more, mills are looking to pay lower prices. Else, they need to be certain that sugar prices would rise adequately for them to make money, after having procured cane at high prices.

Sugar prices have recovered from their lows, and in Mumbai are trading at about Rs30 per kg in the wholesale market, compared with the previous season’s low of about Rs26 a kg. But they are nowhere near the previous season’s high level. In the forthcoming season, sugar mills’ performance will depend more upon their cane procurement price and volumes, apart from the usual factors of government policy and the international market.

The news is good on the volume front, as cane output is expected to be about 25 million tonnes (mt), up 25% over last year’s output of 20.5 mt. Higher crushing will also mean better volumes on by-products such as co-generated power, industrial alcohol and ethanol. Sale of these products along with sugar will determine the margins earned by large sugar producers.

Internationally, Brazil is a key factor and in the sugar season till the first half of November in south central Brazil, production is up by about 22% over the same period last year. But the international market is not expected to be in a surplus due to weather-related issues in several countries. Sugar companies expect the demand-supply situation to be matched, and India’s higher output is not expected to lead to any disruptions in the global trade. However, if sugar exports are freed, it could impact global prices.

The key factor to watch for is government policy, and how that influences the movement of sugar prices. While the situation for sugar companies has improved compared with last year, the uncertainties have not entirely gone away. That calls for continued caution for investors seeking to invest in sugar stocks, till clarity on the price situation emerges.

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