The tide seems to have turned in favour of sugar producers. In July, India’s sugar output for the new season (which starts in October) was predicted at 35-35.5 million tonnes (mt), 10% higher than the previous year’s bumper crop. Good rains and a higher area under cane cultivation contributed to this outlook. The problem of plenty saw the government announce a slew of measures to support industry, so that farmers’ cane arrears were cleared.

But a few months down the road, dry weather and pest infestation have changed estimates. The Indian Sugar Mills Association, the industry alliance, had pegged sugar output lower at 32.2mt. That too may prove optimistic. Last week, Bloomberg reported that a study it commissioned has come up with a revised estimate of 28.9mt—That’s 6mt lower than the initial industry estimate.

Then, there is the question of ethanol production, where the government has provided for higher incentives this year. The expected increase in ethanol output will see some diversion away from sugar. That will further lower the sugar output. Chances are that this estimate will keep changing as the crushing season progresses.

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This makes for an interesting and volatile period, as a combination of variables will determine actual sugar output. At this point, it may seem like an advantage for sugar mills. On Friday, came news of the industry’s plans to export 2mt of raw sugar to China.

The government’s measures were anyway meant to lower domestic supply and support prices. The new estimates indicate a further fall in supply. Since India’s bumper crop was one of the reasons for international prices to fall, they could get some support from the revised numbers. In turn, exports should become more remunerative for domestic mills. This virtuous circle could then lead to a further cut in supply.

The net result is what sugar mills are looking for, a sustained increase in domestic price realizations. From their low levels of 27/kg in May, wholesale sugar prices have moved up to 34/kg now. Raw sugar prices have already recovered from their low levels seen a few months ago, and are ruling firm.

All signs point towards a firm trend in domestic sugar prices. Ordinarily, this should point to a good period for sugar mills. They should earn a higher margin on sugar and their distillery operations should also do well, due to better realizations for ethanol.

There is a risk, however. If prices increase too much, then the government’s stance can shift from providing support to the industry to giving relief to consumers. The government has several levers it can use to pummel prices down. With the general election due early next year, the situation can turn tricky. Sugar mill shares have done very well since September. As things stand, they seem to be in a good place. The one factor they benefit from the most, higher sugar prices, is also a key risk to watch out for.

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