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BusinessLogr > Industry > Sugar: prices play supportive role, export commitment a concern
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Sugar: prices play supportive role, export commitment a concern

deep
Last updated: 2015/12/29 at 5:30 AM
deep Published December 29, 2015
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Photo: Bloomberg

These are better times for sugar stocks, which is reflecting in their shares as well. Globally, the sugar market is forecast to be in a deficit situation in 2015-16. Bad weather has affected the crop in key growing countries such as Brazil and India. Sugar prices have risen substantially since mid-September. Domestic wholesale prices are up by 10%, while global raw sugar prices are up by 18.4% and those of white sugar by 15%.

There is one cloud on the horizon. The government is pushing the industry to meet its export commitment, The Wall Street Journal (WSJ) reported on 13 December. In September, the government had asked mills to export 4 million tonnes of sugar, pro-rated based on their past production, by September 2016.

Why this commitment? Sugar mills have to pay state-mandated prices to cane growers, with the central government fixing a minimum price while some states (notably Uttar Pradesh) fix a higher price. These cane prices stayed stable or even rose while sugar prices went downhill. The government gave various incentives to mills so that they buy new cane and pay farmers their past dues.

The export quota was a means of asking mills to return the favour. The commitment would have bit off a big chunk of the nearly 10 million tonne sugar inventory from the previous season. It would also release significant working capital to pay off arrears to cane farmers. While sugar mills had accepted this commitment then, they had also said realizations were not remunerative for exports.

The government did not intend to give export sops then and prices have actually risen now. As of 3 December, sugar mills have exported 175,000 tonnes since 1 October (4.4% of the total commitment). The government may be worrying this is too little.

The government is likely to force this issue, as the objective of giving incentives was to ensure farmers get paid and mills don’t lose money. It is unrealistic to expect they will not insist. The WSJ report quotes traders as saying that prices could fall by as much as 15% if all this sugar is exported by September.

Meanwhile, domestic sugar output reports indicate comfortable trends so far, attributed to a late start last year. Output is up 24.3% till end-November, but this growth is expected to taper as the season progresses. If output is higher than expected, it will be a dampener for sure.

In Brazil, things are going as expected. Wet weather stopped harvest for 35 days between April-November, according to a release from Brazilian sugar cane industry association UNICA. Recovery rates were lower and more output was diverted to ethanol. Thus, sugar production in the season till end-November has been down by 6.4% over a year ago.

Global sugar prices have retraced a bit in the past few days, and that seems to have hurt domestic sugar firms’ shares a bit as well. They are still giving gains from earlier this year. The outlook for sugar companies looks better at where sugar prices are. The main risks for them are from India’s sugar export commitment and the current sugar season’s output being higher than expected.

[“source -livemint”]

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TAGGED: export commitment a concern, Sugar: prices play supportive role
deep December 29, 2015
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