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After two years of bumper sugarcane crop, twin factors of diversion of cane crop for non-sugar use, and deficient rains have led to a lower crop and India’s sugar output is expected to decline in the crop year starting October. Some cane growers have switched to more profitable crops such as rice, maize and oilseeds, which have higher minimum support prices (MSPs). Another factor is the delay in arrival of monsoon by two to three weeks in several sugarcane-growing states.
The Indian Sugar Mills Association (ISMA) has estimated total domestic output at about 22 million tonnes for the year ending September 2009, down almost 17 per cent from 27 million tonnes estimated this year. In fact, India is expected to report a decline in sugar output for 2009-10 as well. A fall in domestic production recently forced India’s biggest refiner Shree Renuka Sugars to purchase 30,000 metric tonnes of raw sugar from Brazil. This was India’s first overseas purchase in two-and-a-half years.
Industry officials say sugar output from Maharashtra, the nation’s main producer, could slump to as low as 5.2 million tonnes in the crop year beginning October, compared with an estimated 9.1 million tonnes in the ongoing crop year ending September. Uttar Pradesh may become India’s largest sugar producer in the year to September 2009, news agency Reuters reported a few days ago, quoting a senior official in UP Sugar Mills Association. Together, the two states are expected to produce 60 per cent of the estimated 27 million tonnes this year.
Prices
Sugar imports by India will certainly bolster global sugar prices, which have climbed about 50 per cent in the past year and are moving northwards to touch $400 a tonne. Besides, there is a decline in sugar production in Brazil as well as it is diverting more sugar cane for production of ethanol to fulfil the rising demand of the United States for fuel. London-based International Sugar Organisation (ISO) has forecast a world sugar deficit of 3.90 million tonnes in 2008-09 against a surplus of 7.25 million tonnes in 2007-08.
Domestically too, sugar prices have risen about 33 per cent in the past six months. Also, prices of ethanol, the main by-product of sugar millers, are also expected to rise given high crude prices and 10 per cent ethanol blending target by oil marketing companies. At present, ethanol is selling at Rs 18-21 a litre.
Lower domestic output is likely to keep prices firm, and millers may not get subsidy on exports or bank interests any more, which the government had announced over the last 18 months to help those with excess supplies. This expected shortfall in sugar led to a rise in sugar prices from Rs 1,500 a quintal in May to the year-high of Rs 1,970 a quintal in mid-August. Sugar output in India was at an all-time high of 28.33 million tonnes last year, leading to fall in prices due to over supply.
Saddled with a double-digit inflation for the past few months, the government may intervene to check the prices of sugar as it prepares for general elections due next year. The government has enough buffer stock, which it can pump into the market to ease prices, said a Mumbai-based analyst, who did not wish to be named. He added that while production in 2008-09 should largely meet the demand, one could expect imports of the sweetener in 2009-10.
India allows sugar mills to sell 90 per cent of their output at market rates (free-sale quota) but the government fixes the quantity and time of the sale every month. Producers are required to sell 10 per cent to the government at below-market prices (levy sugar) for resale to the poor.
To ease supplies and control price rise, the government had released free-sale quota of 900,000 tonnes for August, against 1.2 million tonnes in July. The agriculture ministry has decided to increase the free sale sugar quota for September to 1.2 million tonnes.
Challenges
Sugar exports during the crop year ending September may reach a record 4.5 million tonnes on the back of the government’s freight subsidy to sugar mills in 2007 to offload stocks from a bumper crop that year. Given the spurt in prices, agriculture minister Sharad Pawar had in February said the freight subsidy of Rs 1,350-Rs 1,450 a tonne will end from October 1, instead of April 2009.
Another important factor that the investors will keep in mind is cane pricing as it has a direct bearing on their profitability. The government sets a minimum price that sugar companies have to pay to farmers for sugarcane. The Supreme Court ruling with regard to cane price controversy involving UP Sugar Mills Association, expected on September 8, will be of great importance. Besides, higher interest rates and double-digit inflation threaten to put pressure on margins and increase project costs for companies.
Stocks
Shree Renuka Sugars, which has the highest market capitalisation among the four major sugar companies analysed below, has been the best performer in 2008. The scrip has risen 13.12 per cent year-to-date, significantly outperforming the Sensex that has lost 29 per cent. Triveni Engineer-ing has fallen more than 50 per cent — the most among these stocks.
The near-term certainly looks attractive for sugar companies, provided the government measures to cool prices do not play a spoilsport. Declining output is bound to push sugar prices up, enabling these companies to enjoy higher margins. Another positive for sugar mills is that prices of molasses have also risen significantly, giving these companies a chance to make more money from alcohol. Prospects of such gains should attract investors. Further, companies that derive a major chunk of their revenue from sugar should score over other diversified players in a high-prices scenario.
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