Sugar prices tend to rise just before the festival season in India which starts from late August and continues till the end of the year. In anticipation of the rise, the government generally releases extra sugar in the market to control prices. This year too it did the same.Earlier this month 400,000 tonne of additional non-levy sugar was released, which is over and above the previous allocation of 4.766 million tonne. The quantity of non-levy sugar also called as free sale sugar is the quota that is given to millers by the government every quarter.
Despite this rise in supply, sugar prices have been rising from Rs 27 a kg levels in June to over Rs 34 a kg currently. Two factors have contributed to this rise. First is the lack of rain in sugarcane growing belts of Maharashtra and Karnataka. These areas have received 15 per cent lower rains than normal.
Second is the government’s policy of exports. In spite of knowing that the country has received lower rainfall, the government has continued with its policy of exports. Sugar exports were freed and put under the Open General Licence (OGL) only in May 2012. Since then the country has exported 1.35 million tonne and exports are expected to touch 3.5 million tonne for the sugar marketing year ending September.
Food Minister KV Thomas has now said that this sugar year (October to September), sugar production is expected to be 23 million tonne. This compares poorly with the Indian Sugar Mills Association’s (ISMA) forecast of production of 25 million tonne for 2012-13 and end the season at 26 million tonne.
What is worrying is that continued exports and lower production will result in a lower inventory level for the next year. This will keep prices of sugar higher with the role of monsoon being extremely critical next year. Domestic sugar prices have already risen so fast that they are now higher than international prices. Fortunately, this has prevented millers from exporting further.
But news from Brazil, the main exporter of sugar is not too encouraging either with reports of a delay in harvest. This can again push up international sugar prices, especially since the US is going through one of the worst drought in recent years. There is a sharp reduction of cane production in the US, which is used mainly to produce ethanol. In order to overcome this demand, analysts feel Brazilian sugarcane will be diverted to produce ethanol rather than sugar.
With higher international sugar prices, exports can resume once again. With domestic demand in the country at 22 million tonne and production at 23 million tonne, carry forward inventory will be very low. While the food minister does not seem to be worried over current year’s demand and has ruled out imports, he was not sure about exports for the next year.
Sugar companies will thus benefit from this quarter as realisations have shot up considerably and fundamentally there is little that can dampen prices.
However, the key element that will decide future sugar prices is the total quantity that will be exported which will decide the closing stock of the current year. If there is enough buffer, price rise will be arrested, if not the government will be staring at rising sugar prices and a possibility of imports on the eve of elections.
In any case sugar companies will have much better realisations than they have had over the last two years. Sugar company stocks have started moving over the past month in anticipation of better times, but could be bought on declines.Source: http://www.business-standard.com/india/news/outlook-sugar-industry-/183998/on
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Karishma Suvarna
Sugar futures displayed bearish trade on NCDEX as speculators booked profits after recent gains. Fall in prices was also due to increased supplies in spot market. In the 2011-12 marketing year sugar mills had produced 26.2 million tonnes (MT) of sugar as against 24.42 MT in the previous year while the country’s annual domestic demand is 22 MT.
The contract for November delivery was trading at Rs 3302.00, down by 0.12% or Rs 4.00 from its previous closing of Rs 3306.00. The open interest of the contract stood at 37180 lots.
The contract for December delivery was trading at Rs 3272.00, down by 0.12% or Rs 4.00 from its previous closing of Rs 3276.00. The open interest of the contract stood at 16490 lots on NCDEX.Tulsian told CNBC-TV18, “Going by the financial performance of Shree Renuka Sugars , we have not been hearing anything on the Brazilian front that how their Brazilian sugar mills are performing because company has not been posting their consolidated numbers on a quarterly basis and that is in fact keeping us in the dark about their global operations. Secondly, they have been talking of monetising some of their assets like overseas Brazilian Cogen assets or maybe selling part of the stake because they are holding two mills in Brazil and they were looking even to exit completely from one of the assets. But nothing has been happening and this we have been hearing for last maybe 9-12 months.”
He further added, “Management has been very confident that they will be able to monetise and reduce the debt. But nothing is happening and that is keeping the domestic performance also quite dull. I don’t think that much of the hopes are seen for the sugar sector more especially when the companies are operating in states like Karnataka or maybe UP. Since this company has presence in Karnataka so definitely things are not very good going ahead for the company. So keep a level of about Rs 29-30 because since this is the only stock available in the F&O space and whenever we see the positive bias building up on the sugar sector, you will be able to see that price and there, the exit is advised.”
Sugar
Partial decontrol-a big positive
Key points
The government recently announced a couple of important decontrol measures that would transform the sugar industry's fortunes. The government has removed the levy quota obligation as well as abolished the monthly release mechanism. The removal of levy obligation will have a substantial impact on sugar companies' profitability as the decision would increase the blended realisation by Rs1.3/kg. The abolition of the release mechanism will facilitate the free play of market forces for the commodity and enable the mills to sell their inventory as per their cash flow requirements to pay to the farmers, especially during the crushing season. The government has also refrained from increasing the excise rate in spite of an increase in its subsidy burden. We believe the government has justly considered the interests of all stakeholders, ie farmers, consumers and the industry, by taking the onus of the subsidy burden on itself.
Lower production estimate for the next season (by 1-2 million tonne) coupled with the end of the harvesting season (in May 2013) should enable sugar prices to scale higher grounds in the coming months. However, the weak international prices will cap the upside in the domestic prices owing to the import parity.
Among the larger companies, we feel the efficient players should trade at par to their book values owing to the improved profitability outlook after the implementation of the decontrol measures. Thus, we continue to prefer Balrampur Chini over others as it is the most efficient player and a better company on account of its leaner balance sheet and lower dependence on the international sugar prices, which are expected to remain subdued.
In a bold move, 100-odd cash-starved private sugar mills in Uttar Pradesh have invoked a state law and told the state government that they would rather know the cane price for the season starting October before submitting their cane requirement for the year. The mills, which are yet to pay R3,243 crore to farmers for cane purchases during 2012-13 and constrained by banks’ reluctance to extend any additional loans to them, have told the government that for the new season, they can at best pay 14% less than last year’s government-fixed price of R280 per quintal.
In July, the Allahabad High Court asked the mills to pay farmers for their cane purchases within six weeks.
In a letter to the state cane commissioner, the UP Sugar Mills Association said: “In the event of fixation of a higher cane price which the mills won’t be able to pay, they will not be liable to crush the entire cane as per the reservation order because the responsibility to run the mill and crush the entire cane does not include any undertaking to incur losses, which are clearly predictable in the event of a higher cane price.”
The mills have pointed out that as per Sections 15 & 16 of the UP Sugarcane (Regulation of Supply and Purchase) Act, 1953, the cane commissioner is to reserve or assign the area of sugarcane to the sugar industry “after having the consultation with the factory/ industry…and as per the provisions of Section 17 of the Act, the industry is to make the provision for payment of the price of cane purchased by the industry”.
Earlier, the state government had written to the mills saying that if they do not submit their cane requirement by September 6, the department will assume that they have nothing to say and fix the cane areas suo motu. The industry’s sharp riposte to the fiat is in the context of mounting losses, exacerbated by cane prices being fixed at a high R280 per quintal for 2012-13 when sugar prices ruled at R3,000 per quintal. The industry repeated its constant complaint that at this high price, their cost of production exceeded R3,600 per quintal, resulting in a collective loss of over R3,000 crore for 2012-13 alone.
To tide over the crisis, the industry asked for either a cash subsidy from the government or help to get interest-free loans. “In the process of asking of the reservation/assignment proposal, the price is an important element, which is not known to the industry,” the association said.
“It must be appreciated that the industry cannot be forced to purchase the cane or to accept the reserved/assigned area, if the running of the sugar industry is not viable. There is no provision in the law that the industry should suffer the losses," said a miller, on condition of anonymity.
The normal practice is that the government earmarks the cane area — from where the mill has to procure the cane — for each mill after factoring in details of requirements submitted. Usually the state government fixes the cane price after the reserved areas are finalised.
In recent years, hefty hikes in cane prices and low crop recoveries have been bleeding sugar mills in Uttar Pradesh compared with states like Maharashtra and Karnataka. Cane prices in UP are already among the country’s highest and the mills have been seeking a rationalisation of cane pricing as a necessary step to revive the industry.
According to industry analysts, Uttar Pradesh very often uses cane price as a political tool to woo vote bases in its farming community. This has gone a long way in making the industry unviable. "The only way out of this is that Uttar Pradesh rationalises its cane price and aligns it with the value of sugar and its first-stage by-products. Only then will it benefit both the industry as well as the farmers in long run," said one of them.
In fact, the Rangarajan panel had suggested linking cane price to that of its by-products and recommended that 70% of ex-mill prices of sugar and each of its three major by-products – bagasse, molasses and press mud – be paid to farmers for cane supplies. The committee also said that the benchmark price fixed by the Centre – also called the fair and remunerative price – be the minimum price for cane purchases.
Cane price fixed by UP (state-advised price or SAP) is the highest in the country, roughly 20% higher than in central Maharashtra, while its recovery rate is among the lowest at around 9% compared with 11% in Maharashtra. The recovery rate refers to the percentage of sugar production out of the crushing of a quintal of cane. Cane price accounts for around 65-70% of the cost of producing sugar