Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Are we nearing the end of Sugar's boom days? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jul 12, 2010

    Are we nearing the end of Sugar's boom days?

    Sugar is one of the most important commodities for consumption. In India, the sugar industry is heavily regulated by the government. This is done to prevent excessive volatility in sugar prices. However, the prices have surged in the recent past due to erratic monsoon and reduced cane acreage.

    One needs to understand the sugar cycle in order to understand the factors that govern prices. Here is our take in the same.

    Sugar cycle explained: The sugar cycle typically starts with a bumper harvest resulting in higher inventory levels. Excess supply leads to correction in prices. Declining prices pressurises the profits of sugar companies. Consequently, the millers delay payments to farmers for sugarcane procurement. As a result, farmers reduce cane acreage and shift their focus to alternative remunerative crops. This results in production shortfall leading to increase in prices. This is termed a sugar cycle upturn.

    Right now, the sugar industry in India is witnessing a cycle upturn. And since sugar cane is a long duration crop, farmers take 2-3 seasons to adjust the plantation cycle. This further aids the rise in prices. In contrast to a cycle upturn, a sugar cycle downturn is characterised by declining prices and higher production.

    Cane pricing mechanism in India: In India, the central and state governments fixe the price of sugar cane. They do this by announcing the Statutory Minimum Price (SMP, also known as Fair Remunerative Price) and State Advised Price (SAP). Major sugar producing states, such as Maharashtra and Karnataka, follow the SMP. The state of UP follows SAP. During FY09 (ended September 2009) the SMP announced by the central government was Rs 1,298 per tonne. The UP government announced SAP of Rs 1,650 per tonne during the same period. With the increase in cane pricing, farmers planted more cane which has led to minor correction in prices from their peak. It should be noted that traditionally SAP is higher than SMP. Thus mills in UP are burdened with higher cane procurement price. Higher SAP has always been a political issue. But the UP government has always maintained its stance for higher SAP. It has done so to incentivise farmers for cane cultivation. It should be noted that UP is the highest sugar cane producing state in India.

    Apart from this, sugar companies are also required to sell certain percentage of their produce through the public distribution system. This is as per the prices set by the government. In addition to this, the government also decides the stock holding limits of the bulk consumers. Thus the industry is characterised with too many regulations. We believe that the government should decide on easing some of the restrictions on the industry.

    The way ahead: Sugar production in India is likely to touch 25 m tonnes in the current fiscal. This will be over the expected 17 m tonnes due to increased planting. Even Brazil's sugar production is likely to surpass initial estimates by over 10%. Thus buoyant production estimates are likely to keep the prices under check. The government may also consider imposing import duty on sugar following increased production estimates. Thus after a secular increase in the sugar prices over the last one to one and half years, one may wonder if the sugar cycle downturn is just around the corner.



    Equitymaster requests your view! Post a comment on "Are we nearing the end of Sugar's boom days?". Click here!


    More Views on News

    GSK Consumer: On the Recovery Path (Quarterly Results Update - Detailed)

    Jun 20, 2017

    While GSK consumer reported muted revenue growth, volumes are seen to be recovering.

    ITC: Demonetisation woes pull down business growth (Quarterly Results Update - Detailed)

    Feb 8, 2017

    ITC Ltd has announced third quarter results of the financial year 2016-2017 (3QFY17). The company has reported 4.7% YoY and 5.7% YoY growth in revenues and net profits respectively. Here is our analysis of the results.

    ITC: A Decent Quarter Amidst Challenging Environment (Quarterly Results Update - Detailed)

    Dec 7, 2016

    ITC has announced second quarter results of the financial year 2016-2017 (2QFY17). The company has reported 8% YoY and 10.5% YoY growth in revenues and net profits respectively.

    Apex frozen food Ltd. (IPO)

    Aug 21, 2017

    Should you subscribe to the IPO of Apex Frozen Foods Ltd?

    ITC: Numbers Go Nowhere in FY16... (Quarterly Results Update - Detailed)

    Jun 8, 2016

    ITC declared results for the quarter and year ended March 2016. During the year, the company's net revenues and profits rise by 1% YoY and 3% YoY respectively.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms