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Sugar sector: Bitter-sweet outlook

Jul 23, 2008

With the sugar-crushing season nearly coming to an end, in this article we given an update on the recent happenings and our outlook on the sugar sector. Indian scenario: Domestic production in the sugar season October 2007 to May 2008 touched 25.4 MT, lower by 6% YoY. Fall in the area under cultivation on account of lower prices, mounting arrears and higher prices of other crops have been cited as the main reasons. The sugarcane crop output is projected to fall to as low as 21 to 22 MT next year as farmers will be encouraged to switch to grains and oilseeds.

Sugarcane output in India was an all-time high at 28.4 MT last year leading to fall in prices. This delayed the start of the crushing period and thereby lower production in the current period. Earlier, most industry players and the government were expecting India's sugar production to be at least 30 MT in FY09, 2 MT more than last year, which is now pegged at 26.3 MT (crushing is still on in Tamil Nadu, Maharashtra and Karnataka), lower by 7% from 28.5 MT in last season.

  • State wise prodcution: The 2 largest sugar producers Maharashtra and Uttar Pradesh are witnesing lower prodcution in FY09. As seen from the table, the output in Maharastra has declined by 1.2%, while Uttar Pradesh witnesed a fall of 13.7% for the Octobler to May period.

    States/ MT 2006-07 2006-07* 2007-08* % change
    Maharashtra 9.09 8.96 8.85 -1.2%
    Uttar Pradesh 8.47 8.46 7.3 -13.7%
    Tamil Nadu 2.65 2.49 2.79 12.0%
    Andhra Pradhesh 1.68 1.65 1.3 -21.2%
    Others 6.41 5.54 5.16 -6.9%
    All - India 28.3 27.1 25.4 -6.3%
    * Oct - May period.
    (% change calculated for Oct- May period)

  • Exports: India exported about 3.6 MT of sugar in the current season till May 2008 as compared to 1.7 MT in the previous year. The government had banned sugar exports in July 2006 to rein in the spiraling prices. However when the ban was lifted in January last year, the record output added to woes of the sugar mills. In recent times the government has offered the export assistance to liquidate the surplus stock in the overseas market. Indian sugar exports are likely to touch record 4.2 MT this sugar season, overtaking previous estimates of 3.5 MT.

Sugar Sector: Turning sweet?

Global scenario: Sugar exports from Australia, the world's third-largest shipper, is expected to decline this year on account of the closure of a CSR, a sugar mill, which produces about 12%, of the company's annual sugar cane crush. Further, weather changes have also led to a decline in the production. In the case of Brazil, the heavy rainfall and higher crude prices (sugar being diverted to ethanol) has led to the sugar production go down by 25% YoY. Yields per hectare on an average were down 8.9% YoY from the same period last year, while sugar yield per ton of sugarcane declined by 21.3% YoY. The sugarcane diverted towards ethanol production has increased from 58% last year to 64% in FY08.

Sugar prices: The price of sugar in India has witnessed volatile trends in recent times. While the prices rose in March 2008, on account of lower production, they declined in the subsequent months with partial removal of government aid for carrying buffer stock. The government has been compensating sugar factories the carrying cost of 5 MT of buffer stock since October 2007. However, in month of July 2008, the price increased by 8% from June 2008, on account of supply shortages and higher exports.

Cane prices: The Allahabad High Court, in July 2008, fixed the state advised price (SAP) for sugar at Rs 125/quintal in Uttar Pradesh. In other states except Uttar Pradesh, statutory minimum price (SMP) announced by central government forms the basis of pricing, which is lower than SAP. However, in Uttar Pradesh the sugar mills have been contesting for lower SAP due to their inability to pay high SAP. The high prices have affected the margins of sugar companies and led to losses in the last fiscal. The final order of the Supreme Court is awaited and may come by end of August 2008.

To conclude...
Talks are on regarding the removal of the government quota on the quantity of sugar sold by mills, which would bring some relief to the sugar producers. Also on account of lower production, prices may rise. However the higher cost of cane would continue to affect the companie's performance. Further, with the ethanol-blending programme not yet taking off, the companie's revenues would largely continue to depend on the sugar sector.

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