Decline in sugar production to result in higher prices

The 32% hike in statutory minimum price of sugarcane may push up wholesale and retail prices of the commodity; FMC has halted futures trading in sugarAn approximate 38-39 per cent fall in domestic production this season will weigh heavy on the prices, which may rise up to Rs 25 a kg.

Rising demand and lower availability of sugar are putting pressure on prices, with the country, the second largest producer of the sweetener after Brazil, straining to meet demand. This season, sugar availability is estimated to be lower at 15-15.5 million tonnes (mt), against the annual domestic demand of 22.5-23 mt of sugar. The demand-supply mismatch is expected to grow further as cane production may be hit in the wake of poor monsoons. Experts feel this may fuel a further rise in prices.

According to Indian Sugar Manufacturers Association (ISMA), the crushing season that got over in April, fell short by 40-45 days than the average period because of lower cane availability. This is expected to lead to sugar prices shooting up in the near future.

“The production estimates for SY09E (sugar year – October 2008 to September 2009) have been lowered to 15-15.5 mt. If we add 15.5 mt to the opening inventory of 8 mt and a further 1.5 mt of imported sugar, the total available sugar in the current season would be around 25 mt against the annual domestic demand of 22.5-23 mt. The closing inventory would fall to less than two months of consumption, putting the supply side in a precarious situation for the next year”, says Ashish Kapur, CEO of Invest Shoppe India.

Raising concern over lower production, Kapur says an approximate 38-39 per cent fall in domestic production this season (SY09E) will weigh heavy on prices, which may rise up to Rs 25 per kg. The price of S grade sugar Kolhapur was trading at 22.70 per kg on NCDEX as on July 11.

“The shortage will be more acute in the current season SY10E (Oct’09 to Sept’10), due to lower production during SY09E, exhausting the opening inventory to meet the annual demand. This should keep the sugar prices firm next year as well”, he adds.
Meanwhile, the sugar industry is keenly watching the planting statistics of cane, as the delay in monsoons could affect productivity. Statistics released by the government on July 3 show sowing acreage of 42.2 lakh hectare against 43.54 lakh hectare in the same period last year.

“Although monsoons have progressed well since last week of June, several areas in Uttar Pradesh still need rains to increase acreage for sugarcane and to benefit from the already sown crop” says Mehul Agarwal, research analyst-commodities at ShareKhan. He says satisfactory rains in the coming weeks should minimise any problem of crop loss. If not, then the country might fall short of the 19-20 mt crop target this year by 2-2.5 mt and may realise only 17-17.5 mt, which is slightly higher than 14.7-15 mt in 2008-09. Also, recent rains in almost all parts of the country, except the northwest, which has significant acreage under sugarcane, is a cause of worry.

However, to tame rising prices and restrict speculation, the Forward Markets Commission recently halted futures trading in sugar from two commodity exchanges till December. As an additional step, the government is now planning to allow import of raw sugar and refined white sugar with a view to keeping prices at a reasonable level. Along with this, factories have been allowed to import raw sugar till September 3, and sell the processed sweetener within the country to meet growing demand.

Also, the Centre has announced a rise in statutory minimum price (SMP) of sugarcane by 32 per cent. This may push up retail and wholesale prices of the commodity. The government has suggested a SMP of Rs 107.76 per tonne for sugar year 2009-2010 against Rs 81.18 per tonne in 2008-09.
Looking forward, Kapur expects lower production to increase the margins of mill-owners, as shortages are likely to continue for the next couple of years, thus firming the prices of sugar. He also expects forward integration across the value chain to enhance the profitability of mill-owners on account of firm ethanol prices.

source: mydigitalfc