DSIJ Mindshare

Sugar May Finally Bring Sweetness In The New Year


Naveen Mathur  Associate Director of the Commodities & Currencies businesses at Angel Broking

Sugar prices in 2015 closed higher for the first time since 2011. During 2015, sugar prices touched its lowest levels in six years in July 2015 and then it recovered quite steep during the second part of the year.  Prices climbed around 32.3 per cent in the second half of 2015 after falling over 22 per cent during the first half of 2015 due to El Nino-induced weather setbacks in the top sugar producing countries. It supports the uptrend on forecast of output deficit for the next season. Domestically, the prices improved as government took some positive steps to enhance sugar exports to reduce sugar glut in the country, reports on lower production due to below normal monsoon and provided monetary benefits to the sugar mills.

Domestic glut to reduce

Indian Sugar Mills Association (ISMA) in its first advance estimate for sugar season 2015-16 has estimated production of 270 lakh tonnes (lt), which is 10 lt lower from its preliminary estimates released in July, 2015. Therefore, the supply of sugar for current year would be about 361 lakh tonnes after adding 91 lt carry over stocks on Oct. 1, 2015.

To reduce the supply glut in the country, government has made compulsory for sugar producers to ramp up exports at least 4 million tonnes in the current crushing season in September 2015.  According to Indian Sugar Mills Association (ISMA), mills have so far signed deals to export more than 600,000 tonnes of sugar, out of this nearly 300,000 tonnes of sugar has already been dispatched. ISMA is targeting 1-1.3 mt of white sugar and 2 mt of raw sugar.
[PAGE BREAK]

Government is further trying to improve trade access for Indian mills in the South Asian Association for Regional Cooperation (SAARC), such as Bangladesh and Sri Lanka


Government initiatives


Government announced production-linked crop subsidies of Rs. 45 per tonnes to farmers to reduce the payment burden of sugar mills. This subsidy is applied to those mills which export more than 50 per cent allotted export quota.

In the meantime, Sugar Cess (Amendment) Bill was passed in Parliament on December 12, 2015 which has now empowered the union government to raise the ceiling on cess from existing Rs 25 per quintal to Rs 200 per quintal. At present, central government levies a sugar cess of Rs 24 a quintal. It is expected that the government would raise cess by Rs 100 per quintal to collect Rs 2,500 crore to fund the sugar production incentive of Rs 4.50 per quintal directly to farmers.

In another development, centre has approved ethanol blending up to 10 per cent in petrol from earlier 5 per cent. To fulfil 10 per cent blending target, sugar mills are expected to double the supply of ethanol to as much as 1.3 billion litres in 2015/16. Earlier, to improve the financial condition of the sugar mills, government removed excise duty on ethanol.

Weather Impact on World Production

World is experiencing strongest El Nino effect for the first time since 1997. El Nino weather pattern usually leads to dry weather across Asia and brings heavy rains and floods in South America.  Drought has already begun to threaten production in Thailand, the number two exporting ccountry and India as weather experts across the world confirm the return of the El Nino phenomenon which may limit supplies from top producers Brazil, India, European Union (EU) and Thailand. It also may boost demand from top importers - China, Indonesia, EU and UAE.

The sugar market is expected to have its first global supply deficit in six years in 2015/16. The International Sugar Organisation's (ISO) latest projections show contraction of 1.15% year-on-year, at 169 million tonnes (mt). This fall in production is expected to coincide with a 2.2 per rise in global sugar consumption to over 172.9 mt, bringing the shortage to an estimated 3.5 mt.

Moreover, the estimate for the global output shortfall in 2016-17 is expected to be at 7.81 mt.

However, according to latest USDA report in November 2015, global sugar production for 2015-16 is expected to be at 172 mt, down by 3 mt compared to last year’s production. Brazil, the top producer, expected to produce 35 mt, down 950,000 tonnes as majority of sugarcane is expected to convert into ethanol due to increase of the mandated ethanol blend in gasoline and excess rains has cut the sucrose content in sugar cane.

Dry weather in India is threatening to cut output. In 2015-16, sugar output in India was estimated at 27 mt against 28.30 mt of previous year as per ISMA.  However, SGS SA estimates only 23 mt this year due to below normal rains. In Thailand, the production is estimated at same levels as last year at 10.8 mt but forecasted less for next year due to dryness.

Moreover, production in European Union is expected to drop by 650,000 tonnes to 16.1 mt due to lower planting and dry weather. Similarly, China, the biggest importer, is set for its smallest crop in a decade at 10.6 mt, down 400,000 tons due to decline in area.

Outlook

Domestic sugar prices at National Commodity and Derivative Exchange (NCDEX) have rebounded more than 54 percent since reaching a six-year low in July 2015 and is expected to keep rising through the first quarter of the next year.  The prospects of deficit world production due to El Nino phenomenon, government’s policy decisions to enhance exports, provision of increasing sugar cess and 100 per cent jump in ethanol blending in petrol may surge sugar prices from the current levels to Rs 3,500 per quintal or even higher in 2016.

Strategy: BUY NCDEX Sugar Mar’16 at 3170 –3240, SL – 3000, TARGET – 3400/3600 (CMP- 3220)

DSIJ MINDSHARE

Mkt Commentary28-Mar, 2024

IPO Analysis29-Mar, 2024

Expert Speak29-Mar, 2024

Mindshare29-Mar, 2024

Multibaggers28-Mar, 2024

DALAL STREET INVESTMENT JOURNAL - DEMOCRATIZING WEALTH CREATION

Principal Officer: Mr. Shashikant Singh,
Email: principalofficer@dsij.in
Tel: (+91)-20-66663800

Compliance Officer: Mr. Rajesh Padode
Email: complianceofficer@dsij.in
Tel: (+91)-20-66663800

Grievance Officer: Mr. Rajesh Padode
Email: service@dsij.in
Tel: (+91)-20-66663800

Corresponding SEBI regional/local office address- SEBI Bhavan BKC, Plot No.C4-A, 'G' Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400051, Maharashtra.
Tel: +91-22-26449000 / 40459000 | Fax : +91-22-26449019-22 / 40459019-22 | E-mail : sebi@sebi.gov.in | Toll Free Investor Helpline: 1800 22 7575 | SEBI SCORES | SMARTODR