By Ms. Pallavi Munankar, Research Analyst, Geojit Comtrade

Sugar prices in the international markets came under pressure in August, as dry weather sped - up the crushing activities in Brazil after slowdown in May and June. This increased concerns over a global surplus in the sugar markets and exerted pressure on prices. As per the data milling association Unica, Brazilian cane mills pumped out 3 million tonnes of sugar in the first half of August as dry weather led output to increase by 14 percent from a year ago for the fastest sugar-producing fortnight this year. However, sugar prices rose in the last week as technical buying at the lower levels was seen which supported prices.

Focusing on the domestic front, Sugar prices continued to rise since June and hit fresh highs in early August 2012. Increasing fears over crops output due to weak rainfall in key sugarcane growing areas, particularly in central part of Maharashtra helped further upside in prices. The central part of Maharashtra has so far received 29 percent less rains than average. Maharashtra's sugar output in 2012-13 (Oct-Sep) is expected to fall 30 percent on year to 6.3 million tonnes due to lower availability of sugarcane in the state. Sugarcane availability in the state is likely to fall to 54.5 million tonnes in 2012-13 compared with over 77 million tonnes this season. Maharashtra mills will start its sugarcane crushing activities late by one month on 1st November instead of 1st October.

Sowing of cane in most states has remained unchanged on week except in West Bengal. Higher acreage was reported in all states, barring Andhra Pradesh, Maharashtra, Karnataka, Punjab, and Uttarakhand. Area under cane in Uttar Pradesh, the largest producer of the crop in the country, was up 10 percent, while that in Maharashtra, the second largest producer, fell 6.4 percent as per the data.

Indian farmers have sown sugarcane over 5.29 million hectares so far this season compared with 5.06 million hectares a year ago, as per agriculture department data. According to latest estimates of government, India's sugar output in the new season beginning October is seen falling to 23.0-23.5 million tonnes as poor rains across the country hit cane yields. India sugar output in 2011-12 is estimated at 26 million tonnes.

In order to rein in prices during the festive season, India released 400,000 tonnes of additional non-levy sugar for the September quarter in August 2012. Prior to that, the government had released 4.5 million tonne of sugar in June and 266,000 tonne in July. Despite fall in production of sugar during the marketing year starting October 2012, due to weak monsoons, government did not halt sugar exports. Around 1.35 million tonne of sugar has been exported this year. 

Outlook

For the short-term, sugar prices in the international markets are expected to trade on a negative note as progress in harvesting process of sugarcane in Brazil will increase concerns over global surplus of sugar which will exert downside pressure on prices.

While, on the domestic front, prices are expected to trade higher taking cues from weak rainfall in the key sugarcane growing regions which may increase fears over crop production and expected demand ahead of festive season will further support prices.

Resistance and support level (short-term)

NCDEX Sugar September contract after giving a breakout above 3500 is trading near a crucial resistance of 3540 levels. If the prices breach the level of 3540 we expect levels of 3610 and 3630. If the prices take resistance at 3540 levels and reverses support on the downside is at 3440 and 3375 levels.