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Dec 20, 2017 06:59 PM IST | Source: Moneycontrol.com

Higher sugarcane crop in India & Brazil to hurt sugar companies for some time now

According to a report by ICRA, the domestic sugar production for the sugar year 2018 is likely to increase by 23 percent to around 25.0 million tonnes, driven principally by a recovery in production across India.

Shishir Asthana

Government’s move of controlling sugar price by imposing stock-holding and turnover limits on sugar dealers has worked. With a bumper crop expected in the current sugar crushing season prices of sugar have already started to move southwards.

The stockholding and turnover limits were imposed to check hoarding by unscrupulous traders who increase prices by creating artificial scarcity in the market. On account of two consecutive years of lower sugar production the government had taken various steps to control sugar prices. The stock holding and turnover limit were imposed until December this year.

Reports say that domestic ex-mill realisations have fallen to Rs 32 per kg as compared to Rs 36-38 per kg at the beginning of the season.

India is the second largest producer of sugar in the world and is expected to crush 249 lakh tonnes of sugarcane in the 2017-18 marketing year (October-September) as compared to 203 lakh tonnes in the previous year. According to a Food Ministry statement "During the current sugar season 2017-18, crushing operations in all major sugar producing states has commenced smoothly. The total sugar production is estimated to be around 249 lakh tonnes by the end of the season against estimated consumption requirement of about 250 lakh tonnes. With the carryover stock, the ministry said the total availability of sugar is sufficient to meet the estimated domestic demand."

According to a report by rating agency ICRA, the domestic sugar production for the sugar year 2018 is likely to increase by 23 percent to around 25.0 million tonnes, driven principally by a recovery in production in Maharashtra, North Karnataka and Uttar Pradesh (UP). The Indian Sugar Mills Association (ISMA) expects sugar production to touch 25.1 million tonnes.

But does this mean an end to the rally in sugar stocks?

Higher production at a time when Fair and Remunerative Price (FRP) increased will reduce the profitability of mills. According to the Indian Sugar Mills Association (ISMA) sugar production data for the current sugar season until the mid of December 2017 shows a 30 percent increase in sugar production at 6.94 million tonnes which were led by a 48 percent jump by mills in Maharashtra and 32 percent increase by mills in Uttar Pradesh.

A good monsoon resulted in a 43 percent increase in acerage in Maharashtra while UP saw an early start to the crushing season. ISMA estimates that UP is on track to cross 10 million tonnes of sugar production with better yields contributing to the increased volumes. However, mills in Karnataka and Tamil Nadu are expected to remain under pressure due to the ensuing effect of weak drought conditions in the previous year which impacted sugarcane planting.

The fortunes of sugar companies will thus depend on the location of the mills. Those in UP will benefit from higher volume and better recovery rates but a moderate increase in state-administered price for cane will have a small impact on the profitability. However, mills from Tamil Nadu and Southern Karnataka do not have the benefit of better cane availability but will be hit due to higher FRP prices.

To add to the problem of higher supply in the domestic market is the higher sugar production in Brazil despite slightly lower sugarcane production. The official Brazilian crop bureau, updating estimates made four months ago, increased its expectation by 74,000 tonnes to 39.46 million tonnes for overall domestic sugar output in 2017-18, on an April-March basis.

These data indicate a higher supply overhang in the sugar market which will keep sugar prices under pressure till monsoon data is available. Till such time sugar companies will have to live with lower profitability. However, many sugar companies had used the last two years of strong growth to deleverage, which will come in handy to see them through the current season.
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