A poor monsoon in 2016 helped propel the market higher as sugar prices received the next booster dose. From a low of Rs 2,165 per 100 kg in July 2015 sugar prices crossed the Rs 4,000 mark by February 2017. Will this rally continue?
Sugar stocks have been trending upward since the second half of 2015 when the first indication of a crop failure was visible. A poor monsoon in 2016 helped propel the market higher as sugar prices received the next booster dose. From a low of Rs 2,165 per 100 kg in July 2015 sugar prices crossed the Rs 4,000 mark by February 2017.
Sugar producers participated in the rally giving multi-bagger returns during this period. Stocks like Dwarikesh Sugar shot up from a low of Rs 23 in August 2015 to a high of Rs 504.90 recently -- an appreciation of 22 times.
The key question is whether the party is likely to continue in future or is it over?
A simple answer is a lot depends on monsoon. Sugar as an agriculture crop is a water guzzler. It has unarguably the most sensitivity to monsoon.
Initial estimates suggest that we are headed for a normal monsoon. US Department of Agriculture (USDA) has predicted that India’s sugar production in FY17-18 would touch 25.8 million tonnes, a jump of 18 percent over last year. Indian agriculture bodies are expecting the number to be around the 25 million mark. In both the cases sugar supply is likely to exceed sugar demand of 24 million tonnes.
Sugarcane acerage in the current year has already touched 46.5 lakh hectares as of last week vs 43.9 lakh hectare last year.
Higher acerage is also on account of government introducing an 11 percent increase in Fair and Remunerative Price (FRP) for the upcoming season. This was necessitated by the government as sugar output had dropped to a seven-year low of 20.3 million tonnes in FY16-17. The problem with these government incentives is that they are hard to remove. FRP has been increased from Rs 130 per quintal in FY09-10 to Rs 255 presently. Irrespective of the monsoon FRP remains at elevated levels.
Unlike fertiliser and subsidised petroleum products, sugar industry bears the high input costs. They are unable to pass on these costs and have to absorb them or take a hit on their profitability.
Thus, if 2017-18 happens to be a good year for sugarcane crop, the industry will have to absorb the cost at a time when the price of sugar would be down. A double-whammy for the industry.
Sugar industry posted profits for the first time in seven years as sugar prices rose. But despite higher profits, the industry has not paid back the farmers, in the main sugarcane growing states of Uttar Pradesh and Maharashtra. Any drop in sugar prices is likely to result in the problem aggravating further.
To make matter worse global sugar production is also likely to be a bumper one. USDA has forecasted that world sugar production would rise to 180 million tonnes on higher account from Brazil, India, China, European Union and Thailand.
For the first time in three years world sugar inventory is likely to increase as demand is also likely to come down marginally to 171.6 million tonnes, a drop of 0.3 million tonnes. Many countries in the developed world have imposed a ‘sweet tax’ to check rising cases of obesity. Also, companies in China are increasingly using cane syrup in the final product as compared to sugar.
Headwinds are clearly visible for the sugar sector and if monsoon is normal this year, there is little reason to hold on to sugar stocks.