Govt policy decisions hold key for sugar revival

With sugar being regulated across the value chain, the pricing and marketing mainly depend on government policies.

According to the regulations, sugar mills have to purchase cane at a fair and remunerative price (FRP) from farmers and compulsorily crush for sugar production. In India, the government decides the sugarcane floor price, also known as the FRP, which has to be paid mandatorily by sugar mills to farmers within 15 days of the commencement of crushing. Thus, mills do not have any control on cane pricing as well as on the quantity of sugar produced.

According to the latest estimate by the Indian Sugar Mills Association (ISMA), mills are expected to produce a record 26 million tonnes (mt) of sugar in the 2014-15 season to September in addition to 7.5 mt stocks carried over from the last season.

This is the fifth consecutive year that the country has produced excess sugar. Until January, mills had produced 13.5 mt – 15 per cent more than last year. Mills are aggressively selling sugar in the domestic market to clear dues to sugarcane growers. Overselling by mills and negligible exports have resulted in prices plunging to four-year lows.

So far, this year, prices on the National Commodity and Derivatives Exchange (NCDEX) have dropped by more than 4.3 per cent on ample supplies and low export demand.

Since 2011, prices have fallen over 11 per cent from ₹3,000 a quintal to ₹2,700 levels. During the same period, prices have declined by 27 per cent from the high of ₹3,600 touched in August 2012. Meanwhile, FRP has increased by 37 per cent to ₹220 a quintal in 2014-15 from ₹139 in 2010-11.

In the past, the government would offer policy support to the sugar sector to tackle the glut by raising the import duty on sugar, offer interest-free loans to sugar factories to clear cane dues, eliminate levy obligation and regulate monthly sugar release for free market sale, besides providing export incentives.

In February last year, the government announced a sugar subsidy scheme, wherein raw sugar exports up to 4 mt would enable the exporter to receive a subsidy of ₹3,300 a tonne. The subsidy was last revised to ₹3,371 for the August-September period.

During that period, about one million tonnes of raw sugar and 2.1 mt of white sugar were exported, which stabilised the sugar prices well over ₹3,000.

Currently, the country is sitting on a huge stock of sugar and needs to ship about 1.5-2 mt to help millers pay the arrears to farmers on time and repay loans to the banks.

The industry is seeking assistance from the government to tackle the situation arising out of surplus sugar. The government is considering subsidy on raw sugar exports for the ongoing marketing year.

For the current year, even though the Food Minister has approved a proposal to increase the export subsidy on raw sugar to ₹4,000 a tonne, the Cabinet is yet to approve the plan.

Sugar mills are getting increasingly anxious as only 2-3 months remain for the crushing operations to come to a halt.

If at all the subsidy is announced, sugar mills have to plan for raw sugar production for exporting to the stand-alone refineries in Asia and Africa at competitive prices.

India might have to compete with Brazil and Thailand if the subsidy decision is delayed further. Exports from Brazil are expected to start from April and Thailand is ready to export sugar.

Any policy change in Brazil, India and Thailand will affect prices in the global sugar market. Recently, a rise in fuel tax in Brazil increased the demand for ethanol as fuel, reducing sugar output.

Similarly, export subsidy in India will help clear stockpiles by exporting sugar at more competitive prices.

There is still hope that additional policy decisions such as increase in the import duty, creating buffer stocks, ethanol blending in petrol and price hikes in ration shops would buoy sugar prices from the current level of ₹2,660 a quintal for the active March contract.

The writer is Associate Director-Commodities & Currencies, Angel Commodities Broking Pvt Ltd. Views are personal.