Sugar rising on output deficit forecast

World sugar prices in recent years have been under pressure and touched 6-1/2-year lows this year due to large supplies in the world market.

However, prices recovered in the last few months on expectation of production deficit in next two years, first time since 2009-10.

Sugar prices, on the futures market, have climbed around 32.3 per cent in the second half until now, after falling over 22 per cent during first half of 2015.

This surge in sugar prices on the National Commodities and Derivatives Exchange (NCDEX) is due to the positive steps taken by the government to increase sugar exports coupled with reports on lower production on below normal monsoon.

In November, the prices were down initially due to good start to the crushing season in the country adding to increased supply.

However, prices recovered on improved exports.

The world is experiencing the strongest El Nino since 1997, which may limit supplies from top producers Brazil, India, European Union (EU) and Thailand and may boost demand from top importers – China, Indonesia, EU and UAE.

According to latest USDA report, global sugar production for 2015-16 is forecast at 172 million tonnes (mt), down by 3 mt compared to last year.

In Brazil, the top producer, is estimated 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.

Earlier, increase in gasoline prices also boosts demand for ethanol.

In India, the second-largest producer, fears of output cut loomed large with the El Nino weather pattern. In 2015-16, sugar output is seen at 27 mt (28.30 mt), according to ISMA.

Moreover, EU production 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 tonnes due to decline in acreage.

Sugar mills are trying their best to export sugar and liquidate surplus stock, even though exports are unviable.

To reduce the stockpile, the Centre announced compulsory export of atleast 4 million tonnes in the current crushing season.

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

In another development, to reduce the payment burden of sugar mills, the government announced production-linked crop subsidies of ₹45 a tonne to the farmer.

Further, to improve the financial positions of sugar mills, the government also removed the excise duty on ethanol and decided to increase ethanol blending with petrol to 10 per cent.

We expect sugar prices to trade higher on improving market fundamentals, as the scenario is shifting from oversupply to production deficit.

Further, rising world consumption, lower ending stocks and positive policy decision for sugar sector may lift NCDEX March contracts to ₹3,000 a quintal (CMP: ₹2,833) in the next two months.

The writer is Head, Commodities & Currencies Business Equity Research & Advisory, Angel Broking Pvt. Ltd. Views are personal.