Output fall won't push sugar prices much beyond MSP of Rs 31 per kilogram

In the 2018-19 season, the government had facilitated creation of a 3 million tonnes sugar buffer stock
The country’s sugar production is projected to fall to below 30 million tonnes in 2019-20, the lowest in the last three years, due to drought in several key growing states.

However, even that won’t be good enough to push up prices much beyond the minimum sale price of Rs 31 per kilogram because of an overhang of record inventories.

From the government side, there is a move to create fresh sugar buffer stock of 5 million tonnes to absorb the surplus with an expenditure of around Rs 2,100 crore for the 2019-20 season.  But industry players said that too won’t work and the only solution lies in subsidised exports of over 7 million tonnes by November 2019.

This could also spell bad news for farmers who are looking forward to early clearance of their sugar cane dues totalling around Rs 19,000 crore as on June 18, a significant portion of which accrues to UP farmers.

“Currently, by normal demand-supply matrix, sugar sale price should be somewhere around Rs 26-27 a kilogram, but because of the rule that the sweetener can’t be sold below Rs 31 a kilogram, we are forced to sell above this price. The projected drop in production will only push this (demand-supply) matrix near the minimum price but not much beyond that,” a senior industry official said. Madan Sabnavis, chief economist at CARE Ratings, in a research note, said the surplus situation is likely to keep domestic sugar prices under pressure.

“We expect sugar prices to remain range bound or increase moderately in the range of Rs 34-Rs 35 per kg in the coming months,” Sabnavis said. Current average sugar prices are in range of Rs 33-34 a kilogram.

Officials said in October 2019, sugar mills in India would be saddled with stocks in excess of 14.5 million tonnes, which will be roughly three times more than the normal opening stock of sugar and the highest in more than nine years (see chart).

And therefore, unless big exports are facilitated in the next 3-4 months, it would be difficult to push up prices much above the minimum sale price despite an expected a drop in production in 2019-20.

In the 2018-19 season, the government had facilitated creation of a 3 million tonnes sugar buffer stock with an expenditure of around Rs 1,550 crore. The validity of the buffer stock expired on June 30.

“With such high inventory levels, unless a proper WTO-compliant export package is framed, it would be difficult to generate adequate cash flows to pay off the farmers,” a senior industry official said.

He said the incentive package for export should be announced quickly. Otherwise, mills would lose out on the opportunity to export sugar in the world market. The mills are demanding that the government fix an export quota of 7 million tonnes in 2019-20, against 5 million tonnes in the 2018-19 season. They also want a proper incentive package, which is compliant with the WTO.

“The world sugar market is expected to see a deficit of about 4 million tonnes after two surplus years due to shortfall in production in India, Thailand and some other countries. So, Indian sugar would be needed from November. Hence, if we miss this opportunity, it would be difficult to push exports,” the official said.

Ideally, the export incentive scheme should come by next month, so that there is ample time for the mills to formalise export commitment and ship the sugar by November, when the world demand peaks, he added.

In the current sugar season of 2018-19, too, mills would export around 3.5 million tonnes against the allocated quota of 5 million tonnes.

“Conditions imposed by the government and the quantum of incentives announced weren’t sufficient enough to encourage mills to enter into export commitments. This is why the quota remained unfulfilled,” the official said.

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