Sugar prices fall to lowest level in 28 months owing to distress sales

Sugar prices have declined to their lowest level in 28 months owing to distress sales by mills on account of storage problems.

Storage problems are because of a production glut this season.

With the output being 30 million tonnes by mid-April and 227 mills still in operation, the industry is now forecasting production at a record 31.5 million tonnes for the season 2017-18 as against 20.3 million tonnes during last season (October-September).

At the beginning of the crushing season, i.e. October last year, the Indian Sugar Mills Association (ISMA) had estimated sugar output at 25.1 million tonnes, and later revised it to 29.5 million tonnes. Since the output has never been this big, mills did not build storage facilities over the past few years. 

“Not only small and medium units, leading sugar producers too are selling their stocks. Renting storage facilities in far-flung areas may be expensive. Hence, distress sale is preferred,” said a senior executive of a leading Uttar Pradesh-based sugar mill.

Against the cost of production of Rs 36 a kg, sugar is trading at Rs 25.50 a kg (ex-factory) and Rs 29 a kg in the wholesale market. 

Sugar prices have declined by 10.2 per cent in April alone and 24.56 per cent since the current crushing season started in October.

Union Food Minister Ram Vilas Paswan has said an informal ministerial panel was exploring options like production-linked subsidies, imposing a sugar cess in accordance with the Sugar Cess Act and a cut on the goods and services tax (GST) on ethanol. These options are being explored to help mills clear cane arrears of Rs 190 billion.

“Considering India’s annual consumption of 25 million tonnes and 2 million tonnes of exports, which could be challenging in the next five months, the government would require to deal with the additional stock of 4.5 million tonnes over and above the normal inventory level,” said Abinash Verma, director general, ISMA.

Meanwhile, a sharp fall in sugar prices in global markets has made exports almost impossible. Under the minimum indicative export quota (MIEQ), the government has allocated sugar export of 2 million tonnes in the current season. But, sugar prices in global markets have fallen in proportion to the price decline in India. The loss to Indian mills has been Rs 10 a kg. The industry has asked for compensation.

“The success of MIEQ largely hinges on the government’s decision to further incentivise exports. The Maharashtra government is planning to provide a subsidy of Rs 5 a kg which other state governments might follow,” said Khushbu Lakhotia, Senior Analyst, India Ratings and Research.

Meanwhile, international sugar prices of around $360 a tonne in March 2018 stands at a 2.5-year low, comparable to the prices in September 2015 and is nearly 30 per cent lower than the prices in March 2017. This is because global markets have been witnessing a supply glut due to an increase in sugar production in Asia and a ramp-up of European production, following the reform of sugar quotas in September 2017. Also, the demand from the world’s largest importer China declined after the Chinese government’s May 2017 decision to increase tariffs to 95 per cent from 50 per cent on out of quota imports.

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