The rain gods finally heard the farmers' ceaseless prayers this south-west monsoon season but the overhang of bad monsoons in the past two years are keeping prices high.
Over the past year, retail sugar prices zoomed more than 30 per cent. Despite the Centre’s 20 per cent export duty levy to discourage sugar exports in June 2016, prices continue to hold near all-time highs. This is definitely welcome for sugar producers, who have seen their stock prices move up considerably.
So, what are the factors that drive sugar prices? First, the demand-supply situation in sugarcane — both domestic and international — plays a critical role. Second, the fair and remunerative pricing (FRP) promised to sugarcane producers determines the profit margin a sugar producer gets from his output. And third, the inventory carried from the end of the previous sugar production cycle (October to September) can dampen or stoke prices.
Domestic demand and supply
The Indian Sugar Mills Association (ISMA) estimates the sugar production in 2015-16 crushing season at 250 lakh tonnes, down from 284 lakh tonnes a year earlier. An unfavourable monsoon over the last two years was the reason for the depressed outlook. The weak monsoon in Maharashtra and Karnataka resulted in production estimates being revised downwards by close to 25 per cent in both States for 2016-17 too.
Luckily, an estimated 10 per cent higher sugar production from Tamil Nadu and Uttar Pradesh for 2015-16 is a breather. But, despite this, total production expected in 2016-17 stands at 234 lakh tonnes, around 18 per cent lower than the peak production reached in 2014-15 (284 lakh tonnes).
Global imbalances
The scenario in the global market seems no different. The demand for 2015-16 is estimated at 171 million tonnes. But because of the unfavourable El Nino event, the expected drop in sugar production is more than 7 million tonnes for 2015-16 — a magnitude of decline last witnessed in 2008-09.
With world consumption growing at an annualised 1.9 per cent over the past 10 years, the excess demand will be met from the 25 million tonnes of inventory accumulated over the last five years (2010-11 to 2014-15).
Besides, the International Sugar Organisation (ISO) continues with its grim production outlook for 2016-17. Thus, sugar prices are not expected to cool for at least one more year in the world market. The current price of benchmark sugar future contract no 11 is about 20 cents per pound, over 40 per cent higher than a year earlier.
Depleting inventory, both domestic and global, has pulled down the stock-to-use ratio (opening stock to expected demand for a year), posing significant threats to global stocks. In India, the stock-to-use ratio is expected to reach 20 per cent for 2017-18, far lower than the 38 per cent of two years ago.
Policy implications
In India, the Centre sets the Fair and Remunerative Price (FRP) to be paid to the sugarcane produce every year. The FRP is a pre-decided price set for the cane produce based on the recommendations of the Commission for Agricultural Costs and Prices.
The FRP does not require farmers to wait till the end of the season to share in the profits of the sugar mills. It is linked to a basic recovery rate of sugar with a premium payable to farmers for higher recoveries. This has been one of the most critical factors hampering the profit margin of sugar producers.
The FRP, which has seen annualised growth of over 10 per cent a year over the last five years, grew at an annualised rate of just above 4 per cent over the last two years. At the end of 2015-16, the FRP stands at ₹230 per quintal.
While the FRP has increased gradually, market prices have recorded a sharper increase. According to data from the Department of Consumer Prices, the average all-India price of sugar at the end of October 2016 is ₹41 per kg, nearly a third higher than the ₹31 per kg at the end of October 2015.
The gainers
The Centre’s decision to not revise the FRP along with a rise in the sugar price has led to a bounty for sugar producing companies. Stock prices of sugar majors such as Balrampur Chini Mills, EID Parry (India) and Dhampur Sugar Mills have increased 35-80 per cent over the last 12 months.
However, with the crushing season peaking, prices may moderate. Besides, the upcoming Assembly polls in Uttar Pradesh and Punjab should make the Centre consider a possible revision in FRP and a probable sugar import in the medium term to ease prices. This may ease the stock prices of major sugar players, albeit moderately. But given the continuing global shortage of sugar, and with India too not immune to global price volatility, a considerable decline in retail sugar prices cannot be expected any time soon.