You are using an older browser version. Please use a supported version for the best MSN experience.

Government in festival mode, wants sugar prices to stay low

LiveMint logoLiveMint 06-09-2017 Ravi Ananthanarayanan

Mumbai: When it comes to sugar, the government does not want to take any chances. The food minister tweeted that the government will decide on sugar imports soon. That’s a signal for more supply and could be a negative sign for prices.

This has come even as sugar prices have remained flat, even though the festival season has begun. Either the government is anticipating prices could flare up when the season approaches its peak, or they want to pre-empt any possibility of that happening.

Let’s look at the market conditions first. In the international market, white sugar prices have declined by 8% since July and the trend seems downward.

Raw sugar prices have not declined in this period, but are ruling flat. The domestic wholesale price of sugar has not declined but has been ruling flat, according to Bloomberg data. So far, prices are not indicating any cause for concern.

The one worry is if the supply situation turns tight. The government is keen to ensure that supply remains steady. It imposed stock limits for September and October, at 21% and 8% of the mills’ 2016-17 sugar season levels.

That means mills have to offload their sugar inventory that is above this level. Even then, the risk here is that lower output means lower sugar inventories and if demand is robust and supply lags, then prices could spike.

That could be a temporary problem but higher sugar prices, in the middle of a festival season, is a politician’s nightmare. That may partly explain the government’s view on sugar imports. This is despite the sugar crushing season being round the corner. It is just a matter of a few months before sugar from the new cane crop comes into the market.

The signs on that front are good. Government data shows that area under sugarcane cultivation has increased by 9.1% in the 2017-18 season. The two main states are doing well. Maharashtra’s cane area is up by 45%, recovering after a bad year. Uttar Pradesh’s output is up by 4%.

On the sugar import front, more clarity will emerge once the government issues the import notification. It is unlikely to be significant enough to lower prices and may be structured such that it allows the Southern sugar mills to import and process raw sugar. Their output has been hit by a poor cane crop due to bad weather. This may ease the supply stress in those markets.

A benign international price situation is conducive for domestic prices to stay lower. While India’s output is set to be higher in the 2017-18 season, Brazil’s output too has increased in the South Central region, and is up by 3.9% as of 16 August, according to data compiled by Unica, the Brazilian sugar industry association.

What does this signal for Indian sugar stocks? The government seems keen to keep prices down and that sends a signal that gains from an increase in prices in the near term appear unlikely. Nevertheless, even a situation where prices are steady is good for mills. The risk to be watched for is if a temporary spike in prices happens and that invokes a sharp policy reaction from the government, which can do lasting damage.

The focus should now shift to the next sugar season. The increase in the fair and remunerative price already indicates a cost-driven push to prices. The next trigger to watch out for is if the Uttar Pradesh government bites the bullet and signs up for a price-linked formula for buying cane in the state. That can change the prospects of UP-based mills for the better, in the longer run.

More From LiveMint

image beaconimage beaconimage beacon