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Sops for sugar industry may not be a one-way street

LiveMint logoLiveMint 08-06-2014 Ravi Ananthanarayanan

Investors seem to think the new government will not grudge sugar mills an increase in prices. Shares of producers shot up last week on news that a government relief package for sugar mills is on the cards. Balrampur Chini Mills Ltd’s shares rose by 15.3% over the previous week’s closing, while Bajaj Hindusthan Ltd’s price rose by 26.3%.

This followed news that the government is considering additional soft loans to sugar mills to help clear cane payment arrears to farmers, an increase in the import duty on sugar to 40% from 15%, and a higher incentive for raw sugar exports. Ironically, the industry wants prices to be freed but at the same time is seeking relief from the government.

Though investors seem to have assumed these measures are a done thing, higher sugar prices will add to inflation, an undesirable outcome for the government as it conflicts with its objective of lowering inflation.

Here’s how the incentives could help increase sugar prices: soft loans allow mills to pay farmers while holding on to inventories, which they would otherwise have to sell to raise funds to pay farmers. This is an outcome of the seasonal nature of the industry as all sugar is produced during harvest season and stocked for sale. More holding power to mills gives them better pricing power.

India imports little white sugar since ample sugar is available locally at reasonable prices. Raw sugar is imported but for conversion by some mills that are located near ports. Therefore, the increase in import duties has no immediate effect, but it gives mills a cushion to hike prices without the threat of imports becoming viable.

With imports taken care of, a higher incentive for raw sugar exports—which was cut from `3,300 per tonne to `2,277 per tonne for April and May—should result in higher exports. If all these measures are implemented simultaneously, it is reasonable to expect that prices could head up.

The international market, too, is pointing to a more balanced situation, despite an upward revision in India’s sugar production. The Indian Sugar Mills Association’s latest estimate pegs output of white sugar at 24.2 million tonnes (mt) in the current season, compared with the earlier estimate of 23.7 mt. Global sugar output is forecast to be flat during 2014-15, according to the US department of agriculture, while consumption is forecast to increase.

A balanced global market and the government’s mill-friendly measures could see prices increase.

One risk is if the rupee strengthens further against the dollar, it could blunt the edge over imported sugar. But the bigger risk could come from a sharp increase in prices. An increase in sugar prices, along with other commodities such as onion and potato, elicits a strong political response. At a time when the government wants inflation to cool so that the Reserve Bank of India can cut interest rates, an increase in sugar prices can leave a bitter taste and invite swift action.

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