Sugar

The Karnataka government has issued recovery certificates against 15 sugar mills in the state for non-payment of cane dues to farmers. Going forward, the state government is likely to slap recovery certificates on more sugar mills. It may also seize stocks of factories, which do not pay cane dues. Some new notices will be issued in a day or two. As of Jul 18, mills across Karnataka owed 10.46 bln rupees to sugarcane farmers for the 2017-18 (Oct-Sep) season. Sugar mills have to make payments to farmers within 14 days of cane purchases, failing which the amount is counted as arrears. Karnataka is the third-largest producer of sugar in the country and is estimated to produce around 3.7 mln tn of the sweetener in the ongoing season.

Cane arrears on fair and remunerative price basis have nearly halved to 81.5 bln rupees as of Friday from 145.4 bln rupees during May end due to a slew of measures taken by the government to bail out the cash-strapped sugar industry. Depressed sugar price due to excess sugar production during current sugar season 2017-18 has adversely affected the financial health of sugar mills. The cane arrears on state advised price basis also came down to 166.0 bln rupees as of Thursday from 232.2 bln rupees in May. As a result of various interventions undertaken by the government, the ex-mill prices of sugar rose to 30-33 rupees a kg, thereby improving the liquidity position of sugar mills, from 24.5-26.0 rupees a kg. The excess sugar production during the current sugar season and indication of surplus production in the ensuing season has adversely affected the market sentiment due to which the ex-mill sugar prices in the domestic market have fallen sharply. The Centre has also created the buffer stock of 3.0 mln tn to help the growers and the industry.

Sugar production in Uttar Pradesh is likely to touch an all-time high of around 13 mln tn in 2018-19 (Oct-Sep), up 7.4% on year. Mills across the state have produced a record 12.1 mln tn sugar this year, surpassing the previous high of 8.8 mln tn in 2016-17. Sugar output in the state is likely to rise on the back of higher area under cane in 2018-19. As of Thursday, cane acreage in Uttar Pradesh was 2.2% higher on year at 2.31 mln ha.

Prices of sugar rose in the key wholesale markets of Maharashtra due to renewed demand from bulk buyers. Medium-grade sugar was sold at 3,540 rupees per 100 kg in Mumbai, up 5 rupees, and in Kolhapur, it was quoted 10 rupees higher at 3,415 rupees per 100 kg. Demand has improved ahead of festivals such as Janmashtami and Raksha Bandhan. So, mills have raised prices. Sugar prices in the key wholesale markets of north India, however, remained steady amid lacklustre trade. The sweetener was quoted at 3,535 rupees per 100 kg in Delhi and at 3,500 rupees in Muzaffarnagar, both largely unchanged. Prices of sugar are likely to spiral downward in the long term due to expectations of record production next season.

Ratings agency ICRA expects sugar prices to fall again on the likelihood of another bumper year of production in 2018-19 (Oct-Sep). Prices of the sweetener have recovered to around 3,350 rupees per 100 kg from a low of 2,650 rupees due to various government measures. Indian Sugar Mills Association has forecast sugar output during the next season at an all-time high of 35.0-35.5 mln tn, beating the record production of the ongoing season at 32.3 mln tn. In June, the government had asked mills to create a 3-mln-tn buffer stock of the sweetener. It had also fixed a floor price for sale of white sugar by mills at 29 rupees per kg for the ongoing season to help them clear cane arrears, which had topped 230 bln rupees in May. After the government measures and recovery in sugar prices, the arrears declined to around 178 bln rupees as on Jul 18. Further, the hike in FRP (fair and remunerative price) is likely to result in margin pressures and provide further impetus to farmers to sow sugarcane, which is likely to exacerbate the oversupply conditions. Earlier this month, the Cabinet Committee on Economic Affairs approved fixing the fair and remunerative price of sugarcane for 2018-19 (Oct-Sep) at 275 rupees per 100 kg. For 2018-19, the government has linked the cane price of 275 rupees per 100 kg to a basic recovery rate of 10% instead of the usual 9.5%, taking into account the increase in average sugar recovery from cane in the past few years. In the 2018-19 season, the government would provide a premium of 2.75 rupees per 100 kg for each 0.1 percentage point rise in recovery rate. At a recovery rate of 10%, this seasons fair price works out to be around 268.4 rupees per 100 kg, which means the effective increase in cane price for 2018-19 is nearly 2.5%.

Mills in Brazils centre-south region produced 2.39 mln tn sugar during the first fortnight of July, down 23.3% from 3.11 mln tn in the year-ago period. Mills in the region, which accounts for more than 90% of the countrys total sugar output, crushed 44.88 mln tn of sugarcane during Jul 1-15, down 6.5% on year. During Apr 1-Jul 15, mills in the region crushed 267.42 mln tn of cane, up 8.1% on year. During the same period, they produced 12.14 mln tn sugar, down 14.5% on year. Sugar production in the region during the period was lower despite the rise in crushing because mills diverted more cane towards ethanol, whose prices are more attractive than sugars.

The amount of sugarcane crushed in the first half of July in Brazils key Center-South region is expected to be 45.39 million mt, down 5.4% year on year, but slightly higher than the previous two-week periods 45.31 million mt. Despite the extremely dry weather in Center-South Brazil in July, which could have favored a good pace of crushing, some sugarcane mills were reported to have halted operations for maintenance. The cumulative cane crush thus far this season would reach 267.6 million mt, up 8.15% year on year.

Mills across the country have exported around 350,000 tn of sugar so far in the ongoing season started October. Around 350,000 tn has already crossed the border. Total export contracts are for around 400,000 tn so far. So, another 50,000 tn is also in the process. The sweetener has been shipped to west Asia, Sri Lanka, and Nepal at a freight-on-board price of nearly $320-$340 per tn. Total sugar exports from the country in 2017-18 (Oct-Sep) are expected to be around 500,000 tn, which is only a fourth of the quantity allocated by the government for the season.

The government is likely to fix the domestic sale quota for sugar mills at 2.1-2.2 mln tn for August. In June and July, the Centre had allowed mills to sell 2.1 mln tn and 1.65 mln tn of the sweetener, respectively. The quota will be higher for August than July as we expect an increase in festival season demand ahead of Janmashtami and Raksha Bandhan. In June, the government had asked mills to create a 3-mln-tn buffer stock of the sweetener. It had also fixed a floor price for sale of white sugar by mills at 29 rupees per kg for the ongoing season to help them clear cane arrears, which had topped 230 bln rupees in May.