Sugar prices are at their decade-high in New York and London on concerns over tight supply.
As reported by Mint, sugar prices have surged due to the anticipation of limited exports from India, as well as weak supplies from Thailand, Europe, China, and Mexico.
"India is one of the largest exporters of white sugar, but shipments are controlled by quotas that are almost exhausted with no real expectation of an increase," Mint quoted Soren Jensen, a longtime market observer, as saying.
Not only in global markets, but sugar prices have risen in the domestic market also. Brokerage firm JM Financial pointed out that domestic prices have risen about 7-8 percent in the last 10 days and it believes another 5-7 percent price rise is likely over the next four-six months.
This is because sugar production is likely to see a significant cut this year.
"Sugar production estimate for the current season is seeing a sharp cut – from 35.5 million tonnes (mnt) earlier to about 33mnt now – on account of lower yields and recovery rates across states, particularly Maharashtra and Karnataka (unseasonal rains)," said JM Financial.
Why are sugar prices soaring?
Sugar prices are soaring due to unfavourable weather conditions and increasing demand. Also, the outlook for sugar production this year is weak.
Arvinder Singh Nanda, Senior Vice President at Master Capital Services, underscored the drop in sugar production is mainly due to unseasonal rainfall in Maharashtra, a possible shortfall of two-to-three lakh tonnes.
Nanda added that due to less availability of sugarcane in Maharashtra and Karnataka, many mills that keep crushing sugarcane by June or July, until the monsoon arrives, have wrapped up operations early. About 71 mills in Karnataka and 190 in Maharashtra have stopped crushing. This leads to a decline in India’s overall sugar output.
Moreover, the El Nino effect has to be closely watched, as sugarcane production is more water-intensive in nature.
As Nanda said, amid El Nino fears as predicted by the US weather department, there is a sudden demand surge from industrial buyers which account for 65 percent of consumption. The coming month’s monsoon trends need to be closely watched as this will give us an indication of sugar production in the medium term.
"We believe that the market will keep an eye on how the government will hike the quota on Indian sugar exports, the allowance for which currently is six million tonnes. As the sugar companies have a commitment to ethanol blending too," said Nanda.
"If the sugar prices rise further, the government has to intervene in order to cap the prices. The outlook is quite uncertain and a close watch needs to be kept on the El Nino trend across major sugar-producing countries and on the government's decision to review the hike in sugar quota," Nanda said.
Narinder Wadhwa, National President of CPAI (Commodity Participants Association of India) is of the view that the rise in sugar prices in India is not an isolated event and is part of a global trend.
He underscored that the global sugar market has been facing various challenges such as lower production levels due to weather fluctuations, increased demand for ethanol production, and changing government policies. These factors have led to price volatility in the global sugar market, which has a ripple effect on local markets such as India.
Wadhwa said the rise in sugar prices has led to concerns about inflation, as sugar is an essential commodity used in various food products in India. The Indian government has taken measures to control sugar prices, such as imposing stock limits and increasing sugar exports.
Sugar prices may see some temporary correction due to government intervention but overall, they may remain at elevated levels for the short to medium term.
As Kayomarz Sadri, Asst. Vice President of Agri Commodities at ABans Broking Services, highlighted the government released a further quota of 2 lakh mt on April 11 which takes the total quota for the month of April 2023 to 24 lakh mt.
"After the release of the quota, the prices may see a correction temporarily but with the majority of the summer season ahead of us and in anticipation of increased demand for the marriage season in April and May, prices of sugar look good for the next two to three months," said Sadri.
Should you bet on sugar stocks?
Will lower production give a strong boost to sugar stocks?
It's unlikely, said JM Financial.
"We think an exceptional rally is unlikely given the government’s direct or indirect controls on the sugar sector (release mechanism; regulated exports; ethanol blending policy and pricing). However, the current year’s tightness and murmurs on next year’s crop will keep the sector in focus," said JM Financial.
"We continue to remain positive about the Indian sugar sector and reiterate our buy rating on Balrampur Chini with an unchanged Mar’24 target price of ₹480," said JM Financial.
Akhilesh Jat, Category Manager - Equity Research at CapitalVia Global Research, pointed out that some sugar stocks have seen decent gains in the last few days as the margins of sugar producers are expected to increase as prices rise.
Jat believes prices of the stocks are expected to rise ahead of the strong demand in the domestic market led by the increased cold-beverage and ice cream consumption and wedding season between April and June.
However, we may see some intervention from the government as the rise in sugar prices would give fillip to inflation and to counter this, the government may think to cut the export limit, which is already near 50 percent as compared to the previous year.
All this may make sugar stocks volatile in the short to medium term and only aggressive risk-takers should bet on these at this juncture.
Santosh Meena, Head of Research, Swastika Investmart, underscored that there are multiple factors at work in this sector, and stock prices remain very volatile; therefore, only aggressive investors should look into this sector.
"The long-term outlook is bullish, as cyclicality has come down due to the ethanol story and there is a demand-supply mismatch globally. However, in the near term, stock prices may remain volatile amid government intervention ahead of the election year. Our top pick will remain Balrampur Chini based on its strong balance sheet and expanding ethanol capacity," said Meena.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.
