Sugar stocks take the bitter turn

Sugar stocks appear to have lost their sweetness completely, with most of them trading near two-year lows at present.

High inventory levels, what with production at a four-year high, are mainly to blame. Indeed, sugar inventory is up 17%, the government said in reply to a question in the Lok Sabha recently.

Sugar producers have been seeking an increase in the export limit and the government has responded favourably. For the current fiscal, it has already allowed 1 million tonne to be exported and chances are another 0.5 mt might also be allowed.
Still, sugar companies are trading at new lows. What gives?

There are two reasons for this. First, after a short spurt, international sugar prices have started falling again.
Sugar prices had started moving higher on expectation of lower output from Brazil, which supplies 54% of the world output. A short dry spell has resulted in higher crushing, which has boosted mill outputs in south central Brazil, the main producing region. Initial estimates were that cane output will be lower by 11%. However, recent data show that while its cane output will indeed be lower, Brazil’s sugar output will be strong due to better quality of cane being harvested.

The demand side is also causing prices to fall. Recent reports say ships waiting to load sugar at Brazil’s main ports were less than half those lined up a year earlier. Vessels were waiting to load 1.12 million tonne of sugar compared with 2.81 million tonne a year ago.

The second reason sugar stocks are going down is the growing protests by farmers, especially in Maharashtra, to increase the advance for growing sugarcane from Rs 1,350 per tonne to Rs 2,350 per tonne. The support price for cane sugar is at Rs 2,000 per tonne, which means farmers are indirectly asking for higher cane prices.

All this can impact the margins of sugar companies further. With international prices also trading lower, it is unlikely the stocks will reverse course anytime soon.