Impact Analysis- Sugar Exports ::Angel Broking

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Snapshot
Sugar Exports permitted for 2011-12 season
Mills profit margins to improve on exports
Decision on India's sugar exports dampens global prices
Decision to scrap sugar stock limit
Delayed cane crushing operations to pick up after export decision
Analysis
 The Empowered Group of Ministers (EGoM) on Tuesday, 22nd November, 2011, allowed exports of 1 million
tonnes of Sugar for 2011-12 season (Oct-Sep). The decision would help Indian Sugar mills to take advantage of
competitive global prices and offset a rise in input costs.
 Further, the exports will help reduce mills inventory, cost of carrying extra sugar and check chances of distress
sale and will improve the cash flows of mills, which will in turn help them make timely payment to farmers
during the crushing season 2011-12.
 Although industry was expecting government to permit Sugar exports between 3-4 million tonnes, the
government decided against it to strike a balance between the interests of farmers, consumers and millers.
 The Brazil white Sugar prices have declined to $ 657/tonne (FOB) last week ended 19th Nov, 2011 compared to
$680-685/tonne (FOB), in the previous week. Current offer price stands at Rs 34,230/tonne in Rupee terms
compared to current domestic price of Rs 31,000 /tonne (FOB). Sugar exporters may thus gain premium of more
than Rs 3200/tonne of Sugar.
 However, India’s move to allow exports may increase Sugar supplies globally thereby pushing global Sugar prices
downward. If global Sugar prices decline sharply below $ 600/tonne, Indian exports may turn unviable. Thus,
Sugar exports remain profitable only if global Sugar prices sustain above $ 600/tonne.
 Besides Brazil, India also competes with Thailand, which is the second largest Sugar exporter. Sugar mills from
Thailand had started their cane crushing operations for 2011-12 after some minor delays caused by floods..
Meanwhile, crushing activities by mills will pick up next month which will increase the supplies globally and will
put some pressure on prices.
 On the back of higher Sugar output estimates of 26 million tonnes, Indian government also decided not to
extend the stock limit on Sugar that traders can hold at any point of time beyond November, 2011. Currently
traders were not allowed to stock more than 500 tonnes of Sugar at a time. The government move to remove
stocks limit is positive for Indian Sugar prices.
 Sugarcane crushing was delayed in the two major Sugar producing states, Maharashtra and Uttar Pradesh due to
dispute over cane pricing, Although the same has been resolved in Maharashtra, the dispute in Uttar Pradesh is
still on as farmers are demanding more hike in SAP (State Advise Price) so as to improve their profits. This has
led to delay in crushing operations in UP. The operations will likely pick up after the export decision and be in full
swing within a week.
Outlook
Sugar prices touched an upper limit of 3 percent today (November 23, 2011) as government allowed Sugar exports of
1 million tonnes. Although export to the tune of 1 million tonnes is very low, it is still higher from the market
participant’s expectations of 5 lakh tonnes in the first tranche. Indian Sugar prices are expected to gain further by Rs.
150-170 per qtl from the current level of Rs 3030 on export decision. However, crushing which was delayed by
almost 1 month in UP on the back of cane price disputes, is expected to commence in full swing in the coming weeks.
Thus, sharp gains may be capped in the long term owing to sufficient supplies in the domestic markets.
Also, if global prices decline sharply on supply pressure from India and Thailand, then Indian exports might turn
unviable thus restricting major upside in prices. Sugar prices in the Indian markets are expected to trade in the range
of Rs 2900- Rs 3200 per qtl in the coming month. If, government allows further exports, then prices may breach even
Rs 3200 per qtl in the long term.