Once engorged to peak levels, the sugar prices have recently bottomed out at ten-month low levels on weak demand due to monsoon season and anticipation of higher-than-expected sugar production this year trimming the gains of the sugar stocks on the bourses.
Recent reports suggested that spot sugar hit a fresh 10-month low on Wednesday as millers trimmed prices to buttress demand. Weak demand has left millers with significant stocks of free sale sugar, which is fixed by the government to be sold every month.
Demand from the wholesale buyers like bakery, confectionery and ice-cream makers reduced in recent months. Harakhchand Vora, vice-president of the Bombay Sugar Merchants Association was quoted by Reuters saying, Milers are struggling to sell non-levy sugar quota. Despite a sharp drop in prices, demand is not picking up due to the monsoon season.
Meanwhile in Uttar Pradesh, which is one of the key sugar growing areas in the country is already facing tough times in the sugar industry. The state industry is feared to incur loss of Rs.600 per quintal due to falling prices and over production.
Sugar prices in UP have crashed from Rs.3,800 per quintal to Rs.3,000 as the Central government allowed import of raw sugar and increased the stock limit.
The millers are faced with the double whammy on one hand the state government schemes that benefits farmers and forces mills to pay higher prices for cane, while on the other hand, central government has a consumer-oriented approach, which does not permit to raise sugar prices.
However, millers have their own argument, which says, Farmers in Maharashtra are getting lower prices despite good-quality cane. Then why forcing us to pay higher prices?
This year, cane acreage in UP is likely to touch 2.15 million hectares. The country's total sugar production is likely to be around 23 million tonnes (MT) in 2010-11. Last year the country had produced 19MT of sugar. The carry-over stock is recorded at around 3.5MT. This is also believed to pressurize prices further down.
Meanwhile, large sugar millers are facing the heat in terms of erosion in stock valuations as the stock movement of the most of the sugar stocks showed downward trend for past several trading sessions.
Bajaj group sugar leader, Bajaj Hindusthan Ltd (BOM:500032) and Dhampur Sugar Mills Ltd (BOM:500119) tumbled to their lowest levels in past three months. Both the companies witnessed over 25% erosion in stock prices during past one quarter since March.
Other sugar mills including Balrampur Chini Mills Ltd (BOM:500038), Oudh Sugar Mills Ltd (BOM:507260) and Shree Renuka Sugars Ltd (BOM:532670) also recorded heavy loss in the stock prices. Balrampur Chini and Oudh Sugar fell by over 17%, while Shree Renuka Sugars fell by over 12% during the given period.
The falling sugar prices are a favourable condition for the consumers but that turns out to be a foul cry for the millers who keep running down with the reduced earnings.
In India, sugarcane production is expected to increase by 10% to reach at 300 MT in the current year on the back of improved cane acreage and better yield.
Likewise, the global scene is also seem to be rosy for the sugar sector as Kingsman SA has revised its 2009/10 global sugar deficit downward to 7.6 MT from a previous estimate of a deficit of 11.9 MT.
Australia's raw sugar production this year is likely to rise by 5% from the last year's to around 4.5 MT on the back of increase in the volume of cane to be harvested & crushed.
On the other hand, Mexico has so far produced 4.67 million tonnes of sugar in the 2009-10 harves, 4.64% less than in the same period last year. Thailand, sugar production is believed to decline 11% in the current year.
A report from National Collateral Management Services Ltd (NCMSL) indicated that considering global and domestic sugar production scenario, the sugar prices are believed to tread in a range-bound manner.
However, the stock valuation still remains a concern as the prices have almost sunk to the bottom levels. Considering the price movement in June, 2010, the stocks are seen stabilizing at bottom levels. Hence, experts opined that there are lesser chances for further downfall in the stock prices. But a rebound in the stock valuation is possible only after the monsoon season gets over.