Shares of sugar makers have rallied in the last month as less-than-estimated production in the ongoing season and expectations of higher exports spelt relief for mills grappling with record output, low prices and farmer dues.
Balrampur Chini Mills Ltd., Dhampur Sugar Mills Ltd. and Dwarikesh Sugar Industries Ltd., among others, rose 7-20 percent in last one month. That compares with a 2.58 percent gain in the Nifty 50 Index during the period.
Sugar output in India, the world’s second-biggest producer, is down 35 percent year-on-year to 4.58 million tonnes as of December in the ongoing season that began on Oct. 1, according to Indian Sugar Mills Association. That’s because flooding in Maharashtra due to the extended annual monsoon, farmer protests demanding a higher price for their produce and a loan waiver hurt crops in the second-biggest growing region. Rain in Uttar Pradesh, the top producer, too, was almost 10 percent below normal.
While output is estimated to fall in India, it’s still higher than the consumption requirement. That leaves enough room for domestic companies to export. Besides, production of sugar fell in Brazil. Millers in the world’s top producer of the crop have now shifted their focus to ethanol, causing a supply deficit globally and leading to a surge in sugar prices. Prices of the sweetener in the international market have rallied nearly 15 percent from their September-low to 13.5 cents per pound.
“Following large surpluses in last two years, the world has transitioned to deficit on lower crop forecasts for India, Thailand and the European Union,” Jeff Dobrydney, vice president at JSG Commodities, a commodity broker, told Bloomberg. “In 2019-20, the global deficit is estimated at six million tonnes.”
In September, India announced a Rs 6,268-crore subsidy for export of six million tonnes of sugar during the 2019-20 marketing year. That would liquidate surplus domestic stock and help mills in clearing arrears of Rs 15,000 crore to farmers.
“We believe that mills would be able to export more sugar this year compared to last year (3.8 million tonnes in 2018-19),” Abinash Verma, director general at ISMA, told BloombergQuint. “Also, with lower sugar recovery due to damaged [crops] it seems highly optimistic that we’ll be able to meet the target set at the start of the year.”
Prakash Naiknavare, managing director at National Federation of Cooperative Sugar Factories, said Indian millers had contracted for exports of nearly 1.4 million tonnes so far this year and more such contracts would be signed in the next few months.
Another factor that would reduce excess sugar and aid millers’ earnings is production of high-margin ethanol. India hiked the procurement price of ethanol, which can be blended with petrol, as the government aims to promote use of alternative and environment-friendly fuels. Oil marketers have targeted 10 percent blending by 2022.
So far this year, mills and standalone distilleries have offered to supply 163 crore litres of ethanol to oil marketers.
“The supply of ethanol of about 73 crore litres from sugarcane juice and B-heavy molasses is almost double that of what was supplied in 2018-19,” ISMA said in a statement. “Therefore, the diversion of sugar into ethanol this season is higher.”
Watch | Why sugar stocks rallied in the last one month...
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