Sugar prices have been steadily declining and are now back to 32.25 rupees a kg at the Delhi wholesale market.
That was last seen in June last year. Prices are down by 8% since early 2013 and are down by 15.7% from a year ago. Festival demand appears to have not been adequate to prop up prices. Adequate supply of sugar at a time when international prices have declined puts a question mark on the industry's performance in the forthcoming sugar season that begins in October.
The industry has demanded that import duties be doubled to 30%. That is in response to a higher than expected surplus in the global sugar market due to good output in many major sugar-growing countries such as Brazil. Raw sugar prices have declined by 15.3% in 2013 so far. That keeps a lid on domestic sugar prices, as mills seek to remain competitive versus imports.
The domestic market has another factor to contend with-higher than expected sugarcane output. The area covered by sugarcane in the kharif season has declined by 2.6%, according to the government. But good rains have led to fears that the actual cane harvest and even sugar recoveries may be higher. More clarity on these factors will emerge as the season progresses.
If demand and supply worries are not enough, political uncertainty is next in line. General elections are due and sugar mills are acceptable collateral to a government trying to appease a visible vote bank of farmers.
The industry would, of course, want the government to implement a market-linked procurement price, as recommended by a government-appointed committee. But that is unlikely to happen ahead of elections. One can expect a sharp jump in the so-called fair and remunerative price, while state governments may hike the state advised price even further. That will hike costs even as prices are trending lower. The only plus point is that a higher output of by-products is likely due to a healthy cane output. That will compensate, to some extent, the losses that mills may incur in the sugar business.
Sugar stocks have been in the dumps in the past 12 months. That situation appears set to continue till the elections get over, and the new government decides to bite the bullet and link procurement prices to the selling price of sugar. Sugar prices have remained low, despite taking steps towards full decontrol.
By giving mills a free hand to sell sugar, decontrol may have contributed a bit to the decline as well. This positive outcome should give the new government enough confidence to continue to loosen its hold over the sugar industry. That is what investors can look forward to after mid-2014.