The outlook for sugar prices and profitability is expected to be weak not only in 2009-10 crop season that will end in October, but in 2010-11 also, research firm Icra said in its latest report.
Based on feedback from industry regarding sowing and cane availability position, production in 2010-11 is expected to be around 25 million tonne which would be marginally higher than the domestic offtake of around 23.5-24 million tonne, thus putting further pressures on sugar prices.
On the positive side, for most states, the actual cane price has been arrived at based on negotiations between farmers and mills and these cane prices are well in excess of FRP/SAP announced by the central/state governments, the study said.
Sabyasachi Majumdar, head, corporate sector, Icra, said: “The domestic sugar stock position continues to remain tight even for the second consecutive year. There has been a sharp correction in sugar prices since the peak seen in Jan -Feb 2010. Free sugar prices, which had reached a peak of around Rs 40,000 per tonne by Q2 of 2009-10, have shown a steep decline to the levels of Rs 28,000 by April.”
Icra expects conversion margins to come under pressure in 2009-10 although the impact is not likely to be uniform across all regions. The two largest production belts?northern India (UP, Uttarakhand, Punjab and Haryana) and the western Maharashtra-north Karnataka belts?are likely to be the worst-hit, given the high cane prices while some other regions like Tamil Nadu and Bihar are likely to be less affected, given that cane was contracted at much lower prices than in the aforementioned regions.
As far as the medium to long-term outlook is considered, the long-term prices and profitability of Indian sugar companies would remain volatile and dependent on domestic and international supply-demand trends. These in turn would depend on agro-climatic conditions in major producing countries and crude oil price trends, which determine the diversion of cane crop to ethanol. Consequently, the price trends in international markets would be the key determinants of future profitability.