Buffer stock creation positive for sugar industry; cane arrears to remain at same level: Icra

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Updated: July 26, 2019 4:00:22 AM

The estimated maximum expenditure for the creation of buffer stock is around Rs 1,674 crore.

Buffer stock creation, sugar industry, domestic market, Icra Ratings, Care Ratings, sugar stocksThe estimated maximum expenditure for the creation of buffer stock is around Rs 1,674 crore.

The Union government’s decision to create a buffer stock of 4 million tonne is positive for sugar industry and sugarcane farmers. This expect to support the industry by not only providing cash support to sugar mills (in form of compensation for carrying cost of stock) but also improving the demand-supply situation in the domestic market and the consequent support to the sugar prices.

The estimated maximum expenditure for the creation of buffer stock is around Rs 1,674 crore. The reimbursement under the scheme would be met on quarterly basis to sugar mills, which would be credited into farmers’ account on behalf of mills against cane price dues, and subsequent balance, if any, would be credited to the mill’s account, said Icra on Thursday.

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Sabyasachi Majumdar, senior vice-president and group head, Icra Ratings, said: “Given our estimates, the closing sugar stocks for SY2019 would be high at around 14.5 million tonne. The direct impact of this move by way of compensating mills for the carrying cost alone would translate into a higher PBT margin by about 1.5% -1.8%. This apart, the buffer stock creation would result in some improvement in the demand-supply situation in the domestic market in turn resulting in support to sugar prices, although the quantum of the increase cannot be ascertained at this moment. These factors could result in liquidity improvement of the sugar mills, thus supporting the cane payments to farmers.”

According to Care Ratings, “The move to create 4 million tonne of buffer stock will lead to reduction in sugar inventory and will facilitate payment of cane arrears. The price of sugarcane has been unchanged to keep the sugarcane arrears under check.”

Icra’s Majumdar further said, “The domestic sugar production in SY2020 is likely to decline by 14% YoY to around 28.2 million tonne from 32.9 million tonne in SY2019 — driven by the lower production in the key sugar producing states such as Maharashtra and Karnataka. We expect the sugar consumption to increase to 26.5 million tonne in SY2020 and the production is likely to outstrip consumption by around 1.7 million tonne.”

Care Ratings said, it can be observed that when the sugarcane FRP was kept unchanged at Rs 230 per quintal for the season 2016-17, the sugarcane arrears reduced to Rs 9,526 crore. This was also backed by higher sugar prices at Rs 39 per kg during 2016-17. In the next sugar season when the FRP was increased to Rs 255 per quintal, the sugarcane arrears increased to Rs 19,780 crore. Also, lower sugar prices at Rs 34 per kg during 2017-18 resulted in higher cane arrears.

Therefore, with introduction of FRP at same level at Rs 275 per quintal for the season 2019-20, the sugarcane arrears for the season 2019-20 can be expected to remain at same level compared to the cane arrears of 2018-19 season assuming that sugar prices remain range bound given higher sugar inventories. As on 17 July 2019, the cane arrears for the season 2018-19 so far stands at Rs 15,222 crore. Also, the same cost of sugarcane will bring relief to the sugar mills and will encourage them to pay cane arrears.

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