The rally in sugar stocks at the start of the sugar season in October 2012 in the back of higher sugar realisations fizzled out after state governments increased sugarcane procurement prices. While hopes were raised on complete decontrol of the sugar sector, the government agreed to partial decontrol only. This added to the underperformance of the stocks in the sector.

Moving forward, do not expect any respite for sugar players as far as sugarcane procurement prices are concerned. With elections approaching, state governments are likely to increase the procurement prices further in the new sugar year (SY) starting October 2013. The government will also not allow sugar prices to rise much to control inflation and on account of elections. The only respite integrated sugar players can get is from the sale of ethanol at higher realisations.

Sugarcane procurement prices impact profitability
Sugar realisations remained better in SY 2013 compared to 2012. Higher realisations were negated by cane procurement prices announced by the UP government. Uttar Pradesh saw the State Administered Price (SAP) going up Rs 40 a quintal to Rs 280 a quintal. Maharashtra, too, saw the procurement prices higher by 10 per cent to an average of around Rs 2,400 a tonne. These were much higher than the central government's Fair and Remunerative Price (FRP) - the price determined by the central government which is linked to the basic recovery rate of sugarcane - of Rs 170 a quintal. Given this, the profitability of sugar producers was bound to get impacted.