Indian sugar mills association

Sugar mills get a leg-up from export subsidy

Date:	07 Mar 2014

Source:	The Live Mint

Reporter:	Ravi Ananthanarayanan

News ID:	3164

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Sugar company shares were indifferent to news that the government has notified a subsidy on raw sugar exports. Mills will be getting Rs.3,300 a tonne as subsidy on raw sugar export from produce of the current and the previous seasons, up to a limit of 4 million tonnes (mt). The subsidy news itself is not new (though the final notification was pending) and sugar shares have risen since February, perhaps explaining why shares did not react to the news.

Sugar mills have already been exporting raw sugar and, in the current season (beginning October), the industry has exported 1.2 mt of sugar, of which 0.5 mt is raw sugar, according to the Indian Sugar Mills Association (Isma). The subsidy makes it more viable for companies to export raw sugar. But they may not make money because international prices are down 2% from a year ago, which may not seem a steep fall, but then procurement costs have risen sharply. Exports, though, can serve to balance the domestic demand-supply imbalance. Mills are hoping that a tighter supply situation will see domestic sugar prices increase; as of date they are down by 8% from a year ago.

India’s surplus sugar situation has coincided with better-than-expected output in other countries, especially Brazil. That has affected global sugar prices in 2013. In recent weeks, bad weather conditions in Brazil have had a positive effect on prices. Since early February, raw sugar one-month forward prices on the Intercontinental Exchange have risen 11.7%. But that could change if weather conditions improve in March.

The domestic situation, too, may help curb the surplus in the current season. Isma figures show that a late start to crushing has resulted in a 10.5% decline in cane-crushing as of 28 February. A more accurate estimate should become available by April. If the global sugar surplus situation is curbed, resulting in higher global prices, then raw sugar exports may become more viable. And, if the domestic output is indeed at lower levels, then both factors can combine to send domestic prices up.

The crucial question, as usual with the sugar sector, is how will the government react to higher prices? In its own eyes, the government has played saviour, even if the reason the industry is in trouble in the first place is because of faulty government policies. But the government has bailed it out by giving interest-free loans and now comes this subsidy on raw sugar exports. If it gets paid back with higher sugar prices, there is no saying what it will do to bring down prices. The more the industry tries to move away from an era of controls, it somehow seems to sink deeper into the quagmire.

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