Domestic sugar production during this sugar season will decline by 5% to 26.8 million tonne, which coupled with compulsory exports of 4 mt is likely to result in a decline in closing stocks to 7.6 mt from 10.1 mt the previous year, ICRA said in its latest study.
While the expected decline in the sugar stocks is positive, it may not result in a significant increase in the domestic sugar realisations as the closing stock would still remain high.
Further, with an increase in the FRP (fair & remunerative price) during sugar season (SY16) and absence of linkage of cane prices to sugar and by-product realisations in the SAP (state advisory price) adhering states, the profitability and debt coverage metrics of the sugar mills would continue to be under stress in the near term, resulting in continued dependence on government support to clear cane arrears to farmers.
With continued pressure on international sugar prices, the effectiveness of mandatory exports in supporting domestic prices remains to be seen, the study pointed out.
Although the mills will have to sell the sugar at low global sugar prices in the absence of extension of export subsidy for SY16, it is expected that the resultant modest increase in domestic sugar realisations will partly offset the losses made in export sales.
According to the ICRA study,while the government has supported the sugar mills by providing interest-free loans to clear cane dues and compulsory exports to tackle the high sugar stocks in the domestic market, the key aspect of linking the sugar and by-product realisations with cane costs in SAP-adhering states is yet to be addressed.