Abinash Verma of Indian Sugar Mills Association (ISMA) says, fundamentals suggest sugar prices will increase at least for a year or more.

According to the International Sugar Organisation (ISO), there is likely to be global sugar shortfall of 5 million tonnes in FY16, much higher than November estimates of 3.5 million tonnes.

Verma says the production this year is estimated to drop to around 260 lakh tonne, compared to 283 lakh tonne last year, due to weak monsoon.

The government has given an export quota of 32 lakh tonnes, of which companies have contracted about 12 lakh tonnes for exports, he says.

Narendra Murkumbi, VC & MD of Shree Renuka Sugars   expects sugar prices to move towards Rs 31-32 per kg eventually. Export realisation is equal to domestic realisation, he says.

Below is the verbatim transcript of Narendra Murkumbi and Abinash Verma’s interview with Nigel D’Souza and Reema Tendulkar on CNBC-TV18.

Nigel: Could you give us some details in terms of what is the total production that we have domestically, what exactly is the export quota currently, could you give us the sense about the domestic numbers?

Verma: First of all, the production numbers this year we are estimating it to be lower than last year because of lower rainfall in Maharashtra and Karnataka. Last year we produced about 283 lakh tonne and this season we are estimating that we will produce about 260 lakh tonne, so a reduction of almost 23 lakh tonne; that is number one.

Number two, regarding the export quota given by the government, the government has told the industry to export about 32 lakh tonne and distributed this 32 lakh tonne amongst each and every sugar mill in the country. Out of 32 lakh tonne, as per my information, we have contracted for around 12 lakh tonne of export against which almost about 9.5 lakh tonne has been dispatched by the factories for export purposes.

Reema: When we last spoke to you, you indicated that sugar prices had already improved to Rs 3,000 per quintal. What is the current status on sugar prices and what would your expectation be? Given the global sugar deficit should we expect prices to improve even further, any numbers?

Verma: The prices for example in Maharashtra had fallen to almost Rs 19 per kilogram, Ex-mill prices which had improved to almost Rs 28-29 per kilogram. It had again corrected downwards by Rs 1.

In Uttar Pradesh it had fallen down to Rs 21 per kilogram, it had gone up to Rs 30 and it is around that level currently. More importantly we have to realise that we have submitted before the government also, that this is not enough because our cost of production across the country is between about Rs 32 in Maharashtra and about Rs 34 in Uttar Pradesh and North India. So, we are still lower as compared to our cost of production and these prices need to improve further.

Secondly you asked me that global prices are improving. Now, global prices are improving but still as compared to domestic prices that we have, the industry will be losing anywhere in the range of around Rs 4,000 per tonne of sugar.

Nigel: Could you give us a sense what exactly is the current selling price on a per kilogram basis because you have exposure to Maharashtra? I am reading a particular report that is stating that they are expecting prices to go up nearly by around Rs 3-4 per kilogram and that is very soon is what the report indicates and also could you tell us what is your current cane procurement cost and what is the selling cost? Has there been a narrowing of the losses at least?

Murkumbi: We are currently selling sugar at about Rs 29,000. As Abinash Verma said, few months ago, the prices had dropped as low as Rs 19,000. Recently on Monday, the state government of Maharashtra has made a very positive announcement that all incentives of purchase tax waiver, etc which they are giving which is pretty substantial, amounts to about 5 percent of the total cost will be waived only to those who meet the export quota.

So, we expect exports to get a fillip. In addition to the financial or benefit that the central government is giving this is also another positive step and that is the basis probably for these newspaper reports suggesting that domestic prices would move up by another Rs 3-4.

Our own cost at Shree Renuka Sugars is around Rs 26,000-27,000 because we run integrated factories and at the current levels, yes, margins have turned positive. I think to reach full levels of profitability, make up some of the losses we have incurred in the last few years, I think the price movement towards Rs 32-33 is what is required. I think it should go there given that world market is fairly supportive and the government policy, both at the center and at the state government levels is very positive in terms of reinforcing exports.

Yesterday world sugar prices in fact had their highest rise in 22 years, it increased by 10 percent in a single day partly on improving fundamentals globally.

Reema: Do you think you will be able to get better export realisations compared to domestic realisations and if you could give us both those numbers?

Murkumbi: At the moment we believe that export realisations including the benefits that the central government is giving towards paying farmers directly, if you add that benefit then export realisation is equal to domestic realisation. If you add the penalty that the state government of Maharashtra would impose if you did not export then it is anyway very positive to export.

So, all things taken together I believe we should cross 2 million tonne of exports in the current year. Given that supply and demand are balanced domestically that should reduce the closing stock. Nigel: Of your total production, how much are you planning on exporting? Murkumbi: I think we have already crossed our 12 percent. We are also exporting on behalf of others, the export quota is good. The idea is to reach about 20 percent of our production.

Nigel: The Brazilian real has depreciated a fair bit, so that could put some kind of pressure on prices. What is your take because you have seen a big movement over there?

Murkumbi: The cane crop in Brazil is roughly similar to last year and anyway now it is off season. In Brazil in fact ethanol consumption is hitting new records every month and the oil price domestically, the petrol price has not been lowered after oil has dropped below USD 50 per barrel and therefore we are having a comfortable parity vis-à-vis oil because currency is weak, ethanol is a domestically produced fuel whereas oil prices are back to international benchmark.

So, we are finding ethanol consumption surging in Brazil and that is reducing the incentive to produce sugar. If the world market is below 14 cents, Brazilian producers would prioritise ethanol rather than sugar.

Reema: Given the world fundamentals as well as in India, do you foresee sugar prices rising from the current Rs 29-30 per kilogram that they are trading at? What would be your forecast on sugar prices in India?

Verma: I cannot forecast but if you ask me fundamentals, I believe the fundamentals suggest that the sugar prices should be improving at least for the next one to one and a half year. My reasons for that are the following. Number one, the current year, as I mentioned, the current year’s production is lower than last year and would be almost matching the domestic consumption.

Secondly, again the planting in Maharashtra and Northern part of Karnataka is lower than the general trend and therefore next year there might be a lower production expected in the 2016-2017 sugar season and because of that there is a sentiment that the surplus would be lower than what we have been carrying the last few years.

Secondly, as you have already mentioned in your reports that the ISO has revised the global deficit from 3.5 million to 5 million which means there will be some extra import demand that could be the reason why the global prices have improved yesterday by a substantial number and that gives all the more reason and enough justification for the Indian sugar industry to export sugar.

As mentioned by Narendra Murkumbi, there are some guidelines given by the Maharashtra government and we believe Maharashtra is going to be the key to the export program and therefore if Maharashtra exports almost about its target of about 10-11 lakh tonne, if it does about 85-90 percent of that, then we should cross 2 million tonne and that will bring down our opening stocks to more reasonable levels for the next sugar season.

These fundamentals suggest that the prices should be improving but since the quantity available, the stocks available will be enough to take care of the domestic requirement we do not expect the sugar prices to run away.

Nigel: We have UP elections coming up, there is a lot of talk, and there is a lot of demand as well. Do you see the possibility of prices being linked to cane prices or do you think in fact that kind of a bold move will not be taken?

Verma: If you really see the whole movement across the country, Maharashtra and Karnataka have taken the lead. They have brought in laws to link the sugarcane price to the revenue realisation. The commission on agriculture cost and prices which recommends the Fair and Remunerative Price (FRP) to the central government has recommended that the industry should be paying their cane price linked to the revenue realisation and if it is going to be lower than the FRP then that gap should come in from the central government through a price stablisation fund.

Now, specifically on Uttar Pradesh, in the last four years they have not increased the sugarcane price majorly on the realisation and acceptance that state advised price (SAP) has become unreasonable and beyond reach. We are seeing in the last three years that the UP government assisting on the cane price directly. So, therefore the realisation is there but the structure as you mentioned whether there is going to be a formal structure like Maharashtra and Karnataka linking the cane price to the sugar price, we will have to wait and see.

However, I believe that that is the future in the Indian sugar industry because that is how we can move forward, make us a competitive domestically as well as internationally.

(Interview transcribed by Priyanka Deshpande)