Brief: Sugar price unlikely to fall significantly as shortage of sugar in the domestic market, despite duty free imports will keep prices high in FY18

Impact: Negative

Sugarcane production dropped by (-) 3.8% in FY16 and was followed by (-) 11% contraction in FY17. Fall in sugar cane production for two consecutive years has significantly influenced the sugar production and thereby sugar prices. This happened because of higher MSPs offered for crops such as Pulses, which in turn substituted sugarcane. Sugar production on its part has contracted by (-) 11% in FY16 and we expect that sugar production will fall by nearly (-) 15% in FY17 as well. This fall in production for two consecutive years has put upward pressure on sugar prices. As a result, sugar price has reached a historical high of Rs. 3,985 per quintal in March 2017. In retail market, the sugar price has increased by nearly 20% in FY17 (CPI inflation).

However, price of sugar generally follows the price of crude. This is because when crude prices are high, demand for ethanol increases, thereby increasing the latter’s prices. Amidst lower crude price in 2016 and 2017, consumption of sugarcane for ethanol production went down and this has given farmers a lower incentive to sow sugarcane (a classic example of hog cycles). Therefore, sugar prices in the global market is likely to remain low. Sugar price in Brazil, a major sugar producing country, have already reached a new low in March 2017. It must be considered that the Latin American country bifurcates almost 55% sugarcane for ethanol.

In India, on the other hand, lower production of sugarcane has created demand-supply mismatch and this has had an upward push on prices. In order to deal with the situation, the Indian Government has recently allowed duty free import of 5 lakh tons sugar (until June, 2017) in order to raise supply of the commodity in the domestic market. This will control the bullish trend of sugar price in the near term. However, we believe that there would be a shortage of sugar in the domestic market despite duty free imports and prices are expected to remain high in FY18 as well. As the gap between domestic and international sugar price becomes wider, import duty will be a key factor in determining the price level in the domestic market.