Exports could be the big story for Indian sugar industry this season

Sugar follows a unique sugar season cycle that stretches from October to September next year. For the sugar season ending in September 2020, India is expected to produce 27.2 million tons of sugar.

Aug 21, 2020 12:08 IST India Infoline News Service

After being the world’s second largest producer of sugar for the last many years, India has ended up being the largest producer in the last two years. As Brazil diverts more of its sugarcane to ethanol production, Indian sugar producers have been going aggressive on the back of better prices.

Sugar output and the sugar season cycle

Sugar follows a unique sugar season cycle that stretches from October to September next year. For the sugar season ending in September 2020, India is expected to produce 27.2 million tons of sugar. However, this is expected to increase by 11.7% to 32 million tons in the sugar season SY20-21.

Data Source: ISMA

The sugar output for SY2019-20 is estimated at 27.2 MT. While the supply and demand for sugar has been largely balanced in last 10-12 years, sugar production has been robust in SY2017-18 and SY2018-19. Market estimates are that the sugar consumption will not pick up to the extent to which the sugar production is likely to increase and we already have the overhang of sugar stocks. Let us first understand why sugar demand has been tepid as compared to output.

Why sugar demand has been tepid?

Nearly 60% of sugar demand in India comes from industrial demand coming from service outlets like restaurants, cafes and fast food joints. This segment suffered due to closure of malls and restaurants. Sugar demand also comes from confectioners, cola makers, beverage companies, biscuits makers etc. While industrial production is getting back to pre-COVID levels, the 3 months of production shutdown is a sunk cost. It is estimated that the industrial segment could see 13-14% contraction in SY2019-20.

Household consumption accounts for 35% of total demand. On one hand, lower income levels reduced monthly sugar consumption. At the same time, lockdown led to people spending more time at home. This has triggered higher demand for sugar related beverages and snacks. The net effect has been that demand contraction in household segment will be about 2%. However, both the industrial segment and the household segment are likely to see a sharp recovery in demand for sugar from the last quarter of 2020.

How would sugar output look like in SY2020-21?

As stated earlier, the sugar output for the SY2020-21 is expected to be higher by 11.7% at 32 MT. Let us look at what will drive sugar output in SY2020-21? Sugar output in Uttar Pradesh, is expected to be flat at 12.30 MT in SY2020-21. This is largely on the back of lower sugarcane acreage during the year in UP. However, Maharashtra will more than make for that with a massive surge of 65% to 10.13 MT. This is likely to be supported by a 43% increase in sugarcane acreage. The third largest sugar producer, Karnataka, is expected to produce 25% more sugar next year at 4.31 MT. These 3 states will account for more than 80% of overall sugar output in SY2020-21. The moral of the story is that if you add the supply-demand gap and the closing stock, there will be a glut of sugar supply. With limited options to divert sugarcane to ethanol production, the only option is to look at exports.

Sugar exports emerging as the next big story

For the SY2020-21, India is likely to export a record 5.50 million tons of sugar. In fact, with just 2 months to go for the sugar season to end, 4.80 million tons have already moved out. This could be the best export performance for the Indian sugar industry in the last 12 years.

Chart Source: Bloomberg

In the last 2 years, the government has been providing sugar subsidies to Indian sugar exporters to make up for the cost advantage that other countries enjoy. Brazil and Thailand had complained to the WTO, but there is really not much of a case in it.

Brazil and Thailand are ceding room to India

If Indian sugar exports get a boost, it is partially due to what is happening in Brazil and Thailand. In 2019-20, Brazil had allocated 46% of its sugarcane crop to sugar production. However, the lockdown hit Brazil hard and dented Brazil’s position as the world’s largest sugar exporter. Brazil has also suffered due to labour related delays at its largest port, Santos. This has meant that Brazilsugar despatches are taking 45 days more to reach.

Then there is the problem that the third largest producer of sugar, Thailand, is also facing. Thailand’s sugar output hit a 9-year low this season due to drought conditions. Thailand’s sugar output this year is expected to fall by 28% to 10.5 million tons. That has already opened up big sugar orders for India from some of Thailand’s traditional sugar buyers like Vietnam, Indonesia, Bangladesh, Iran and Kenya. For now, it looks like sugar exports could be the big story for the sugar season cycle 2019-20 and beyond!

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