MUMBAI (Commodity Online): Higher sugar prices fo 2009 will be sustained in 2010 also despite the marginal increase in cane supply by 3% in sugar season 2010 (October 2009 to September 2010) as stable growth in demand will keep sugar availability in deficit, according to an analysis by Fitch Ratings. The sugar production in sugar season (SS) 09 was 155 mn tonnes.

Fitch Ratings expects prices could ease towards H2SS11, with better visibility of cane output and a declining supply deficit, although Fitch does not expect the low prices of SS08 and H1SS09 to be repeated. The global price outlook for sugar also remains strong, with other major sugar‐producing regions such as Brazil also seeing a drop in production during SS09.

Sugar production has typically been affected by shortfalls in sugarcane availability — an outcome of the relative sugarcane price paid to farmers, substantial disputed sugarcane arrears payable by the mills to the farmers, and better prices from other cash crops. Adverse weather conditions are clearly also a major factor in sugar supply — with a direct impact on sugar yields and recoveries. Fitch notes that the industry has traditionally followed a pattern whereby the cycle seems to turn every two years.

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During SS09, a significant 17% drop in sugarcane acreage cultivation — in addition to a drop in sugar recoveries from over 10% in earlier years to 9.5% in SS09 — resulted in a 44% drop in total sugar production, Fitch Ratings said.

Fitch expects sugarcane acreage to partially increase in SS10, resulting in a continued shortage in cane supply. The shortfall will lead to further competition between sugar mills to obtain a share of the cane produced, which will put pressure on the capacity utilisation of most mills — as well as a sharp rise in cane procurement costs. During SS10, sugar mills have procured sugarcane at a price per quintal of INR200‐205, as against the announced State Advised Price of Rs 165‐175 per quintal — a difference of over 40%. Fitch expects these rates to further increase during SS10 and SS11, and a part of this increase will be to motivate farmers to increase cane acreage, Fitch Ratings said.

During the past six years (SS03 to 09), demand for sugar has grown steadily at a compound annual growth rate (CAGR) of 4.4%. Contributing to this rise has been a growing population coupled with higher consumption patterns (towards refined sugar from more unrefined substitutes), in line with per capita GDP growth.

The Indian sugar sector will enter into the second sustained year of deficit during SS10, although the quantum will be lower than in SS09.

Global Sugar Scenario:
Continued Shortage Limited growth in sugar output in Brazil, a shortfall in Indian production, and a higher sugar crop in the European Union, will increase global sugar production during SS10 to around 159mt, from 154mt in SS09. An expansion in global consumption will result in a second consecutive sugar deficit. However, post‐SS10, global production levels are also expected to rise in SS11 — and to result in a narrowing of the global deficit gap, due to Brazil’s efforts to divert more sugarcane to sugar production.

Positive Sugar Price Outlook
Fitch expects domestic sugar prices to be higher than prices in the past sugar upcycle during SS10 and SS11. This is mainly on due to the above mentioned supply/demand dynamics.

Fitch notes that as of January 2010, domestic sugar prices have further inched up to Rs 40.5 to 41.0 per kg, compared with Rs 25-30 per kg in Q4SS09. The agency expects sugar prices during the following quarters of SS10 to eventually settle at slightly lower levels. On the anticipation of higher sugar supply, domestic sugar prices could see further moderation in SS11. Imports are unlikely to moderate prices, due to the ongoing global deficit. As of February 2010, the landed cost of imported
sugar is largely on a par with prevailing Indian prices.

On a global scale, too, sugar prices in December 2009 increased to USD721 per tonne from USD600 per tonne in November 2009, whilst unrefined sugar prices have moved up from approximately 24 cents a pound to 27.6 cents over the same period. Nonetheless, the rise in sugar prices could be affected by government intervention measures taken to curb inflationary concerns. Fitch believes this could only have a short‐term impact, and that supply/demand dynamics will eventually direct the positive movement in sugar prices in SS10.