Cash Flow

Mumbai, March 16: Sugar producers have hit the sweet spot this year.

After a two-year glut in international markets forced manufacturers to sell sugar at prices that were at one stage lower than costs, both international and domestic sugar prices have started to harden — and firms are starting to see an end to their woes.

On the overseas markets, crude oil prices have crossed the $100-per-barrel mark. As a result, the demand for value-added products such as ethanol has also started to rise.

Industry sources say that in India, unseasonal rains and lower acreage can lead to stable prices. The annual demand for sugar in India is put at around 19 million tonnes and the sugar season usually lasts from October to September.

In 2006-07, a bumper sugarcane crop led to a surplus sugar production of around 30 million tonnes. It is estimated that in the current year, sugar production will be around 27 million tonnes, down from the initial estimate of close to 31 million tonnes.

“Since many sugarcane farmers did not get adequate returns in the last season, the acreage in key states such as Maharashtra and Uttar Pradesh has gone down. Therefore, prices are expected to be stable. They will certainly not crash,” sources said.

Uttar Pradesh and Maharashtra together contribute more than 67 per cent to India’s sugar production.

“Last year, the price we paid for sugarcane was more than the ex-factory price of sugar. Sugar prices were then ruling at Rs 12 per kg. However, they are now ruling at around Rs 17 per kg. Therefore, the situation is much better than before and margins are also looking up,” a senior official from a leading sugar company said.

Observers added that the industry typically followed a two-year cycle of ups and downs. “It, therefore, seems that the wheel has turned a full circle. Things should look up from here on,” an analyst said. The stock markets have started reacting to the strong outlook for the sugar industry. After being hammered over the past few months, key sugar stocks such as Bajaj Hindusthan, Balrampur Chini and some others have come off their lows.

However, there are divergent views on how some of the key players will fare in the current season. A recent report by credit rating agency Fitch said a court ruling on the Uttar Pradesh sugar policy will have a direct bearing on the profitability of some companies. Sugar mills in Uttar Pradesh are required to procure sugarcane at the state advised price, which is announced by the state government during each sugar season.

During the sugar season 2006-07, the state government had fixed a price of Rs 125 per quintal. This was, however, challenged in the courts.