Sugar: a bitter pill to swallow

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Sugar stocks were the toast of the markets for a good part of the week, before some profit booking trimmed those massive gains, unheard of in recent times.

Behind the newfound love for the commodity was a spate of news and a bunch of expectations that the markets think will turn around the fortunes of the sector, which has been a pariah for a while.

There is nothing wrong in terms of looking at a sector that is in the dumps. Remember this column on fertiliser stocks on December 30, 2006? The fertiliser stocks on average have risen around 40 per cent in absolute terms and some like Nagarjuna have risen upwards of 250 per cent since then. But the sugar stocks will have to wait for their place under the sun.

It all began with the union agriculture minister, Sharad Pawar, announcing the government's intention to allow the production of ethanol directly from sugarcane, increasing the blending of ethanol from the present 5 per cent to 10 per cent by October 2008 and announcing a relief package for the industry.

Punters immediately lit a fire under the sugar companies and sent them soaring on Wednesday with a huge addition to the open interest. The simple logic applied was that this would reduce the sugarcane inventory and accordingly less sugar will be made, improving the price of sugar.

Secondly, direct production of ethanol from cane is an efficient process and could result in higher profits for the units that put up such plants.

While the aforesaid are valid assumptions in theory, there are many a slip between the cup and the lip. There are many valid reasons as to why this may not turn around the fortunes of the ailing sector.

Our sugar season runs from October to September. For the sake of simplicity, let's go by the calendar year. At the end of 2007, we are likely to have an inventory of 13.7 million tonnes.

This inventory could go up if the actual production during the year is more than 30 million tonnes. We consume close to 19 million tonnes of the sweetener. This means that we will have an inventory of more than 8.5 months of our consumption on our hands.

Next year, we will produce around 34 million tonnes of sugar and consume 21 million tonnes and may export 5 million tonnes, leaving us with an unpleasant prospect of an inventory equivalent to a year's consumption, with a full year's production yet to come.

India is likely to take over Brazil next year as the largest producer of sugar. And world markets too expect a rise of 17 e cent in production, which would keep prices under pressure in the foreseeable future. No wonder that October 2007, December 2007 and March 2008 futures are quoting at Rs 1,303, Rs 1,253 and Rs 1,183 per tonne respectively, at massive discounts.

As for the cane to be used for the direct ethanol production, things may have to wait as the machinery will not be in place. The two companies that produce the machinery for the sector reportedly have a waiting period of more than a year.

Coming back to the industry, it is in a pitiable state. The price of sugar is on the decline. Average prices in the spot market are between Rs 1,350-Rs 1,400, which is about Rs 250-Rs 300 below the average cost of production.

Warehouses are reluctant to store any more sugar as it is a non-moving item. Mills cannot afford the jute bag , which is mandatory as the stock of the empty bag is more than a kilo of sugar. Arrears to the farmers have mounted upwards of Rs 5,000 crore and the bankers do a disappearing act the moment they spot a mill owner at a mile's distance.

No sir, all's not well with sugar. Those wanting to make a quick buck in the commodity may be running the risk of singeing their hands in the fire "" and we may see a repetition of what happened during the late Choudhary Charan Singh's regime.