Sugar Update

Friday | September 13, 2013

Content
Overview Price Performance Sugarcane planting progress Monsoon and Crop Conditions Currency factor Domestic Crop Prospects Global Updates Outlook

Prepared by
Vedika Narvekar Chief Manager- Fundamental Research Agri Commodities
vedika.narveker@angelbroking.com

Anuj Choudhary Research Analyst Agri Commodities

anuj.choudhary@angelbroking.com

(022) 2921 2000 Extn. 6130

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Sugar Update
Friday | September 13, 2013

Sugar in a consolidation mode- Ample supplies offsetting festive demand

Sugar prices in the global as well as domestic markets have continued to move southwards over the past few months. Three consecutive years of global surplus production has led to huge supplies of the sweetener, resulting in a supply glut situation, mounting downside pressure on the prices. In the domestic markets, prices on the NCDEX witnessed lackluster trades over the last one month and have consolidated at lower levels. In the month of August, the September Futures contract declined marginally by 0.83 percent on a monthly basis.

Source: Reuters and Angel Research

Abundant supplies of sugar in the domestic markets due to a third year of surplus situation and poor exports have kept sugar prices under check. Above normal rains, especially in the drought ridden state of Maharashtra helped ease concerns over output. Demand from stockists ahead of the upcoming festive season have, however, supported prices at lower levels. In the international markets, Sugar prices have recovered from their lowest levels in three year touched earlier in July as the speculators covered their net short positions. Also, rains in Brazil, the largest sugar producer impacted the pace of crushing, further supporting prices. Cold weather and frost conditions raised fears of crop damage. There were reports that about a fifth of the standing cane crop could be damaged due to adverse climatic conditions. However, dry weather conditions later on led to an improvement in the crushing process since early August and cut short the upside movement. Sugar prices on the ICE as well as LIFFE have declined around 2.9 percent and 3.3 percent respectively during the month of August.

Good monsoons to increase in yield and acreage

Despite a steep hike in the Fair and Remunerative Price of cane by 24 percent, sugarcane area for 2013 has taken a hit due a decline in planting in Maharashtra and Karnataka which faced a drought situation this year. Higher cane prices of sugar boosted farmers to plant record area under sugar cane last year.

Source: Ministry of Agriculture

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Sugar Update
Friday | September 13, 2013

An early monsoon and evenly distributed rains in the sugarcane belts of Maharashtra, Karnataka and Uttar Pradesh has led to an improvement in the yield. However, the total output may not touch last years level, as planting was negligible in the months of Feb-Mar in Maharashtra due to drought. Area under cane cultivation which was down by almost 10 percent as on 14th June, 2013 is now down by just 2.64 percent as on 30th August at 48.74 lakh hectares.

Monsoon Progress and Sugarcane crop conditions

Cane acreage has witnessed a drop this Area weighted season Rainfall for the Period June 01- September 11 year due to the drought conditions in Actual Rainfall Normal % departure Maharashtra, which has also raised (mm) Rainfall (mm) from LPA concerns over the yield. According to Regions the food ministry, sugar output was Country as a whole 834.1 788.2 6 initially projected to drop 10 per cent to North West India 621.2 559.7 11 22 million tonnes (mt) in the 2013-14 Central India 1040.2 880 18 marketing year starting October, due to 726 608.8 19 poor rains in Maharashtra and South Peninsula 942.6 1256.2 25 Karnataka. However, early monsoon East and North East and proper distribution of rains have eased concerns over sugar cane yield. Infact, according to the Food Minister Sharad Pawar, sugar production is now expected to increase to last years levels of 25 mt. Favorable weather conditions here onwards may even surpass last years production figures. Cumulative rains as on 30th August, 2013 has been 11 percent above the Long Period Average, with Central India receiving 29 percent above normal rains. In case of Sugarcane, autumn planting is generally done in October in the northern parts of the country, especially UP and harvested after 12 months. These crops are currently under the grand growth Phase (120-270 days) in a 12-month crop, wherein the actual cane formation and elongation and thus yield build up takes place. During this period good rainfall encourages rapid cane growth, cane elongation and internodes formation. In Tamil Nadu, Andhra Pradesh, Maharashtra and Karnataka cane planting is done in December-February. Spring cane is planted in February-March and is the best time for cane planting in Punjab and Haryana, UP and Bihar. Crops in these areas are in Tillering Phase (50-120 days). Current conditions are favorable for good cane yields, provided rainfall distribution is even and withdrawal is on time. Currency factor influencing trade scenario India, the second largest producer and the largest consumer of sugar, has always been central to any discussion on the sweetener in the global markets. Due to the cyclical nature of cane production, Indias status as a net importer or exporter frequently inter-changes. Apart from this, currency factor and global fundamentals also influences the Indian trade scenario. After exporting a significant quantity of sugar last year, Indian exports were hit drastically this season on the back of weak international and strong domestic prices which made exports unviable. Despite of holding comfortable stocks, import purchases

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Sugar Update
Friday | September 13, 2013

were made, as importing raw sugar was cheaper compared to buying from the domestic markets. Also, domestic crop uncertainties gave an added lift to prices. The drop in world sugar prices made imports cheaper than domestic supplies. India has imported around 7 lakh tn sugar so far in the current year that started on October 1, 2012, including imports of 1 lakh tonne white sugar. Over the past few months, the Rupee has witnessed a sharp depreciation, impacting the countrys international trade. It has made imports expensive, while the exports have become more competitive and India signed some exports deals earlier in July especially from the Gulf and Africa during the festive period of Ramadan. Also, government imposed 15 percent import duty on sugar which will further deterred imports to India. Cane arrears in UP- Maharashtra and Karnataka have edge over UP Due to higher cane prices and lower sugar prices, many sugar mills in Uttar Pradesh have defaulted on their cane arrears. The state government, to protect the interest of the farmers, has issued recovery certificates against some private millers. The cost of sugarcane procurement in UP is very higher vis--vis other states like Maharashtra and Karnataka. In Maharashtra the farmers are paid the Fair and Remunerative Price (FRP) which is decided by the centre, while in UP the farmers are paid the StateAdvised Price (SAP) which is announced by the state government and is usually much higher than the FRP. Over the last 3 years, the Uttar Pradesh state government has increased the cane SAP by about 70 percent and is currently at Rs. 280 per quintal. However, the FRP for 2013-14 season is Rs. 210 per quintal. Total cane arrears in UP stands at around Rs. 2650 crore. Sugar output revised higher upside remained capped Lower plantings and drought conditions had raised concerns over 2013-14 cane output. Initial projections by the industry body Indian Sugar Mills Association (ISMA) had forecast output below the consumption levels of 22.5-23 mn tn. However, early and above normal rains have curbed damages to some extent and has also improved the yield. The Food Minister K V Thomas has revised the output expectations and said that sugar output may increase to about 23.5-23.7 mn tn. The ISMA has also Source: Ministry of Agriculture, Reuters and Angel Research revised its forecast to about 23.7 mn tn for the 2013-14 season starting October 2013.

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Sugar Update
Friday | September 13, 2013

ISMA expects the opening sugar balance for the next season starting October at about 8 mn tn higher than the normal opening balance of about 6 mn tn due to weak exports. Higher opening stocks and weak exports may offset output losses and keep supply side fundamentals strong in the coming season. However, it is too early to predict supplies for next season at the current juncture as timely withdrawal on the monsoon season will play a crucial role in determining the total sugarcane production.

Global Updates International sugar prices at 3 years low With three years of surplus situation, the global sugar stocks are soaring, leading to a supply glut situation. Sugar prices have continuously been on the downtrend and have recently reached their lowest levels in three years. Due to expectations of yet another year of bumper production in countries like Brazil and India, global production may witness a fourth year of Source: Reuters and Angel Research surplus situation. The International Sugar Organization (ISO) has forecast a fourth straight year of surplus, at 3.5 million tonnes in 2013- 14, down from a surplus of around 10 million in 2012-13. World sugar output is expected to decline by 1.92 percent to 178.5 mn tn while consumption is expected to grow by around 2 percent to 175.5 mn tn in 2013-14. Since the global sugar markets are currently at the end of the marketing year for the 2012-13 season, prices have started taking cues from the 2013-14 output and stock forecast. Although surplus is projected for 2013-14 season, prices should in due course should consolidate at these levels and edge up from the production cost. With world sugar stocks rebuilding since 2010-11, the global sugar markets are witnessing a glut situation pushing prices to their 3 years low. Mounting surpluses over the past three seasons had taken the global stock to use ratio to more than 40 percent. The International Sugar Organization (ISO) has forecast a fourth straight year of surplus, at 3.5 million tonnes in 2013- 14, down from a surplus of around 10 million in 2012-13.

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Sugar Update
Friday | September 13, 2013

Harvest in the largest exporting nation set to rise Brazil's 2013-14 sugar production is set to rise owning to higher cane harvest and the pace of crushing in its main Centre-South region. According to the latest data from Unica, SouthCentral Brazil cane harvest for 2013/14 as on September 1, 2013 jumped 18.15% at 363.45 million tonnes compared to the same period last year. Total harvest for the 2013/14 season is projected at 589.60 million tons. Sugar production for the main center-south region increased almost 7% to 19.96 million tonnes compared to the same period last year. Total sugar production for the current season is projected at a record 35.5 mn tn.

Source: USDA

More cane diverted towards ethanol amid attractive prices Over the last one year, it has been seen that more and more sugarcane have been diverted towards the production of ethanol. According to Unica, the share of sugar and ethanol for 2013/14 season as on September 1, 2013 stands at 44.42 percent 55.58 percent respectively vis--vis 49.17 percent and 50.83 percent respectively during the same period last year. There are two primary reasons attributed for the diversion, declining global sugar prices and increase in the domestic demand for ethanol. Also, new tax and blending incentives will raise the use of sugarcane in bio-ethanol in 2013-14. Production of ethanol in the 2013/14 as on September 1 2013 stands at 15.358 billion liters.

Brazil sugar prodution until September 1, 2013 (2013-14 harvest season) South-Central Region Products 2012/13 2013/14 Change (%) Sugarcane 1 307,615 363,453 18.15 Sugar 1 18,663 19,961 6.96 Anhydrous Ethanol 2 4,546 6,499 42.96 Hydrous Ethanol 2 7,335 8,859 20.77 Total Ethanol 2 11,882 15,358 29.26 Share (%): Sugar 49.17 44.42 Ethanol 50.83 55.58 Litres of ethanol/ton of sugarcane 38.63 42.26 9.4 Kg of sugar/ton of sugarcane 60.67 54.92 (9.47)
Source: UNICA. Note:- 1- Thousand tonnes, 2-Million Liters

Risks to Brazilian supplies remain if world sugar prices continue to drop. With lower prices amid rising input costs, the pace of investment in plantation and mill expansion may slowdown. It is also possible that improving state incentives to use more cane in bio-ethanol will have a greater impact than we predicted.

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Sugar Update
Friday | September 13, 2013

Outlook Expectations of improvement in sugar production from the earlier forecast due to higher than normal rains in the main sugarcane growing states in the 2013-14 southwest monsoon season may lead to a fourth year of surplus, keeping prices under downside pressure. With commencement of crushing expected to begin soon, the millers are under pressure to liquidate their current positions in the market. Also millers in Uttar Pradesh have cane arrears mounting, and with the state government issuing recovery certificates, selling pressure may be seen to liquidate their stocks to clear their arrears. Although a sharp depreciation in the Indian Rupee led to some export orders in July, but with the recovery of the Rupee over a couple of wee, and lower prices in the international markets, exports of sugar from India has become unviable. However, we dont expect much downside in the sugar prices from the current levels as a series of festivals is around the corner and generally, demand for sugar increases during this period for various sweets and delicacies, thus supporting prices at lower levels. Also, to curb the inflows of cheaper sugar from the international markets, the government has hiked duties on import. Apart from the domestic fundamentals, prices shall also take cues from the progress of Brazilian cane crushing and their impact on the global sugar prices. Although projected world surplus for 2013-14 seaosn should keep International price under pressure, they should eventually consolidate at these levels and edge up gradually from production costs. Also, withdrawal of southwest monsoon has to be watched carefully as any delay in the withdrawal may affect the yield and total production of cane. Sugar October contract which is currently trading at Rs 2985 per qtl levels may find support at Rs 2920/2860 per qtl and resistance may be seen at Rs 3060/3140 per qtl in the short term (1 month).

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