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Ind-Ra: Respite from Sugar Bailout Package to be Short-Lived as Structural Challenges Loom
11-Jun-18   14:16 Hrs IST
India Ratings and Research (Ind-Ra) believes the government's INR70 billion bailout package will provide the much-needed relief to the sugar sector, although the oversupply situation would continue to plague the industry in the current (October 2017-September 2018) and next sugar season (October 2018-September 2019). The Indian sugar industry has been grappling with falling prices, amid a supply glut, that eroded profit margins and liquidity of sugar mills, and resulted in mounting cane dues.

The three-fold package, approved by the Cabinet Committee on Economic Affairs on 6 June 2018, involves creation of buffer stock, fixation of floor price on sugar and incentivising ethanol capacity additions. While these measures would provide some relief to the beleaguered sugar sector, Ind-Ra believes further challenges lie ahead amid the looming surplus scenario in SS2018-19, making the ramp-up of exports imperative.

Buffer Stock to Reduce Oversupply and Cane Arrears: The food ministry will create a buffer stock of 3 million tonnes of sugar for one year, which could be reviewed anytime based on the market conditions. The estimated cost towards this is INR11.8 billion and the reimbursement would directly be credited to farmers' accounts on a quarterly basis, against their cane dues from sugar mills. The buffer stock will serve the twin purpose of reducing excess stocks in the market (and thus support prices) and reduce cane dues. Besides, it will also lead to some improvement in the liquidity position of sugar mills by freeing up funds blocked by way of carrying costs of inventory.

Cane arrears crossed INR220 billion at end-April 2018, up from INR32.7 billion at the beginning of SS2017-18, as declining spreads weakened the liquidity position of sugar millers, and hence their ability to pay sugarcane dues to farmers. Uttar Pradesh, the largest sugarcane growing state, reported highest cane dues of over INR120 billion, while cane dues in Maharashtra stood at around INR20 billion.

Inventory to Increase: According to the data released by Indian Sugar Mills Association (ISMA) on 11 May 2018, sugar production for SS2017-18 crossed 31 million tonnes at end-April 2018 with the two largest producers, Uttar Pradesh and Maharashtra constituting 11.2 million tonnes and 10.7 million tonnes, respectively. With around 130 sugar mills (mostly in Uttar Pradesh) crushing sugarcane as of end-April 2018, the total production for SS2017-18 would increase further to 31.5 million-32 million tonnes, against an estimated demand of around 25 million tonnes, translating into a closing stock of 10.5 million-11 million tonnes (including stock of 4 million tonnes from SS2016-17). However, the normative carry forward requirement for SS2018-19 is only 4 million-4.5 million tonnes, leaving the country with an excess of around 6.5 million tonnes. Successful execution of export quota of 2 million tonnes and buffer stock will reduce this excess to 1.5 million-2 million.

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