What has triggered the rally in sugar prices?

Rally in sugar stock prices
Rally in sugar stock prices

by 5paisa Research Team Last Updated: Dec 10, 2022 - 12:11 pm 7.9k Views
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Sugar stocks in India may have been quiet for a long time, but in the last few days, some of the sugar stocks have rallied sharply. On Tuesday, 06th December 2022, the price of sugar stocks rallied sharply after reports of lower sugar output in the current year. In sugar parlance, when we talk of year, it refers to the sugar cycle year which extends from October to September. Currently, we have just commenced the sugar cycle year 2022-23. That is the definition of year that the sugar industry adheres to and it is different either from the concept of calendar year or from the concept of fiscal year followed by companies.

On Tuesday, the price of sugar shares rallied by 9.8% on an average after reports came in from the Indian Sugar Manufacturers Association (ISMA) that the total sugar output for the current sugar cycle year would fall by 7% on a yoy basis. There are several reasons for this expected fall in sugar output. For instance, the erratic weather conditions have sharply dampened cane yields. Cane yields refer to the richness of the cane based on the proportion of sugar that can be extracted from each tonne of cane crushed. Higher the cane yield, higher is the sugar output for each KG of sugarcane that is cultivated in India.

The rally has been frenetic across several sugar companies in terms of one day returns and also short period returns. For instance, the stock of Ugar Sugars was up in double digits in a single day. On the other hand, Bajaj Hindustan of the Kushagra Bajaj group has rallied by nearly 49% in the last one week. Even a stock like Renuka Sugars has rallied by 3% on Tuesday, showing the all-round impact that the sugar output reduction was likely to have on the total sugar output and sugar prices. Other players like EID Parry, Dhampur Sugars, Balrampur Chini, Dalmia Sugars and Dwarikesh Sugars also rallied sharply on the supply woes that were likely to be created by lower output on the back of weak cane yields.

The cane yields this year have fallen sharply in key sugar producing states like Maharashtra and Karnataka. While UP remains the largest producer of sugar in India, Maharashtra comes in second place followed by Karnataka in third place. The weak sugar output is likely to be driven by weak sugarcane yields in Maharashtra and Karnataka, where the yields are expected to have fallen by anywhere between 15% and 35% on a yoy basis. Incidentally, Maharashtra alone accounts for one-third of the sugar output in India and a fall in cane yields in this region is going to have a deep impact on output.

The state of Maharashtra is likely to produce just about 13.8 million tonne of sugar in the current marketing year. That is almost flat on a yoy basis. In terms of macro impact, the lower cane yields would result in reduction of exports, which can further affect India’s position as the second largest exporter of sugar cane. The net impact is that sugar prices are likely to go up in India.

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