Sugar prices have been on a tear in the domestic market in the past few days, with prices of the sweetener jumping 24 percent in the past three weeks.
CNBC-TV18's Latha Venkatesh and Sonia Shenoy discussed the issue, along with the state of the industry and its own business, with Shree Renuka Sugar's managing director Narendra Murkumbi.
He conceded that a looming risk of weather disturbance is expected to keep prices high till the onset of monsoon. "There is a major weather risk hanging over all global agricultural markets. It has to do with El Nino and rain patterns in South America, which have not been normal."
Also read: India Ratings upgrades sugar cos to 'negative to stable'
Below is the interview of Narendra Murkumbi, MD of Shree Renuka Sugars with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Sonia: Why are sugar prices rising so much, is it just the weather condition or is something changing?
A: There are two factors, one was sugar prices were rather beaten down in the middle of the season that is December-January, global prices were at a three-year low, so there is overdue correction as the season closure is imminent.
Second is there is a major weather risk hanging over all global agricultural markets. It has to do with El Nino and rain patterns in South America, which have not been normal. So the combined effect is: people are factoring in that in 2014, there could be significant disturbance from the weather.
Right now, we do not have very abnormal weather, it has been drier than usual in Southeast Asia but everybody is watching the onset of the Indian monsoon and until then we can expect a bullish tilt at least to the sugar and oil markets.
Latha: How could you place the price target for now? We are still floundering on how the weather might move but for the next quarter, is there more to come in terms of sugar price hikes?
A: Right now we moved from about Rs 25,000 a tonne, ex-mill in Maharashtra to Rs 30,000. I think there is room to go to about Rs 32,000. You must also remember that now with decontrol, the price difference between on-season and offseason is going to be pretty large and that is also one of the factors playing out.
Beyond that now, we are looking towards end of June, we will have a fair idea of the monsoon and then the price cues will be based on that.
We had very healthy exports as well from India. We will end up with about 1.8 million tonne of exports. So stocks have also become very comfortable. So two government measures, soft loans as well as export subsidy have helped supporting and bringing up prices.
Sonia: What about the output, there is an expectation that for the first time in three years the sugar output is expected to climb quite a bit, what kind of production do you think we could see this year?
A: Domestic production is lower than early estimates. Against 25.1 million tonne, which we produced last year, we will end up at about 23.5 million tonne. We are also seeing lesser planting in North India, the planting season is not over. Cane arrears are at a record, which is causing farmers to divert away from sugarcane to other crops.
Arrears are mainly in North India now, they are concentrated in Uttar Pradesh and that part of the country.
Latha: We were getting varied estimates of even the current sugar years output, ISMA is going with 23.8 million tonne, some individual forecasters were putting it lower than 23, where are your own forecasts and give us an idea of how much lower can it be next year precisely for the problem that you are saying that lack of money is going to divert sugarcane farmers?
A: We are quite sure it will be above 23 million. Production is already 21.5 million as of March end.
Latha: Is there much crushing done thereafter?
A: There is not much but it seems to be enough to cross 23 because crushing is on still in all major states. As far as next year is concerned, one is lower plantings that we are seeing in North India.
There is slightly higher planting in Maharashtra given that monsoon was good this year but the main factor is going to be the spread and the consistency of the monsoon.
So it is too early to say what would be next year's production but it should be in the same range given normal weather.
Sonia: Your sugar business was down almost about 35 percent in the quarter gone by. You have posted an EBITDA loss also close to 20 crore, what could be the way forward, when do you see things recovering?
A: I think the underlying factors have already taken a positive swing. We had inventory losses, we had sugar produced at higher prices, which are sold at the bottom of the market. Going forward, prices are positive.
We have in the last 12 months -- other than the decontrol at the central government level -- moved to a cane pricing mechanism based on sharing of revenue with farmers in both our states, Maharashtra and Karnataka.
That means that our margins will be much more consistent from hereon irrespective of whether sugar prices are high or low. So some of these fundamental changes in the business will start getting reflected in the next few quarters.
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