Sugar Cycles: 7-8 years of losses followed by 2-3 years of super gains!

Sugar Price to further accelerate as per industry experts and we can see downstream of ethanol by companies soon. I think once ethanol gets used for industrial use government will not regulate industry that much.

Sugar prices may spike up faster than anticipated as shortage is looming… it is inevitable in commodity business.
In long term sugar industry is looking good due to by-product usage and new uses like bio-chemicals. Bio-chemicals are necessary and will soon replace petro-chemicals (in a small way !!). Indian govt should have promoted this years back. Balrampur has started and others will follow. ENA usage is also increasing.
Govt should promote this industry instead of being fixated over controlling sugar prices - which is anyway not a big part of household expenditure - and no voters will not vote due to high sugar prices !!!
Sugar prices will never be low going forward.

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One more video to understand on sugar cycle where Anil Sir has shared his insight on the current changes

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ISMA raises sugar output estimate to 340 lakh tonnes

  • gross sugar production is now estimated at 340 lt in 2023- 24 against the gross output of 366.2 lt in the previous year.

  • availability in Maharashtra and Karnataka is higher than expected.

  • However, cane availability in another major state, Uttar Pradesh, is predicted to be lower than earlier estimates.

Business Line 14-Mar-24

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Oil Minister says Probably’ state fuel retailers still incurring revenue loss on diesel sales

Have launched Ethanol-100; an auto fuel to be available at 400 petrol pumps from Apr 1, 2024.

Seems like good news for sugar companies?

Disclosure: I had only investments in one company Uttam Sugar. Had shifted to it from Renuka in Mar/April 2023 after holding for a year plus there. Have fully exited Uttam Sugar post Q3 results. Our field reports suggest there is some trouble ahead this year for Uttam Sugar in its mill areas. crushing/yield will be affected. Anyone invested in Uttam Sugar, please do your own diligence.

Every time I think I have understood the variables somewhat to like 60% competency levels, something out of the ordinary comes - this time the Govt policy intervention totally spoiled the sentiment curve. And actual production is not bad in KA, TN

just to complete the sugar-cycle experience in this cycle (for myself) - I have thought of getting into Triveni Engg - as it’s a better risk-adjusted bet - but haven’t yet taken action on that front. Will update if I do. My sugar expert friends invested in Triveni Engg have stayed invested.

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there is no doubt that ethanol ban will be lifted after elections or where is the ethanol going to come from for these pumps? prices of sugar will go up… may be 5% to 42 (wholesale price) after elections - enough for the sugar mills to make higher profits than last year.
the biggest challenge now is how to tackle delayed payment to farmers. govt will have to give temporary funds for few months to clear dues to farmers which will be repaid once sugar stocks are sold.
the situation in the industry right now is only temporary and will be back to long term growth cycle after elections.

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There is grain based Ethanol too

Cane based ethanol is not sustainable in the long run. It takes up too much water. If the crude prices remain in control, the government might not push too much towards ethanol blending unless it comes from grain based sources. Just my perspective.

Balrampur chini mills promoters also bought recently.

Dhampur sugar did buyback recently. Dwarikesh Sugar also announced buyback recently.

Ethanol story was mainly to abosrb the exces sugar stock. Petrol from Crude oil is generally cheaper then ethanol blending.

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There are reports that next year its going to be La Nina…excess rainfall in India …drought in Brazil

This shortfall in sugar production has been expertly dealt with by the Modi govt in a win win manner…farmers are happy, mills and consumers are not complaining…and a by product of all this will be a clean sweep in the upcoming election in the sugar belt…i have held that those betting on upcycle in sugar sector are basically betting on bungling of the sugar sector by Modi govt…the govt has again won.

Next year…if there is excess production, then india will first build a buffer stock…then use the excess production to export and for ethanol production

It may take quite a few years for the sugar sector to become bullish again…till then lets try not to get trapped here…

Guys …pl dont try to fight the market…dont get stuck in sugar stocks for next few years by over analysing…do remember investing in cyclicals is a game of momentum…the long term charts of frontline sugar stocks are clearly signalling an exit.

If you really want to play cyclicals…have a look at HEG / Graphite India…SAIL…THIRUMALAI…ETC

Good bye

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Buffer stock of 4M tons was built in 2019. Now that we know the template of sugar use as Modi govt sees (priority order):

  1. Have atleast 3 months of buffer stock
  2. Ensure sugar is available for next sugar year (India’s consumption isn’t going beyond 29-30M in next few years)
  3. Exports or ethanol blending.

Last time (2021-22 ?) sugar sector was bullish with a combination of factors:

  1. Ethanol blending was at (till then) highest, mills could practically choose which ethanol (juice, B-Heavy, C-Heavy) to sell based on profitability. Immediate cash-flow within 15 days was a given.
  2. Cane FRP/SAP was by and large constant from previous year(s)
  3. Optimum sugar stocks, sugar price rose ‚āĻ2-3/kg, inspite of sugar MSP staying constant at ‚āĻ31/kg since 2019.
  4. Exports allowed sugar mills to liquidate additional stock.

Unless UP is affected in a very big way, with last few years improvement in recovery/yield in UP, India may never face sugar shortage requiring imports like happened in 2009. Domestic sugar demand is ~29-30M tons, any cane shortfall as it happened this year will affect exports/ethanol first.

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Sugar sector has been affected by Govt. policies - like banning exports, banning ethanol, tight control on sales quota. But still sugar companies in UP will make more profits than last year due to following:

a) cost of production is low - India is second lowest cost producer of sugar after Brazil as mills are efficient. Inspite of cost of sugarcane being higher by 20% than Brazil as Govt. controls the price of cane. Sugarcane is the most profitable crop in India and still Govt. keeps increasing the price. In 2022 even when SAP was not hiked acreage increased by 7%. Due to delay in cane payment in last few months (due to ethanol ban), farmers who were planning to plant more sugarcane have not done it. While returns from sugarcane is high delays in payments can be a big discouragement. For all crops the aggregators/ middlemen buy at 25% lower from farmers as they offer cash payment. Farmers prefer to take lesser price but most important is assured payment. Govt is yet to understand this for sugarcane.

b) Use of all by products like bagasse for power, CO2, spent wash (new usage) , etc.

c) Low debt inspite of soft loans available from Govt. Sugar companies have become smart over the years not to trust the Govt. Most of the companies have debt: equity <1 - that too as the loans are at low rates from govt. they have used surplus cash for share buyback !!

With new product like bio-chemicals/ bio-plastics, this sector is going to outperform in the coming years.

My observations on the current situation of the Industry are as follows:

  1. Sugar production in Brazil has increased to 41 million tonnes in 2023-24 compared to 38 million tonnes in the previous year. . Source Sugar production in Brazil 2023 | Statista The sugar cane production is much more than the sugar production in Brazil and the mills choose between sugar and Ethanol depending upon whichever is more profitable. So, if the sugar prices become more attractive, Brazil might prefer to produce sugar which will bridge part of the gap.

  2. The global sugar price show a decline trend peaking out at 28 cents a pound in the fourth quarter of 2023.source Sugar - Price - Chart - Historical Data - News
    However, Reuters expects to prices to increase due to expected shortages in the global market. Source : https://www.reuters.com/markets/commodities/global-raw-sugar-prices-expected-rise-20-this-year-2024-02-14/#:~:text=Commodities-,Global%20raw%20sugar%20prices%20expected,20%25%20this%20year%3A%20Reuters%20poll&text=LONDON%2C%20Feb%2014%20(Reuters),12%20traders%20and%20analysts%20showed.
    So, it is a dynamic situation of how much is the expected shortage and what does Brazil do.

  3. At the current prices and together with export subsidy, exporting sugar is attractive for the Indian sugar mills.

  4. The average Indian sugar production have been about 32 million tonnes while the domestic consumption has been about 26million tonnes leaving an excess of about 6 million tonnes To prevent sugar shortage, the Government might have decided to restrict exports, restrict diversion of sugar cane juice and B Heaby molasses.

  5. If India wants to achieve 20% ethanol mixing in petrol by 2025, the excess production of 6 million tonnes equivalent or a major portion of it can be diverted towards ethanol. In this case, the country will achieve its target of mixing in Petrol, the government need not have to pay export subsidy and the mills will get a better realization.

  6. The major headwinds for the industry now are Export restrictions and restrictions on use of sugar cane juice and B Heavy Molasses for ethanol production. While FRP have gone up many times for the sugar cane, the MSP for sugar have not increased for a long time now. All these are policy decisions by the government. One may not expect any such policy decisions to be taken before the elections. However, after Election, whichever party comes to power , may take such decisions based on how they perceive the adequacy of sugar in the country is.

  7. Such policy decisions may be the infliction point for the sugar stocks. Sugar stock prices have corrected from their peak and in my humble opinion deserve to be in our watch list.

Disclosure: I do not own any sugar stocks. I am not SEBI registered . My views are academic and arenot recommendations to buy or hold or sell.

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London refined sugar price is USD 652 per ton - which translates to Rs 55/ kg - much higher compared to wholesale price of Rs. 40 in India. Govt. has done a good job of keeping prices in control by banning exports and ethanol.

Due to this all sugar mills have cancelled their ethanol expansion plans and are looking at alternate uses like CBG, bio-chemicals. Triveni is diversifying into branded alcohol !

On hindsight export and ethanol ban have been good for the industry - companies will focus on higher margin products rather than sugar/ ethanol. Sugar prices are currently about 37-38 ex mill which will lead to higher margins compared to last year (after higher SAP prices). Next year prices are going to be higher by few Rupees which will absorb increase in FRP/SAP and margins will be even higher. By then alternate uses like bio-plastics of Balrampur, etc will be in place and hence prices of sugar will sustain.

Given all this valuation of sugar sector is lower than fair value. I expect more share buybacks to happen next year.

I think ethanol blending target of 20% will happen only by 2030 as not enough cane is available and even grain based ethanol is not making money due to high grain prices. Whatever the scenario, ethanol will not negatively affect the sector. In case Govt allows ethanol sugar prices will increase and profits of sugar mills will be higher.

One thing everyone has to understand (incl govt) is that only profitable sugar companies can make this sector sustainable and ultimately benefit the farmers.

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As anticipated, Ethanol blending target of 20% has no target date (earlier it was 2025)… even PM is not mentioning when the target will be met.

He mentions one more use of bagasse - bio-degradable cutlery… hopefuly demand will go up now…

Sugar consumption has increased to 29 -30 mn tons.
https://twitter.com/fooddeptgoi/status/1778688756381569294

Good days ahead for the sugar sector… demand increasing from multiple uses… entire sector could see a rerating…

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Sugar prices have shot up - but benefit will reflect in Q1 FY25.

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