Indian sugar prices climbed four percent on Wednesday to their highest level in nearly 11 months after the government allowed exports of one million tonnes and traders looked to take advantage of higher global prices, analysts and traders said. The December sugar contract on India's National Commodity and Derivatives Exchange was 2.34 percent higher at 3,015 rupees ($57.9) per 100 kg at 1108 GMT.
The contract earlier hit a high of 3,059 rupees, the highest level for the front month contract since December 29, 2010. In Kolhapur spot market in the country's top producing Maharashtra state, sugar jumped 3.4 percent to 3,050 rupees per 100 kg. Global prices eased on the promise of extra supplies.
India late on Tuesday decided to allow one million tonnes of white sugar exports under Open General Licence (OGL), double initial expectations from the world's second-biggest producer. It also decided to scrap the stock limit for traders. "(Domestic) sugar prices will gain further as the market was expecting permission for 500,000 tonnes, but the government has surprised with one million tonnes," said Vedika Narvekar, a senior research analyst at Angel Commodities Broking Pvt Ltd.
Traders and analysts all agreed domestic prices are likely to see a floor at current levels but expectations for gains ranged between two to seven percent in the next two months. "We need to see at what prices mills will export sugar. If they get good premiums over domestic prices, then local prices will harden further," said Mukesh Kuvadia, secretary of the Bombay Sugar Merchants Association.
New York benchmark raw sugar futures traded down 0.64 percent at 23.29 cents a lb at 1109 GMT while Liffe white sugar March futures fell 0.7 percent to $609.6 a tonne on a free on board (FOB) basis. Indian sugar futures prices currently equate to around $630 per tonne for white sugar, delivered to a domestic port. The government expects India to produce 24.7-25.0 million tonnes of sugar in 2011/12, while the Indian Sugar Mills Association sees production at 26 million tonnes. Consumption is about 22 million tonnes a year, leaving ample room for exports.
In the 12 months ending September 30, 2011, India allowed exports of 2.6 million tonnes of sugar, including unrestricted overseas shipments of 1.5 million tonnes, popularly termed as sales under OGL. OGL sales are limited only in quantity, not by any other trade restrictions. Exports will be welcomed by Indian sugar millers struggling with higher input costs due to a rise in cane prices.
"The exports will help millers in reducing inventory and ultimately cost of carrying extra sugar will go down. It will also improve the cash flows for them," Narvekar of Angel said. Shares of sugar companies like Shree Renuka Sugars, Bajaj Hindusthan, Balrampur Chini Mills and Simbhaoli Sugars Ltd rose as much as four percent early on Wednesday, but ended as much as 7.5 percent lower on weakness in the broader stock market and as investors worried about production costs.
"Currently due to the weak rupee and higher prices in the international market, millers are getting better realisation from exports. It should help them in improving their bottom line," said a Mumbai-based sector analyst with an international brokerage. "But its impact will be limited as this year they are going to pay farmers much higher prices for cane."
In the biggest sugar producing state, Maharashtra, millers have agreed to raise the first instalment of payment - usually over 80 percent of the total cane price - by five rupees per 100 kg to 180-205 rupees per 100 kg. In the second-biggest sugar producer Uttar Pradesh, the state government has raised the cane price by as much as 19 percent to 235-250 rupees per 100 kg. Millers have been pressing the government for the past few months to allow this first tranche of exports and now hope in early 2012 it may allow second tranche, if there is more clarity over output levels.