Why have sugar stocks rallied sharply in the markets?

Sugar stocks may not have had the best of times in the last 3 months. However, in the last couple of days, the momentum of sugar stocks has picked up sharply after the government agreed to expand the export quota for the current sugar cycle year. The sugar companies have benefited substantially over the last few years due to liberal export quotas and that has helped them reduce the outstanding. However, with the global food shortage, India also had decided to put restrictions on sugar exports. Now that is going to be relaxed.

The above table captures the price and their current market price levels vis-à-vis their year highs and lows. While sugar stocks had come under pressure after the government imposed the quota, the tide appears to have changed in the last couple of days after the government agreed to expand the sugar export quota for the current sugar cycle year. The above table only covers the sugar companies in India that are listed and have a market capitalization of more than Rs1,000 crore. But, first here is a quick primer on the Sugar Cycle year.

Unlike the other businesses that normally follow the financial year cycle, sugar is one sector that follows a unique cycle that extends from October of the current year to September of the next year. When we refer to sugar cycle year 2021-22 (current cycle) we are referring to the cycle extending from October 2021 to September 2022. This is the annual cycle that sees the sugar cycle extending from cane farming to crushing to the manufacture of refined sugar and other by products, including ethanol, which is a key blending agent for petrol.

The recent enthusiasm is with reference to the permission given to sugar mills to export more than previously permitted quotas. This, according to the government, will be instrumental in preventing defaults on contracts and ensure that the farmers and the crushing units do not end up paying a steep price in the process. In May 2022, amidst the global food crisis, the government had restricted the total export of sugar for the full 2021-22 sugar cycle year to just 10 million tonnes, lower than the export potential.

Now, with about two and a half months to go for the completion of the sugar cycle, the government is serious considering enhancing the sugar quota limit by 10 to 12%. Effectively, the total sugar export quota for the year would get enhanced by around 1.2 million tonnes to 11.2 million tonnes. This would be instrumental in ensuring smooth cash flows and also timely payments to the crushing units and also to the farmers. The final confirmation on the exact quota enhancement is still awaited from the government of India. 

India is already the world’s second-largest producer of sugar and in the past other countries like Brazil and Thailand had complained to the WTO that India was subsidizing sugar exports and it was also forcing global prices down by deluging the global markets with sugar. In May, the government was not too convinced that India would be able to meet domestic demand. But with sufficient inventories, that is hardly a concern. The best choice is to enhance the sugar export quota and hit multiple birds with one stone. Sugar companies are not complaining for sure.