India may reduce shipments and boost production

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During the third week of March, the India Sugar Mills Association (ISMA) updated the country’s sugar production data accumulated until the end of the first half of this month. We had declines in all comparisons, year over year, in the margin, on the five-year average, and in the crop’s cumulative volume. Yet, observing more deeply that developments in local fundamentals draw more attention, with initial revisions for the current production being positively adjusted by representatives of both the productive and industrial sectors.

The first revision came from the ISMA, which, in February, raised its expectations from 26 to 26.5 million tons of sugar by the end of the 2019/20 international season, which ends in October this year. Later, All India Sugar Trade Association (AISTA) raised its numbers from 27.4 to 27.5 in early March, followed by Indias’ Ministry of Food Processing Industries (equivalent to the Ministry of Agriculture in Brazil) ‘calibrating’ their data, only this time in a negative way and more in line with ISMA and AISTA, changing from the range of 28 to 29 million tons to the level of 27.3 million. Despite the more pragmatic alignment around 27 million tons by three important local entities, SAFRAS & Mercado warns about new upward adjustments in India’s supply.

Although these gains are not as large as the volume of the past crop, which hit 34.4 million tons, India must still have a supply of 30 million or, worst case, 29 million. Local ethanol production has gained momentum, reaching 1.4 billion liters in Uttar Pradesh alone, one of the main producing states, which helps limit the possibility of volumes above 30 million tons for the current season. Even so, the local blend must oscillate at most by 4.8% of ethanol in gasoline in the current season, against 2% in the 2018/19 season. The 10% target for 2021 had already been disregarded in early January this year.

Looking at the most recent data, during the first half of March India had a production of 1.68 million tons of sugar, down 42.04% from 2.90 million tons produced in the previous fortnight. In the annual comparison, we can observe a fall of 34.63% from 2.57 million tons produced during the same period last year.

Compared with the 3-year average for the same reference period, production dropped 26.78% from the current volume. The 3-year average itself decreased by 19.38% in the margin, from 2.85 to 2.30 million tons. India indicated the shipment of 1.60 million tons of sugar, while 3.20 million are already committed. This volume shows that 53% of the country’s subsidized export target are already completed.

The 34.63% decrease in the annual comparison of the first half of March contrasts with the annual increase seen in the immediately previous fortnight, when the volume produced was 2.50% below the same moment of the previous year. Since the beginning of the year, the average decline of volumes in annual terms has fluctuated around 17.92%, while from the perspective of the 3-year average decreases have generally fluctuated around the level of 11.11%.

In the season’s cumulative volume, India already has a supply of 21.58 million tons, down 21.11% from 27.35 million tons produced in the cumulative volume of the season until the same moment of the previous year. In the volume accumulated until the previous fortnight, the lag between the current and previous crop hit 22.57%. In this context, the volume of 1.68 million tons produced in the first half of March was 37.50% below the average production for the current crop, which currently fluctuates by 2.69 million tons. The season’s average production decreased by 5.08%.

Last Tuesday, the National Federation of Cooperative Sugar Factories (NFCSF) indicated its expectation that the country will end up shipping only 4.5 million tons of the commodity during the current 2019/20 season. This volume contrasts with the expectations of the Indian Sugar Mills Association (6 million tons) and the USDA (5 million tons).

Given this signal, the market can expect a cut in the supply availability between 500,000 and 1.5 million tons, which would respond to a 10% to 25% decline in the expectation of shipments by India. It is clear that the calculations of percentage evolution sound more ‘dramatic’ than the reality usually is, especially when we take into account that until now 3.70 million tons of sugar are already committed in exports, with 75% of such volume (2.8 million tons) already shipped. Thus, India would still have nearly 3.2 to 1.7 million tons to export. If we look at what is already committed, the advance is even greater, between 2.3 million and 800 thousand tons available in the market, depending on whether the estimate is either 6 or 4.5 million tons.

Therefore, SAFRAS & Mercado expects there will be few impacts of the reduction in the estimate for Indian exports for the current season by the NFCSF, remembering that local mills still have a subsidy for sugar shipments of USD 137.5 per ton, equivalent to 6.24 cents, that is, more than 50% of the current driver contract of the New York exchange.

There have been rumors by mills in India that there will not be conditions to pay local suppliers due to the current low prices on the foreign market. However, these are only more local speculations trying to raise prices. In the meantime, in Brazil, Petrobras ended up announcing a 15% cut in gasoline prices in force last Wednesday, which could further lower hydrated ethanol prices, raising the mix for sugar and reinforcing the downward pressure on domestic prices.