By Srijan Kanoi, Edited by Pankti Mehta
The Indian government, along with the Cabinet Committee on Economic Affairs headed by the Prime Minister, on Wednesday approved a production-linked sugarcane subsidy of Indian Rupees 55 (82 cents)/mt to be paid directly to farmers by mills, in order to support domestic prices amid a sugar supply glut.
Domestic prices in India on the NCDEX spot market in Kolhapur, Maharashtra, have fallen by about 25% from the beginning of the 2017-2018 (October-September) season to Indian Rupees 28,646 ($430)/mt, inclusive of GST, Wednesday.
Along with bolstering domestic prices, the subsidy will assist domestic mills in reducing the cane arrears of $2.5-$3 billion and help them achieve the export target of 2 million mt, set by the government back in March for the current 2017-2018 season, market sources said.
The production-linked subsidy is equivalent to an export subsidy of about $122/mt, with export target of 2 million mt and a sugar production estimate of 31 million mttq this season, S&P Global Platts Analytics data showed.
This would make Indian low-quality white, or LQW, sugar competitive in the region at around $300-$310/mt FOB West Coast India, with Pakistani LQW offers at around $315-320/mt FOB Karachi. Indian LQWs will also compete for homes in end destinations such as Sudan, Myanmar and Taiwan against Thai high-quality whites, or HQW, which was assessed at $330.40/mt Wednesday, S&P Global Platts data showed.
Before the subsidy announcement, Indian LQWs were uncompetitive in the region with the spread between domestic prices and the front-month London No.5 futures, the global benchmark for white sugar, at $85.20/mt Wednesday.
“With Indian closing stocks at around 8-9 million mt [for the 2017-2018 season], they needed to export and for exports, the domestic mills needed a subsidy,” a trader said.
The production-linked subsidy is not the first attempt by the government to support domestic prices. It has already scrapped the 20% duty on exports and have imposed a mill-wise Minimum Indicative Export Quota (MIEQ) for 2 million mt exports until the end of the 2017-2018 season.
Domestic sugar prices in India have been in a bear grip this year, amid an unprecedented rise in cane availability, feverish pace of crush and record agricultural yields which will result in a record production of 31 million mt this season, Platts Analytics estimated.
The last time India exported sugar was in 2015-2016 when the government awarded a production subsidy of Rupees 45/mt (70 cents/mt) of cane crushed on the condition that the industry exported about 3.2 million mt of sugar and also supply a specific quantity of ethanol for blending.
The Indian subsidy exacerbates the bearish sentiment in the global sugar market, which is already grappling with a bumper crop and increased exports from Thailand, Pakistan and the EU.
Following the announcement on Wednesday, the front-month London No.5 August (Q) future dropped to $315.97/mt during the day, down $9.43/mt from the previous settlement, to settle at $323.8/mt, down $1.6/mt on the day.
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