• The move for sugar decontrol i.e removing levy quota has once again gained momentum because of dip in sugar prices aided by both improved domestic forecast and higher production in Brazil, the world’s biggest exporter
• Currently there are several restrictions imposed on sugar industry
• Mills are expected to surrender 10% of their production to the government at prices below the market rate. This is called levy system
• Levy sugar goes to meet the needs under the public distribution system
• The remaining 90% is sold by mills in a restricted marketing environment
• In present sugar control regime, the government decides the distance between two sugar mills and takes decisions with regard to sugar import and export
• If the system of imposing levy quota is removed, government may have to buy at the prevailing market price
• If prices rise, the government will then have to take on a subsidy burden, if it wishes to sell cheap
• There have been suggestions that to compensate for this additional cost on government, a tax in the form of ces can be imposed on the industry
• The sugar industry is divided into – Private sugar mills, under Indian Sugar Mills Association and co-operative sugar mills represented by the National Federation of Co-operative Sugar factories
• ISMA wants the government to announce the decontrol decision at the earliest as they think it would be very beneficial for the industry as mills will be in a position to release floating capital after sale of sugar
• On the other hand co- operative mills fear that decontrol will lead to crash in sugar prices
• Still there are many issues which need to be resolved before decontrol can be implemented

Author:Rahul Sonthalia, Research Head, Kredent

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This was in fact hurting the Brazilian economy, since a major portion of its income depends on export of Sugar and other related products. Thus in a move to protect its exporters the government took this decision. This also lead to a 3.4% fall in the BrazilianBovespa Index tumbling by around 3%, the most since March.
I believe that this move could also lead to a correction in the Global sugar prices, because it will lead to a slowdown of fund flow in Brazil. Thus, at the current levels it makes sense to go short on the Indian Sugar stocks, which have already risen by a handsome amount (YTD), because if sugar prices will correct, its inevitable for the stocks to follow the same trend.

Moreover, most of the leading brokerage houses in India has come up with fresh buy calls on the Indian sugar stocks, despite their already escalated levels and which I believe could be the sugar sector entering into the distribution phase of this bubble.

Hence, one can go short on the sector with a trading view, but definitely with a stop loss.

Author: Rahul Sonthalia, Analyst, Kredent Group

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