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Wednesday, April 27, 2016

Are sugar sector stocks turning sweeter? - a guest post

Most small investors will be wise to stay away from sugar sector stocks for several reasons. Like most commodities, sugar's price moves in cycles. That makes long-term investing a challenge. One needs to carefully time entry and exit to make money from sugar stocks.

The other major reason is government interference and price control. Sugar manufacturers are not always at liberty to decide whether they will sell in the domestic or export markets and at what prices. Government also dictates what prices producers have to pay farmers for their sugarcane produce. As an agricultural produce, weather plays an important role in sugar production.

However, experienced investors who are not risk-averse and are adept at timing their entry or exit can take a look at sugar stocks now. In this month's guest post, Nishit explains why the current water scarcity and drought-like conditions in several states may benefit stock prices of sugar companies. 

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Summer is a time of drought and water scarcity in many regions of India. While the main reason for this is deficient rainfall, the impact has been higher - especially in Maharashtra - because a lot of water has been diverted to water-guzzling sugarcane crops.

The most drought-affected areas are the sugarcane belt and Maharashtra Government has declared a moratorium on new sugarcane factories for the next 5 years. Sugarcane output may fall to 50% of what it was 2 years back in Maharashtra, which is supposed to be one of the highest producers of sugar within the country.

Sugar stocks are in the limelight and they should be. Lower production leads to higher prices. That means bigger profits for sugar companies.

In Maharashtra, the drought cycle will continue till the farmers switch to cash crops which require less water. Sugarcane farming will lead to more droughts. Often it takes a crisis for us Indians to act. We have a crisis staring at us right now in terms of drought.

The sugar cycle is a long cycle and the prices have still not gone up very much. Global sugar prices had peaked at around US $35 in 2011 and are currently at US $15 after touching a low of US $10.

With increasing population and lower production, sugar sector is looking up. One of the issues which need to be considered is the debt of Sugar Mills. During the last price rise in 2011-2012, this debt factor prevented many sugar stocks from gaining ground.

Sugar producing companies in the southern part of the country need to be looked at also. With water scarcity unfolding and production of sugarcane dropping, sugar sector stocks cannot be ignored.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money ManthanYou can reach him at nish.stockid@gmail.com)

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