Improving output: A view of a sugarcane farm. G. Chandrashekhar
Mumbai, Aug. 6 Who will feed the Indian appetite for sugar in the coming months is the multi-million dollar question doing the rounds of the global sugar market. .
Even as the second half of the four-month South-West monsoon cycle has begun, over half the country is reeling under deficient rains. Key agricultural States continue to face acute moisture stress.
The prospect of sugar production improving from the disastrous level of 2008-09 has considerably waned by now. The combination of threatened low production, robust demand and precipitous decline in inventory has propelled market prices to levels out of reach for a vast majority of the population.
But the worst is yet to come. If India — the world’s largest consumer and second largest producer — is suffering drought-like conditions, the world’s largest producer and exporter, Brazil, has begun to face problems of excess rainfall.
There will be delays in crushing by Brazilian mills as the second half of the year is likely to face wet conditions. The sucrose content is also seen lower. It is ironical that both the top players face weather-related problem — too much rains in Brazil and too little in India.
Speculators active What happens to the market when the world’s top two producers face problems that will have a bearing on annual production, supplies and stocks? Seizing the opportunity, speculators have already moved into sugar futures. The lengthening long positions on the international bourses are a testimony to growing speculative interest.
No wonder, among agricultural commodities, sugar has continued to be star performer. Sugar futures prices have been rising relentlessly in recent weeks. The latest is that ICE front-month sugar contract has surpassed multi-year highs and is threatening to breach the 20 cents a pound mark, a psychologically significant level.
In May, the preliminary global sugar production and consumption for 2009-10 was projected to be tightly balanced at about 160 million tonnes, raw value. There have been dramatic changes in the last two months. Now, the market balance is decisively going into the negative territory, with no major recovery in India in sight and some risk to Brazilian sugar production. .
On current reckoning, Brazilian sugar output may fall short of the initial forecast of 37 m.t. El Nino is also a factor that holds a threat.
At the same time, as for Indian production, the initial projection of close to 20 m.t. (up from 15 m.t. of 2008-09) is at a serious risk of a decline, probably to 15-17 m.t. levels. Consumption, on the other hand, may stay at 23 m.t. Thus, the global market fundamentals are in no position to release the upward price pressure. .
Already, white sugar has crossed the magical $500 a tonne mark. Indeed, punters are betting on sugar futures for February 2010 touching a record 22 cent a pound, if El Nino takes its toll. In the event, the landed cost of white sugar would be over $ 600 a tonne or Rs 30,000 a tonne ex-docks. It would be at least 10-12 per cent higher at the retail level.
Import bill India’s import requirement is expected to be not less than four m.t. valued at about Rs 10,000 crore, with the possibility of it going to five m.t. How the government would respond to this alarming situation remains to be seen.
Without the industry’s cooperation, it would be well nigh impossible to contain galloping prices. Will the industry rise to the occasion?
It is imperative that the interest of consumers is protected. Even among consumers, household consumers need greater protection. The only mechanism available at present to deliver sugar at lower prices to poor consumers is the public distribution system. .
Institutional or industrial users, on the other hand, constitute as much as 60-65 per cent of the total sugar consumption. They are in any case going to pass on the burden of higher sugar price to the eventual consumers. Is it possible to sell sugar at differential prices — at higher rates to bulk consumers such as bakeries, toffee and candy producers, sweetmeat makers and soft-drinks manufacturers?
When crushing of indigenous sugarcane begins by November, there could be a minor relief from high prices; but it would surely be temporary. 2010 is going to be one of the toughest years for consumers, sugar mills and the government alike. 2008-09 is all but over, barring the festivals.
All stakeholders will have to look beyond and start reworking their priorities. .
High food inflation will embarrass the government no end. Political pressures will manifest themselves in the form of policy risk — sudden changes in policy and more stringent controls at every stage of the supply chain.
This will, in turn, create huge business risk for those dealing in sugar.
MSF Price at posting:
$2.13 Sentiment: Buy Disclosure: Held
