The Indian government must now be regretting its failure to recognize until the other day that the
mounting global sugar shortages — and the world demand not wilting in spite of economic strain —will leave it with little headroom to manage open market prices of the sweetener. It is
understandable why in the present circumstances New Delhi is asking the factories to bring into the market the maximum quantity of sugar from its current production and also by way of inventory liquidation as part of supply side management. But in its attempt to cap prices of sugar, the government is ensuring that the new season, to begin in October, will have disturbingly
thin stocks to open with. Remember the big festive demand for the commodity will
stretch from September to January when India will have a number of festivals to celebrate,
and the mills will be able to pump in new-season sugar in reasonable quantities only from
mid-November.
Therefore, the intensive resort-to-release instrument could be fraught with peril as we
go forward. This year’s disconcerting Indian production of less 14.8mt (million tonnes), a
fall of 48% over the previous season, plus imports of 3mt falls way short of domestic
demand, to meet which India is rapidly emptying the inventory.
Cane is a resilient crop. But from the time preceding sowing to ready to harvest cane,
the crop needs good rains during the entire span of India’s south-west monsoon. An
errant monsoon, which is the case now, could tell both on the crop size and cane’s sugar
content. If India is experiencing a nearly 20% shortfall in rains over the June–September
period, then it becomes imperative to scale down the 2009/10 projection of the country’s
sugar production from the earlier 20mt to as little as 16mt.
The development of El Niño weather phenomenon is simultaneously denying India a
normal monsoon critical for its food and cane crops and spelling a particularly wet
weather in Brazil dislocating harvest of cane standing in the fields. So the world is in a
situation where diametrically opposite kinds of weather will have a devastating impact on
the cane crop in the world’s two leading sugar producing countries.
As a consequence, in New York ICE October 2010 contract raw sugar is traded at a
28-year high of over 22 cents a pound. The October Liffe white sugar is also done at a
record around $570 a tonne. Since the beginning of 2009, sugar prices — helped by a
widening global deficit — have advanced over 75%.
Kushagra Bajaj, managing director of India’s largest sugar group Bajaj Hindustan, says the
market is so poised as to take raw prices to 25 cents a pound and beyond. According to
him, a major trigger for further price spikes will be India’s sugar import needs rising to
4.5mt next season. But Morgan Stanley suspects India may end up importing 6mt.
There is no doubt that the world physical market for sugar will become increasingly
tight as we come to 2010, helped as much by the long-term weather forecast suggesting
heavy rains in Brazil’s cane growing centres till December coinciding with the end of
harvesting season and buyers rushing in to make spot and forward deals. Commodity
watchers are, therefore, saying raw futures could very well cross 30 cents a pound.
Industry official Om Dhanuka says the combination of a global deficit of 12mt and
stocks approaching record lows are leading all importing countries to cover their positions
quickly. Besides big ticket importer India, the US will be importing over 800,000 tonnes by
late spring as its sugar stocks to usage ratio has sunk to a worrying 3.4%. US Department
of Agriculture considers 15% to be the ideal ratio.
The ranks of significant importers are increasing with Mexico having suffered a
production setback is to import at least 400,000 tonnes. Egypt will be another big
importer. As the underlying sentiment is to stay bullish well into 2010, food and beverage
companies are making spirited purchases of futures as a hedge against future price spikes.
Dhanuka says sugar price advances have led hedge funds to double their net long
positions. After a break of 10 months speculative money is coming in torrents in the
commodity market per se and sugar is a major beneficiary of that.
Bajaj says sugar demand growth is not going to be impaired by its current prices. He,
therefore, expects Indian sugar use to rise 4.3% to 24mt next season. Whatever the
prices, sugar will constitute only a small portion of a family’s food budget. Neither does
the economic meltdown hit the sales of beverages and sweets.