Sugar prices have come a full circle. After reaching a peak of Rs 2,000 per quintal in June '06, they started to fall and bottomed at Rs 1,400 Sugar Prices per quintal by May '07. The excess of sugar inventory led to lower sugar cane cropping. The resultant decrease in sugar production, triggered the climb back of sugar prices. The prices are now ruling at Rs 2,480 having breached the earlier peak.
The domestic prices are also in sync with international prices, and have increased 15% since January to touch Rs 2,480 per quintal. Moreover, the May contracts at London International Financial Futures Exchange (LIFFE) for white sugar futures are up already around 17% in value since the beginning of the year. At Intercontinental Commodity Exchange (ICE), May raw sugar futures have gained around 9% in the last four months.
Sugar futures at National Commodity Exchange (NCDEX) are also trading at a premium to spot price, in anticipation of a further tightening in supplies. This is a contango, when far future contracts trade at a premium as compared to the near term contracts. This discrepancy between NCDEX future prices and the spot price can disappear only after the sugar supply rebounds and inventories start rising.
The major reason for the uptrend in sugar prices is the decline in area under sugar cane cultivation in India, with farmers switching to other crops like wheat and rice. According to the Indian Sugar Mills Association (ISMA), the area under cane cultivation has decreased from 28.5 lakh hectares in '07-08 to 21.4 lakh hectares in '08-09. As a result, domestic crop production is expected at 15.5 million tonnes during the October '08-September '09 period, significantly lower than the annual consumption of around 22.5 million tonnes. This will increase the dependence on stockpiles, which stood at around 10 million tonnes at the beginning of this sugar year.
The global production scenario is also grim, with factors such as diversion of crop for ethanol production and switching to cash crops being the main reasons. According to the International Sugar Organisation, '08-09 world sugar production is also forecast to drop 4.2% year-on-year to 161.5 million tonnes raw value, which would be 4.3 million tonnes short of total demand. Raw value of sugar is a basic measure in which all forms of sugar can be expressed. Reduced cropping in India, the world's second-largest sugar producer and largest consumer, is also among the causes for the world moving from surplus to deficit in terms of sugar supply.
To meet the widening deficit of the domestic market, the government has adopted various policy initiatives, which includes setting stock limits and importing raw sugar and white refined sugar. India plans to import about three million tonnes of sugar to meet its domestic demand. But imported sugar is much more expensive than local sweeteners at present, making the imports unviable. Raw sugar imports at zero duty to increase domestic supply has failed to put a lid over prices, as the local market is coupled with global prices which are also rising and the weaker rupee has made imports dearer. The other recent initiative of duty-free imports up to one million tonnes of white refined sugar is also yet to make an impact on the commodity prices.
While there seems to be no sign of prices easing in the near term, much is expected from Brazil, where sugar production will start this month. Brazil, the largest producer and a major exporter, has seen an impressive increase of 10.7% in area under sugar cane cultivation in '08-09. This is likely to increase sugar cane production to 600 million tonnes, an increase of 6%, and a similar increase in sugar production. This should certainly ease the pressure on sugar prices globally, by July, when Brazil gets into full production. With a policy environment in favour of imports, this should also provide enough supplies for the domestic market. Till then, the bullish trend in sugar prices is expected to continue.
Source : The Economic Times