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Business News/ Money / Personal-finance/  Global sugar market shows signs of further tightening
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Global sugar market shows signs of further tightening

Global sugar market shows signs of further tightening

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Trading in sugar futures resumed on Monday, after being closed by the government in May 2009. Unfairly blamed for causing volatility in sugar prices, the resumption in futures trading is a right step in a free market. But the timing is puzzling. Though India’s sugar crop is expected to be good, with a low risk of a supply shock, sugar prices have been rising steadily. The sugar crushing season is underway. This is also the time when estimates of sugar production, notorious for being off the mark, will start making the rounds. Last year, the final output was around 21 million tonnes (mt) compared with a low estimate of about 13 mt.

Also See Not So Sweet (PDF)

Chances of a better output this year are higher. Weather conditions have been good. Last year’s high cane prices will ensure that the area under cane cultivation will be higher this season. Sugar output is estimated to be about 25 mt in sugar season 2011 (October 2010-September2011). Prices have been rising nevertheless, though in a more gradual fashion. Wholesale sugar prices in Delhi are up 13% since September and about 17% from their 12-month low. That may not seem like an alarming rise, but the global sugar situation is a bit precarious.

Weather-related issues are expected to hamper production in many large sugar cane growing countries. In Brazil, dry weather has affected productivity in the south-central region according to the country’s sugar cane industry association UNICA. In the second half of November, sugar cane crushing was down by 29% compared with the same period last year. In the season so far, cane crushing is estimated to be about 9% higher, compared with last year. But dry weather has put at risk the earlier estimate of 570 mt of processed cane, with the actual figure coming in closer to 560 mt. Developed markets such as Europe and US are expected to see less than expected output, due to cold conditions. In Australia, the industry association, Canegrowers, estimates raw sugar output at 3.6 mt compared with a normal range of 4.5-5 mt.

If India was a key factor in the previous sugar season, then it looks likely to play a similar role in the current season as well. Last year, after initial estimates projected a shortfall in India’s sugar cane crop, global prices soared. When the actual crop came in much higher, prices tanked. Now India’s output is very healthy, but the government has only given permission to export 500,000 tonnes. Expectations of tight supply in leading sugar producing countries, and the belief that India may not be a major exporter, are translating to higher world prices. On Friday, raw sugar ICE futures in New York jumped by about 20% over 1 December, and expectations are that the trend will be upwards.

The first day of futures trading in sugar went off uneventfully, with January contracts trading only marginally above spot prices. But the resumption of futures trading may result in more volatility, as international developments will affect domestic futures, too.

Normally, that would be a sign of more efficient markets. The problem is, when prices fall, this may be appreciated but not the other way around. The government is already under flak for rising prices of vegetables such as onions and it would not like to add sugar to its worries.

Currently, sugar companies appear to be in a good position. The government has relaxed the stringent stock limits it had imposed on end-users. They will be in a position to produce more sugar this year, with the cane procurement price too expected to be lower, compared with last year. What’s more, the levy price (the price at which the government procures sugar from mills for its public distribution system) is much higher at about 18 a kg. That reduces the losses they incur on levy sugar this year, because their cane costs are lower, too. The resumption of sugar futures is another indication of a more relaxed government policy stance.

The next few months will be critical for the sector. The ideal environment would be for sugar prices to continue the trend so far—a gradual upward movement. A spike could make the government nervous again, setting in motion a series of policy measures that take the wind out of sugar prices, repeating last year’s situation. Though sugar stocks may appear good bets under current conditions, investors should not forget last year’s harsh experience. In the near term, firm estimates of India’s sugar output would provide the next trigger for domestic and global sugar prices.

Graphics by Yogesh Kumar/Mint

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Published: 27 Dec 2010, 09:19 PM IST
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