The government could slap an import tax on sugar before the start of its 2010-11 season in October, to protect farmers and millers from a flood of foreign supplies as global prices crash and the rupee hovers at a 19-month peak.
A tax by the world’s top sugar consumer would discourage the imports India needs to build up stocks and put more pressure on New York raw sugar futures, which crashed to an 11-month low in April from a 29-year peak two months ago.
India’s sugar cycle is also set to flip to a surplus, from the sharp deficit that boosted New York prices, as farmers have planted more cane in response to higher prices last year.
“The government will certainly impose a duty on imports,” said Veeresh Hiremath, a senior analyst with commodity brokerage Karvy Comtrade. “But it will not do anything in a hurry.”
Last year India permitted duty-free sugar imports and set limits on stocks as output fell sharply and prices soared. Now, millers want the government to prop up falling prices.
“The cane price was very high this year, and so was the production cost, said Ashok Jain, president of the Bombay Sugar Merchants Association (BSMA), referring to the crop year that began in October 2009.
“It was around Rs28 to Rs29,” he added, citing a figure equivalent to about 63 to 65 US cents per kg.
“Now millers are putting pressure on the government to stabilise falling prices.”
In the changed market situation, millers and industry officials said, unfettered sugar imports could cut domestic prices to a level where sugar makers would suffer losses and default on payments to farmers.
“They should impose an import duty to protect the farmers,” said M Manickam, managing director at Sakthi Sugars, who said millers were fighting to retain their margins.
A broker based in western Maharashtra, the country’s top sugar-producing state, said imports would land on Indian shores at well below the domestic cost of production if prices stay at current levels.
“The international market is testing new support levels every day. The rupee is also strengthening. In the second half of the year the landed cost of imported sugar would be around Rs21 to 22,” said the broker, who deals mainly in raw sugar.
The rupee soared to a 19-month high this week, rising from a record low of 52.20 against the dollar in March 2009 to 44.43 on Friday, buoyed by a flow of $4.7 billion into Indian share markets in March.
Sugar imports into India may be even cheaper in future, as a Reuters poll forecasts a further rise of the rupee.
“If cheap imported sugar keeps coming into the market prices will fall further,” Jain said.
The price of sugar in Maharashtra has fallen by about a third to Rs2,700 per 100 kg since hitting a record high of Rs3,972.3 on 7 January.
With two-thirds of India’s population of more than a billion living in villages and forming a powerful voting block, the government tries to balance the interests of consumers and farmers.
Farmers helped Prime Minister Manmohan Singh’s government win two consecutive elections, but extracted a high price by launching protests over lower cane prices offered by millers.
Farmers in northern India, who had set on fire imports of raw sugar and forced Uttar Pradesh state to ban processing of raws, will fiercely resist lower cane rates but mills need to cut costs in step with sinking sugar prices.
Amid a supply glut in 2007-08, New Delhi had subsidised sugar exports to assist farmers, and Maharashtra state offered a subsidy to help millers pay farmers.
Farmers are aggressively seeking higher cane prices but millers cannot afford rises if sugar prices are low.
“It is difficult for the government to balance between farmers and consumers. It will not allow prices to rise sharply and at the same time will not allow them to fall significantly,” said Mukesh Kuvadia, secretary of the BSMA.
India’s 2009-10 sugar output of 18.0 million to 18.5 million tonnes would still fall short of domestic demand of 23 million, but a much larger crop is expected in the coming year.
“Now we need fewer imports than we thought. So there is nothing wrong in imposing an import duty,” a senior industry official from Maharashtra said.
“Despite a duty, say about 30 to 40%, imports would be viable.”
Kuvadia said imports were needed to rebuild stockpiles.
India should enter the 2010-11 sugar year with opening stocks of 3 million tonnes if domestic output tops 17 million in 2009-10, an official of the Maharashtra State Cooperative Sugar Factories Federation said.
“In 2010-11, I am expecting sugar production of more than 22 million tonnes,” said Prakash Naiknavare, managing director of the body.
The 2010 monsoon forecast and the start of rains that water crops in a landscape parched by a hot summer will also play a key role in deciding when the levy takes effect, said Ashwini Bansod, a senior analyst at MF Global Commodities India.
“Everyone is looking towards the monsoon this year. The government will watch its initial progress and its spread. And then only, I think, they will take a decision on the duty,” Bansod added.
Monsoon rains in South Asia are expected to be normal this year, a top Indian weather official has said, raising hopes for lower inflation and a rebound in the output of cane, soybean and rice after drought last year.