Government’s anti-inflationary stance to keep a check on sugar prices

Government’s anti-inflationary stance to keep a check on sugar prices

Will the government allow sugar prices to go up? That is the question investors must answer when faced with talks about a possible surge in sugar prices. Currently, the government’s decision to allow sugar exports of about half a million tonnes and news from Brazil about lower output are contributing to the buzz.

On Wednesday, the price of sugar for July delivery on the National Commodity and Derivatives Exchange rose by 1.2%, but fell by about 1% on Thursday. International prices have indeed risen sharply. The average international spot price of sugar in June was about 20% higher compared with May. But note that prices had dropped in May over April. Compare June prices with those in April, the increase is only about 3%.

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International prices have risen because Brazil’s sugar industry association Unica said that sugarcane crushing in south-central Brazil had fallen by 13% in the first half of June. All eyes will be on further updates from Brazil.

Another country that can influence global price movement is India. Its current crop output is estimated at about 24 million tonnes, with consumption at about 22.5 million tonnes. Any significant revision in the final figure, which is not unusual, could affect prices either way. Higher exports could also see a tighter market and prices going higher.

But domestic prices will not track international prices as long as the government stands in between. In May, India’s spot sugar price (ex-Kolhapur) fell 3.7% from a year ago, a period in which international prices had gained 36%. This shows the low correlation between international and domestic sugar price movements.

But that does not mean a bleak outlook for investors. Sugar firms are in a much better position in 2011-12 than they were in the previous sugar season. Output is plentiful, sugar inventory is priced reasonably and their by-product operations have enough raw material. Higher sales of co-generated power, ethanol and industrial alcohol should add to margins. But there are no windfall profits to be made, as sugar prices remain depressed. Rising interest rates are a bother for an industry that produces during season and holds inventory for the rest of the year.

As of now, there is no reason to expect a material and sustained rise in sugar prices. A downward revision in output may cause prices to go up. Another mitigating factor could be that sugar prices have been really depressed. And recent wholesale inflation data has shown that food prices are not driving primary inflation. Sugar in particular has been well-behaved, down by 6% since January. The government may ignore a small rise in sugar prices, as a reward, but anything more than that will be frowned upon.

Graphics by Yogesh Kumar/Mint

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