The Hindu Business Line : Bearish phase in sugar may last a fortnight

Bitter `n' sweet
Release of extra free sale quota has hit sentiments
Indian firms may bag more export orders & prices could gain
Futures helping corporates to hedge their risks

Kolkata , March 5

The domestic sugar futures market has been witnessing a bearish phase over the last fortnight and this trend is likely to continue for at least another fortnight.

This trend is totally against the international movement, where the prices are moving upwards. Domestic sugar price is likely to change its course and move northward next month. And this bullish trend is likely to continue for at least three months.

The existing bearish trend is being perceived only as a temporary phenomenon because the prospects of the industry are extremely bright and international market scenario would boost Indian prices. Also, a resistance has built up both in the domestic and global market against the current price.

Correction

The current bearish phase is actually a correction because the sugar prices in the commodity exchanges had peaked earlier than they should have been.

Several factors had been attributed for the current easing of prices. First, the Union government released an additional quota of 1.5 lakh tonnes of free sales for the months of February and March.

Export orders were bagged by the industry too. For example, Indian Sugar Exim Corporation would be exporting 50,000 tonnes to Pakistan and Simbhaoli Sugar Mills has entered into an agreement with Cargill International SA to sell 25,000 tonnes.

Indian sugar companies are likely to bag more such export orders because for the first time they are enjoying a price advantage over the foreign players. While global sugar price is hovering around $440 a tonne, domestic sugar price is only around $422.

It is being predicted that the sugar price in the US market will rise further in April. It is likely to move up to 17.4 cents per pound from the current levels of 16.4 cents per pound.

EU subsidy

This price advantage is due to the recent metamorphosis the global sugar industry had witnessed after Australia, Brazil and Thailand successfully fought a suit against the European Union for subsidising its sugar farmers.

Due to this subsidy distortion, the EU was dumping 6-7 million tonnes of sugar into the world market at lower prices. At present, the subsidies has been withdrawn and subsequently, the prices have increased. The withdrawal of EU sugar subsidy had pushed the global prices up. However, the bullish phase for the Indian sugar industry has been long overdue after the sweetner's price fell to a low of Rs 1,100 a tonne three years ago.

Government policies

The Union Government does not allow stand-alone sugar exports. (Current exports are actually part of the re-export obligations). However, the price advantage has made exports attractive and Indian companies may soon ask the Centre for more freedom for foreign deals.

The Centre may not accept the request because there is an apprehension of a shortfall in sugar supplies. It says that sugar production would be 175 lakh tonnes, but industry feels that it would be 180-185 lakh tonnes. Consumption is projected around 185-190 lakh tonnes.

Domestic sugar production is expected to increase manifold because all the major corporate houses have announced big expansion plans. The two beneficiary states are Uttar Pradesh and Bihar.

However, the existing restriction of 15 km radius of command area is a major obstacle for capacity addition because cane availability would become a major problem. The industry is pleading that the catchment area be increased to 25 km.

Levy system

Abolition of the levy system has been a major demand of the sugar industry for a long time. The Centre has not accepted it yet and in the Budget proposals announced on February 28, Mr P Chidambaram, the Union Finance Minister, did not give any such hint either.

Another interesting aspect of sugar futures is that all the major corporate houses are regularly participating in this trade. They find the market an extremely attractive hedging instrument.

Moreover, with a future sale contract in hand the companies demand better interest rates from the banks for short-term credits. The futures market has helped them in better financial and more liquidity options.

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