The Hindu Business Line : Sugar prices set to surge next season

The global sugar market has been rather dormant for sometime now, with the underlying weakness preventing hectic activity. For 2007-08, the market is clearly in surplus; there is simply too much sugar and few takers.

Large carryover in two of the world’s largest producers – Brazil and India – as also weak demand from even traditionally large importers such as Russia has merely added to the woes of the market.

But there are indications that the large surplus may soon give way to a more finely balanced market in 2008-09. This surely will have implication on the world sugar prices. Once again, the situation in Brazil and India needs to be watched carefully.

Cane output

In Asia, both India and China are most likely to harvest smaller crops.

On the other hand, the size of Brazil’s cane output is expected to reach 490-500 million tonnes (mt). Even if a larger part of cane is diverted for ethanol (driven by high energy prices), the country would still produce more sugar in 2008-09.

The incremental output is currently estimated at 2 mt. In other words, enough cane would be available in 2008-09; but the key to sugar market dynamics is to know how much cane would Brazilian millers utilise for ethanol and how much for sugar.

Ethanol parity level

In order to ensure that Brazilian millers maximise ethanol output and are not tempted to increase sugar production (beyond say 2 mt), sugar prices need to remain below their ethanol parity level, according to experts. However, some support for the market could come from an increase in Brazilian gasoline prices, which would increase the level to which sugar prices can rise without becoming more attractive than ethanol.

Similarly, enhanced opportunities for ethanol exports to the US and the EU will also encourage ethanol output, thereby, providing some relief to the sugar market, experts added.

For 2008-09, it is tentatively estimated that the world sugar production may decline by around 6 mt (raw value) in the wake of smaller crops in Asia, in general, and anticipated downturn in India and China, in particular. Consumption, on the other hand, is expected to continue to grow by around 1.7 per cent. This will surely leave much smaller surplus of about 2 mt in 2008-09 against about 10 mt in 2007-08.

Domestic situation

For 2007-08, sugar production is expected to be a record 27-28 mt, with comfortable availability of cane (340 mt). Trailing domestic consumption means there is a huge surplus, a part of which the country is seeking to dispose of in the export market. The volume of Indian sugar exports will depend not only on international prices but also on domestic prices. While international prices are weak, domestic market has improved recently, making exports so much less viable. A firmer rupee too, has not helped in recent months, although lately the rupee has weakened from levels three months ago.

Cut in area, output

With the crushing season expected to slowly grind to a halt, the market has already begun to look at the next season.

Planting numbers suggest a reduction in crop area and a sharp decline in cane output that would be ready by October-November 2008. Some forecast put the decline in crop size by as much as 20 per cent. The emerging situation is fraught with possibilities.

Monsoon & festivities

Although the Government has released a part of the buffer stock to dampen prices, the onset and progress of southwest monsoon will have a bearing on prices. A series of festivals during August-October would increase sugar consumption manifold. Importantly, on current reckoning, the prospects for the next crop are none-too-bright.

In this emerging scenario, sugar prices are most likely to surge in the coming months from the current level of around Rs 1,550 a quintal in the wholesale market.

With elections round the corner, the Government would be hard pressed to contain prices. Despite current surplus, restrictions on sugar exports cannot be ruled out.

Mills and traders will continue to build inventory in anticipation of a rising market. Consumers will have to brace themselves to pay a higher price for their favourite sweetener.

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