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Harish Damodaran

New Delhi, Oct 20 If there has been any one commodity close to being an oddball in recent times, it would perhaps be sugar.

At the height of the boom, when prices of virtually every commodity went through the stratosphere, sugar simply missed out. And now, even as the global turmoil in financial markets has triggered off huge sell-offs in commodities, it is only sugar that seems to be somewhat holding out.

Consider this. Since the start of 2006 and July this year, world prices of every other commodity shot up, from 36 per cent for aluminium and cotton to as much as 371 per cent in the case of coal.

Sugar was an exception though. The benchmark New York raw sugar No. 11 nearest futures contract actually fell from an average 13.93 cents a pound in December 2005 to 13.21 in July 2008, having, in fact, traded below the 10-cent levels for most of 2007.

But now, it could well be the other way round, with sugar once again bucking the trend. The past few weeks have seen investors exiting commodities in droves and liquidating their futures positions to raise cash in response to the ongoing global credit squeeze.

As a result, crude oil at the New York Mercantile Exchange has fallen off its peak of $147.27 a barrel reached on July 11 to below $ 75. Likewise, at the Chicago Board of Trade (CBOT), the most active contracts for soyabean, wheat and corn are selling in the range of $9.5, $5.7 and $4.1 a bushel, after scaling records of $16.3675 (on July 3), $ 13.495 (February 27) and $7.9925 (June 27), respectively.

Sugar, too, on its part has eased. The No. 11 contract for March 2009 is currently ruling at around 11.6 cents a pound, down from 13.9 cents a month ago and the high of 14.07 cents touched on October 1. Prices have fallen, but not collapsed the way others have.

There are two factors basically at play in respect of sugar now. On the one hand, the fundamentals for the commodity are pretty bullish, with the Swiss consultancy firm, Kingsman SA, recently forecasting a global sugar deficit of almost 4.7 million tonnes (mt) for 2008-09. This is an upward revision from its earlier shortfall projection of 3.8 mt.

But on the other hand, in the present context where funds are under pressure to finance redemptions and pare exposure to commodities in general, there will be no speculative support to complement and amplify the tightening global supplies position. Reinforcing this trend is the falling freight charges – the cost of shipping raw sugar from Brazil to India has dropped to around $40 a tonne, against $90-plus in July.

This is quite the opposite of the earlier situation that was characterised by a heavy worldwide production glut in sugar led by India. This created a situation where sugar attracted very little fund buying interest, unlike in other commodities where the slightest news of supply disruptions engendered huge price increases. Raw sugar prices indeed fell then, from over 18 cents a pound in February 2006 to nine cents by May 2007.

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