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Harish Damodaran

New Delhi, May 3 World sugar prices have surged to a near-three year high, on the back of speculative buying by funds betting on supply shortfalls in India and Pakistan.

On Friday, raw sugar futures in New York crossed the 15 cents a pound mark for the first time since July 2006.

The benchmark No. 11 contract for July delivery closed at 15.05 cents (about $ 332 a tonne), against Thursday’s 14.36 cents.

In the last 20 days or so, prices have risen by roughly 2.5 cents or $ 55 a tonne.

Much of this increase reflects buying by funds, which see little downside risks in investing in a commodity where global production during 2008-09 is projected to lag behind demand by nine million tonnes (mt).

Friday saw as many as 82,108 lots (each of 50.8 tonnes) of the July contract getting traded, as compared to 57,603 lots in the preceding day.

The October contract, which closed even higher at 15.56 cents a pound, also registered a jump in trading volumes from 18,908 to 30,855 lots.

“82,108 lots translate into some 4.2 mt of just the July contract being traded on a single day.

And if you see the total open interest of 6,62,356 lots or 33.6 mt, it is clearly indicative of funds going long on sugar”, trade sources said.

The news is not particularly good for India, which needs to import at least three mt of sugar during the current season (October-September) and an equal, if not more, quantity in 2009-10.

Mills are said to have, so far, contracted about 1.8 mt of raw sugar imports.

“At 15.05 cents, the landed cost of raw sugar in Indian ports will be in the range of $395 a tonne, whereas till now, no mill has contracted at above $330-340.

The ex-factory cost of the processed white sugar at these rates would be around Rs 24,500 a tonne for mills close to ports and Rs 26,000 for those in Uttar Pradesh”, the sources pointed out.

As against this, mills in Tamil Nadu are currently realising only Rs 20,500 to Rs 21,000 a tonne, while it is ruling at Rs 21,500 to Rs 22,000 in Uttar Pradesh.

Over the last three weeks, domestic realisations have dropped by Rs 3,000-3,500 a tonne, even as international prices have climbed by over $55 or Rs 2,750 a tonne.

“The Government is today caught in a strange situation, where, on the other hand, it wants mills to import raw sugar.

But on the other hand, by pushing down domestic prices in view of elections, it is simultaneously killing the incentive to import”, the sources added.

Meanwhile, the option of directly importing white sugar has also become unviable, with prices in London touching $441 a tonne.

The landed price of whites at this rate will work out to about $500 a tonne, which is well above Rs 25,000 without factoring in discharge and distribution costs.

More Stories on : Sugar | Commodity Markets

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