Purchase of sugar on call option should be considered

Of late, sugar has been a commodity of concern for consumers and policymakers alike, with prices escalating rapidly following clear evidence of a decline in production in 2016-17.

It would be a second successive year of decline, after output peaked at 28.5 million tonnes (mt) in 2014-15 that resulted in supply surplus, bulging inventory and low prices for nearly two years. In 2015-16, production declined to 25.1 mt. The below-normal rainfall, related to El Nino in 2015 in major cane producing States like Maharashtra, has adversely affected cane planting and harvest. Cane is a 12 month crop.

Despite the ongoing crushing and peak production season, market rates are threatening to breach and stay above the psychological level of ₹40,000 a ton.

It is estimated that sugar production in 2016-17 will be 22-23 mt, while consumption is estimated at about 25 mt, leaving a clear current deficit of over 2 mt.

The industry’s estimate of over 7 mt of opening stock, has to be taken with a pinch of salt because there is no guarantee that what is shown on the stock register is actually physically available in the warehouses.

In any case, it is axiomatic that commodity markets react to expected changes in the market fundamentals at a future point in time, rather than to the current supply-demand situation.

The expected changes in the coming months point to acute tightness in availability. Given that, the domestic sugar market does not betray any abnormal behavior.

With demand set to outstrip production in 2016-17, the country will have to live with tightening sugar availability and higher prices at least until the last quarter of this calendar year.

Indeed, meeting the festival demand later this year – August to October – and reining in prices will be a daunting challenge for the Centre. If anything, the country may be forced to import at least 2 mt of sugar, if not more, from the global market this year in order to augment availability.

From being a net exporter, India may well become a net importer. World raw sugar prices are already relatively high at over 20 cents a pound, equivalent to about $460 a tonne. The rising crude price is sure to boost the sugar market via the biofuel route. The propensity to divert larger amounts of cane for ethanol production increases with rising crude oil market.

It is, therefore, imperative that New Delhi takes cognizance of the emerging situation. Opening up sugar imports with sharp reduction in customs duty appears inevitable. Purchasing sugar on ‘call option contract’ may be considered.

Timing, of course, is important. The world market is closely watching India. The moment the market is able to sniff India’s vulnerability and desperation to import, prices are sure to jump by well over 10 per cent. A decision on sugar in terms of augmenting availability brooks no delay.

The author is agribusiness and commodities market specialist. Views are personal

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