Delay in sugar export decision will cause Rs 250 cr forex loss

The Government may have got the timing wrong in respect of five lakh tonnes sugar export announced recently. The delay in taking a positive decision will cost the country up to Rs 250 crore by way of loss of foreign exchange earnings via lower prices.

The final decision has come at least two months too late. From their peak levels, world sugar prices have declined during the last several weeks by about 20 per cent. This forces India as an exporter to realise lower export prices, an invisible loss the country will suffer.

World prices have declined from the peak of well over $800 a tonne by over 15 per cent. Indian sugar will currently fetch about $100 a tonne lower than it would have commanded say two months ago. Loss of $100 a tonne translates to an aggregate loss of $50 million equivalent to well over Rs 225 crore on export of five lakh tonnes.

Mills ready for exports are heaving a sigh of relief over the announcement to permit export, but are tight-lipped about loss of lucrative export prices.

Although the world sugar market was somewhat rattled initially by India's announcement of five lakh tonnes export, it managed to stabilise soon. The market is trading at around 28 cents a pound, having declined from the peak of 34 cents a pound a couple of months ago.

No further dip

However, given the tight global demand-supply fundamentals, world prices are most unlikely to decline further, despite India's decision to ship out half a million tonnes. The macroeconomic picture is supportive of a firm sugar market.

Crude oil is trading well above $100 a barrel with little prospect of correction anytime soon. Support is also coming from firm grain markets following tightening fundamentals, weather concerns and Chinese demand.

While these external factors are likely to keep the sugar market steady on pullbacks, fund activity in the sugar counter is not pronounced. Because of tight balance sheet, even a small change in either demand or supply will see speculative capital rushing to the market, which will have a disproportionately larger impact on prices.

Brazilian exports

On the other hand, on every advance in price, Brazilian exporters will be sellers as the harvest season approaches. What can trigger a price surge from current levels are weather concerns in the southern hemisphere. Brazilian centre-south production on a best case basis might not be much better than last year's reduced level, commented an expert.

Back home, one can expect sugar market to begin to firm up and reach Rs 3,000-a-quintal level soon, a gain of about 10 per cent. Directionally, what is important is whether cane planting for 2011-12 will be at least 50 lakh hectares, same as previous year. In the event, and of course subject to normal southwest monsoon, cane production next season should match at least current year's.

Domestic demand

But there is nagging feeling that domestic demand is underestimated, consciously or otherwise. The economy is growing at a robust rate and incomes are rising in the hands of over a third of the population. Demand for foods – all kinds including processed, ready-to-eat foods – is rising rapidly. Sugar is a critical ingredient for many food products. Institutional demand is rising rapidly.

If we have to keep sugar prices on leash and also produce some export surplus, our sugar production must expand by over 10 lakh tonnes every year from the current level. This calls for concerted effort by all stakeholders.

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