World sugar market waits and watches, as India dithers on export

The world sugar market is at the crossroads, waiting for direction, which may well come from India.

For 2010-11, global sugar market fundamentals appear tightly balanced with production and consumption almost equally matched at about 166 million tonnes.

A tightly-balanced market after two years of deficit is an explosive situation. No wonder sugar prices are where they are currently, firmly above 30 cents a pound.

Adverse weather has certainly affected production in a number of origins. Stocks with exporting countries as well as importing countries are thinning.

At the same time, demand has returned, as evidenced by the import tenders.

Delayed policymaking

As the world's second-largest producer, India plays a crucial role in determining the fortunes of the global sugar market in terms of price impact. A couple of months ago, the Government announced it would allow export of about 500,000 tonnes of sugar, but shied away from implementing the decision for fear of fanning food inflation.

Union Minister for Food and Agriculture Mr Sharad Pawar asserted early this year that a final decision would be taken by end-January, when sugar production estimate would crystallise. Meanwhile, there has been a change of guard at the Food Ministry, with Prof K.V. Thomas holding the reins.

It is unclear what the new Food Minister's views are on sugar exports, but the Government's continued silence has kept the market on tenterhooks.

We are now racing towards the end of February and there is still no firm decision on whether or not export will be allowed. Such trade policy indecision not only creates avoidable confusion in the market, but also fans speculative tendencies.

Price trend stays firm

Internationally, sugar futures witnessed wild price swings last year — from a low of 13 cents a pound to a 30-year high of 34.8 cents a pound, with tremendous volatility as the defining feature. Since the beginning of 2011, prices have stayed firmly above 30 cents a pound, with no respite seen likely at least in the first half of the year.

So, in an environment of firm demand and low stocks, and of course continued reticence of Indian policymakers, there is nothing to suggest that prices would ease. If anything, even a small disruption on the supply side will have a disproportionately large impact on prices. Some relief from high prices is possible in the second half of the year, though.

Eye on global scene

For the Indian sugar industry, perhaps it is time to look ahead into the next season — 2011-12. A reasonable estimate of acreage under cane would be available by end-March/ early-April. If the area planted falls below five million hectares, it should be seen as cause for concern. Anything above 5 million hectares would mean satisfactory availability of cane for the next crushing season. The behaviour of the southwest monsoon too will have a bearing on cane crop prospects.

Considering the tightness in the global market, a weak US dollar, high crude prices and continued uncertain weather across the world, the sugar market is most likely to stay firm. Indian policymakers have to closely monitor the global and domestic situation.

There is a view that it makes commercial sense for India to allow export of 500,000 tonnes to take advantage of high international prices; and, if need be, import sugar later in the year when prices are expected to decline. On the face of it, the logic is unassailable. Such a bold decision needs tremendous political will and conviction. In the current environment of the Government's losing battle against food inflation, maybe it is asking for too much.

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