India must have a buffer stock for sugar

The world sugar market is in a state of surplus for the third year in a row. With a projected consumption of 170 million tonnes and estimated production of 178 million tonnes for 2012-13, the surplus is a clear 8 million.

No wonder, raw sugar prices have remained soft for a length of time, with prices averaging 18 cents a pound in the first quarter of 2013.

Considering the market surplus, futures bourse New York ICE has recorded a high level of speculative short positions.

Looking ahead, in the next three quarters, sugar prices do not face any significant upside risk, barring really exceptional circumstances.

In other words, sugar is likely to trade globally within a range — between a low of 17 cents and a less-probable high of 20 cents a pound and more around 18-19 cents.

India finds itself in a peculiar situation. Although the industry at present has substantial stocks , the outlook for the next three quarters is fraught with possibilities. For the 2012-13 season, production is likely to end up at anything between 23.5 million and 24.5 million (more likely towards the lower end); consumption projections suggest the market is very finely balanced.

Potential risk for prices

A delicately balanced domestic market is a potential risk for prices. In such a market, even a small change in either demand or supply, will have a disproportionate impact on prices. The Government, especially the Union Ministry of Food, has to exercise caution in the matter of potential upside risks to sugar prices.

There is compelling reason to believe that next year (2013-14), the country’s sugar production may fall from the current level to about 22-23 million tonnes. Although final planted acreage data are not yet available, lingering drought conditions, especially in Maharashtra, Karnataka and Tamil Nadu, are a matter of concern. Large cane arrears in Uttar Pradesh and high cane costs are likely to act as constraining factors for mills.

Worse, if there is any aberration in the onset and progress of southwest monsoon, sugarcane yields could be hurt.

However, demand for the sweetener could rise manifold from July starting with Ramzan till Diwali (October/November). Domestic sugar prices could spurt suddenly; and there is no guarantee that the industry will not seek to benefit from tightening availability.

Given that de-control is now a reality, policymakers are sure to come under intense pressure to quickly augment supplies and contain price rise. This is the kind of situation the world market is waiting for.

If India is forced to import, world sugar prices will rally dramatically. Elections also are likely to force the Government to take drastic steps.

Unpopular measures such as storage control may have to be imposed. Such a potentially embarrassing situation can be avoided if New Delhi decides to build a buffer stock of at least one million tonnes of sugar (if not more) right away.

On current reckoning, there is every possibility India may turn into a sugar importer next year; when India enters the world market as an importer, the impact on prices can well be imagined. It is better to be safe than sorry.

Building a buffer stock of one to two million tonnes of sugar at the current attractive price levels, is a safe bet for the Government, both politically and commercially.

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