Raw sugar prices in the global market are rising. While the rates have been hovering around 14.5 cents per pound mark since mid-January, marking a two-year high, the market is now set to test the 15.0 cents a pound mark, having moved up to 14.9 cents on Tuesday.

Considering that the market was in the 11-12 cents a pound range just six months ago, the ongoing price performance is spectacular. The world sugar market is in a state of deficit this year (2019-20 season), with the deficit variously estimated between 6 and 7.5 million tonnes.

End of glut?

There is also growing suspicion that the world market may have seen the end of a run of surpluses and the deficit may extend to next year too. Much will, of course, depend on the developments in Brazil and India, two of the world’s largest origins, constantly vying for the top spot.

The relationship between crude oil and sugar is, of course, well recognised. Through the ethanol route, higher crude oil prices drive diversion of cane for production of ethanol, making so much less cane available for sugar production.

Yet, despite Brent staying above $ 60 a barrel for much of 2019, sugar prices continued to remain soft because of burdensome inventory in origins such as India. In particular, in recent years, Brazil has been channelling a greater share of its cane for ethanol production as sugar rates were unattractive.

The market fundamentals are changing now because of three origins – Brazil, India and Thailand. The crushing season in Brazil has all but ended, and all indicators point to sugar output of about 27 million tonnes, unchanged from the previous year. As is often the case, India is the mover and shaker of this market. Latest estimates suggest that sugar production for 2019-20 will be 26-27 mt, a clear 6-7 mt decline from the previous year. At the same time, sugar production in Thailand is expected to hit a multi-year low. In the EU too, sugar output is expected to stay at the previous year’s low level.

No wonder, the world market has got into deficit with concomitant impact on the price.

One must now look ahead into the 2020-21 season. Reports from Brazil suggest higher cane harvest (600 mt) and projected 10-11 per cent expansion in sugar production to around 30 mt. Brazil’s season begins in April. Current attractive sugar prices (combined with falling crude oil rates due to growth concerns and the coronavirus epidemic) are expected to induce greater utilisation of cane for sugar.

India scene

In India, extended southwest monsoon well into early November last year has improved the subsoil moisture in principal growing regions. Subject, of course, to normal southwest monsoon in 2020, there is the strong possibility of a rebound in sugar production, at least by 10 per cent, if not higher. India should take advantage of the current high international prices and attempt to maximise exports. It is necessary to leverage various bilateral agreements with countries to push sugar exports in order to reduce the stock burden.

The International Sugar Organisation expects global sugar market to continue to be in deficit in 2020-21, but has projected a lower deficit of around 3.5 mt. This suggests that the current high prices, partly driven by inflow of speculative capital, may come in for some correction when projected numbers materialise. Global growth will also exert an impact. For India to reduce burdensome inventory, it may become necessary to boost domestic consumption in addition to maximizing exports.

The writer is a policy commentator and commodities market specialist. Views are personal