COMMENTARY. More sugar imports may be needed to avert shortage

The Centre has woken up to the emerging tightness in the domestic availability of sugar and has permitted refiners and millers to import up to 5 lakh tonnes of raw sugar duty-free, but the measure may be inadequate to ease the strain in the coming months.

In fact, there is a belief that policymakers are merely testing the waters by permitting a limited quantity of import.

Given the enormity of the expected shortage, there is a felt need for the import of an additional 15-20 lakh tonnes in order to contain the risk of a price spiral and diffuse the adverse fallout of the market’s regional concentration.

From all accounts, the market has taken cognisance of the possibility of additional imports in the coming months.

Indicatively, spot prices are slightly higher than forward rates.

There may be some logic to the zone-wise limits imposed on suger imports, but there are also anomalies.

The eastern zone, which faces the most pronounced shortage, gets to import a paltry 50,000 tonnes. The southern zone has been allocated an import limit of 3 lakh tonnes because it faces a severe cane shortage; the western zone gets to import the rest.

These 5 lakh tonnes of raw sugar will flow into the country in the coming months and hit the ports before June 30.

Raw sugar is quoted at about $370 a tonne in the international market.

The recent appreciation of the rupee should benefit importers. At about ₹5,000 a tonne , the price differential between imported raw sugar and local sugar looks attractive.

In the global market, sugar prices are in a consumer-friendly phase.

The downward price pressure faced by crude oil (mineral oil) is helping to cap the upside to sugar prices via the ethanol route.

How much longer the crude market will remain at the current levels is anybody’s guess. Many forecasters, in fact, see an upside risk to crude oil prices; if it does materialise, it will lift sugar prices as well.

Even though 2016-17 is yet to unfold itself in terms of the total availability, demand and prices, one can do a spot of crystal-ball-gazing into 2017-18. Even assuming that cane planting exceeds 5 million hectares and the harvest next season rebounds to well over 300 mt (say, 330-340 mt ) and, as a consequence, sugar production expands to, say, 24 mt (up from 20 mt of 2016-17), the availability will continue to remain tight even if the supply shortfall narrows.

Under the circumstances, prices are most likely to remain high — upwards of ₹40,000 a tonne at the wholesale level barring periods of arrival pressure.

Given the country’s economic outlook for 2017-18, demand is expected to increase, breaking out of the sluggishness arising from recent events such as demonetisation.

During the peak consumption season — the summer demand in conjunction with Ramzan demand (May-June), followed by a series of festivals from August to October — the tightness in availability will show up as higher prices.

Therefore, it is necessary to take a view not only for the next six months but for the year ahead.

Weather patterns, including South-West monsoon this year, remain a concern. Global sugar market players are watching developments in India and will look to jack up prices if they see India slipping in its response to market fundamentals in time.

For policymakers, inflation control remains a priority.

Therefore, it may be prudent to set a trigger point in terms of price beyond which a policy response will kick in. What that response will be ought to be specified so that the market has a clear idea of the government’s intention and interventionist role.

The writer is Global Agribusiness and Commodities Market Specialist. Views are personal.

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