Commodity Analysis

Sugar misses the sweet spot in global trade

Nalinakanthi V | Updated on January 11, 2018 Published on May 14, 2017



But prices are hitting new highs in the domestic market

Sugar seems to be losing its sweetness in the global market. The price of Sugar11, which is the most global benchmark for raw sugar contract, has seen a sharp slide from its October peak of about $0.23 per pound to about $0.16 per pound currently. The fall has been steep in the last three months.

This has been on account of three key events. First, expectation of a balanced demand-supply scenario in the global market as against the earlier estimate of production deficit of about 5 million tonnes in the current year has had a negative impact on sugar.

Global sugar production is estimated at 171 million tonnes in 2016-17, higher than the 166 million tonnes in 2015-16, driven by higher output in Brazil and increased allocation of cane for sugar production.

Over 45 per cent of the cane production in Brazil is expected to be diverted towards sugar production in the current season. This is the highest allocation since the 2012-13 sugar season.

Second, lower than estimated import of sugar by India in the current sugar season due to a temporary consumption slowdown on account of de-monetisation has also had a negative rub-off on global prices.

Finally, tightening of import restrictions by China to contain illegal smuggling of sugar into the country has also not helped global prices.

However, the sentiment in the domestic market has been quite different. Domestic sugar price has been making new highs, following a long-drawn-out downcycle that lasted for five long years beginning 2010.

Drought impact

After hitting a record-high mark in 2014-15, the country’s sugar production has been on a falling spree over the last two years. In the current sugar season (October 2016-September 2017), sugar production is expected to be 19 per cent lower than in 2015-16, at 20.3 million tonnes, according to industry body ISMA (Indian Sugar Mills Association).

This is largely on account of drought in key cane-growing States — Maharashtra and Karnataka, and consequent reduction in cane availability.

Sugar production in these two States is expected to halve during the 2016-17 sugar season.

This has helped the strong rally in domestic sugar price (Sugar M contract on the NCDEX).

From the July 2015 lows of ₹21.6 a kg, the price of the sweetener in the home market has risen to ₹36 levels currently.

The strong price rise was aided by the steep drop in production, from 28.3 million tonnes in 2013-14, to 25.1 million tonnes in 2015-16.

The expectation of lower sugar production in the current year aided the rally in domestic sugar prices — from ₹35/kg levels in December 2016 to a new high of ₹39.7 a kg in February 2017.

Drop expected

The market price currently hovers at ₹36 levels and is expected to remain steady in the ₹36-38 levels.

Thanks to the steep production decline expected this year, the closing stock is anticipated to drop from 7.7 million tonnes in 2015-16 to about 4.2 million tonnes this year.

Even as domestic sugar prices are expected to remain relatively stable in the near term, cane availability in 2017 and sugar production estimates for the next season will play a critical role in determining the domestic price trend.

With the onset of the south-west monsoon barely a month away, rainfall distribution and sugarcane acreage and production will be critical to the sweetener’s price performance in the current year.

Published on May 14, 2017
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