global , indian sugar prices set to surge


Aberrant weather in cane growing States such as Maharashtra, Andhra Pradesh and Karnataka has created risk of yield loss. .


G. Chandrashekhar

Mumbai, July 28 After a tepid performance last two years, the global sugar market is showing promising signs of a bounce back in prices, thanks to developments in key producing and consuming markets. India is likely to play a key role in lending strength to international prices.

Deteriorating prospects for sugar crops in two of the world's largest producers Brazil and India, combined with the world's largest importer Russia re-entering the market have meant that the price weakness will soon become a thing of the past.

Output estimate

World sugar market fundamentals are set to tighten next season. In 2007-08, world sugar consumption projected at about 160 million tonnes (mt) is set to trail production (171 mt) by over 10 mt which would be available as surplus. There has been a glut of sugar and the large surplus has acted as a lid on prices.

Come 2008-09, the picture is going to change. At best, production and consumption both are going to be finely balanced at about 164-165 mt, leaving little surplus. Sugar production in Asia – represented by India, China and Pakistan – is set to be lower than in the previous year.

Even in the European Union, following uncertainties relating to reforms, there exist the strong possibility of lower sugar production (from beet). Also, in Brazil, the 2008-09 crop is already behind schedule, making it rather difficult for the industry to match or exceed the level of production in the previous year.

There will be no surplus as such. If anything, there is the possibility of consumption surpassing production albeit marginally. This is constructive for sugar prices. This finely balanced demand-supply fundamental has the potential to create volatility in the sugar market.

As is axiomatic, in a tightly balanced commodity market, even a small change in either demand or supply or both will have a disproportionately larger impact on market prices. Such a fundamental picture will also attract speculative capital which can heighten volatility.

Area under sugarcane

Specifically, as far as India is concerned, the area under sugarcane is down to 4.3 million hectares for 2008-09 from 5.2 mha in the previous year, according to the Ministry of Agriculture.

Aberrant weather in cane growing States such as Maharashtra, Andhra Pradesh and Karnataka has created risk of yield loss. There is general consensus that cane output in the country would fall considerably short of 340 mt of last year.

As result, the preliminary expectation of 2008-09 sugar production is 22-23 mt versus 27 mt of previous year. A nearly 20 per cent decline in output is sure to push domestic prices higher.

Exports

Indian sugar exports from 2007-08 season have already touched 3.5 mt and may potentially reach 4.0 mt. A weakening rupee and firming export prices have encouraged exporters to scout for more business.

However, in the absence of a genuine export surplus next season and the strong upside risk to domestic sugar prices, exports may not materialise from India.

Indeed, it is most likely that sugar exports will be either drastically restricted or altogether banned.

This possibility arises because of a series of elections the country is going to face in the coming months. The global market has already taken cognisance of the emerging situation.

Forward prices are firming. In the domestic market too, sugar prices will begin to surge with the beginning of the festival season by mid-August. It should surprise no one if by the end of the year, sugar touches Rs 2,000 a quintal, rising by a third from current levels.



-- source business line