If it costs you more to buy sugar over the next one year, blame it on the faulty government policy. On March 26, 2012, Indian government allowed exports of a further one million tonnes of the commodity. This takes the total exports allowed for the year at three million tonnes for the 2011-12 marketing year.
The logic behind the rise in exports has been a bumper production which has taken production to 26 million tonnes a jump of 7.5% over the previous year. Indian consumption of sugar is around 22 million tonnes per annum. The excess 4 million tonnes of production was the reason for allowing sugar exports from India.
Now there is news that sugar output in India will drop for the first time in four years. Broker and Research firm Kingsman SA has been quoted by the media as saying that this year’s production is expected to fall to 24.5 million tonnes on account of dry weather in some regions of the country.
Further, government has now relaxed rules for exports which removed the quota on individual mills to export sugar and has now permitted exports on an open-general-license basis. While exports will be possible from mills located near the coast, sugar prices across the country go up as supply within the country reduces.
What has not been kept in mind however has been that the policy has led to a sharp reduction in sugar inventory in the country. India, as per a report in Futures Magazine, has been maintaining an inventory level of about 50% of consumption. This, after accounting for the current set of exports will bring down the stocks to 27% of usage.
Sugar prices in the commodity exchanges have moved up from a low of Rs 2,718 per quintal (M30 sugar) to the current level of Rs 3,076 per quintal.
If we have to pay for higher sugar prices, might as well earn it. Time to go long on sugar stocks?