Indian producers’ discomfort with the rapid fall in sugar prices taking the cue from the world market where ICE May raw sugar at about 18.25 cents a pound, down 40 per cent from the 30-year peak seen on February 1, is easily understandable. As the factories in the north, including the country’s largest cane growing state Uttar Pradesh are paying prices ranging between Rs 260 and Rs 275 a quintal for the crop, their economics of operation has gone haywire due to the rapid fall in ex-factory prices of sugar.
Free sugar is done at around Rs 2,800 a quintal in the west and the south while rates for the north are Rs 3,100 a quintal. Indian Sugar Mills Association (Isma) says with the factories paying an extra Rs 19,000 crore over the fair and remunerative cane prices for the current season and their shouldering the burden of making over 20 per cent of production as levy sugar to the government at half the production cost, the current market prices remain a good degree below break-even level.
Isma president Vivek Saraogi is right that it is because of the industry remunerating growers so handsomely that sugar factories could draw away cane from gur and khandsari makers. This, according to Saraogi, is making a significant contribution to the country going to end the season with sugar production of at least 16.845 million tonnes against the earlier estimate of 16 million tonnes. Last season we had a dismal production of 14.6 million tonnes.
Our annual sugar consumption being around 23 million tonnes and growing nearly 3 per cent a year, the government tried to save the situation by allowing duty free import of both white and raws. The country has already received 3 million tonnes of imported sugar while another 2 million tonnes have been contracted for imports. In fact, India turning into a major importer since 2008-09 after being an exporter for three seasons in a row, Brazilian production taking a hit because of heavy rain during the cropping period this time and major import demand from Pakistan, Egypt and Mexico combined to make the commodity a hunting field for speculators and funds.
On January 21, the Liffe March price for white was a whopping $759 with punters still keen to take long position meaning hopes were still there for prices to harden further. No surprise therefore, with our buyers making contracts at such high rates, ex-factory prices here in January stayed between Rs 3,905 and Rs 4,050 a tonne. Even while the government was doing all kinds of engineering like stock limits on bulk consumers accounting for 65 per cent of sugar use and asking mills to move over to weekly sales and despatches from monthly practice to rein in prices, these remained uncomfortably high for all stakeholders.
But now the tables have turned with the Brazilian consultancy Datagro forecasting Brazil to raise sugar production by 12.7 per cent to 37.3 million tonnes. Using empirical evidences that whenever farmers get good rewards for their efforts and cane bills get quickly settled their immediate response is to commit more land to cane, former Isma president Om Dhanuka says the next season beginning October could see India producing up to 25 million tonnes of sugar. The stories from the world’s two largest sugar producers have sent shivers down the spine of operators with net long positions.
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No one is ruling out further price correction. Will the funds be unwinding their positions in view of the anticipated bumper production in Brazil and India? Are they not going to take note of European Union selling 500,000 tonne extra beet sugar and WTO finding nothing wrong in that? Will the sugar market be not drawing some inspiration from China likely to make some big purchases to top up stocks in the face of a likely 2-million-tonne shortfall in production? Or from the import requirements of Indonesia, Egypt, Pakistan and Mexico? We should have the answer in the next few trading sessions.
A Macquaire analyst suggesting raws below 18 cents would make good value is an indication of where the market is heading. Giving the warning that the sudden liquidation of positions might see some buyers failing to honour buy agreements, Prakash Naiknavare, managing director of Maharashtra State Cooperative Sugar Factories Federation is seeing raws sinking below 18 cents and white at less than $500.
Isma also admits that some pending contracts involving Indian importers run the risk of being abandoned. But thanks to the surprising improvement in production outlook lately and large arrivals of imported sugar already, our next season’s opening stocks should be comfortable. Financial Times has quoted a trader saying “Who wants to catch a falling knife?” Is there not a suggestion in this that we will see more blood in the market? Where does the unfinished rout leave the pundits forecasting 30 cents and more for raws a few weeks ago?