Sweet spot

The continuing boom in sugar scrips is neither unexpected nor unwarranted. These have been on the upswing for quite some time, though the gains in the past week have been even more easily noticed than before. The sharp upturn is the result of both domestic and global factors. On the home front, the cane crop-driven decline in sugar production in the 2003-04 and 2004-05 seasons, which pushed up domestic sugar prices, also helped sugar companies' profits. Though sugar output surged this year, prices have tended to remain favourable from the viewpoint of the sugar industry. On the global front, India's importance in the sugar market has risen appreciably in recent years, the country being the largest consumer of sugar and second-largest producer. It was, indeed, India's entry in the global sugar market as a buyer in the recent past that helped the reversal of the downtrend in world sugar prices.

Fortunately for the Indian sugar sector, the buoyancy in global sugar prices has tended to endure till the time the supply position in India improves, allowing sugar exports. Indeed, the strengthening of world sugar prices continued through 2005, when the International Sugar Agreement (ISA) daily price averaged 9.2 US cents per lb, an increase of over 30 per cent over the 2004 position. The sugar prices in the London market have now touched a record high. Significantly, this trend may sustain for some time as it has been underpinned by the strong growth in world consumption against relatively slow growth in production, causing a depletion of sugar inventories. This apart, the drop in global sugar output due mainly to adverse weather conditions in some key sugar-producing and -exporting countries has also contributed to this outlook.

However, what is noteworthy is that price volatility has been typical of the global sugar market and will, inevitably, remain so. Uncertainties in the movement of crude oil prices, changes in governments' policies towards sugar and ethanol-doped petrol and diesel, and exchange rates can trigger this price volatility once again at any time. This can result in the price movement on either side. No doubt, a rise in global oil prices is generally interpreted to mean diversion of more cane to ethanol production, resulting in fall in sugar production and surge in sugar prices.

But, if the oil price uptrend gets strengthened to the extent where it begins to affect economic growth, it can potentially depress sugar demand, putting a downward pressure on prices. Such a demand drop was visible in the the Russian Federation, the world's largest sugar importer, during the period of its economic depression. In India, too, the demand for ethanol for mixing with oil is likely to rise and can have a bearing on sugar production as well as prices. Also, India's entry into the global sugar bazaar as an exporter can influence international prices. But the most significant of all these factors is the uncertainty over the government's sugar policy. Some crucial decisions on further relaxation of controls on this sector have been pending for quite some time. There seems little logic in further delaying a total deregulation and decontrol of this sector. With the markets opening up and the supplies being comfortable, the time seems ripe to let this sector take its own business decisions.