It is the simple principle of economics that if a commodity, specially of essential nature like sugar remains globally in short supply with the crops failing in the world’s two leading production centres then the inevitable result will be that the prices surge. Thanks to India experiencing the weakest monsoon since 1972 last year and the Brazilian cane harvesting getting badly disrupted in the final months of 2009, sugar prices have scaled to 30-year highs in the past 12 months.
The world put up with sugar deficit of around 11 million tonnes last year. That is why March futures now for white sugar on LIFFE are moving astronomically between $730 and $748 a tonne and that for raw sugar on ICE are range bound between 27.91 cents and 28.95 cents a pound. When trading resumed in January 2009 after the Christmas and New Year break, LIFFE March whites were $327.80 a tonne and ICE raws were 11.82 cents a pound.
The 2008-09 Indian crop failure made even worse by large-scale diversion of cane to the highly inefficient and revenue denying to the exchequer gur and khandsari factories saw India making only 14.6 million tonnes of sugar while requirements were conservatively placed at 22.5 million tonnes. The day then was saved by the season’s comfortable opening stocks and imports. But now as the world knows our sugar cupboard is virtually bare and we must import very large quantities of both raws and whites to fulfil domestic requirements, whatever the cost.
Much troubled by raging sugar prices, agriculture minister Sharad Pawar bemoans the fact that “whenever we decide to import sugar, considering the volume, world sugar prices rise and when the time comes for export because of surplus, global sugar prices fall.” This, however, will not exonerate Delhi for stopping exports a couple of seasons ago when sugar was fetching high prices in the world market on unfounded fears that the country was heading towards low domestic production. That was also the time when we made a breakthrough in the Pakistani market. It may be recalled that India produced a record 28.33 million tonnes in 2006-07 followed by another bumper production of 26.33 million tonnes next year.
The wrong decision then to withdraw from exports also played a role in Monday’s crisis. This needs some elaboration. Under the weight of surplus production and the export exit route sealed, the domestic market was deluged with sugar and in the process for months together, the mills had to sell the commodity at prices which did not even cover the cost of cane. Then one thing led to another. Almost every mill defaulted badly in settling cane bills even while the industry is required by law to clear farmers’ dues in 14 days.
At one point, mill dues on cane account rose to Rs 9,000 crore. The government had no alternative but to come to the rescue of an industry where all balance sheets got heavily dipped in red. Industry official Om Dhanuka says the farmers having suffered privation for no fault of theirs took revenge by shifting land to competing crops. “Not only was land under cane down to 4.395 million hectares last season from 5.151 million hectares in 2006-07, the industry also experienced during this period the spiriting away of cane by sweeteners alternative to sugar from 9.7 per cent to as much as 35 per cent. To make matters worse, we also had a bad spell of weather,” says Dhanuka.
But now high prices of sugar and also the reassertion of their rights to get remunerative cane prices, which incidentally has the backing of all political parties, have led farmers to growing cane once again on a large scale. But cane, depending on its variety, is a 12 to 15 month crop. We will, therefore, reap the benefits of additional plantation during the 2010-11 season when our sugar production could be 24 million tonnes, making imports dispensable.
In the case of Brazil, the harvesting disruptive heavy rains between September and December will, however, have a beneficial impact on the 2010-11 (May to April) crop which is now expected to be a bumper 590 million tonnes. A Goldman Sachs report says, “Record sugar prices may incentivise harvesting of Brazilian crop as early as March instead of usual May.” All this has led International Sugar Organisation to say that the next season will see production being 1 million tonnes in excess of demand.
What does all this mean for the common man who is paying shockingly high prices for sugar? As new season Brazilian sweetener hits the market, it will be difficult to find sugar bulls beyond the first half of 2010. Experts are seeing ICE futures coming down to 17 cents a pound. For the time being, however, the common man should not hope for any relief.
