Production estimates revised to 26 mt for 2010-11 and supply to be boosted by 5 mt of stocks spilling over from last year.
At no point this season was there any doubt that the country will have rich enough production of sugar, creating an ideal condition for liberal exports. Not only was production of 26 million tonnes for 2010-11 forecast at season beginning, the supply was also to be boosted by close to 5 million tonnes of stocks spilling over from last year. There has now been a scaling back of production estimate to 24.5 million tonnes by the government and a little lower than this by Indian Sugar Mills Association (Isma).
This revision makes only marginal difference to the overwhelming supply scene. From almost the start of cane crushing, Isma was pleading with the government to allow the industry to export to discharge its obligation on the past import account and also on open general licence so that mayhem of the sugar economy be avoided. While the industry had exported around 1.5 million tonnes of sugar against past imports, the government for reasons best known to it took an inordinately long time to sanction export of 500,000 tonnes under OGL. The point is, government dithering denied the industry the highly lucrative export price of over $800 a tonne in January-February.
Isma Director General Abinash Verma rues the fact that when the industry first proposed exports under OGL, India was seen as the only place with surplus sugar. But the picture changed subsequently, with production in Thailand now pegged at a bumper 9.3 million tonnes and good reports emerging from some other major cane growing countries. What is more sugar is the worst performer this year on prospects of higher supply of the 24 commodities figuring in the Standard & Poor’s GSCI index.
To go by industry expert Jonathan Kingsman’s forecast that the world is to see raw sugar surplus widening to 10.575 million tonnes next year from 2.445 million tonnes this time, we are in for a long bear phase in the commodity. The approaching biggest global surplus since 2006-07 when India had record production of 28.33 million tonnes could see raw sugar sinking below 20 cents a pound.
Whatever the compulsions, New Delhi remains the arbiter of monthly sugar releases for the domestic market, as also for exports. At the same time, it will tell traders of the stockholding cutoff point. The March increase in stockholding limit to 500 tonnes for traders has done little for sugar prices while the ceiling has proved to be a deterrent to futures trading on a meaningful scale. Even while ex-factory sugar prices have come down to a level leaving the mills with a loss of Rs 150 or more a quintal, consumption of the sweetener is likely to stagnate at 22 million tonnes. So, the industry, in the absence of adequate exports, will be left with back-breaking surpluses as the 2010-11 crushing period nears an end and the new sugar season starts in October.
Industry official Om Prakash Dhanuka recalls that when in November 2010, Isma saw a surplus of 3.5 million tonnes for export, the forward prices were $805 a tonne for white sugar and 33 cents a pound for raws. As is any industry’s wont the surplus might have been pegged a few notches higher than the actual. The fact, however, remains that it is not difficult to form an opinion at the season’s start the likely cane harvest size, if the weather does not play foul or the fields are not visited by pests subsequently. So, the government could have flagged off exports around the time Sharad Pawar first publicly aired his views on the subject.
Mind you, food inflation was then raging so strongly that a concerned government was prone to err on the side of caution by repeatedly postponing a decision on exports. Not only did New Delhi take over three months to allow export of 500,000 tonnes on OGL, but it was also not quick in issuing release orders for actual exports to happen. All this has brought into focus our failure to make use of risk management tools embedded in futures trading. The government could well be averse to allowing sugar exports in the season’s beginning. It might also be that having painted itself into a corner on inflation count, the government lost its way in managing the impending sugar surplus.
Would it not have been in order for New Delhi to ask its own trade agencies and Indian Sugar Exim Corporation, the industry’s representative body, to sell sugar in the world market at spot rates early in this season and simultaneously cover the risk through forward buying? Thereby, the risk relating to any unforeseen setback in crop would have been taken care of and the industry’s cash flow would have improved.
Equally importantly, as Dhanuka explains, such a move would have spared the industry the pains of maintaining godown-bursting inventories. In fact, at season close, the industry will have no alternative but to ask the government to create a sufficiently large buffer stock. This will give well deserved relief to the now loss-making industry, since the government is to bear the cost of buffer maintenance.
