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Globally, sugar is in a state of surplus for a fourth year in a row. According to the US Department of Agriculture (USDA), global stockpiles will increase to an all-time high of 43.4 million tonnes (mt) in the year ending in 2014. The global sugar surplus in 2013-14 at 6.1 mt is the third largest, and is most likely to be revised up. The largest sugar surplus was recorded in 2011/12 at 7 mt. In the northern hemisphere, Thailand and India will have a large production and exportable surplus. In southern, crushing in Brazil has been extended till December due to rains. Clearly, large supplies will remain burdensome even this year.
The currency factor is further putting pressure on the prices to go lower. Since mid-October, the Brazilian real has depreciated by 11.4 per cent, Thai baht 4.2 per cent and rupee 1.3 per cent. A cheaper currency makes exporters more aggressive and pushes prices lower. The dollar index has strengthened 2.5 per cent for the same period making the dollar-denominated commodity cheaper. The price scenario gets murkier if the US Federal Reserve were to start the tapering of quantitative easing (QE). The world sugar prices are already at three-year lows and could go lower. The US Commodity Futures Trading Commission (CFTC) data show large speculators and hedge funds remain substantially long. This makes sugar prices all the more vulnerable to a sell-off.
The Indian sugar year 2013-14 has opened with a 9-mt stock. Good weather and very remunerative prices have made sure the production is sustained at close to 25 mt. Against this, the consumption is close to 23 mt. Of the extra 11 mt, India will need to export at least 4 mt if prices were to come out of this bearish trap. But given the global demand, supply and price scenario, 4 mt looks ambitious. The Indian currency movement is not helping either, specially when looked at in light of the currency depreciation of the competitors discussed above. Lately, sugar exports have picked up due to corrected prices and weak currency. Logistic issues in Brazil hampered sugar exports and helped Indian exporters. Recently, geo-political problems have erupted in Thailand. So far, it has not impacted exports, but the risk premium there could drive some demand for Indian sugar, specially in geographically close countries.
Historically, higher sugarcane production has been associated with lower cane diversion. But the same may not be the case this year due to the delay in crushing operations. The latest rabi acreage numbers show that in Uttar Pradesh, farmers have sown wheat in around 6.4 million hectares till November 28, which is almost 17 per cent more year-on-year and is at the highest level in five years. Clearly, farmers who wanted to switch from sugar have harvested and diverted some of the cane to Gur. This will impact the total production number. But will not have much impact on the overall scenario.
Spot prices are the lowest since March 2012 and down 16 per cent year-on-year. Looking at the supply-heavy global and domestic scenario, the path of least resistance remains downwards. Crushing has just begun and fresh supplies could take prices lower by five-seven per cent by January. Beyond which exports will need to be watched carefully. Consistent exports of 200,000-300,000 tonnes every month could see the sugar price improve by March-April; the lack of which could see the price fall sharper and the sector crisis deepen.
The author is vice-president, research, Kotak Commodity Services Ltd
