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OVERVIEW

Sugar Price and Inflation
Monday, 06 January, 2014, 08 : 00 AM [IST]
Prerana
Sugar remains a commodity that is politically sensitive and rise in prices of the sweetener is on the watch list of the political masters. Higher sugar prices have always met with sharp reactions from policy-makers.

As a result the industry itself has been highly regularised over the years. Its production, distribution, exports and imports were regularised. Only in April 2013, has the government initiated decontrolling this industry. While the industry has welcomed the decontrol it wants the reform process to be extended to sugarcane prices also.

The industry has been rather uncomfortable about the weightage of the commodity in the price indices. Higher weightage in price index is another reason why it invites political intervention when the prices rise. Currently weight of sugar in the consumer price index is 1.91. And hence, change in prices of sugar has a reasonable influence on the headline inflation.

Price correction
Sugar prices have corrected more than 10 to 14% over last year same time, 31% from the recent high levels seen in mid-Aug 2012. So far in the season, prices have corrected by 3.4%. Good monsoon throughout was already pressurising prices on higher sugar production prospects for a fourth year in a row.

Historically sugarcane production cycle has a life of six to seven years, in which three years are of production being much higher than consumption and three years of production being much lower than the consumption, effectively making India a very big swing factor in the world market. During sugar surplus years India exports in a big way pulling the world prices down and vice-a-versa during the sugar deficit years. This sugar cycle is largely policy-induced due to fragmented sugarcane policy in various states; building of large sugarcane arrears and resultant swings in sugarcane acreage.

Partial liberalisation
In April 2013, the sector was liberalised partially. Mills were freed from mandatory monthly selling quota, discount price for the compulsory diversion to the public distribution system and so on. Steps were taken based on the Rangarajan Committee Report.

The report is half implemented as the committee also recommends linking cane prices to sugar prices, and there needs to be a consensus amongst the stakeholders to implement it. The current crisis in the sugar industry has kind of forced all the stakeholders to come together to resolve the crisis.

Ever since mills are free to decide how much to sell and when to sell the prices have been falling. Not used to being in a market-driven environment, it has resulted in sugar getting dumped in the open market. This has caused a lot of pain to the industry. As the fundamentals suggest this pain is anything but over.

Indian sugar year 2013-14 has opening stock of 9 million tonne. Very good monsoon and very remunerative prices has made sure that the production is sustained at close to 25 million tonne. In the state of UP the state advisory prices have increased by close to 200% in last 10 years! Clearly despite rising arrears farmers continue to stick to the cane crop due to the assured buyers and assured prices!

As against this the consumption is close to 23 million tonne. India will need to export 3-4 million tonne to see prices turn up. But given the global demand, supply and price scenario, this looks ambitious. Indian currency is not helping at all. Since mid-October Indian currency has stayed at the same level, while Brazilian Real has depreciated by 12% and Thai Baht has depreciated by more than 4%! These two are the main competitor for Indian sugar in the world market. Sugar exports in the month of November picked up due to the world sugar price rise in the month of October. Logistic issues in Brazil hampered sugar exports and in turn 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, especially in geographically close countries. But the occasional opportunities are not sufficient to offload the burdensome surplus in India.

Sugar surplus
Global scenario is not helping at all. USDA numbers show that global stockpiles are at all-time high of 43.379 million metric tonne in 203-14. Because lot of sugar produced is consumed in the country itself, the global prices are not guided by the ending stocks only. Sugar surplus is a much better indicator to guide the prices. Sugar surplus is defined as total export minus total imports. Global sugar surplus in 2013-14 at 6.1 million tonne and is the third largest. However here too the total exports estimated for India seem to be an underestimation and hence it is most likely that this number is revised up in days and months to come. Largest sugar surplus was recorded in 2011/12 at 6.9 MT.

From May to November, Brazil is the sole supplier of sugar to the world. Sugar production is only marginally above last year at 38.75 million tonne, but it has sustained at this record level for a second year in a row. Crushing in Brazil has been extended till December due to rains. Of northern hemisphere, Thailand and India will have a large production and exportable surplus. Clearly large supplies will remain burdensome even in 2013-14. Currency factor is further putting pressure on the prices to go lower.

GSCI Spot Index
Cheaper currencies of sugar exporting nations viz Brazil, Thailand and India makes them more aggressive and push prices lower. Dollar index has strengthened by 2.5% for the same period making the dollar denominated commodity cheaper. Global commodity prices have been declining. The Standard & Poor’s GSCI Spot Index of 24 raw materials indicates that what we are seeing now is the worst raw material slump since 2008, and is most likely to deepen as the funds pull out of commodities to invest in equity. If US Fed was to start tapering of QE the liquidation in commodities could potentially worsen. World sugar prices are already at three-year low levels and could go lower. CFTC (Commodity Futures Trading Commission) data shows that the large speculators and hedge funds remain substantially long. This makes sugar prices all the more vulnerable to sell off.

Fresh supplies
Looking at supply heavy global and domestic scenario; path of least resistance remains downwards. Crushing has just begun and fresh supplies could take prices lower by another 3-5% by January. Simultaneously one will need to keep an eye on the pace of exports and global prices. Improvement in either of them or both of them could turn the sugar prices in India. Preliminary port-based numbers show that around 1.7 lakh tonne sugar was exported in month of November, and around 1 lakh tonne in first half of December. India needs consistently exports of 2-3 lakh tonne every month. Only then could we see prices improve by the summer months, when the higher demand could also possibly support the prices. Lack of exports or a sudden sell off in global prices could see Indian prices dive lower.

Last year
Headline inflation is about change in price over same time last year. As can be seen in the chart, sugar prices were comparatively higher last year this time and they continued to fall through out. The demand supply scenario suggests that 2013-14 should see a comparatively tighter balance sheet, provided of course the exports materialise. Hence it can be said that the inflation numbers will show negative sugar inflation in first half of next year mainly due to the higher base effect. The trend should last till probably April. From April onwards, the lower base effect, summer demand and reduced supplies will see higher sugar inflation. After June of course the ball will rest in the weather court and will guide the prices.

(The author is vice-president, research, Kotak Commodity Services Ltd, Mumbai. She can be contacted at
prerana.desai@ kotakcommodities.com)
 
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