Big Picture. Sugar to get sweeter, but only slightly

The global commodity markets are going through one of its worst phases in 2015, thanks to sluggish global demand and a supply glut.

Most agricultural commodities have touched their all-time lows – on an aggregate down 40 per cent from their peaks in 2011.

In India, sugar has been one of the worst performers with its price reaching a record low of ₹20 a kg in July 2015 from ₹34 a year before. 

With domestic demand being relatively stable, the huge pile up of surplus sugar, accompanied by lower export demand, has led to its price crashing well below the cost of production.

This led to cane arrears rushing to ₹21,000 crore at the start of FY 2015.

Supply factors Global sugar supply has now been exceeding demand for five years. The sector gets large financial support from governments in key producing countries, such as Brazil, India and Thailand.

Brazil spends at least $2.5 billion on sugar loan programs.

The Thai Government maintains total control over its sugar production and distribution through provision of direct subsidies to farmers and loan programs, while mandating 70-80 per cent of its production to be exported. In India, sugar output has been exceeding consumption for the sixth year in a row.

Despite increasing cane arrears and delays in payments, acreage allocation for sugarcane cultivation is on the rise.

Subsidies, assurance about payments and higher cane support price over-incentivise cane cultivation in the country.

Since mid-2014, falling crude oil prices which influence the prices of key inputs like fertilisers, have pushed up the production of soft commodities. This adds to the supply glut.

Demand factors Cheaper crude oil has also led to lower demand for bio-fuels (ethanol is a by-product of sugar) from oil marketing companies (OMC).

Despite fixed target of 10 per cent ethanol blending in fuel and subsidies for mills fulfilling 80 per cent of the allotted quantity for delivery, not even 3 per cent ethanol blending is happening in India.

What has changed now? In the market, bearish sentiment for sugar is turning bullish. Sugar prices have shot up 35 per cent in the last three months because of heavy rainfall in Brazil that has slowed down cane harvest.

Worse, the ongoing dry weather is likely to harm its next cane crop. 

With a plummeting Real and deepening economic crisis, things are bad for Brazil’s sugar sector. The weaker Real is making servicing of dollar debt (availed by top sugar mills) difficult, with 50 of 350 sugar mills already closed down, and 10 more to follow suit.

The higher cost of gasoline is promoting the diversion of cane towards ethanol production.

Thus, Brazil is unlikely to expand sugar output even though the weak Real incentivises sugar export.

Dry weather in India and Thailand is not helping global sugar output either, thanks to El Nino.

The International Sugar Organization (ISO) in its latest forecast has raised the world sugar production deficit to 3.53 million tonnes (mt) from its earlier estimate of 1.04 mt for 2015-16, and 6 mt for 2016-17.

This shortfall will be the first of its kind in six years mainly due to a cut in the production estimates for Brazil, India, EU and Thailand.

Export prospects Given its surplus stock, India is trying to push sugar exports and is eying South-East Asia, Sri Lanka and Africa. It has fixed an export quota of 4 MMT.

Indian exports are expected to pick up from the second quarter of next year, when Brazil’s stocks will start receding.

Recent recovery in sugar prices and weaker tupee has brought Indian sugar prices closer to market competition globally.

Already India has contracted to export two lakh tonnes of sugar.

China factor Lower international prices of sugar compared to its domestic prices have led to increased buying by China, the world’s largest buyer.

The ISO predicts China will import 4.5 mt in 2015 and 4.7 mt next year.

The USDA expects China to import 5.058 mt against 4.27 mt in 2014-15.

India is expected to produce 27-28 mt in 2015-16 because of the below normal monsoon and drought conditions which have impacted cane crops in Maharashtra and Karnataka.

Overall, the mandatory export quota of 3.2 mt from India, bad weather concerns and robust Chinese demand are likely to provide support to sugar prices.

However, the opening stocks of 10 mt for this marketing season starting October 1, and existing global sugar stocks at 85.4 mt at the end of September are likely to restrict any large price gains. 

We expect sugar prices to remain steady or there could be a slight uptick in the short to medium term.

(The author is Vice-President and Head Agriculture, Food and Retail at Biznomics Consulting.)

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