Why the sweetener turned sour

Better than expected cane production in Brazil dragged down the prices

After a weak 2014, which saw global sugar prices fall by almost 11 per cent, sugar producers were hoping for some respite. But to their dismay, 2015 has not been any better.

The price of the Sugar 11 futures contract, traded on the New York Mercantile Exchange (NYMEX), has been on a falling spree, losing over 10 per cent since January.

Belying hopes of a revival, global sugar prices which recovered from the September lows of US cents13.5/lb to US cents 17/lb in October, have since fallen steadily. Sugar 11 futures have since slipped 23 per cent from the October 2014 high.

Better-than-expected cane production in Brazil dragged down global sugar prices.

The ethanol factor

Global sugarcane output and crushing were expected to decline significantly in 2014-15 after Brazil’s single largest cane growing state — Sao Paulo — witnessed the worst drought in more than 80 years. But contrary to preliminary estimates (in August 2014) of a 6 per cent decline, total cane crushed till end-November was lower by just 3 per cent. Higher than expected cane crushing depressed global sugar prices.

They have fallen sharply from US cents17/lb in October to 13/lb currently.

Higher diversion of sugarcane towards ethanol this year also failed to firm up sugar prices. Despite higher sugarcane being diverted towards ethanol, the sugar output for the season up to December was lower by just 5 per cent.

In addition to this, the sharp appreciation of US dollar against most global currencies has added to the pressure on global sugar prices. However, the recent decision by the Brazilian Government to increase ethanol blending in gasoline should increase the demand for anhydrous ethanol by one billion litres, claim news reports.

India scene

In India, the price of sugar futures contract traded in the NCDEX has been sliding this year. From ₹31 a kg in early September 2014, the price of sugar futures have fallen by almost 20 per cent to ₹25 a kg now. Supply glut in the domestic market, given the expectation of over 5 per cent increase in sugar production for 2014-15, has dampened the sentiment.

Though domestic sugar prices react largely to local demand-supply dynamics and cane availability, international prices also matter to sugar makers. This is because in surplus years, Indian sugar makers export up to a tenth of their total production. Weak sugar prices in the global market impact export realisations for Indian sugar producers.

In 2014-15, the Indian sugar industry is expected to have exportable surplus of about 2.5 million tonnes, which is roughly 10 per cent of their production. In February, to give a push to exports, the Government increased subsidy on raw sugar imports of up to 1.4 million tonnes by 18 per cent — from ₹3,371 per tonne in 2013-14 sugar season to ₹4,000 per tonne.

But despite the increase in subsidy, the free fall in global prices has made exports unattractive.. If exports don’t materialise, the domestic sugar glut can expand and impose further pressure on domestic prices in the months ahead.

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