Sugar prices to stay firm

Supply-demand fundamentals will be tight despite production recovery

With just two months to go for the 2016-17 sugar season to conclude, the government has taken cognizance of the tightening market fundamentals — lower production, falling inventory and steady demand — and has imposed stock limits on sugar producers to prevent any manipulated price action in the market during the ongoing peak festival season.

It is time to look beyond the present and into the upcoming season 2017-18 to examine the emerging scenario. Without doubt, the planted area has recovered to 49.8 million hectares versus the El Nino-affected 45.6 m ha of the previous year 2016-17.

With higher acreage, cane output for 2017-18 is sure to show a smart increase from the previous year’s 307 million tonnes (mt). However, on current reckoning, it is clear that the year’s cane output target of 355 mt fixed by the government will not be achieved, especially because of the moisture stress conditions faced by principal growing regions in Uttar Pradesh, Maharashtra and Karnataka.

Demand-supply situation

Actual harvest of cane may end up at 325-330 mt with concomitant impact on sugar production. Even assuming normal recovery, sugar production for 2017-18 may well recover to just about 23 mt from the previous year’s 20 mt. On the other hand, demand is expected to expand steadily and may well touch 25 mt with the perceived effect of demonetisation waning. In other words, the year’s supply will trail demand by a good two million tonnes. Ending stock in 2016-17 season is unlikely to be of any significant support, given the heavy drawdown during the year to meet current demand and the government’s stern warning to the industry while imposing stock limits as an anti-hoarding measure.

So, the emerging scenario for 2017-18 is by and large clear. Despite production recovery, the supply-demand fundamentals will be tight, and prices will have the propensity to stay firm with a strong upside bias. Given production pressure that will begin to build from November, sugar prices may stay range-bound till March 2018 after which there is the real risk of a runaway price spike, especially during peak summer demand followed by festival season from August to October.

Risk management

Indeed, it is time for the policymakers to look beyond the current year into the next year 2017-18 and start examining risk management measures. New Delhi should be in a state of readiness to ensure uninterrupted availability of the essential commodity at affordable prices for consumers. It is becoming increasingly clear that imports may become inevitable to replenish stocks and rein in price rise. The political climate — State elections, inflation targeting — also will support a case for sugar imports.

In so doing, the world market is unlikely to be helpful. Of course, international prices have been modestly low until now, with the prospect of return to global surplus in the 2017-18 season.

Indeed, investors have recently moved into a net short position in the derivatives market for the first time in two years. However, all this is set for a change.

World sugar prices next year are poised for a 20 per cent rise to around 16 cents a pound from the current 13 cents a pound. Weather aberrations, if any, can exacerbate the price situation. The world’s largest sugar producer and exporter Brazil is expected to produce less sugar as cane will be diverted for more attractively priced ethanol.

The market is also taking cognizance of the Indian situation and expects that India will be forced to import 1.5-2 mt to augment supplies and keep prices under check. Obviously, there is a case for reviewing the tariff structure (rate of import duty on sugar) to face any eventuality.

The writer is a global agribusiness and commodities market specialist

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