Rising stocks crush prices

The mystery of sugar trade has got more intriguing. London sugar prices were down from the high of $767 to $500 in less than 45 days. Initial estimates of import demand of nearly 7 million tonnes (mt) from India in 2009-10 and then its downward revision by 3.5 mt surprised both domestic and international players. So has the sudden surge in sugar available domestically. The Indian wholesale price of sugar have fallen 34% from Rs 39 a kg to Rs 26 a kg in less than two months.




The stakeholders are now wondering if there are still more unknowns. Is it a magic or a miracle or a manipulation or a mirage or a material change of ground realities of supply demand matrix? Barring the Uttar Pradesh chief minister, all others have been proven wrong. She had maintained that there would be enough sugarcane in the state, and actually prohibited entry of imported raw sugar till end of cane-crushing season.



It must be remembered that the world takes a serious note of government statements. If any government declares that production is low, global prices will rise and vice versa. Indian sugar production was 14.7 mt in 2008-09.



In 2009-10, India projected production of 16 mt (October ‘09-September ‘10) against demand of 23 mt, with carry-in stocks of three million tonnes. Since February ‘09, sensing severe shortages from October ‘09, the Centre allowed duty free import of whites and raws both by the mills and traders, banned futures, increased levy quota from 10% to 20%, enforced stock limits on bulk consumers, enhanced fair and remunerative prices (FRP), proclaimed that farmers needed higher prices for lower sugarcane output, enforced weekly release quota, raided the premises of brokers and stockist, monitored closely the importers, and extended imports till Jan ‘11.



These actions reflect the panic among policymakers. The Opposition and ruling party urged the Centre to arrange bulk imports through public sector undertakings and to extend subsidy. The food ministry convened numerous meetings with trade to push for higher imports. These actions sent very bullish signals to the international trade, and white sugar the prices climbed from $350 to $767 between April ‘09 and February ‘10, while raw sugar values traded in range of 13-30 cent a pound.



In March ‘10, state sugar federations from UP, Maharashtra and south India reported large cane yields and improved sucrose recovery — a jump 3-3.5 mt in production. Thus, sugar production estimates were revised up from 16 mt to 18 mt and carry-in was revised from 3 mt to 4.5 mt. This forced local and international prices to correct.



Even carry in stocks, which can be easily and physically verified, were misreported by more than a million tonne. Will total supply still exceed 18-19 mt? Neither the government nor the cane commissioners know what is happening on the ground.



The November ‘09 US Department of Agriculture report — indicating production at 17.3 mt (including 0.4 mt of gur), carry-in of 3.7 mt and demand at 23.5 mt — conforms more to the local realities than the current projections of India. However, India continued to hammer its own pessimistic output estimates.
 
he government, farmers and funds are the major beneficiaries of the revised estimates, while millers, sellers, buyers and all others who are involved in physical distribution channels are on the losing side. Millers had agreed to pay as much as Rs 260-280 per quintal to farmers for sugarcane and now wholesale prices have declined to unremunerative levels of Rs 26-27 a kg.




Stock prices of all major sugar producers have dipped — indicating potential fall in profits. Millers could default in payment to farmers if pushed beyond a limit. International sellers who sold white sugar above $600 plus cost & freight (c&f) and raws above $500 plus c&f fear default/deferments by buyers, if domestic price average Rs 34-35 a kg in the April-May ‘10.



At the end of March, when price of whites were hovering around $560-570 (c&f) for whites and $450-460 for raws, there were no buyers. At domestic price of Rs 26-27 a kg, the contracted 3 mt of sugar is unlikely to arrive. Since international prices have tanked, industry is bound to seek the protection of import duty. A crisis like situation might re-emerge in June-November ‘10.



Indian demand has a long way to go after crushing mills down their shutters in April/May ‘10. Such a violent volatility caused by erroneous estimates need immediate actions such as abolition of weekly quota and removal of limits on bulk consumers on storage period. This should stabilise the wholesale price at Rs 34/35 kg.



If the prices continue to tumble below Rs 27/28 kg, millers will be forced to book huge losses, which will jeopardise the interest of farmers and the financial institutions. Importers will shun taking any forward positions even at lower values. Their outstanding contracts could face default/litigation /compensation.



It will then be too late for the government to wake up for controlling the imminent rise of sugar prices again during the festival season. It is time to take a call for the gross mismanagement of forecasting the supply side and balance equitably the interests all involved in the sugar tangle. The key lesson out of this episode is that accurate forecasting of crop numbers is very critical or else it can be economically and politically a disaster.

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