Global and Indian sugar prices have been rising for several months now following supply side problems in major origins. The pace of price rise may have slowed of late; but if anyone thought the bull-run has ended they must think again, for, conditions are turning positive for a continued price rise into 2010.
From 12 cents a pound a year ago, global sugar prices galloped to nearly 25 cents three months ago with the world's second largest producer India desperately seeking the commodity to meet its domestic shortfall for the second season in a row. In the last one month, prices have settled lower at 22 cents. The market is unlikely to stay at this level for long.
Broad range-trading at the 20-24 cents level and absence of break in either direction in recent times may have prompted some analysts to assert that the bull-run has come to an end. Such an assertion ignores ground realities. If anything, from the current levels, sugar prices have risks to the upside. Indeed, the global market is yet to enter the tightest period in 2009-10 market deficit. Production deficit for the year is estimated at 7 million tonnes.
Once again, India is set to trigger price escalation. The first advance estimate issued by the Ministry of Agriculture for 2009-10 season shows sugarcane output at 249 million tonnes, down from 274 million tonnes a year ago. There is no guarantee that cane output will be scaled down in future. For 2008-09, the first advance estimate was 294 million tonnes which as scaled down to 274 million tonnes in the fourth advance estimate. Will there be a repetition this season?
One thing is clear: Sugar output in 2009-10 is most unlikely to exceed previous year's output of 15 million tonnes. Demand for cane from producers of traditional sweeteners (gur and khandsari) continues to be strong, cutting into availability for mills.
India's opening stock for the new season is one of the lowest in recent memory. The saving grace has been duty-free imports. The country has so far purchased about 4-5 million tonnes of sugar which continues to flow in. Additional imports of at least three million tons may be required to rein in open market sugar prices.
Weather induced damage in Maharashtra the largest producer and disruption to cane marketing in the major growing State of Uttar Pradesh can create supply bottlenecks. Importantly, the Government messed up the cane pricing issue which has now taken a political colour.
Although Indian market fundamentals are not at all supportive of a price correction anytime soon, with crushing season having started, the upside to prices will be capped effectively for the next three months. When the crushing season comes to an end, by March 2010, the market has the potential change direction. By that time, planting conditions and acreage for 2010-11 would be known. On current reckoning, there is nothing to suggest a bounce back in cane acreage to anywhere close to 5 million hectares. So, in all likelihood, India's sugar woes may well continue. Brazil is caught up in its own problems. Reports point to the situation that the main centre-south Brazilian harvest is now coming to an end; but despite strong level of crush, the impact of heavier rains than usual (associated with El Nino) have markedly reduced yields. Sugar production is likely to hover around 35 million tonnes. Mills are considering closing early due to yields becoming uneconomic.
Importantly, now that the flow of Brazilian sugar will trend lower until the start of the next harvesting year (May 2010), in terms of solving global deficit this is the start of the period when the market tightness will begin to be felt most acutely. Elsewhere, Chinese production has been revised down, while Mexico is facing weak production again.
So, a combination of slowdown in heavy Brazilian exports, run down in global stock levels and chronic deficit staring India in the face is expected to propel world sugar prices higher than they currently are. Although appearing somewhat weak at the moment, crude market is likely to turn supportive.
It is not beyond expectation that world sugar prices could rise 10-15 percent from current levels to test 25 cents a pound (and even beyond if too much speculative capital flows in) sometime in the first half of 2010, and more likely in the second quarter April-June when Indian conditions crystallise.
Policymakers in India are often obsessed with solving current problems and tend to ignore the impending ones. Krishi Bhawan which houses the Ministries of Agriculture and Food must begin to look at ways and means to expand cane acreage to 5 million hectares for the 2010-11 season and assured cane output of at least 300 million tonnes if it is serious about containing the ongoing sugar crisis. Until it happens, consumers will have little relief from high sugar prices.
Source : Business Line