Real's depreciation lends edge to Brazilian sugar export

With the Russian and Ukrainian steelmakers managing to raise their profits in a big way by stepping up exports of their products, the Brazilian sugar sector is able to avoid commodity blues by selling the sweetener in increasingly large quantities in the world market. In both cases, India is subject to collateral damage. Large imports from east European countries and East Asian ones are among the principal reasons for keeping steel prices down in India, shrinking margins for local producers. The surge in Brazilian exports in a global surplus situation and low prices, is standing in the way of India selling sugar in the world market. This is in spite of New Delhi belatedly sanctioning an export subsidy of Rs 4,000 a tonne to improve the cash flows of sugar factories, so that they could settle parts of their alarmingly high cane dues.

The other consideration for subsidy grant was to facilitate export of 1.4 million tonnes (mt), which would go some way in reducing overflowing inventories with factories, improving local market sentiment. However, with popular May futures for raw sugar trading on the Intercontinental Exchange in New York at close to one-third of their 2011 prices, India does not stand a chance to export unless government trading houses such as STC and MMTC undertake the task. But their procurement of sugar should ideally pay for factory production cost. In any case, the government, not perceived as particularly farmer-friendly, is not betraying any urgency to bail out cane growers and factories.

Currency devaluation has created ideal conditions for Brazil, Russia and Ukraine to profit from exports. For example, the Brazilian real is down 20 per cent against the dollar since the start of the year. Real has hit a decadal low because of concerns about the economy and surfacing of evidence of corruption in awarding government contracts, particularly concerning oil. What does this degree of Brazilian currency depreciation mean for the country's sugar sector? As Financial Times points out, "Compared with a year ago, sugar prices have slumped 32 per cent in dollar terms, while in Brazilian real terms, it has only declined three per cent." It's a win-win situation for Brazilian factories as cane bills, the major cost component of sugar production and wages, are all settled in the local currency, while the sweetener export is denominated in dollar.

Brazil, the world's largest manufacturer and exporter of sugar, has an unbeatable level of production efficiency. This is because of the operational size of each group, cane crop harvesting mechanisation, high sugar content in cane and flexibility in allocating the crop between sugar and biofuel ethanol production, depending on which of the two finds favour with the market in a season. According to a major Sao Paulo-based industry consultant, the Brazilian sugar season that began this month, the centre-south of the country, accounting for a major part of the crop, is likely to see cane crushing go up by 2.6 per cent to 585 mt. This will result in greater export thrust. India and Thailand, whose currencies have managed to hold ground against the dollar, face an uphill task in selling sugar abroad, says industry official O P Dhanuka. A strengthening dollar is more than sustaining sugar value in local currency terms for Brazil.

To go by a Bloomberg survey of analysts, sugar prices have not bottomed yet. Expect these to fall to 12.02 cents a pound by July. Alarmingly for India, where 50 million growers are engaged in cane cultivation and another few million working in factories and the tertiary sector, sugar is destined to remain among the worst-performing of 22 items tracked by the Bloomberg Commodity Index. The International Sugar Organisation and some research agencies have forecast that global supply will exceed demand for five years in a row during the season to end in September 2015.

When the world will be holding season-ending stocks of about 80 mt, pressure on prices will be intense. Dhanuka says world production is staying high when there is no sugar demand growth in developed countries, mainly on account of health concerns. Moreover, sugar faces high tariff barrier, in the US and European countries continue to provide subsidy to beet growers. These are instances of protecting the interest of local farmers. Nearly 80 per cent of world sugar is derived from cane and the rest from beet. The absence of government support in surplus management and administration of the sugar exim trade have left Indian farmers and factories in a quandary.

BITTERSWEET

• Sugar exports from Brazil, the world's largest manufacturer and exporter of the commodity, is set to increase further
   
• Currency devaluation has created an ideal condition for Brazil to profit from exports
   
• This could dent the prospects of India's sugar sector, shrinking the margins of local producers
   
• In India, sugar is likely to remain among the worst performing commodities
   
• With end-of-season stocks estimated at 80 mt, it could put further pressure on prices