Sugar prices get boost from rising global deficit

What did encourage the sugar bulls to finally overcome the last key technical resistance level of 15 cents a pound for raw sugar? The three-month price of raws at 16 cents is at a multi-month high. Sugar futures hit a seven-year low at 11.2 cents a pound in August, plunging the sector worldwide into a crisis.

"Two developments will principally explain why prices of sugar, source of livelihood for millions in growing countries across the world, which fell out of market favour for long, should continue to trend higher in the coming days. First, research agencies have all revised upwards the global deficit - that is, production trailing consumption - for the current season ending in September 2016. Second, the world's largest producer and exporter, Brazil, is spiriting away increasingly larger volumes of cane juice from the sweetener to ethanol as its currency (real) continues to appreciate," says Indian Sugar Mills Association (Isma) former president Om Dhanuka. Agroconsult of Brazil says of an estimated 622 million tonnes (mt) of cane to be crushed in the country's centre-south region in the coming season starting next month, the share of ethanol will be 58.3 per cent and of sugar, 41.7 per cent.

According to the consultancy, rains in the past few months have largely compensated the earlier El Niño effect on cane plant growth. Some other agencies, however, maintain extended rains will delay the start of cane crushing by most factories in 2016-17.

The El Niño phenomenon has not spared the world's second largest producer India and Thailand either. Against last season's very high production of 28.31 mt, output is likely to shrink to 25.5 mt or even less this time. Lack of rain during the south-west monsoon was particularly acute in Maharashtra, a leading producer.

"As drought has shrivelled, cane crop in Thailand, the country will be producing about 10 mt in the current season, 14 per cent less than the earlier estimate of 11.6 mt," says Dhanuka.

International Sugar Organization has now pegged world production shortfall at 5.02 mt, up from 3.5 mt in November 2015. It says "a statistical deficit is clearly supportive for world prices" moving generally higher in the remaining months of the 2015-16 season. While Rabobank confirms that the deficit will be bigger than its earlier estimate of 4.7 mt, some agencies are putting the shortfall at up to seven mt, spurring bullish sentiment.

In step with rises in world prices, the Indian sector, under growing pressure to settle cane dues of Rs 15,500 crore and service bank loans, is mercifully meeting with steadily improving ex-factory rates. May futures contracts on the National Commodity and Derivatives Exchange are Rs 3,430 a quintal.

Isma president Tarun Sawhney attributes better price realisations to revised lower sugar production during 2015-16, expectation of reduced plantings for the season to start in October and the sector's "good response" to the government's export quota programme. Whether or not factories manage to break even while selling in the world market, they must make every attempt to achieve the sector's export target of 3.2 mt. The Prime Minister's Office, Maharashtra and a few other states have held out punitive steps such as buying unfulfilled export quota as levy sugar at discounted prices and linking sugarcane purchase tax exemption to export quota fulfilment.

At likely exports of two mt, the shortfall over the industry target will be quite large. But, the overhang of a large inventory, a cause of keeping local prices down, will get shaved to the extent of exports. The industry began the current season with stocks of close to nine mt. Now, a combination of exports and drought-related production fall will leave factories with stocks of 7.9 mt at September-end. Parched conditions in many cane-growing centres in Maharashtra and north Karnataka will keep supply of the crop down for the next season. Even while cane supplies are set to improve in Tamil Nadu, where the crop found succour in plentiful rains in November-December and in Uttar Pradesh, the country mightface a further fall in sugar output to 22.5 mt in 2016-17. Sawhney says the shortfall in cane production will inevitably result in competition among factories in many states to get supplies. That's a sure recipe for farmers to bring more land under cane, leading to bumper sugar production in future. Ahead of that, the sector's health needs attention.