Weather to affect cane crop globally

Our food and agriculture ministry must be having a sense of mea culpa for its failure to recognise till the other day that the mounting global sugar shortages and the demand not wilting in spite of economic strain will leave it with little headroom to manage open market prices of the sweetener. It is understandable why in the present circumstances the government is tending to make liberal releases of free sale sugar as part of supply side management.

But in its attempt to cap prices of sugar, which enjoys an inexplicably high weightage of 3.6 per cent in WPI, the government is ensuring that the new season to begin in October will have disturbingly thin brought forward stocks. Remember the big festive demand for the commodity will stretch from September to January and the mills will be able to pump in new season sugar in reasonable quantities only from mid-November.

 

Therefore, the intensive resort to release instrument could be fraught with peril as we go forward. This year’s disconcerting production of less than 15 million tonnes plus imports of 3 million tonnes falls way short of domestic demand to meet which we are rapidly emptying the inventory. Cane is a resilient crop. But from the time preceding sowing to ready to harvest cane, the crop needs good rains during the entire span of south-west monsoon.

An errant monsoon, which is the case now, could tell both on the crop size and cane’s sugar content. If we are to experience an 18 per cent shortfall in rains over the June-September period, then it becomes imperative to scale down the 2009-10 projection of Indian sugar production from the earlier 20 million tonnes to as little as 16 million tonnes.

The development of El Nino weather phenomenon is simultaneously denying India a normal monsoon critical for its food and cane crops and spelling a particularly wet weather in Brazil dislocating harvest of cane standing in the fields. So we are in a situation where diametrically opposite kinds of weather will have a devastating impact on the cane crop in the world’s two leading sugar producing countries.

As a consequence, in New York ICE October 2010 contract raw sugar is traded at a 28-year high of over 21 cents a pound. The October Liffe white sugar is also done at a record high of around $567 a tonne. Since 2009 beginning, sugar prices helped by a widening global deficit have advanced over 75 per cent.

Bajaj Hindustan MD Kushagra Bajaj says the market is so poised as to take raw prices to 25 cents a pound. According to him, a major trigger for further price spikes will be India’s sugar import needs rising to 4.5 million tonnes next season. But Morgan Stanley suspects India may end up importing 6 million tonnes.

There is no doubt that the world physical market for sugar will become increasingly tight as we come to 2010, helped as much by the long–term weather forecast suggesting heavy rains in Brazil’s cane growing centres till December coinciding with the end of harvesting season and buyers rushing in to make spot and forward deals. Commodity watchers are, therefore, saying raw futures could very well cross 30 cents a pound.

Industry official Om Dhanuka says the combination of a global deficit of 12 million tonnes and stocks approaching record lows are leading all importing countries to cover their positions quickly. Besides big ticket importer India, the US will be importing over 800,000 tonnes by late spring as its sugar stocks to usage ratio has sunk to a worrying 3.4 per cent.

The ranks of significant importers are increasing with Mexico having suffered a production set back is to import at least 400,000 tonnes. Egypt will be another big importer. As the underlying sentiment is to stay bullish well into 2010, food and beverage companies are making spirited purchases of futures as a hedge. Dhanuka says sugar price advances have led hedge funds to double their net long positions.

Bajaj says sugar demand growth is not going to be impaired by its current prices. He, therefore, expects our sugar use to rise 4.3 per cent to 24 million tonnes next season. Mind you, sugar was the only commodity to escape demand contraction during the south-east Asian financial crisis. Balrampur Chini MD Vivek Saraogi will expect the government to take a lesson from all that is happening and create an “environment” through policy reforms where sugar will be available to consumers at fair prices and at the same time farmers and factories will get a “fair economic rate of return.” A recipe for sustainable growth of our sugar industry.