Tuesday, August 4, 2009

Sugar prices shoot to 25-year high in global market

Gear up for real pricey sugar, Rs 30/kg may soon turn history with newer, higher, highs. With global white sugar prices hitting a 25-year phenomenal high at $500/tonne and raw sugar prices following suit, the country's sugar mills may not find it uneconomical to import despite the government's easing imports with an extended deadline to end March 2010. Unless the government, already strapped for sugar stocks to release in the open market and check prices, goes slow on this and other administrative moves to control consumer price.

Crucially, the sugar industry is of the view that at the current prices in the international market, the import of raw/white sugar even at nil rate of duty becomes increasingly unviable.

Ironic, since the government only recently extended the August 1 deadline for duty-free raw sugar imports. In addition, it has also allowed duty-free imports of up to one million tonne white (or ready to eat) sugar till November 30.

Significantly, the development of sugar prices shooting up to marked highs is being attributed in the global market primarily to signals that India will be importing a substantial quantity of both raws and whites. On Monday, the Liffe October white sugar surged in London to $505.9 a tonne, the highest level since the launch of the contract in July 1983.

Andy in New York, ICE October raw sugar rose to a three-year high above 19.3 cents a pound, fast approaching a 2006 peak of 19.73 a pound. Currently, raw sugar prices is trading at a three and half year high. But the key ICE March 2010 contract, which will be the benchmark later this year, moved to 20.44 cents. At that level, raw sugar would be at a 28-year high.

World raw sugar prices rose steeply from only 11.4 cents/pound in January 2009 to 18 cents per pound in July. Worse, traders have begun projecting raw sugar prices at an unheard of 30 cents/pound. Last week, Kushagra Bajaj, Joint MD of one of the country s biggest sugar mills, Bajaj Hindusthan, projected a high raw sugar price of 25 cents/pound, indicating that higher import prices for raw sugar could make it tougher for the industry to realise its production/processing price unless the government allowed domestic retail prices to climb up further.

Currently, retail prices rule anywhere between Rs 27-Rs 30/kg. According to industry monitors, the landed cost of imported raw sugar at the prevailing price works out to around $470 a tonne and the ex-factory cost of processed sugar from the imported raws is unlikely to be lower than Rs 26,000/tonne in the coastal States and Rs 28,000/tonne for UP, even without including financing costs. At the projected retail price of around Rs 35/kg, the ex-factory price of sugar would work out to Rs 28,000-30,000/ tonne, the only way in which the sugar industry feels it can realise its processing costs on imported raws at high prices.

As an offshoot of such high import and processing price for mills, problems could compound further on many fronts for the already sugarcane strapped industry, which has faced an increase of about 60% in raw sugar prices during the year and a similar trend in white sugar prices as well, with demand outstripping consumption significantly in the world market.

In the last two years, 2006-07 to 2008-09, the sugar price realisation was uneconomical, leading to large arrears by mills in sugar cane price to farmers. A loan of Rs 4000 crore was disbursed with a two year moratorium and repayment over four years. The industry is already carrying a huge liability and repaymetn starts from 2009-10. In the meantime, the cost of production of sugar has increased steeply in 2008-09 due to higher cane price payment, under utilisation of capacity and low recovery. The government should urgently adopt a balanced policy to empower the sector by allowing a reasonable retail price for sugar so that the industry can realise its production price and cane price arrears to farmers are cleared on time and they have a good incentive to increase sugarcane production, an official of an UP-based sugar mill emphasized. The sugarcane area in UP is projected to shrink by almost 6%-8% to under 2.02 million hectares in the 2009-10 season.

Some 2.5 m tonnes of sugar have already been imported this year but the soaring international prices are expected to put a big spanner in the works for the plans of the industry to import substantial quantities to meet high doemstic demand. On the flip side, the government has already made unprecedented sugar releases into the open market this year, ensuring that there is nil carryover stocks into the 2009-10 season, thus increasing pressure for big imports. But it could still be a Hobson s choice for the government on allowing sugar retail prices to shoot up further. This, despite the political sensitivity over keeping prices down, especially in the festival period starting in early September right through to the end of the year. Sugar has a 3.6% weightage int he WPI and has contributed noticeably to higher inflation rates, but the government is working on rationalising the weightage downward.

In a bid to keep domestic sugar prices down, the governmetn also extended sugar stockholding and turnover limits upto the end of the year and banned futures trade, apart form easing imports, both under OGL and the AL scheme.

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