Mumbai: Sugar seems set to lose some of its sweetness for consumers in the time to come, with the year 2010 seeing the tightest supply of the sweetener in half a century.
"Global production of 157 million tonnes for 2010 is expected to be at least 2 million tonnes lower than the demand. After a severe deficit of 9 million tonnes in 2009, this will exacerbate the inventory situation and the stock-to-use ratio at the end of 2010 will fall to its lowest level in 50 years," Vikash Jain of CLSA Asia Pacific, a brokerage firm, wrote in a report dated October 9.
Vijay Bhambwani, explained the deficit in supply saying sugar production typically has a seven- or eight-year cycle. "The soil gives peak output for three years and then the output starts to decline. The soil then needs to be rejuvenated with lower crop levels and the cycle starts again. The sugar cycle peaked in 2008, and the next one-and-a-half to two years is likely to see a decline in production."
Sugar prices recently touched a 28-year high of 25.39 cents per pound on September 30, 2009. This is likely to climb up going forward, because imports by countries such as China, Russia, Mexico and India are set to rise. These countries are consuming more, but producing less of the commodity.
Jaiprakash Toshniwal, research analyst, ULJK Securities Pvt Ltd, in a recent report, said, "International sugar prices are at a very high level due to the lower production in countries with high consumption levels." Hence, this will lead to increased imports, analysts feel.
Jain of CLSA wrote, "We expect India to import an additional 8 million tonnes over the coming 18 months. Given an annual global export of 30 million tonnes, this is likely to lead to a further strengthening of international prices from the current 28-year high."
An analyst with a leading research firm said India is expected to produce only 15-16 million tonnes of sugar in the season starting October 1, as against the demand of 23 million tonnes. This (15-16 million tonnes) is over 40% lower than last year's sugar production of 26.3 million tonnes. Due to this shortfall, sugar prices in India have risen by over 50% and are currently trading at Rs 30 per kg, as against Rs 20 per kg last year.
On its part, the government, in a bid to keep a check on sugar prices, has allowed duty-free raw sugar import without re-export obligations until March.
"This has helped in arresting the northward price movement by 15-20%, but it's a matter of time for the prices to move up again," another analyst said. With the festival season on, the government has flooded the market with sugar from its buffer stocks, helping drive down prices by 15-20%. But this has also brought down the buffer stocks, which will create a supply problem next year. "Politicians typically sweep the problem under the carpet, but it will come back to haunt us next year," an analyst said.
"Over the next few years, we may see sugar prices in the range of Rs 45-47 per kilo levels. The next cycle for sugar is likely to start in 2010-2011 and that is when the pricing power will come back to the sugar mills. Till then, the pricing power remains with the farmer," Bhambwani said.
Prices rise at a much faster rate vis-a-vis the decrease in supply due to various reasons, such as the suppliers hoarding the commodity and speculators entering the market.
The below-average monsoon season, which was the worst in 37 years, has had an impact on sugar production. Uttar Pradesh is a major sugar producer and the lack of rains clearly did not help.
The untimely rainfall and floods in southern states of Andhra Pradesh and Tamil Nadu, which are the other major producers of sugar, has also had an impact.
Other than these reasons, "Earth is closest to the moon in 300 years and due to this, water levels have risen and supply of arable land has declined by 8% in five years. Given this, prices of not only sugar but other commodities are bound to go up," said Bhambwani.
