Sugar glut, only a speculation

Date 21-May-2010        Source The Hindu        Reporter G. Chandrashekhar        News Id 154

Mumbai, May 20 These days, everyone — the Government, industry and sundry others including so-called analysts — is bullish about India’s sugar production during 2010-11. There is expectation of a huge rebound in production next season as a result of which there already are some talks of India exporting the white crystal next year. To what extent are these forecasts and expectations justified? What is the basis of the very optimistic outlook? A closer scrutiny reveals that talks and reports circulating in the market are based less on hard facts and more perhaps on one’s trading positions or mere hearsay. There is tremendous hype about next year’s crop and sugar production, not based on currently known facts and solid evidence, unfortunately. Acreage Let’s get the facts clear. In 2009-10, sugarcane acreage was 4.25 million hectares (mh) that give cane output of 274.6 million tonnes (mt), compared with the previous year’s 4.38 mh, from which cane output was 285 mt. The national cane yield averages 65 tonnes/ha. For 2010-11, let’s start with the assumption that consumption demand for sugar would be 24 mt although some may pitch it slightly lower at 23 mt. It is widely expected that the opening stock for next year would be an estimated 4 mt; but more realistically it could be around 3 mt or even less given that the peak consumption demand season (series of festivals from August to October) is over two months away. To produce 24 mt sugar next season, the industry needs to crush at least 230 mt of cane. We have to account for diversion of cane for traditional sweeteners (gur and khandsari), direct consumption and so on. It would be anything between 70 million and 100 mt . Let’s assume it to be 80 mt. Excess output In other words, for 2010-11, we need cane output in excess of 300 mt and closer to 320 mt. To get there, cane planting will have be on at least 5 mh and assuming normal rainfall conditions across the country, the average yield would be 65 tonnes/ha which would generate 325 mt of cane. As of today, no one has any realistic idea of what the cane acreage is, although planting was completed several weeks ago. We do not have solid evidence of cane acreage expanding to 5.0 mh from last year’s 4.25 m h and normal acreage of 4.4 mh. So, it is unclear what the basis of everyone’s expectation is. Nearly two months ago, the Agriculture Minister, Mr Sharad Pawar, talked about an emerging glut in sugar next season. He should come up with specific numbers and justify his expectation. The first official estimate of cane acreage may come out sometime in July. But given the sensitivity of sugar, why should the Government hold back any information regarding acreage under cane and forecast of cane output? Unless the expectations are justified with solid evidence and numbers, such expectations may be tainted as speculation. The issue is not whether India will eventually produce 24 mt of sugar next year. It is that today do we have credible evidence that it may happen? Based on historical trends, one can surely expect India’s sugar production to bounce back; but such rebound will be constrained by acreage considerations. On current reckoning and based on inputs from different parts of the country regarding cane acreage, it appears safe to assume that our sugar production next year may reach 21-22 mt. In the event, some sugar imports would become inevitable, and international prices will reflect India’s need. Tightly balanced Even assuming that India miraculously manages to produce say 24 mt of sugar next year, there may not be a window for export. The domestic sugar market fundamentals would be tightly balanced. There are risks in such a situation because in a tightly balanced market, even a small change in demand or supply will have a disproportionately large impact on market prices. International sugar prices – currently at around 14-15 cents pound, down from record 26-27 cents three months ago – may have overshot to the downside. Once the Indian picture becomes clear – probably by July – there may be scope for prices climbing to around 20 cents.