After languishing for an extended period, the sugar market appears to be in revival mode thanks to government support from time to time. After the hike in minimum support price for sugar recently, the domestic market has clearly bottomed out.

Although the current price of around ₹3,300 a quintal is higher compared with the low of ₹2,800 a quintal a year ago, it may not exactly be attractive. However, there are expectations that the rates would move up further, which should cheer mills as their ways and means position or liquidity is likely to improve. It is important to ensure that mills expedite clearance of cane arrears.

Be that as it may, sugar production in the current and the next season is likely to decline from the 2017-18 industry estimate of a record 32.5 million tonnes. If anything, production could be close to 30 mt this year despite the Agriculture Ministry’s estimate of a record 384 mt of cane as compared with the previous year’s 377 mt.

On current reckoning, the cane output in 2019-20 could fall sharply following dry conditions in key growing areas.

Risk factors

It is acknowledged that important States such as Maharashtra and Karnataka have had less-than-normal precipitation and soil moisture conditions are not exactly helpful. Another risk factor is the looming threat of El Nino. At the moment, it is in the ‘Watch’ category, meaning there is a 50 per cent chance it may strike.

While the current glut in the wake of two years of significantly large production (well in excess of domestic consumption demand) would keep sugar prices under check during the months ahead, one should not be surprised if the market takes cognisance of the likely decline in output next year and prices start to move up.

It is in the very nature of commodity markets that prices react, based not so much on current supply-demand fundamentals but on the anticipated change in the fundamentals in future. From that perspective, it may be safe to assume the Indian sugar market has bottomed out.

In the event of rising domestic prices, sugar exports from India could suffer. It is also highly likely that the government’s export target of 5 million tonnes may not be achieved. The increase in minimum support price for sugar is seen dampening the incentive to export.

At the same time, rising crude oil prices in the international market (currently around $65 a barrel) are providing a fillip to sugar. The relationship between crude oil and sugar is through the biofuel route. Higher crude oil prices encourage higher diversion of cane for production of ethanol, and reduce availability of cane for sugar.

This happens all the time in the world’s largest producer, Brazil.

Taking cognisance of the developments in India, the world sugar market has begun to react. According to reports, in London, white sugar prices surged by a hefty 4 per cent or so to test $360 a tonne.

This is said to be the highest level since October 2018.

Sugar is a sensitive commodity in our country and many politicians have a stake in the fortunes of the sugar sector.

Given this, it will be necessary for Indian policymakers to keep a close watch on developments in this space. An unintended casualty of the rising price could be the ethanol programme currently being pursued to lighten the glut situation.

The writer is a policy commentator and agribusiness specialist. Views are personal

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