Since the beginning of this year, world raw cane sugar price has surged 10-12 percent because of a combination of reasons - concerns over Brazilian sugar production and rising crude oil market. To be sure, Brazil is the world’s largest producer and exporter of sugar and the country’s propensity for ethanol production drives the sugar market.

From around 15.5¢/ lb in January this year, price has moved to about 17.5¢/lb. This is despite the rise in global production contributed mainly by EU, India and Thailand. This rise has more than offset the decline in Brazil.

At the same time, consumption is set to reach a new record, according to USDA, due to growth in populous markets such as China and India. As Covid-19 related restrictions are gradually lifted and economic activities normalize in developed and developing economies, sugar consumption is expected to surge.

Surplus production

However, going forward, the world sugar market is likely to be burdened with surplus and the size of surplus is sure to weigh on prices. For example, in 2020-21, the world’s second largest producer India harvested a near-record 398 million tonnes of cane which will result in sugar production in excess of 30 million tonnes.

Considering that domestic consumption is unlikely to move beyond 25-26 million tonnes, there is a clear surplus further aggravating the already burdensome inventory level. No wonder, India has sought to reduce the inventory burden through export of 5-6 million tonnes of sugar with an element of subsidy.

Fortuitously, elevated global prices are aiding Indian’s export efforts; but this is unlikely to last long as global sugar surplus will begin to soon weigh on market sentiment and prices. In the event, India will be forced to reconsider the quantum of subsidy and may have to hike it.

Ethanol programme

The recently announced ethanol programme will be a sentimental boost; but given that only B10 will be enforced (blending of 10 percent ethanol with gasoline) in 2021-22, there will only be marginally higher diversion for the biofuel.

Of course, how the rupee behaves in the second half of the year will matter. While it has been strengthening in recent days, the prospect of the US dollar appreciating in the months ahead will put pressure on the rupee. If the dollar rises, the rupee will depreciate like many emerging market currencies.

The one support factor for sugar would be crude oil. Sugar prices will find a safety net if the energy market continues to stay at elevated levels, say Brent at $ 75-80 a barrel given the exemplary production discipline demonstrated by OPEC+ and revival of demand. In the event there will be more diversion of raw cane sugar for ethanol production.

Interestingly, International Sugar Organisation (ISO) has forecast a deficit of 2.7 million tonnes in the sugar market in 2021-22 as it expects demand to rise as life begins to normalize. Even for 2020-21 ISO had forecast a deficit of 3.1 million tonnes.

(The author is a policy commentator and agribusiness specialist. Views are personal)

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