Tightening sugar market fundamentals and rising prices have generated renewed concerns within government circles over the risk of a further spike in the price of the essential food commodity during the upcoming festival season. This may have a bearing on credit policy in the context of inflation expectations.
In commodity markets, it is axiomatic that the market moves, based not on current fundamentals, but on expected changes in demand and supply in the future.
Worse, in a tightly balanced market, even a small change in either demand or supply or both, will exert a disproportionately larger impact on prices; and admittedly the domestic sugar market is tightly balanced this year.
Concentration of inventory in one region is an additional risk for the market and for consumers. For a large country such as ours, a well dispersed stock holding is most desirable.
As we move into the months of peak festival demand, when consumption rises manifold across the country, the tightness is expected to accentuate further. This will inexorably propel prices higher. The new season sugar is most likely to be available from November even if cane crushing is advanced by a couple weeks to mid-October.
No wonder, it is reported that the government may consider additional imports of sugar duty-free to augment domestic availability and rein in rising prices. This would be over and above the 5 lakh tonnes allowed to be imported three months ago.
Indeed, it would be commercially prudent and politically expedient to permit import of an additional 10 lakh tonnes, which can help contain the risk of a price spurt, augment supplies across the country and help have a modest carry-over into the new season. Administrative measures such as storage limits have only a limited impact. Laws of economics will eventually prevail.
Ambitious 2017-18 targetIndeed, policymakers must now begin to look at the new season (2017-18). Per the latest acreage report, cane has been planted on 4.9 million hectares. On current reckoning, the cane production target of 355 mt looks ambitious and actual output may fall short by 8-10 per cent.
In the event, while sugar production in 2017-18 is set to rise from the previous year’s 200 lakh tonnes, it may still fall short of consumption demand for the year. With rather limited carry-in for the new year, the situation in 2017-18 may also turn out to be not so comfortable for consumers, although it would be slightly better than 2016-17.
Sugar production has declined over the last three years. From 285 lakh tonnes in 2014-15, output fell to 251 lakh tonnes the following year and plunged to 200 lakh tonnes in 2016-17. This has resulted in a steady inventory drawdown.
According to the government, consumption demand for sugar was 256 lakh tonnes in 2014-15, which declined to 248 lakh tonnes in 2015-16. In the event of a normal South-West monsoon and a decent Kharif harvest in September, rural incomes may rise and result in additional demand for all essential food commodities, including sugar.
It would be expedient to plan for 2017-18 and address the immediate issue of sugar availability and prices in the next three months.
The writer is a global agribusiness and commodities market specialist. Views are personal