After a prolonged bear market, world sugar prices may be set to bottom out this year. To start with, supply may be lower this year. The world sugar market is likely to move into deficit this year after three successive seasons of surplus.

While many agricultural crops — grains and softs — are facing the threat of El Nino, the sugar market is likely to be the most sensitive to this weather phenomenon. Already, surpluses of the last three years and consequent low prices (16-18 cents a pound) have resulted in an increase in demand.

Dry conditions in the last three months in the world’s largest sugar producer and exporter Brazil can lead to lower supplies. Similarly, if the forecast of a below-normal monsoon for India turns true, this too can hurt cane yields and sugar production. This adverse combination in the world’s top two sugar producers can result in firmer sugar prices. Dry conditions in Thailand and South-East Asia may also limit cane harvest in these regions. Possible El Nino-induced losses in India and tight credit availability in the former Soviet Union can impact prices too.

On the bourses, prices have already risen by 8-10 per cent since the beginning of the year, primarily driven by the Brazil factor.

On the demand side, strong appetite for fuels in Brazil will result in increase in usage. But while Brazil may see good growth in domestic demand, the export outlook isn’t bright as the US looks set to harvest a large corn crop. This will help it to maximise its own ethanol production and rely less on imports from Brazil.

If Brazil’s production holds, though, ethanol demand will drive prices.

Overall, the global sugar market is likely to be ranged 17-19 cents/lb with prices testing the lower end when cane crushing accelerates in Brazil. Prices can break out upwards in the second half of the year if El Nino strikes and production is affected in India. In that event, Brazil will have to play a larger role in the world sugar market. The price outlook till the end of the third quarter does not look bullish on current reckoning.

India factor

Clearly, India is the swing factor in the global sugar market. Whether India is an exporter or an importer determines the market outlook and price direction.

For 2014-15, India’s sugarcane production target is 345 million tonnes compared with the 348 million tonnes in 2013-14. However, there are ominous portends.

The risk that actual cane harvest may fall short of the target is real. Slightly lower production and rising consumption is sure to result in tightening of stock and firming prices. Sugar has been a political commodity in India for long years. How the new Government treats the sector remains to be seen.

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