Given the supply glut in both the domestic and global markets, sugar prices had sharply corrected and moved to decade-low levels in August 2018. However, there is a possibility of a modest supply deficit returning in 2019-20. That should provide support and bring some cheers to depressed sugar prices after two years of robust output that had led to all-time high stocks of the sweetener.

The expected output-shortfall is most likely to come from Australia, the EU and major Asian producers such as India, Thailand and Pakistan. For 2018-19, a diminished outlook for sugar production in Brazil, India and the EU led the International Sugar Organization (ISO) to significantly trim its forecast for the global sugar surplus to 6,40,000 tonnes, 70 per cent lower than its previous estimate.

The year 2018-19 (April-March) also witnessed Brazil moving to the second spot with an output of 26.5 million metric tonnes (down from 36.06 MMT in 2017-18) in the world sugar production ranking; India is now the world’s largest producer. There has been a steep decline in Brazil’s sugar-ethanol mix — the share of sugar in cane decreased to 35 per cent in 2018-19 from 47 per cent in 2017-18 — in a response to high ethanol prices. The major reason for higher cane allocation for ethanol conversion was a change in State oil company Petrobras’ pricing policy that now follows international pricing norms.

However, the new season’s crushing has just started for 2019-20. Brazil’s sugar mix is expected to remain a crucial watch-out factor due to its ability to switch faster between ethanol and sugar production depending upon the premium on ethanol vis-a-vis sugar. But, market analysts expect cane crushers to incline towards ethanol, at a percentage closer to last year’s sugar-ethanol mix.

On the other hand, a sluggish growth in global sugar consumption due to increasing health awareness is expected to partially offset the gain in sugar prices arising out of a squeeze in the oversupplied market. That will keep global sugar prices in the lower range. China, the world’s second-biggest buyer after Indonesia, imported just 60,000 tonnes of sugar in March, down 85 per cent over the previous year, while its February imports were at a nine-year low.

Domestic factors

A higher output level above 30 MMT in the last two years due to higher productivity and enhanced acreage have put India in the global limelight. That also led to Australia, Brazil and Guatemala lodging a formal complaint at the WTO Dispute Settlement Body (DSB). They have challenged India’s cane-pricing regime on the grounds that its violates WTO rules and causes distortion in production and trade in the sugar sector, thereby, hurting the prospects of more efficient growers and millers worldwide.

India produced a record 32.5 MMT of sugar in 2017-18, and is heading towards its second-best production mark at 30.7 MMT in 2018-19 against the consumption requirement of 26 MMT. No doubt, sugar prices have collapsed despite government’s repeated attempts to provide support through imposition of minimum selling price (MSP) or monthly sales quotas when the attempts to export away surplus were met with limited success.

The attempts to export sugar have been hindered by substantially excess output and lower (than domestic) international prices. Between October 1, 2018 and April 6, 2019, India could export only 35 per cent of the mandated target of 5 MMT, though the crushing season is almost over. With the net supply continuing to far exceed demand, India is likely to open the new sugar year 2019-20 with a carry-over stock of over 10 MMT.

However, the next year can bring some respite for the industry because of lower output as well as government’s support measures. India’s sugar production is expected to enter into a tighter supply zone in 2019-20 with the output falling around 29 MMT. Poor monsoon rains in the last two years and critical water levels in the reservoirs, especially in Maharashtra, are expected to reduce the State’s output to a three-year low.

There are speculations that the government may further hike the floor price of sugar — that will push up domestic prices despite somewhat muted demand and excess supply. However, artificially further hiking up the floor prices of the sweetener may prompt big buyers such as FMCG companies and traders to go slow on their purchases.

Outlook

In the light of lower output — both domestically and globally — and the government’s support measures, sugar prices are set to go up steadily. However, net supply still far exceeds demand — that will keep the upside limited.

The writer is co-founder, Director and Head of Agriculture, Food and Retail at Indonomics Consulting

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