By CP Krishnan, Whole Time Director of Geojit Comtrade Ltd.

Sugar

Following a cluster of healthy fundamentals, sugar prices in futures and spot market has witnessed an escalation since the first week of June. Prices tested a two and a half year high last month. Futures prices in National Commodities and Derivatives Exchanges (NCDEX) climbed from Rs 2800 a quintal level in June to Rs 3600 levels by the mid of August, a surge of more than 25 percent. Domestic retail prices too mounted to Rs 40 a kilogram from Rs 30 during this period. However, following a steep rise, prices somewhat cooled down after a series of measures taken by the Government.

Expectations of anticipated fall in production owing to deficient rains in key growing areas and strong overseas market influenced domestic prices. As per the Indian Meteorological Department forecast, India’s monsoon rains likely to be 85 percent, below the long period average during this monsoon period. Scarcity of water probably affected the produce from Maharashtra, Karnataka and Gujarat. These states have already reported to the central government about shortage in output of sugar cane this season due to scanty rainfalls. Meanwhile, as per reports, expected upbeat production from Uttar Pradesh and Tamil Nadu are likely to compensate the shortage in production.

The draught like situation may have an adverse affect on the kharif and rabi crops but ongoing monsoon conditions in few states are supportive for sugar cane which could provide higher output.

Festive based demand was another factor in boosting prices higher. Domestically, the month August was packed with several festivals. Festivals like Janmashtami, Rakshabhandan and Eid were celebrated during this month. Increased consumption owing to these festivities also supported bullish sentiments.

Government of India has taken multiple steps to curb the growing prices which include releasing additional non-levy sugar and plans to drop the import duty. The government approved 4 lakh tonnes of non levy sugar for the current quarter ending September taking the total non levy supply of 5.17 million tonnes for the last three months. It is the third time this quarter that the government has extended additional non levy quota to market with an aim to pull down the prices further. Increased domestic supplies possibly curbed local prices.  The government is also considering dropping of 10 percent of import duty on sugar to relax the prices if import of raw sugar is more feasible in this situation.

As per food minister Prof. K.V. Thomas, sugar production in India is sufficient to meet our domestic demand. He says for the current marketing year 2011-12 period, 26 million tonnes of sugar is being expected against 22 million tonnes in the previous year. India exported 1.35 million tonnes of sugar in the first half of the 2011-12 marketing period. However, as per Indian Sugar Mills Association, estimated sugar production for the season starting from October is 25 million tonnes. The carryover stocks are a bit high at 7 million tonnes compared to 5.5MT in the last year. Limited exports from India provided mild support to international sugar prices. Higher local prices and vague production outlook have restricted exports from India. Expectations of adverse weather condition due to El Nino also favoured the situation. Anyhow, as per USDA reports, India exported 2.5 million tonnes of sugar in the current season.

Since India is the biggest consumer and the second largest producer of sugar after Brazil, their consumption habits, output, export and import figures tend to have an effect on the global prices too. As per Indian Sugar Mills Association figures, India will possibly have a surplus of 2.5-3 million tonnes of sugar to keep for exports during the next marketing year in spite of a weak monsoon.

Looking ahead, any radical correction in prices is least expected due to bullish fundamentals. In NCDEX futures, prices likely to test a dip towards 3200-3000 levels a quintal followed by a consolidation and extend the rally later. Briefly, prices have an upside room till 3800-4000 levels with falls possibly restricted at 2800.

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