Moneycontrol Pro Panorama | India's shadow looms large on global food chain 

One of the ways to cool domestic prices is to resort to imports which can send global prices up, but help cool the domestic market.

Dear Reader,

The weather is actually to blame for India’s food inflation woes, but politicians make for a nice soft target. And with only a few months to go before election fever grips the country, the incumbent government can be expected to leave nothing to chance when it comes to electoral issues. Inflation has always been a hot potato or a pungent onion when campaigning begins. While the issue in itself is as old as independent India, this year its after-effects are causing some waves in the world, too.

Take the latest major development -- India’s decision to ban sugarcane syrup or juice as a feedstock to make ethanol. You can read here and here if you wish to know more about the issue and its impact on sugar mills. In short, it puts a question mark over sugar mills’ performance and India’s ethanol availability in the forthcoming season.

While this is the domestic impact, the context in which the government took this decision arrested a decline in global sugar prices. On Friday, the ICE #11 raw sugar contract rose by 1.3 percent, which news reports
attributed to an Indian government official’s statement of an expected 12 percent decline in the sugarcane output.

However, the ethanol feedstock policy change means that sugar output should not fall as much as expected. A CRISIL note puts the decline in sugar output at 3-4 percent compared to the earlier projected 11-12 percent. If that’s the case, then sugar prices may actually get some support in the coming weeks once there is enough clarity on the ethanol issue.

Now, sugar prices have been falling in the past month, after having risen 47 percent in the year so far till end-October. Since then, they have fallen by 16 percent. A major reason for the fall is likely a huge spurt in Brazil’s sugar output, with the first half of November seeing sugar output jump by 31 percent over a year ago.

In the crushing season till mid-November, output is up by 23.1 percent over a year ago and the share of sugarcane deployed towards sugar has risen to 49.4 percent compared to 45.9 percent. This will come at ethanol’s expense. One reason, of course, is high sugar prices, for which India is mainly responsible but Thailand, another major sugar exporter, has also contributed. Thailand’s output too has been affected due to adverse weather conditions. Another aspect is a bearish trend in oil prices as biofuels’ realisations depend in part on crude oil price trends. Lastly, the Brazilian real has depreciated against the dollar, making sugar exports remunerative.

Thus, agricultural markets too adjust to supply shortages, in the manner of industries such as mining. Linked (crude oil prices and demand for ethanol) or extraneous factors can have unexpected effects. Brazil’s sugar mills are pumping out so much sugar that the country’s sugar output for the year 2023-24 has been revised upwards by 15 percent over its August estimate.

It’s not just in sugar that India’s supply problems are affecting global availability. In two main staples of rice and wheat, India’s export restrictions — with a mix of measures such as outright bans, export duties and so on — have affected global export availability and prices. But the latest FAO cereal brief (December) has revised upwards its estimate of global cereal production for 2023 by 3.6 million tonnes, mainly due to an increase in global wheat output estimates by 2 million tonnes. In November, it had raised its rice forecast by 0.9 million tonnes. Again, while other factors such as weather may explain increases in output, an environment where realisations are firming up and import demand needs to be met give farmers additional incentive to hike output where feasible.

As this report in Moneycontrol points out, in products such as onions, sugar, rice and wheat, the government continues to fight inflationary fires. CRISIL estimates that it’s not going to be an easy effort as factors such as lower stocks compared to historical levels will support firm price trends. Therefore, measures such as what we saw last week can be expected to continue in the forthcoming months, and where commodities form part of the global supply chain, they will have an effect on global prices, too.

One of the ways to cool domestic prices is to resort to imports which can send global prices up, but help cool the domestic market. But that will be unpopular with farmers and traders as they will be on the losing end of the deal. Which bullet to bite is the question.

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