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Letter from Mumbai: Falling global sugar prices hit exports

February 22, 2016


The Reserve Bank of India seal is pictured on a gate outside the 
RBI headquarters in Mumbai. New Delhi is preparing to pump in a 
higher-than-anticipated capital sum — as much as $34bn additionally — into poorly performing state banks, government sources said, but it could make it harder to hit planned deficit targets.—Reuters file photo
The Reserve Bank of India seal is pictured on a gate outside the RBI headquarters in Mumbai. New Delhi is preparing to pump in a higher-than-anticipated capital sum — as much as $34bn additionally — into poorly performing state banks, government sources said, but it could make it harder to hit planned deficit targets.—Reuters file photo

EXPORTS of sugar from India, the world’s second-largest producer after Brazil, have slowed down as international prices have started tumbling. The price of the sweetener fell last week from $425 a tonne to $375.

“The international rates have dropped due to the fall in Brazilian real,” said Mukesh Kuvedia, secretary-general, Bombay Sugar Merchants Association (BSMA). “Moreover, the country is anticipating a good crop which is expected to come into the market soon and this could also impact Indian exports.”

Despite an upsurge in sugar production in Brazil, globally there will be a huge gap in supplies this year and next. Analysts expect a shortfall of 5.5m tonnes in the current year (ending September) in global production and of 6.2m tonnes next year.

This is mainly because of the shortfall in supplies from India and Thailand. Last week, the Indian Sugar Mills Association (ISMA) revised the estimated production for sugar marketing year 2015-16 (October-September) to 26m tonnes, as compared to 28.3MT in 2014-15 marketing year.

Two successive years of bad rains have affected sugarcane production in key states including Maharashtra, Gujarat and Karnataka. According to ISMA, cane production in Maharashtra — one of the largest producers — is expected to be lower at 8.36m tonnes this year as against 10.22m tonnes last year.

Consequently, sugar production in the state will be around 8 to 8.5m tonnes. Drought-like conditions in Marathawada, a backward region, have resulted in many mills shutting down operations because of non-availability of cane.

According to government figures, of the 177 sugar mills which began crushing operations, 33 had stopped production by last week as they were not getting cane from farmers.

Sanjeev Babar, managing director, Maharashtra State Co-operative Sugar Factories Federation, warns that most sugar mills will stop crushing by mid-March (as against end-April) because of lack of cane.

B.B. Thombre, president, Western India Sugar Mills Association, says almost all the 50 mills in Marathawada will down shutters by the end of this month.

In Karnataka, four mills had stopped production and two mills had shut down operations in Gujarat and Uttar Pradesh. In Tamil Nadu, the fourth-largest cane producing state, faulty policies of the state government relating to the remuneration paid to farmers is affecting sugar production.

Abinash Verma, director-general, ISMA, has called for a reformulation of policies relating to sugarcane and sugar in the southern state. The government needs to rationalise taxes to ensure that the mills remain profitable, he says.

The state, which has about 400,000 cane farmers and 45 sugar mills, accounts for 9pc of India’s sugar production. However, this year has been disastrous in Tamil Nadu. Sugar production has plunged to 1.2m tonnes (as against a capacity of 3m tonnes) and the area under sugar cultivation has fallen by 50-60pc.

According to ISMA, while the central government has raised cane prices by 60pc over the last five years, the state government has fixed its ‘State Advised Price’ at Rs2,850/tonne for the current season, which is Rs550 more than the central government’s ‘fair and remunerative’ price.

Verma says that the production cost per quintal of sugar works out to Rs3,100 in Tamil Nadu, the highest in the country; in contrast, the ex-mill sugar price is just Rs2,850/quintal.

Consequently, mills in the state are not even able to sell the commodity to Sri Lanka, despite access to ports and proximity to the neighbouring country. India could meet just half of the imports of 600,000 tonnes for white sugar of Sri Lanka, with Brazil supplying the rest.

The high cost of sugarcane in India resulted in Sri Lanka finding it cheaper to import the sweetener from Brazil, which is nearly 15,000km away, rather than from next-door Tamil Nadu.

THE Indian government had made it mandatory for mills to export four million tonnes of sugar to be eligible for a subsidy of Rs45/tonne. But the fall in international prices of sugar, following the decline in the value of the Brazilian currency, has made it difficult for Indian mills to sell in the global markets.

Additionally, the rates in the domestic market (about Rs3,200/quintal) are more attractive, says Kuvedia of the BSMA. According to him, meeting the government stipulated target of 4m tonnes of exports would be difficult under these circumstances.

Sugar mills have contracted to export 1m tonnes of sugar in the current season and have so far supplied about 850,000 tonnes.

ISMA notes that with a fall in international prices, the pace of export contracts has slowed down. Sugar mills are also finding it difficult to service their bank debts and in making payments to farmers. Mills have to start repaying loans taken under a ‘Scheme for extending financial assistance for sugar undertakings,’ besides soft loans for the previous sugar season.

Despite the lower estimates for sugar production in India, food minister Ram Vilas Paswan believes there will be enough production to meet domestic demand. According to the minister, cane arrears have also fallen from a high of Rs210bn in April 2015 to just Rs27bn.

But lower sugar production would result in perking up prices, which had fallen to a record low of Rs19/kg (ex-factory) last year. Sugar prices are now up at Rs30/kg (wholesale prices).

“The sentiment has improved in the last few months after three years of depressed sugar prices when mills incurred massive losses,” says ISMA. “The improvement is mostly because sugar production is expected to be lower than last year.”

But with the average cost of production adding up to Rs35/kg, sugar mills are unable to cover their costs.

Published in Dawn, Business & Finance weekly, February 22nd, 2016