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Sugar: Bitter taste - Views on News from Equitymaster
 
 
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  • Sep 23, 2009

    Sugar: Bitter taste

    With the impact of drought on sugar crops in India, the price of small grade sugar in Mumbai reached Rs 3,000 per quintal on 22 August 2009, an increase of 59% YoY. According to experts, sugar prices are expected to climb further due to festival season demand. While India consumes about 23 million tonnes of sugar a year, the production for year ending September 2009 stands at only 15 million tonnes. For the next year, output is seen at 16-17 million tonnes.

    The situation is all the more worrying because we are facing a global shortage as well. The global supply deficit may be 10.4 m tonnes in this year through September as excessive rain hampered harvesting in Brazil, the biggest sugar producer in the world. For the year 2009-10, international sugar shortfall is seen at 11 m tonnes according to the International Sugar Organization.

    Steps taken by the government
    The Indian government has taken various measures to control the rising prices of the commodity. To ensure that sugar is available to the common man the government has increased the levy sugar from 10% to 20% of total production. The levy sugar is sugar which is available to the government from mills for distributing through the public distribution system.

    Further, the government has imposed stock limits on big sugar consumers, wholesale traders and retailers. According to a recent government notification, bulk consumers whose monthly average consumption is over 10 quintals cannot stock more than 15 days requirement. This limit is valid for a period of six months. The government has also ordered the mill owners to sell half of their monthly saleable or non-levy quota every fortnight. Non-levy, or free-sale sugar, is sold by mill owners in the open market, but the quantity each mill can sell is fixed by the government on a monthly basis. Earlier, mill owners were allowed to sell the entire monthly quota anytime in the month, but from September 2009 the government has made it mandatory for them to sell half the monthly quota in a fortnight. The government also increased the deadline for import of duty-free white and raw sugar to November 2009 and March 2010 respectively. Further, the government has banned trading of sugar futures to curb speculation.

    Effects of the steps taken by the government
    Although the price of sugar has corrected in the last few days, with the increase in levy sugar, the mill owners have started feeling the pinch. This is because they are buying raw sugar from global markets at open market rates and selling part of it at subsidised rates. Due to the 15 days rule, companies which had a large holding of sugar are busy selling it while at the same time buying more expensive imported sugar.

    What we expect?
    With the festive season reaching its peak in the coming month, we expect the sugar prices to rise still further. We are concerned about food companies facing rising cost of raw material especially when these companies are unable to hedge with trading of sugar futures banned. We are also concerned about sugar companies as they are selling more sugar at subsidised rates. Moreover, there is concern that the recovery rate for juice from sugar cane will be low the coming year due to sub-par monsoons resulting in higher cost for sugar companies.

     

     

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