Sugar — buy London, sell Delhi

The good news was that sugar prices were down in first fortnight of December 2009 when cane crushing season started in full force. From Rs 35/kg in wholesale they were around Rs 31/in Delhi — a decline of 11 per cent in a fortnight — but still much higher (95 per cent) than Rs 16/kg of July 2008.

The not-so-good news is that — as 2009 says goodbye — prices in Delhi have again touched Rs 34-35/kg. Due to lower sugarcane output, higher cost and likely halting of crushing by March 2010 — domestic prices are bound to recoil up during April-November 2010 to levels unseen hitherto.



The bad news is that international prices are firm — kissing almost $700 at LIFFE on December 24, 2009 — and are likely to harden as demand pressures from importing nations get injected into tight supplies from Brazil and Thailand.

India, Indonesia and Pakistan have openly declared their shortages and compulsions to import. Indian import of raw/white sugar may touch 7-8 million tonnes by September 2010 — (23 million demand against production of 15-16 mt). Whispers of 2-3 mt of import by China are also being heard.

Today imported sugar will cost Rs 37-38 a kg as against Indian price of Rs 34 a kg. But trend reversal will be witnessed in April-October 2010 when Indian prices will move vertical — faster than international values.

Money can be made by Indian importers by prudently positioning for white/raw sugar ex London/ New York exchanges.

But it is not all that simple. Prices in London/ New York and Delhi are not synchronous. Back to back parity is awfully missing. Delhi will follow London in jerks and jolts after 45-60 days.

Wholesale prices rose by 25 per cent between April-October 2009 (from Rs 23 to Rs 29 a kg). In 2009-10, with a “carry in” of one month only and import now being at Rs 37-38/ a kg, sugar in bulk might breach Rs 45/kg during non-crushing season of 2010 — if last year's formula is applied. Possibility of touching Rs 50/kg cannot be ruled out. For a trader this trend is going to be friend provided sugar is bought basis London (LIFFE) now for Feb-March delivery, with intent to sell after April 2010. For raws, it will be basis New York.

Mantra is — buy London basis with intention to sell Delhi (read India) in forward. Sugar trading can be sweet and sweeter. It could be risky too — due to unexpected intervention by the Government — but then risk and reward go together.

Sugar industry is left with no option but to transfer significant amount of burden of enhanced cost/ poor capacity utilisation to the consumers and also to take advantage of the market dynamics. Stock market reports are suggesting substantial increase in sales turnover and profitability of all major well managed sugar producers/refiners in the country due to higher per tonne sale value and profitability. Farmers are demanding market determined remunerative price — not Fair Remunerative Price (FRP) or State advisory price (SAP) — for the sugarcane and they are being supported by the Gur and Khandsari business. So, sugar business is in the money for at least next one year.

Enhancing availability
If policy makers are thinking of enhancing availability of sugar in the domestic market as a short-term solution, then it cannot be improved by merely Government importing and resorting to subsidised sale. Subsidised sales will hurt the sugar industry and disincentivise these corporate from importing raw sugar — and that will accentuate the existing short supply. (Operational constraints have compelled some mills in UP to wash out existing contracts at profit as reported in Business Line of December 24, 2009.) Moreover, import agencies of Government lack distribution channels in the local market and even if they have such routes, they are highly inefficient and therefore the imported commodity does not reach the consumers fast to depress the local prices.

These subsidised operations have been “crowding out” the private trade, and its entrepreneurial skills. That is why a very effective role of private traders in sugar import is needed.

Excessive speculation can be curbed by efficient imports, revoking quantitative storage limits and by allowing private distributors and retailers to work without fear of Damocles sword. When the Government announced duty free import of one mt of white sugar from April 2009, traders have not imported more than 350,000 mt so far. It is the fear of the Government action that is preventing importers to aggressively bring sugar in the Indian market.

Under present circumstances, short term spike in the international and domestic prices cannot be ruled out. Any interventionist measures may not work. Policy makers may, therefore, act as facilitators and reasonable regulators, dispel fear phobia from private trade and supplement it with supply side macro management, in the long term interest of lowering sugar prices.

source: thehindubusinessline