Sugar Prices Hit All Time High in India - January 2010

Almost one year ago, I recollect reading several articles on the upcoming demand supply mismatch in the global sugar industry. Just like the rest of the world, even India was facing a similar scenario although globally, the chatter was specific to Brazil, which is one of the largest producers of Sugar in the world.

In India, one year ago, the price of sugar was climbing to fresh highs of Rupees 25 per bag. As of yesterday, the price of sugar is almost rupees 40 per bag and there is a very clear possibility of it hitting rupees 50 per bag. The beginning of the year is usually marked by various festivals in the eastern and northern parts of the country, increasing the demand for sweets and other confectionary. This coupled with the all time low interest rates is adding to speculative positions in the commodity. Along with sugar, most soft commodities including pulses, onions and the likes have already started climbing to all time high levels and the mass population is up in arms over the government inability to control the steady price rise.

When it comes to sugar specifically, the government has to be very careful in the steps it chooses. Uttar Pradesh, which is the most populous state in the country, hence the largest vote bank, is primarily a sugarcane cultivating region. Any policy change which works against them is sure to be met with swift and possibly violent protests.

The sugar industry is known to go through a 4 year cycle and this current price rise coincides with the 4 year peak, which is adding to the surge in price. Although sugar isn't a necessary ingredient in the poor mans staple, it is widely used in various other industries like confectionary, biscuits and cold drinks. One can expect to see a clear demand reduction in these industries.

One option which is available to the government is to release its emergency quota in the market. The government stocks up most essential commodities in a warehouse every year to meet any shortfall in supply owing to natural catastrophe. Releasing the emergency quota will be viewed as a measure of desperation and will put the country at risk should a natural catastrophe actually strike. Hence, the government has not done so yet but one cannot rule it out.

source: associatedcontent