Sugar Prices & Global Recession

Sugar is affordable this festival season. Marketmen say it will become expensive by next summer when supply could drop.
Sugar companies are certainly betting on it. But given the miasma of global recession, encashing the demand-supply mismatch may not be so easy.

ET helps you join the dots between consumer pessimism and the future of sugar.
Indian sugar prices are steady for now because the government has been pushing mills to sell at least 2 mt each month. With five states going to polls in the next few weeks, the last thing it wants is voters getting ugly on food prices.

Fortuitously for Indian consumers, the collapse in global sugar prices was well-timed with the festival season. The big funds and index traders are rapidly unwinding their long positions, which has led to selling pressure. That has queered the pitch for Indian exports.

All of 2007, sugar was tugged up by the price of ethanol, which itself was linked to crude oil. Now that crude oil is at 2006-levels , the correction in sugar and ethanol prices was inevitable.

At the same time, Brazilians have begun aggressively exporting sugar because their currency—real—has fallen to a three-and-half-year low against the dollar. A weak real has offset the fall in sugar prices. Put together, sugar is bearish for now.

But mills have not lost heart. All forecasts point to a drop in supply in 2009. The world may run short by 5 mt due to a 4% cut in global sugar production in 2009. Bad weather in countries such as Cuba have further put pressure on supply.

In India, the drop in production could be especially dramatic. Farmers have been so upset with tardy payment for cane that they have shifted to other crops. In top producer Maharashtra, sugar production will fall 30% this year. Over all, Indian sugar production could fall 20% in 2008-09 and a further 14% in 2009-10 sugar season. With Indian demand and supply likely to be finely balanced next year and dry trade pipeline, the industry is betting on a price rise.

On the face of it, this decline in production appears to be just what the doctor ordered for sugar mills. But the recovery in bottomlines may not be so quick or so widespread. There are two googlies mills would have to dodge.
One, when farmers grow less cane, mills too crush less.

That strains their capacity utilisation and sales figures. In Uttar Pradesh, where mills have reserved cane area, they can hope to pick up any cane grown within 15-km radius. But in states without cane zoning, the fight for cane could get very bitter indeed next year.

Already mills in Maharashtra are bearing the brunt of decline in cane area. The state government has decided to issue licenses only to factories where sugarcane availability is more than half their crushing capacity for the entire season. Of the 173 mills in the state, at least 20 may have to shut shop this year. Next year this problem could worsen.


The second googly could be dampening consumer demand if the economy slows down. In most middle-class households, the monthly sugar consumption is price insensitive because they rarely buy more than 8-10 kg. So even if prices jump by Rs 5/kg, that means an extra expenditure of Rs 50/month. No one is really bothered.

It is actually the sugar consumed indirectly that could get affected if the world does go into recession. When times get tough, households tend to reduce purchase of expensive processed foods, sauces, icecreams, jams, cold drinks, juices, confectionery and luxury chocolates to offset higher expenses in other areas. Since these are not toppriority foods, their consumption is usually the first to get lopped off.

This in turn could impact the demand for sugar by processed food and beverage companies, who are the single largest purchasers of sugar in India. If sugar becomes more expensive due to a squeeze in supply while demand for end products drops, food companies are likely to rework their sums. Cola companies, where sugar is a significant part of input costs, will be especially keen to negotiate discounts.

The joker in the pack next year would be ethanol. Brazil, the world’s biggest producer, has been scaling up capacity to increase export to the US and EU. In 2009 that could be tough. Exports to the US, Brazil’s main ethanol market abroad, are frozen for now because US ethanol prices have fallen so much that Brazilian ethanol, even with a weaker real, stands no chance.

The slump in US fuel demand means a slump in ethanol demand as well. Brazil’s domestic demand for ethanol was boosted by flex-fuel cars—cars that can run on any mixture of gasoline and ethanol. Brazilian demand for the biofuel rose to 1.6 billion litres per month currently from 550 million litres five years ago. But most flex fuel cars are bought on credit. If there is an economic slowdown , this credit would be affected.

The exchange rate could also impact ethanol output. Some analysts believe that if the real weakens further, it would encourage Brazilian mills to produce sugar for export, rather than ethanol for the domestic market. That could cool global sugar prices.

After years of oversupply, global sugar supply is finally balancing with demand. Any new threat to global production would tilt the balance firmly towards a shortage. That is definitely headline news. However, there is no straight line between high commodity prices and individual corporate profits. As always, the best business strategy will win.