There is no escaping high sugar prices

According to the Indian Sugar Mills Association (ISMA), sugar production in India this season (October 2008-September 2009) is expected to fall to 15.5 million tonnes, much below the estimates given by the Agriculture Ministry (16 mt); this would be over 40 per cent decline from the previous year figure which stood at 26.4 million tonnes. Various analysts may differ on this figure; many have over projected the figure assuming that the current high prices would lead to a significant increase in the production. But, as Indian agriculture depends mostly on monsoon it would be too early to say that the figure for the next year would lead to surplus.

It was evident in the month of July-August (2008) that the production would fall this year (crops were badly affected by the failure of monsoon). Yet, the Indian government failed to take corrective measures to ensure that the common man is not affected by the sudden fall in the production figure. It took months for the Indian government to allow the sugar mills to import duty-free raw sugar to sale locally after processing it under the Advance Licenses (AL) agreement. Now, when it is evident that the production has in fact fallen drastically, the government is yet to take a decision on allowing duty-free white sugar (refined) for the domestic consumption.

At present, imports of both raw and white sugar attract 60 percent import duty. But, mills are allowed to import raw sugar at zero duty against advance licenses subject to fulfilling an obligation to re-export one tonne of white (refined) sugar for every 1.05 tonnes of raw sugar imported. With the production figure falling in India, international prices have also moved up. This makes import of even white sugar at zero duty not viable as there are other costs like transportation, packaging, sales tax, etc which takes the overall cost above or around what it is being traded right now in the Indian market.

Many mills in Uttar Pradesh and Maharashtra have already closed their crushing due to unavailability of sugarcane. The others are to follow them in a few weeks. In India, sugarcane is used to produce sugar as well as jaggery. With the shortage of sugarcane, much of the sugarcane this year was diverted towards jaggery as the farmers were getting better pay there. There are reports in the media that the sugar mills are encouraging farmers to go in for cane cultivation by offering them higher prices and incentives. They fear that farmers may divert towards other crops which seems to be attractive at present. Prices of various commodities like rice, maize, oil-seeds, etc have increased in the past few months. At the same time, these crops are shorter duration crops and have quicker returns unlike sugarcane where the farmers have to wait for a few months to realize their payments. Thus, it seems that farmers would be attracted towards other crops. So, it is not easy for the Indian Sugar industry to come out of this mess as production this year may not rise drastically as predicted by many experts.

The consumption in India this season is expected to be around 23 million tonnes which is much higher than what India is estimated to produce (15.5 to 16 million tonnes). The deficit is expected to be met by imports which is not viable at present as the prices are currently ruling high. Therefore, in near future, sugar prices would continue to rule high due to sugarcane shortage and demand from the cold drink and ice-cream makers. Also, it is a marriage season in the North India, so demand would be good throughout this quarter. At, present retail prices are ruling at around Rs.23 to Rs.26 per quintal. So even if imports come into play, prices will still rule around Rs.20 to Rs.22 per quintal which is still higher than the previous year.