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.
Showing posts with label Agriculture. Show all posts
Showing posts with label Agriculture. Show all posts
April 3, 2009
February 5, 2009
Sugar prices to remain firm
Sugar prices have been continuously rising since past few months. It was predictable. Sugar experts all over the country had warned the government through their analysis about the mismatch of demand and supply; and how the prices would rule firm in the near future. In my earlier blog, I had mentioned how sugar prices would rule firm at the year end. The agriculture minister was wrong from the very beginning. Though, it has allowed sugar mills to import duty-free sugar against advance licenses (AL) on a ‘tonne-to-tonne’ basis, yet the decision came very late. Already, sugar prices are ruling very high.
A few weeks back, the agriculture minister Sharad Pawar had said that the production in India would fall to around 18 million tones from 26 million tonnes a year ago. Yet, the ministry was reluctant to allow imports. The difference in opinion between the agriculture minister and the commerce minister has affected the sugar sector badly. Yet, the decision will bring some cheers to all those involved with the sugar sector. I will explain the reason for saying some cheers.
With this decision, the mills can now import the duty-free sugar and sell it in the domestic market after reprocessing it into white sugar. The export obligation can be made later on from the domestic production, but within two year. This will help bring down the prices by making available more sugar in the market. According to earlier policy, which believed in ‘grain-to-grain’, the mills that were allowed to import raw sugar had an obligation to re-export the same consignment after reprocessing it within two years of the AL being issued. But, the present policy means that the mills can meet the export obligation by processing cane independently.
Though, in the near term prices may cool a bit, yet, in the long run the sugar sector will see many happenings. The prices will climb to a new height unless government comes out with more liberal policies for this sector. The reports coming from various quarters indicate that the production of sugar this year will fall even below the expected 18 million tonnes. It should be noted that last year due to average monsoon in the sugarcane growing areas of Maharashtra, farmers had converted their standing cane for fodder. Poor monsoon led to poor production of fodder; hence, farmers had no other option but, to convert their crop into fodder. So, the farmers then chose to harvest the cane for fodder rather than waiting for the crops to mature to sell it to the sugar mills.
Sugar recovery too this year is expected to fall drastically. Sugar recovery is the percentage of sugar mills extract from every tonne of cane crushed. The average recovery in Uttar Pradesh so far this season has been 8.8 per cent against 9.48 per cent in the same period last year. As a result, the overall production in the state is expected to fall. Lower recovery of sugar is due to cane plant suffering damage from the frost.
Even the area under cultivation was lower last year as the mills were (are) not in a position to pay farmers the State Advised Price (SAP). At the same time, due to poor monsoon, yield too fell to around 32 tonnes a hectare from 58 tonnes a hectare in the year 2007-08. One thing that the government needs to carefully examine is the pricing of cane. What should be the right price for the mills to be able to pay to the farmers? More important, who should dictate the price? It is irony that the Union Government comes out with Statutory Minimum Price (SMP) and the state comes out with their State Advised Price (SAP), usually much higher than the SMP to score brownie points without realizing the implications of such policy. When the prices rule very high and the consumers are in pain, it is the Central Government that has to act and not the state government. So, why should a state be given a right to decide the pricing of cane when it doesn’t come into picture?
Due to poor availability of cane for crushing, most of the mills are expected to shut their crushing by March end. Normally, crushing continues till April. In Maharashtra, out of 145 mills that had started crushing this season, 14 have already closed, compared to one out of 165 mills last year (2007-08). So, the overall picture looks bleak for the sugar sector. In the near term, prices will rule in a range as the government will ensure sufficient supply in the market through free sale quota (FSQ) as this is a election year.
A few weeks back, the agriculture minister Sharad Pawar had said that the production in India would fall to around 18 million tones from 26 million tonnes a year ago. Yet, the ministry was reluctant to allow imports. The difference in opinion between the agriculture minister and the commerce minister has affected the sugar sector badly. Yet, the decision will bring some cheers to all those involved with the sugar sector. I will explain the reason for saying some cheers.
With this decision, the mills can now import the duty-free sugar and sell it in the domestic market after reprocessing it into white sugar. The export obligation can be made later on from the domestic production, but within two year. This will help bring down the prices by making available more sugar in the market. According to earlier policy, which believed in ‘grain-to-grain’, the mills that were allowed to import raw sugar had an obligation to re-export the same consignment after reprocessing it within two years of the AL being issued. But, the present policy means that the mills can meet the export obligation by processing cane independently.
Though, in the near term prices may cool a bit, yet, in the long run the sugar sector will see many happenings. The prices will climb to a new height unless government comes out with more liberal policies for this sector. The reports coming from various quarters indicate that the production of sugar this year will fall even below the expected 18 million tonnes. It should be noted that last year due to average monsoon in the sugarcane growing areas of Maharashtra, farmers had converted their standing cane for fodder. Poor monsoon led to poor production of fodder; hence, farmers had no other option but, to convert their crop into fodder. So, the farmers then chose to harvest the cane for fodder rather than waiting for the crops to mature to sell it to the sugar mills.
Sugar recovery too this year is expected to fall drastically. Sugar recovery is the percentage of sugar mills extract from every tonne of cane crushed. The average recovery in Uttar Pradesh so far this season has been 8.8 per cent against 9.48 per cent in the same period last year. As a result, the overall production in the state is expected to fall. Lower recovery of sugar is due to cane plant suffering damage from the frost.
Even the area under cultivation was lower last year as the mills were (are) not in a position to pay farmers the State Advised Price (SAP). At the same time, due to poor monsoon, yield too fell to around 32 tonnes a hectare from 58 tonnes a hectare in the year 2007-08. One thing that the government needs to carefully examine is the pricing of cane. What should be the right price for the mills to be able to pay to the farmers? More important, who should dictate the price? It is irony that the Union Government comes out with Statutory Minimum Price (SMP) and the state comes out with their State Advised Price (SAP), usually much higher than the SMP to score brownie points without realizing the implications of such policy. When the prices rule very high and the consumers are in pain, it is the Central Government that has to act and not the state government. So, why should a state be given a right to decide the pricing of cane when it doesn’t come into picture?
Due to poor availability of cane for crushing, most of the mills are expected to shut their crushing by March end. Normally, crushing continues till April. In Maharashtra, out of 145 mills that had started crushing this season, 14 have already closed, compared to one out of 165 mills last year (2007-08). So, the overall picture looks bleak for the sugar sector. In the near term, prices will rule in a range as the government will ensure sufficient supply in the market through free sale quota (FSQ) as this is a election year.
August 1, 2008
Sugar at Rs.2,000 a quintal!
The sudden surge in sugar prices has made everyone redo their homework. Prices of sugar have seen a continuous bull run for the past few days. Even though the production this year was exceptionally good yet the prices are ruling firm. NCDEX December contract for M Grade Kolhapur is currently ruling at Rs.1835 a quintal which is Rs.187 more or 11 per cent higher than the August price of Rs.1648. Logically, prices should be lowest in December due to supply pressure. So, why the prices are heading northward? For this, we need to first understand the dynamics of sugar industry.
Dynamics of sugar Industry
India is the largest consumer and second largest producer of sugar in the world. Sugarcane occupies about 4.2% of the total kharif area under cultivated area and it is one of the most important cash crops in the country. Sugar is a sensitive issue in India just like onion. The economics of sugar in India is very complicated as compared to other countries. This is because in India there is two type of sugar industry; one the large mills and second, is the small cottage industries that manufacture specially gur (solidified cane juice) and khandsari (semi-white centrifugal sugar). Therefore, both these industries compete for sugar cane.
In India, sugar comes under the Essential Commodities Act, 1955 and the government involvement is at each level, right from fixing the Statutory Minimum Price (SMP) to the growers, to giving industrial licensing for establishment of sugar factory. In addition to it, the government also decides the quantity that can be sold in the open market, fixes the price of the levy quota sugar and determines the maximum stock levels for wholesalers, etc.
At present, sugar mills are forced to sell 10% of their output to government at cheaper rates (generally 20 per cent lower than the cost of the output). Government uses this sugar to meet its target under PDS (Public Distribution System) to sell sugar at cheap rates to the poor. At the same time, government authorities also decide how much of the remaining they can sell in the open market. This is done to keep the prices stable in the domestic market and is achieved through quota system wherein government announces the release of sugar quota for each quarter. For instance, the sugar quota released for this quarter, i.e., July, August and September is 30 lakh tonnes. Apart from that, buffer stock of 8 lakh tonnes is also supposed to be released in this quarter.
Government announces the SMP for sugarcane every year based on the recommendations of the Commission for Agricultural Costs and Prices (CACP). While the Central Government regulates the sugar industry, the State Governments exercise control over supply and distribution of cane as an agricultural crop. Thus, the State Government announces State Advised Prices (SAPs) for sugarcane in respect of cane supplied to mills within their boundaries. The SAPs which mills are required to pay are generally substantially higher than the SMP. Also, every mill is given a certain boundary region. All canes grown in that region are to be compulsorily sold to the mills allotted to that region.
Current Scenario
Over the past few weeks, sugar prices have been continuously rising. There are various factors for the rise in the sugar prices. As usual, first is the demand and supply scenario.
The demand for the sugar sector seems to be good in the coming days. With strong demand, weak price will be thing of the past. It is reported that sugar prospects in Brazil and India is not good. Production is expected to decline. With the re-entering of Russia, the largest importer, prices of sugar are expected to head northward.
The world sugar fundamentals are expected to tighten next season. In 2007-08, world sugar consumption is projected at about 160 million tonnes against the expected production of 170 million tonnes. The surplus is about 10 million tonnes. But, with reports coming from various corners of the world, the production would be about 160 million tonnes the year 2008-09. The production in India, China and Pakistan is expected to be lower than the previous year. Even reports from Brazil indicate that the crop is behind the schedule.
Indian Scenario
According to the Ministry of Agriculture, the area under sugarcane for the year 2008-09 is down to 4.3 million hectares from the 5.2 million hectares in the previous year. Aberrant monsoon in the Western states like Maharashtra, Karnataka and Andhra Pradesh has created a risk of yield loss. It believed that the total output for the country will fall to about 22 to 23 million tonnes against 27 million tonnes of previous year.
Indian exports for this season have already touched 3.5 million tonnes and is about to reach 4.5 million tonnes. The reason for this is weakening rupee and firm export price. However, with the production expected to decline next year, export would not materialize as the government may ban exports of sugar to reign in the domestic prices. There is high possibility of such actions with the elections of various states which are to be conducted next year.
The report from Maharashtra is even worse. The prolonged dry spell is inducing farmers to convert their standing cane for fodder. When the rains fail, the cattle have no fodder thereby pushing up the prices for fodder. So, the farmers then choose to harvest the cane for fodder rather than waiting for the crops to mature to sell it to the sugar mills. Cane availability for this year's crushing season is expected to go down to 50 million tonnes out of total cane production of 54.4 million tonnes due to diversion. If that happens then the production will be badly affected.
Indian sugar industry typically follows a 4 to 5 or 6 year cycle. The down trends in the sugar cycle starts with improved profitability of sugar mills. This results in prompt and higher payment to the farmers resulting in low sugarcane arrears. Good payment and low arrears lead to higher area under sugarcane cultivation and bumper production. All these lead to drop in prices of sugar. When the sugar prices fall drastically, it leads to losses or low profit to sugar mills. Hence, mills are not able to pay the farmers on time leading to increase in arrears. The farmers are ultimately forced to move towards other cash crops. The production falls and prices start moving up again. This whole viscous cycle continue for about 5 to 6 years. It is believed that the current year is a peak year on sugar cycle due to bumper production since last few years. Hence, prices are expected to peak this year leading to fall in production. However, long term trend of production is of increasing in nature.
Ethanol will play an important part in rising sugar prices. It is expected that Brazil will divert more of their sugar crop towards ethanol production due to rising crude prices which have affected almost every other commodities. Also, Indian government is toying with the idea of allowing petrol blending with 10 per cent of ethanol. This will drastically affect the sugar output.
Forward prices are firming and sugar prices will begin to surge with the beginning of the festival season by mid-August.Therefore, looking at various factors one should not be surprised if the prices touch Rs.2,000 a quintal.
Dynamics of sugar Industry
India is the largest consumer and second largest producer of sugar in the world. Sugarcane occupies about 4.2% of the total kharif area under cultivated area and it is one of the most important cash crops in the country. Sugar is a sensitive issue in India just like onion. The economics of sugar in India is very complicated as compared to other countries. This is because in India there is two type of sugar industry; one the large mills and second, is the small cottage industries that manufacture specially gur (solidified cane juice) and khandsari (semi-white centrifugal sugar). Therefore, both these industries compete for sugar cane.
In India, sugar comes under the Essential Commodities Act, 1955 and the government involvement is at each level, right from fixing the Statutory Minimum Price (SMP) to the growers, to giving industrial licensing for establishment of sugar factory. In addition to it, the government also decides the quantity that can be sold in the open market, fixes the price of the levy quota sugar and determines the maximum stock levels for wholesalers, etc.
At present, sugar mills are forced to sell 10% of their output to government at cheaper rates (generally 20 per cent lower than the cost of the output). Government uses this sugar to meet its target under PDS (Public Distribution System) to sell sugar at cheap rates to the poor. At the same time, government authorities also decide how much of the remaining they can sell in the open market. This is done to keep the prices stable in the domestic market and is achieved through quota system wherein government announces the release of sugar quota for each quarter. For instance, the sugar quota released for this quarter, i.e., July, August and September is 30 lakh tonnes. Apart from that, buffer stock of 8 lakh tonnes is also supposed to be released in this quarter.
Government announces the SMP for sugarcane every year based on the recommendations of the Commission for Agricultural Costs and Prices (CACP). While the Central Government regulates the sugar industry, the State Governments exercise control over supply and distribution of cane as an agricultural crop. Thus, the State Government announces State Advised Prices (SAPs) for sugarcane in respect of cane supplied to mills within their boundaries. The SAPs which mills are required to pay are generally substantially higher than the SMP. Also, every mill is given a certain boundary region. All canes grown in that region are to be compulsorily sold to the mills allotted to that region.
Current Scenario
Over the past few weeks, sugar prices have been continuously rising. There are various factors for the rise in the sugar prices. As usual, first is the demand and supply scenario.
The demand for the sugar sector seems to be good in the coming days. With strong demand, weak price will be thing of the past. It is reported that sugar prospects in Brazil and India is not good. Production is expected to decline. With the re-entering of Russia, the largest importer, prices of sugar are expected to head northward.
The world sugar fundamentals are expected to tighten next season. In 2007-08, world sugar consumption is projected at about 160 million tonnes against the expected production of 170 million tonnes. The surplus is about 10 million tonnes. But, with reports coming from various corners of the world, the production would be about 160 million tonnes the year 2008-09. The production in India, China and Pakistan is expected to be lower than the previous year. Even reports from Brazil indicate that the crop is behind the schedule.
Indian Scenario
According to the Ministry of Agriculture, the area under sugarcane for the year 2008-09 is down to 4.3 million hectares from the 5.2 million hectares in the previous year. Aberrant monsoon in the Western states like Maharashtra, Karnataka and Andhra Pradesh has created a risk of yield loss. It believed that the total output for the country will fall to about 22 to 23 million tonnes against 27 million tonnes of previous year.
Indian exports for this season have already touched 3.5 million tonnes and is about to reach 4.5 million tonnes. The reason for this is weakening rupee and firm export price. However, with the production expected to decline next year, export would not materialize as the government may ban exports of sugar to reign in the domestic prices. There is high possibility of such actions with the elections of various states which are to be conducted next year.
The report from Maharashtra is even worse. The prolonged dry spell is inducing farmers to convert their standing cane for fodder. When the rains fail, the cattle have no fodder thereby pushing up the prices for fodder. So, the farmers then choose to harvest the cane for fodder rather than waiting for the crops to mature to sell it to the sugar mills. Cane availability for this year's crushing season is expected to go down to 50 million tonnes out of total cane production of 54.4 million tonnes due to diversion. If that happens then the production will be badly affected.
Indian sugar industry typically follows a 4 to 5 or 6 year cycle. The down trends in the sugar cycle starts with improved profitability of sugar mills. This results in prompt and higher payment to the farmers resulting in low sugarcane arrears. Good payment and low arrears lead to higher area under sugarcane cultivation and bumper production. All these lead to drop in prices of sugar. When the sugar prices fall drastically, it leads to losses or low profit to sugar mills. Hence, mills are not able to pay the farmers on time leading to increase in arrears. The farmers are ultimately forced to move towards other cash crops. The production falls and prices start moving up again. This whole viscous cycle continue for about 5 to 6 years. It is believed that the current year is a peak year on sugar cycle due to bumper production since last few years. Hence, prices are expected to peak this year leading to fall in production. However, long term trend of production is of increasing in nature.
Ethanol will play an important part in rising sugar prices. It is expected that Brazil will divert more of their sugar crop towards ethanol production due to rising crude prices which have affected almost every other commodities. Also, Indian government is toying with the idea of allowing petrol blending with 10 per cent of ethanol. This will drastically affect the sugar output.
Forward prices are firming and sugar prices will begin to surge with the beginning of the festival season by mid-August.Therefore, looking at various factors one should not be surprised if the prices touch Rs.2,000 a quintal.
July 24, 2008
Government steps in to arrest the rising domestic cotton prices
Over the past few weeks, cotton prices had been rising rapidly. Government was under tremendous pressure from the domestic textile industry to ban exports of cotton. Only a fortnight ago, government had scrapped 14 per cent import duty on raw cotton and additionally withdrew 1 per cent export incentive (duty drawbacks). Even after these measures, cotton prices were heading north. So, to arrest the rising domestic cotton prices, government has placed an export restraint on cotton by stipulating mandatory registration of contracts with the Textile Commissioner before their shipment. Moreover, the Directorate General of Foreign Trade has also made it mandatory for the Customs authority to verify the contracts before clearing the cotton consignment. The restriction covers exports of cotton, cotton waste and yarn waste.
The current move is expected to have a dampening effect on cotton exports. But, if we look at the fundamentals then, this step will have a moderate effect on the cotton prices. Prices may come down initially as this will put psychological pressure on exporters. But, in the long run prices will reflect the demand and supply situation in India. India exported about 6.5 million bales of cotton in 2007-08. Cotton exports grew from 4.7 million bales in 2005-06 to 5.8 million bales in 2006-07. Exports this year are estimated to touch 8.5 million bales.
It is alleged that only about 0.4 million cotton bales are available for consumption by the domestic industry, while multinationals companies are hoarding about 2.5 million bales. With monsoons getting delayed in most of the western states in India, production is expected to take a dip. Hence, even after these measures cotton prices are expected to rule firm in near future. Therefore, to end this uncertainty government can fix a quota on exports so that domestic prices are stable.
The current move is expected to have a dampening effect on cotton exports. But, if we look at the fundamentals then, this step will have a moderate effect on the cotton prices. Prices may come down initially as this will put psychological pressure on exporters. But, in the long run prices will reflect the demand and supply situation in India. India exported about 6.5 million bales of cotton in 2007-08. Cotton exports grew from 4.7 million bales in 2005-06 to 5.8 million bales in 2006-07. Exports this year are estimated to touch 8.5 million bales.
It is alleged that only about 0.4 million cotton bales are available for consumption by the domestic industry, while multinationals companies are hoarding about 2.5 million bales. With monsoons getting delayed in most of the western states in India, production is expected to take a dip. Hence, even after these measures cotton prices are expected to rule firm in near future. Therefore, to end this uncertainty government can fix a quota on exports so that domestic prices are stable.
Subscribe to:
Posts (Atom)