Prices have fallen to the lowest in six years and it looks like there’s further to go
Sugar producers hammered by the slump in global prices might be in for further pain as the Indian government looks set to bring in rules to make it compulsory for its own sugar mills to export millions of tonnes of surplus supplies to support local prices.
The move could quell growing anger among farmers but add to a glut on global markets, dashing hopes that prices might soon start to recover, sources told Reuters.
A final decision rests with India’s Prime Minister Narendra Modi, who discussed the politically sensitive issue at a weekend meeting with ministers, officials and sugar mill bosses, said the two government sources.
The proposal, which could mean mills selling at a loss, comes at time when the world sugar market is grappling with a flood of supplies and prices at six-and-a-half-year lows.
The mandatory export rule, which could be introduced from the start of the next crop year on October 1, would apply only when output was higher than local demand, said the officials, who are directly involved in formulating the policy.
If approved, India could overtake Australia as the world’s third-largest exporter behind Brazil and Thailand.
Food ministry spokesman NC Joshi declined to respond to Reuters’ request for comment.
Shares (Berlin: DI6.BE – news) of Indian sugar companies such as Bajaj Hindusthan Sugar, Shree Renuka Sugars, Simbhaoli Sugars (BSE: SIMBHSUGAR.BO – news) and Bannari Amman Sugars (BSE: BANARISUG.BO – news) jumped as much as 12pc after the Reuters report.
Apart from boosting farm exports, government-backed overseas sales of sugar could also help mills clear the roughly $ 2.5bn they owe to 50 million cane growers – a group equivalent in size to the population of Spain.
India, the world’s largest sugar consumer and biggest producer after Brazil, has been producing more sugar than it needs for the past five years and the trend is likely to continue.
“Mandatory exports may force mills to sell sugar at a loss now, but they would (eventually) gain because lower domestic stocks mean higher domestic prices,” said one of the sources.
India’s mills are expected to produce 28 million tonnes in the next season, when inventories will climb to 10.3 million tonnes, up from 7.5 million tonnes at the start of the current season.
Indians consume 24-25 million tonnes of sugar a year, thus could easily export 5-6 million tonnes yearly even after stocking up for emergencies, analysts said.
That would be more than the 3 million tonnes that Australia sells and compares to Brazil’s exports of 27 million tonnes and Thailand’s 10 million tonnes.
This sugar season, India’s overseas sales are expected to be only 800,000 tonnes, against 2.2 million tonnes in the previous year, despite a government-funded export incentive of 4,000 rupees a tonne.
European sugar producers are investing, while their Brazilian counterparts are doing the opposite
In the meantime, European sugar companies are getting ready for a surge in overseas sales when export restrictions end in 2017, opening the door for competition with major producers such as Brazil.
The European Union will become a net exporter of the sweetener and shipments may reach 4 million metric tonnes a year, according to Rabobank International. That’s almost triple the current maximum of 1.37 million tonnes.
A bigger presence by Europe in the sugar market may shift trade patterns for Brazil, which dominates the global industry and sells to countries in the Middle East and North Africa.
“All the big traders are positioning themselves to get a piece of the pie,” said Tracey Allen, an analyst at Rabobank in London. “There’s going to be a lot of competition for that volume.”
European trading houses have been preparing for more business. French producer Tereos bought Napier Brown Sugar in May and started a distribution business last year.
Most growers use sugar beets to extract the sweetener and have seen productivity increase with better growing techniques and favourable weather. Yields have risen about 10pc since 2009, Eurostat data show.
Prices for sugar will continue to fall
The opposite is happening in Brazil, where ageing cane toward the end of a six-year crop cycle isn’t being replanted.
Cane yields fell 4.8pc in six years through the 2014-15 season, data from industry group Unica shows.
The country accounts for about 45pc of global sugar exports.
“If you take Brazil, where there’s practically no investment and no expansion in terms of capacity growth, you have to start looking around the world to see where you can see growth,” said Kona Haque, head of commodities research at ED&F Man Holdings in London. “The EU can fill the gap.”
European farmers may switch to growing sugar beets instead of wheat because it’s more profitable, according to Claudiu Covrig, senior agricultural analyst in Lausanne, Switzerland for Kingsman.
The increased supply could push sugar prices down even further, he said.
Brazil sends about a third of its sugar exports to the Middle East and North Africa, where the raw sweetener is turned into white sugar and sold to local consumers.
But European producers, who are closer to those buyers, already make refined sugar from beets.
