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INDIAN SUGAR SECTOR- OUTCOME OF ANALYSIS.
Dear Friends,
With raw sugar futures hitting fresh 29-year highs last week it was of no surprise that the stocks with strategic interest in sugar sector made fresh breakouts along with the sugar futures. In Indian context the wholesale sugar prices moved up more then 7% on a week on week basis. If one studies the demand and supply dynamics of the sugar industry in India one would understand that the higher prices are here to stay. Refer the table alongside.
With an annual consumption of 23 MT and an estimated production of 15-15.7 MT,India would probably close the year with the lowest level of inventory in a decade. Globally there is more to sugar cycle then what meets the eye. With a carry forward discount in Sugar futures (between forward contracts and immediate contracts) no sane investor would try and store sugar to loose money with forward arbitrage. If traders remember this is precisely the reason why crude oil under performed compared with other commodities in last few quarters? Last year when crude oil was trading below 50$ many VLCC were booked to store the same and benefit from the arbitrage premium in the forward contracts. This is precisely the reason why the upmove from 86$ to 97 $ in Crude might be sharp as most of that supply is absorbed by the markets. What happened in India was that the official machinery was until mid 2008 providing exports sops to sugar producers. The Indian government has probably realized that free market is probably the best way ahead. After abolishing the export sops the government enforced stringent quotas on sugar hoarding by dealers in early 2009. In between the FMC abolished the Sugar contracts from the local commodity exchanges. The FMC probably thought that the tail (commodity traders) was guiding the Dog in this case. After two failed directives the Government of the day tried imposing stock limits on mass sugar consumers. People would be surprised to know that almost 67% of Indian sugar is consumed by mass consumers like soft drink manufacturers, confectionery and Fmcg companies. The government has ordered an increased levy quantity of 20% this year. The remaining 13% is what remains for the actual consumer.
I am not a pessimistic as far as the potential of the Indian farmer is concerned but there is much more then what meet the eye on sugar production and
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