The world sugar industry, which found sweetener prices down by over 20% last year, is not going to get any respite in the current season to end in September 2013. White sugar at London Futures Exchange sinking well below $500 a tonne and March delivery raws at NewYork Intercontinental Exchange quoting less than 18.50 cents a pound mean that factories engaged in crushing sugarcane but with low rates of sugar recovery and not found efficient in using cane by-products like bagasse, molasses and press mud will find themselves deep in the red.

The world’s largest sugar producer and exporter Brazil with its efficient farm practices and high sugar recovery rates will no doubt ride out the difficult 2012/13 season (April to March) better than most other sugar-producing countries. “Unlike India, where ethanol production and the biofuels blending with fossil fuel are yet to take off in a meaningful way, thanks to government prevarication, Brazil is using close to half of its sugarcane output to make ethanol. In India, however, we make the biofuel from sugarcane by-product molasses,” says industry official Om Prakash Dhanuka. Sugar factories in Indian northern states like Uttar Pradesh and Bihar, which are asked by local governments to pay very high prices for the raw material to placate farmers constituting large vote banks, not even half way through the season are not finding it possible to settle cane bills, says Dhanuka. Payment denials over a length of time make farmers angry creating condition for land shift to other crops.

Losses are extended in futures contracts on certainty of yet another year of global supply surplus. Barclays analyst Kate Tang says,“We expect the third consecutive global surplus in 2012/13... with stronger-than-expected production in Brazil to continue to pressure prices.” The Brazilian season to end in March will see sugar production climbing 8.8% to 34.1mt (million tonnes), according to industry and ethanol body UNICA, which earlier forecast an output of 32.7mt. Brazil is likely to harvest a crop 11% higher at 570mt during 2013/14. Consultancy firm Datagro, however, thinks the next harvest could be bigger at 580mt.

But since the world’s second largest ethanol producer after the US, which sources the biofuel from corn, is once again to mandate a blending of 25% (against 20% now) of ethanol with gasoline, the next season sugar production will not show much change on the higher side. Brazil’s gasoline production is to rise 14% to 25bn litres (6.6bn gallons) from 22bn litres this season. Even then the business intelligence group F.O. Licht sees the possibility of Brazil churning out more sugar in 2013/14 dimming the prospect of any break from the bearish sentiment any time soon.

So in this third season in a row when supply will be in excess of demand, how much surplus sugar will the world have? According to the International Sugar Organization, the world will have a sugar surplus of 6.18mt (raw value) and this will keep prices under pressure at least till the current crop cycle ends. Rabobank, however, thinks surplus could be 6.6mt riding on the back of high Brazilian output. An official of the Dutch bank says, “modest downward revisions to sugar production projections in India [the world’s second largest],Thailand and Russia in recent

weeks have been offset by upward revisions to estimates for Brazil [mainly], Mexico and others.” Pressured by bumper production, Brazil is giving a push to exports resulting in sugar awaiting loading at its main ports rising to at times to about 1.2mt from normal 800,000 to 850,000 tonnes.

Sugar is one of the many commodities in which China will engage in stock replenishment by way of imports when world prices hit low. This was much in evidence last season when Chinese imports amounted to 4.2mt. China, the second-largest consumer of the sweetener after India, has made some contracts for significant volume in December and January for delivery by February end at about $460 a tonne, including freight, for raws. The US Department of Agriculture says Chinese imports this season will be 2mt, down from 4.2mt in 2011/12 when much of stock replenishment happened. Production fall will, however, require of Russia to step up imports by 150,000 tonnes to 900,000 tonnes. However, in 2010/11, Russia — facing a big shortfall in domestic supply — had to import 2.5mt of sugar. Jonathan Kingsman, managing director at research house Kingsman SA, says “now that stocks have been rebuilt, producers are beginning to ask who will buy their sugar in 2013.”

In a situation like this, it defies logic that India, which opened the season with stocks of 6.5mt and is expected to produce 24mt, should be importing any sugar at all, says Dhanuka. India’s imports till now amount to 500,000 tonnes. The country will need around 22mt for its own use. Unless there are exports, India will end the season with “unmanageable inventories” of 9mt. “Our production costs are relatively high, thanks to state- level arbitrariness in fixing cane prices. At the current low world prices, Indian exports will be feasible only with WTO-compliant incentives from the government. The government could think of defraying transportation cost of cargoes, from factories to ports of despatch and sea freight,” says Dhanuka. Last year India exported 3.4mt of sugar but without any subsidy. Admitting that this season is to prove trying for Indian sugar industry, particularly for factories in the north, a food ministry official told DCI,“it’s time attention is given to bring down cane conversion cost. At the same time, our research institutions will have to develop drought resistant varieties of cane. We must learn to grow the crop with much less water than now.”

By Kunal Bose