The Hindu Business Line : Sugar price spiral defying supply fundamentals?

THE country's sugar production in the ongoing 2003-04 crushing season (October-September) is likely to fall to 155-160 lakh tonnes from the previous season's all-time high of 201.45 lakh tonnes. But is that reason enough for the present price spiral that is seemingly assuming maniacal proportions?

Ex-factory sugar prices have now crossed the psychological mark of Rs 1,500 per quintal, which is around Rs 450 per quintal higher than the corresponding realisations at this point last year. During the current month alone, prices have spurted by about Rs 150 per quintal, much of which has occurred following the United States Department of Agriculture's (USDA) projection last week that India will end up importing over 10 lakh tonnes of sugar in the ensuing season.

A dispassionate view, however, suggests that there is little basis for the kind of panic being witnessed now. Various estimates have been made of the stocks that sugar mills held at the start of the current season, ranging from 105 lakh tonnes to 120 lakh tonnes.

Even taking the low figure and assuming this season's output to fall to 155 lakh tonnes, aggregate sugar availability would still work out to 260 lakh tonnes.

Coming now to consumption, it may be noted that the total despatches of levy and non-levy sugar by factories (excluding for export purposes) amounted to 151.31 lakh tonnes and 160.22 lakh tonnes in the 2000-01 and 2001-02 seasons respectively. During the 2002-03 season, this shot up to 183.74 lakh tonnes, roughly 15 lakh tonnes more than what would ordinarily have been despatched, going by past trends.

But then, 2002-03 was an abnormal year, when factories were desperate to pare down their overflowing inventories at any cost and virtually every mill had secured Court orders to sell sugar beyond the free sale quota (FSQ) allotted to it by the Government. Indeed, total non-levy sugar despatches by mills during the last season exceeded their FSQ releases by over 65 lakh tonnes. There is also reason to believe that the dip in ex-factory realisations to Rs 1,050-Rs 1,100 per quintal would, by itself, have generated extra demand and facilitated consumption of the bulk of the 183.74 lakh tonnes of sugar despatched by factories.

But with prices now ruling at Rs 1,500 per quintal, it is difficult to foresee this kind of demand being sustained. Even if one assumes consumption to be 180 lakh tonnes this season and makes an additional provision of five lakh tonnes of exports (on the higher side), the 2004-05 season will begin with opening stocks of over 75 lakh tonnes, equivalent to five months of consumption at existing levels. These offer adequate buffer even against a likely second successive bad sugar season during 2004-05, which may see production fall further to 150 lakh tonnes or lower.

Whichever way one looks at it, there is no massive shortage of sugar in the offing, as the market seems to be indicating. According to some observers, a lot of panic is being deliberately created by a section of the trade that has already accumulated stocks close to five lakh tonnes in anticipation of making a killing during the coming festival months. Some of them have stocked up truckloads of sugar even in distant centres such as Guwahati.

The Government, on its part, has reacted by releasing an FSQ of 14 lakh tonnes for the current month and 16 lakh tonnes for May, in addition to the 2.16 lakh tonnes each of levy sugar to be channelised through fair price shops.

But this, observers feel, will have only a temporary impact. "Higher releases will lead to mills offloading more sugar to dealers and stockists. It does not guarantee that the sugar bought by dealers would flow further to the ultimate consumer and not be hoarded, as is the case now," they added.