Time to go short on sugar?

National monthly CPI based price of sugar is yet to score a 100 in November 2020, but the federal government has already begun to congratulate itself on prices reversing trajectory, based on a 3 percent decline in national average as per latest weekly SPI. Is the jubilation premature?

Not according to historic trends, which predicted peaking by September. Except this year, that inflection point seems to have been endlessly delayed as the marathon rise in retail prices refused to tap out. Inventory levels across the country touched a fresh low, led by production of only 4.8 million tons in the outgoing season, lowest in almost a decade.

It was always within federal government’s power to stabilize sugar prices if it had made a timely decision to liberalize the commodity trade regime. Instead, recommendations to import sugar which had first been made as early as February, took 5 months to receive ECC’s assent by July end, with imports cargo finally reaching the country by October in earnest.

Instead, November 2020 has started with an estimated domestic stock availability for just six-weeks, inclusive of 0.25 million tons import that had docked at the ports by the end of the previous month. Commodity prices are forward looking. If the quantum of imports were sufficient to meet the shortfall, logic demands that prices should have not continued to rise till mid-November. Yet they did.

Still others believe that the early notification of the crushing period has signalled a tipping point for the 24-month long price spiral. But historically, sugar prices begin their seasonal drop long before crushing begins – nearly 45 to 60 days – as forecast of cane crop available for harvest reaches the market players. Instead, low carryover stocks from last crushing season ensured that upbeat crop outlook could not make a dent in retail prices during September to mid-November.

But what now? According to minutes of a recent meeting of Federal Committee on Agriculture, cane crop available for crushing has increased by 14 percent in the ongoing harvest season, led by a resurgence in acreage in Punjab by nearly 20 percent. Does it mean that the sugar millers’ bonhomie is over?

Some caution may be warranted. In December last year, sugar prices declined by 5 percent (from September peak) after mills achieved highest-ever crushing for the month of December. Then, a confluence of ill-fated price control measures, premium demanded by growers over support price, undeclared strike by mills in Punjab, imposition of ban on export, and early close of crushing due to Covid, led to an overall shortfall in production, as cane crop utilization by mills came at just 75 percent for the full season – lowest in a decade.

That fear is not unwarranted. Mills will fight tooth and nail to keep domestic commodity prices at current levels to continue enjoying attractive returns. With raw material available in abundance, an increase in base price (MSP), and growers’ demanding a premium amidst uncertain demand outlook due to looming fears of second Covid wave, industry’s only shot at maintaining current high prices is to keep the utilization level low. And with cheaper imports now flowing in freely, it has the perfect excuse to do so.

The government has a short window of opportunity to pre-empt this – right before crushing reaches peak levels in February. With international sugar prices trending upwards, the MoC can take the bold step to lift the ban on export of sugar (without any freight support, obviously!). If the 2018-19 cycle is any guide, the industry will jump to capitalize on opportunistic export, especially given the surplus availability of raw material. Moreover, if the industry chooses to export at prices under $450 per ton, it will also offer an insight into ex-factory price levels at which mills do not incur losses. This may also ensure that net import of sugar during the full fiscal comes out at zero.

Public policy rarely offers second chances. By delaying the decision to import wheat and sugar, PTI government missed its first. Now, it has another. If it misses the opportunity to remove controls on commodity trade, it will once again be leaving the field open for the industry to take undue advantage.

In which case, this movie will only play out in two possible ways: a shortfall of sugar leading to more imports as industry refuses to procure cane at higher than base prices; or, ramping up of crushing under administrative pressure, leading to high carryover stocks, followed by demands for subsidy to export surplus in coming seasons. Either way, it never ends well for the consumers.