We have been here before!

Eleven weeks ago, this space had predicted that refined sugar prices are on a resurgence, driven less by supply-side pressures and more by inflationary outlook (Read: Get Ready for Sugar-flation?, published April 10, 2019).

Since then, average refined sugar prices have galloped another 18 percent, as tracked by weekly SPI. Compared to same period last year, that’s an increase of nearly 36 percent – and the highest monthly average price recorded in almost 8 years. Should the public brace for a commodity price run amok?

Here is another prediction: the prices may peak up to Rs 85-90, before they start reverting to mean come next marketing year. Sure, that would mean two-thirds increase – but is it warranted?

Let’s recap: marketing year began with an opening stock of 2.2 million tons, of which only 0.3 million tons has been exported as of 7M-MY19 (Oct to April). Crushing began in December-18, and nearly 4.9 million tons had been produced as of March-19 LSM figures.

Unless phenomenal export is recorded between May and June (when the quota expires), stocks available for local consumption should stand at about 7.2 million tons, against stated annual demand of 5.4 million tons.

A surge in export is unlikely, considering average export price fetched in ongoing period has declined to $310 per ton, against $350 per ton fetched last year. That was in addition to Rs 10.7 and Rs 20 per kg subsidy extended to Punjab and Sindh-based exporters, respectively last year– whereas only the former may avail subsidy this year, that too at Rs 5 per kg.

On the supply-side, provisional crop statistics put cane acreage at 1.1 million hectares, with a yield of 61 tons/hec. Even if utilization remains at 75 percent (five-year low) and sucrose recovery at 10 percent, the industry should still manage to produce at least 5.1 million tons; which is in line with LSM figures so far.

Add back to opening stock, and there is no way country should record a shortage in the ongoing season.

Which brings us to the key-term: which season? While stocks may be sufficient for ongoing period, several seasons of delay in payments to farmers and tussle over indicative price has raised fears that sugarcane’s growth trajectory has finally reached an inflection point, with current year’s acreage recording a decline of 18 percent over MY18.

Furthermore, effort to stage a cotton crop revival to kickstart textile exports at both federal and provincial level has raised fears that the slump in sugarcane cultivation may not just stop here. In case acreage records another season of double-digit decline in ongoing sowing season, crop shortage could become a reality.

As refined sugar is not a perishable commodity, prices may have recorded an upswing in anticipation of a deficit in future periods. Why then is it unlikely for price surge to overshoot Rs 90 per kg?

Because global sugar prices are witnessing a historic low, trading at $327 per ton. Sadly, domestic prices practically bear no link to international market. Given 40 percent import duty and (assumed) importer’s margin of 20 percent, domestic sellers can push prices up to Rs 90 per kg before import becomes competitive at prevailing exchange rate.

And that’s a ceiling domestic consumers have seen before. Back in MY10, acreage had dropped by one-fourth from its peak in MY08 and took two seasons before restoring to equilibrium levels. The crisis lasted two years because sugar prices in global market had also peaked at over $700 per ton, meaning domestic shortage could not be met by import either.

What does this all mean? Mostly that there is no crisis yet. Farming community had been signalling its anger over no change in cane indicative rate for over three years, worsened due to cashflow challenges. They can now expect to fetch a better price in upcoming season.

By pushing the ex-factory price up, millers in turn are signalling to the government to not take the “cotton-incentivization” policy too far, fearing it may give farmers too much bargaining power over cane pricing by restricting cane supply.

The public can pay a tad more while two parties sort their issues out. Cheers!