The Hindu : Business : Government intervention corrects sugar price surge

Online edition of India's National Newspaper
Sunday, Jan 09, 2005

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Business

Government intervention corrects sugar price surge

By Ramnath Subbu

MUMBAI, JAN. 8. The rise in the price of sugar over the last one year and the particularly alarming rise over the last ten days to Rs. 2,000 plus a quintal level saw the Government step in on Thursday and announce steps to curb a further rise.

Sugar prices touched a 30-year high of Rs. 22 a kg for the whole of last week and many dubbed the rise as speculative. Even in end-November 2004, prices were around Rs. 1,500 a quintal.

In 2004, following a poor output, sugar prices had already risen 40 per cent. On Thursday, the Government stepped in to release additional sugar in the open market.

The move though, seems to have had the desired effect with the ex-mill price falling to Rs. 1,700 a quintal level.

Speculation

There was speculation of some mills in Uttar Pradesh not selling monthly quotas and the Government announced that any unsold sugar at the end of the month would be converted into levy sugar. Ram Thyagarajan, Managing Director, Thiru Arooran Sugars, said, "The basic provocation for the Government stepping in was the prices rising too fast in one week and it called for a response. The problem was that on the NCDEX (National Commodity Exchange), volumes shot up in the last month. The speculative aspect was corrected and adequately addressed."

The Central Government announced the release of four lakh tonnes of sugar in the open market taking the quarter quota allocation to 38 lakh tonnes. The Government also indicated a possible reduction in duty on refined white sugar to facilitate imports.

Export norms

On the other hand, the Government revised the export norms for imported raw sugar. The export obligation now has to be fulfilled only after 36 months instead of 24 months. The industry, unburdened from exporting the same quantity of sugar, could instead direct it for domestic consumption.

"Import of raws is sensible as value is added by mills here and the government can regulate the quantum of what is imported and converted," said Mr. Thyagarajan.

Excess realisation

Kushagra Bajaj, Vice Chairman and Managing Director, Bajaj Hindustan, the largest organised player in the domestic market, said, "It must be understood that prices were at a 40-year low for a number of years till last year.

"Since then, they have improved and gone to previous levels. Unless prices move in conjunction with what is happening globally, it will not be viable for the units. After all, sugarcane prices are also up and farmers need to be paid."

There is a stipulation in place that any excess realisation by the mills has to be shared with the farmers.

In the south, this is diligently followed and so the entire increase in price does not only go to the mills but also it is shared with the farmers.

Mr. Bajaj explained that prices in India were among the lowest in the world.

"Consider that ex-factory prices in India at around Rs. 20 a kg is lower than ex-factory prices even of neighbouring countries such as Pakistan, Sri Lanka Nepal and Bangladesh where it is around Rs. 23 a kg. It is after all a commodity cycle and the up-cycle has only just begun.

"This year, production is expected at around 12 million tonnes against 13.5 million tonnes last year. This is not larming and there is sugar stock of around 8 million tonnes and consumption is estimated at 18 million tonnes."

Ceiling

Mr. Thyagarajan said the domestic industry had been witnessing low prices for the last 4-5 years and the ceiling level of Rs. 20 a kg announced gave enough room for mills to remain profitable.

"Unfortunately, with drought conditions here, similar problems were also prevalent in China, Thailand and Pakistan and all of them were importing sugar.

"Brazil could produce a lot of sugar but freight rates had also gone up significantly and so globally, prices were firm."

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