The conundrum of Indian sugar exports
Last Friday, the New York sugar market was given a psychological boost as some unnamed Indian government official said that India would consider limiting sugar exports at 8.0 MMT. Even though 8.0 MMT would be 11% above last season’s 7.2MMT, it is still below the 9.0 MMT some have suggested India could push out given their production numbers continue to rise. The last ISMA estimate for India was 33.3 MMT, but some are pointing to 34.50 and perhaps even 35.00 MMT. Remember this number is even with a 2.8-3.4 MMT diversion of sugar to ethanol.
Later in the day on Friday another unnamed government official said they were not contemplating an export limit. I would say, if that was the case, then why two weeks ago did they begin asking for the export sales numbers from the mills? They are supposedly going to collate those numbers this week, but the question would be how accurate will those numbers be? Some are suggesting we could see double counting and some mills might delay. The official export number in the government letter was 6.5 MMT. Unofficially, market talk puts the number closer to 7.00 MMT.
According to sources, they believe the government will only be concerned if the estimate for ending stocks for this crop were to fall below 6.0 MMT. Of course, unless they monitor how would they know? If consumption were to be around 27 MMT, 6 MMT, would be around 80 days of consumption or less than three months.
As long as the monsoon is normal, as Skymet suggests in their early forecast they should be ok with that. But then again, India has seen three straight good monsoon seasons and temps this summer have seen 76 year records broken in the north and western part of the country. There is no guarantee with weather these days, globally or in India. We are also seeing concern over commodity supply globally as one of the world’s most important bread baskets is thrown into turmoil by the Russian invasion of Ukraine. Indian wheat exporters, and oil importers are benefiting from the situation, but the situation could see a long duration and at least for exporters, they might see a great initial benefit, but it might leave the Indian market vulnerable if production of sugar or wheat were compromised and internal prices jump. The Indian government wants to avoid inflationary price pressures like all governments, so to think they will just freely allow export without limits and they will certainly monitor internal prices. If prices jump, they could quickly intervene. Right now though is harvest time so prices will, or should be at their weakest.
The Indian sugar industry is enjoying some of the best two years of its existence. The mills got a great bonus last year with the export subsidy that wasn’t needed after prices jumped and with the government promoting ethanol, the surge in investment is showing that the expected returns on ethanol production are currently attractive. However for a continuation of the good times, they will need to see sugar prices maintain above 18.50 and crude prices holding above $80 a barrel. If not then the government might have to come in again and subsidize sugar exports again and even subsidize ethanol prices as well.
Despite the intention of the government to try and shift some sugar production to ethanol, being partially successful, the overall boost from ethanol prices has caused a surge in sugarcane investment overall and we can see that exports have been increasing, not dropping. Some of this is stock drawdown for sure, but note production of sugar is rising faster than consumption. Early whisper numbers for next year’s sugar production is now up to 37 MMT, though conveniently there is talk of a further 2 MMT of diversion on top of the current 2.8-3.4 MMT.
So, the government curbing sugar export might have a dual purpose. Guaranteeing against internal price rally in case of poor weather later in the season but also putting a brake on the industry in general, by keeping internal prices suppressed. Export is growing in importance, and ethanol will as well, but internal prices and turnover is the mills bread and butter.
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Mr. Michael McDougall is Managing Director at Paragon Global Markets, LLC, New York, USA. He has been active in commodity futures for 35 years.
