Business Today

Why sugar crisis repeats in three years

India had an import duty of 60 per cent on sugar till January 2009, which it slashed to zero only when it realised that it may have to import 5-7 million tonnes of sugar.

Ashok Gulati | Print Edition: October 4, 2009

Ashok Gulati
Ashok Gulati

How would sugar taste to an aam admi (common man) if I say that by November 2009, sugar price is going to hit Rs 40 plus/kg. It would be utterly bitter and may spoil the holiday mood in October when festivities in India peak. But why is the price of sugar going through the roof? Only a year ago, it was Rs 16/kg, and by now it is already double of that, and is still continuing its bull run.

The reasons are not hard to explain. The production last year was down, and is not likely to be much higher even this year. The sugar stocks have almost depleted and would scrape the bottom by October, and global prices are on an upswing and likely to remain high till December 2009, at least, if not beyond that.

Sugar production has a typical three-year cycle. Therefore, to understand what is happening today, one should start at least three years back. In 2006-07, sugar production was 28 million tonnes against the domestic consumption requirement of around 20-22 million tonnes. In 2007-08, again, the production was 26 million tonnes. It led to huge accumulation of sugar stocks, which had to be liquidated by giving a freight subsidy (Rs 1,450/tonne) on exports of sugar, and this continued till September 2008.

In 2007-08, sugar mills were reluctant to lift cane from farmers, resulting in accumulation of arrears of cane payment to farmers. Having burnt their fingers with overproduction of cane, farmers switched away from cane in 2008-09, and sugar production fell from 26 million tonnes in 2007-08 to 15 million tonnes in 2008-09, a whopping drop of more than 40 per cent in a single year. And in 2009-10, given the drought, the condition on sugar front is not going to improve significantly for quite some time.

India had an import duty of 60 per cent on sugar till January 2009, which it slashed to zero only when it realised that it may have to import 5-7 million tonnes of sugar. But unfortunately, the global market of sugar was already under fire… the sugar price in August 2009 touched a 27-year high at 24 cents a pound.

White Sugar Futures trades at Liffe commodities (London International Financial Futures and Options Exchange) for the next couple of months show an upward swing in the price, i.e., as high as $566.4/tonne in December 2009 against $537.2/ tonne for October 2009. This would almost amount to Rs 30 plus/kg at the port, and by adding unloading charges, domestic freight, retail margins and so on, it won’t be a surprise to see it crossing the Rs 40/kg barrier by November-December 2009. Consumers will pay through their nose and it may exert pressure on politicians.

But who is responsible for this mess? One may count several factors behind this, but the central part of the story lies in administrative regime of minimum support price (MSP) in case of wheat and rice and statutory minimum price (SMP) and state advised price (SAP) for sugarcane. They are influenced by political considerations, especially SAP in UP, and lead to large swings in production, leading to a threeyear cycle of boom and bust. Unless Indian policymakers are ready to reform this administrative price regime, consumers and producers both will keep having a roller coaster ride on this three-year sugar cycle.

Ashok Gulati is Director (Asia), International Food Policy Research Institute

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