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With national average retail sugar prices closing in on Rs 90 per kg – a first in almost a decade – the million-dollar question is whether sugar supply will be balanced. Let’s check.

A cursory look at the scenario-based table would indicate that only in 1 out of 6 scenarios will sugar supply be sufficient for domestic requirements in the upcoming marketing year, 2020-21. That should be alarming since domestic prices have been trending upwards for the last 27 months. A shortfall in domestic output in the upcoming year will mean that the bull run continues for at least another 12-14 months, the longest in recent memory.

While mathematical scenarios may appear grim, long-term trends suggest otherwise. Historically, a decline in cane crop output continues for no more than two seasons. That makes sense, since cane is a 14-18 months crop in various regions, and once replanted the supply may take up to two years to restore.

Second, while last two years’ low utilization and production may suggest otherwise, an extrapolation based on these years may be misleading. Low utilization in the past two years may not dissuade growers from cane crop as many made healthy profits by selling crop to mills at 20 percent premium to government notified rate.

Third, unrestrained increase in retail price of sugar and suspension of tariffs on import point towards a shortfall in domestic supply. This means that if prices maintain at current levels, mills will not short-change growers in the upcoming crushing season and at least pay the full rate. Both second and third factors will ensure that cane crop continues to offer attractive returns for growers.

There are also no signs of yield suffering acutely this season. For one, the threat of second locust wave has abated. Two, rain and water supply for kharif thus far has been adequate. Three – and probably most crucial – is the subsidy on urea. Historically, cane and wheat yields have benefited most in years when subsidy on fertilizer was timely announced during sowing season.

No official estimates of cane or other kharif crop acreage are available so far; therefore, forecasting is a tricky business. However, the outcome of the game in the upcoming season will depend on crop utilization levels by the mills. And that has ranged as low as 74 percent in MY20 to as high as 95 percent in MY17.

With no export support in sight, mills will see little reason in producing more sugar, never mind their claims about mandatory crushing and FIRs. Oversupplying the market will only crash domestic retail price from the current comfortable levels.

Yet, they may also stay wary of producing too little in a bid to keep prices high. Official quarters have begun putting out whispers of “taking over” mills by invoking emergency provisions in case supply is constrained or mills refuse to purchase crop. For so long as that does not turn into a battle of wits, mills will avoid unnecessary face off with the government and keep utilization levels at adequate level.

However, the government must be cautioned from turning this into an egotistical challenge or trying to make an example out of the industry. For one, the government must first judge its ability to run any industry let alone a tricky business such as sugar. Two, any such action will have long term consequences not only for the industry but also for private sector confidence. Tread carefully and conduct crop acreage surveys in pre-harvest season. If acreage is between 1.1 – 1.2 million hectares, this too shall pass.

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