Highest-ever recorded production for November and December (with the exception of 2008), yet the sharpest in-season month-on-month rise in retail sugar prices in January 2021; the sugar price drama has now entered 28th month - and counting. Is the rise and rise in sugar prices going to be the embarrassment incumbents will have to carry for the rest of their tenure as well?
Regular readers will recall that higher output in November 2020 was attributed by the industry and government alike to enforcement of early crushing by the Punjab government. Indeed, it also helped bring down prices temporarily – December CPI reading for the sweetener came down by over 16 percent. Now the release of December 2020 LSM scorecard has brought another ‘monthly highest-ever’, yet the prices have reversed gears in January. Foul play, or are the prices just trying to find a new equilibrium?
It depends on who you ask. Industry association is convinced that the demand-supply gap will persist in 2020-21 as the recovery rate is low due to early crushing (crop has been harvested before it reached full maturity, it is claimed). But the numbers simply do not add up, unless 2021 will break relationship will all historic trends.
Historically, the Jan-March quarter is responsible for 75 percent of season’s output (on average). Going by this estimate, production of 5.6 million tons of sugar may yet be reported in the coming months, taking total output to over 7 million tons, as predicted in this space earlier, (for more, read “Time to go short on sugar”, published by BR Research on 24 November, 2020). But even if the output during current quarter falls to its lowest in a decade – 68 percent – total output may still clock in upwards of 6.5 million tons, a significant surplus over annual domestic consumption of 5.5 – 6 million tons.
Readers will recall that the Federal Committee on Agriculture projected that sugarcane volume of up to 76 million tons shall be marketed this season; thus, even if the sucrose recovery level ‘disastrously’ falls to 9 percent, all of that bumper crop cannot simply disappear. At worst-case utilization level of 75 percent, the lower bound (for sugar output) cannot fall below 5.1 million tons, even if all hell breaks loose and recovery declines to levels last seen 14 years ago.
Bottomline? The industry association will have to tweak far too many variables to maintain prices at the currently obscene levels. Possible, given the brazenness deployed in the past – but runs the risk of making things messy considering how the sugar-saga keeps getting pulled back in the media limelight.
Unless, of course, you are one to question the mother of all premises: crop output. The ministry of NFS&R – and its reporting bodies – do not have much of a reputation when it comes to accurate data collection or farm output forecast; be it dairy yields, cotton outlook, or wheat import requirement. That means there is little reason to have blind faith in its forecast of sugarcane crop of 76 million tons. And the suspicion may not be without reason.
The only directly available data on procurement price of sugarcane comes from sugar mills, whose claim that cane is being purchased at 20- 25 percent premium has been questioned in this space earlier. After all, as profit-driven enterprises, mills have every reason to blame rise in ex-factory prices on raw material cost spiral. But mills appear to have found a new friend in the form of PBS.
The index value of ‘Sugar crops’ reported in the monthly Wholesale Price Index increased by 10.2 percent for January 2021, highest month-on-month rise since at least the base year revision. Take the cost-push angle in raw material prices into account, and suddenly, the rise in refined sugar prices doesn’t look half as bad. And, it makes little sense for raw material prices to make double-digit jumps mid-season, unless of course there is no bumper crop.
In all likelihood, either the PBS or the NFS&R has gotten its data wrong. Before the hounds are unleashed again on the industry for a never-ending commodity price spiral, federal cabinet is best advised to first re-check things under the hood. What if there is no crop surplus and it has failed to forecast a shortfall all over again?
Comments
Comments are closed.