It is not only oil that has tumbled, with prices of West Texas Intermediate grade crude closing at an unprecedented minus $37.63 per barrel on April 20, before recovering a tad to $13.78 by Wednesday. On April 21, prices of raw sugar for May delivery at New York crashed to 9.75 cents per pound, the lowest closing for a nearest-month futures contract since the 9.70 cents recorded on June 9, 2008. Even commodities such as corn and palm oil have seen price declines following the slide in crude. A look at the connection:
We know about oil. But why have global sugar prices also collapsed?
All commodities have taken a demand hit from subdued economic activity and lockdowns imposed by many countries to combat the COVID-19 pandemic. But sugar is one commodity that, until quite recently, was on a bull run. Most estimates showed global production in 2019-20 (October-September) to fall short of consumption by 8-9 million tonnes (mt). On February 12, the front-month raw sugar futures contract at New York actually closed 15.78 cents per pound, the highest since May 2017. A drop from that to below 10 cents is rather steep.
One reason for this collapse is the closure of restaurants, weddings and other social functions not taking place, and people avoiding ice-creams and sweetened cold beverages that might cause throat infections. The impact of coronavirus-induced lockdowns on out-of-home consumption and institutional (as opposed to direct household) demand for sugar is obvious. Prakash Naiknavare, managing director of the National Federation of Cooperative Sugar Factories, projects sugar consumption in India alone to dip by 1.5-2 mt in 2019-20, from the normal 25.5-26 mt levels.
Is that the only reason?
Sinking crude prices appear an even bigger factor. The juice from crushing sugarcane can be crystallised into sugar or fermented into alcohol. When oil prices are high, mills — especially in Brazil — tend to divert cane for making ethanol (alcohol of 99%-plus purity) that is used for blending with petrol. In 2019-20 (April-March), only 34.32% of cane crushed by Brazilian mills went for manufacturing 26.73 mt of sugar. The rest was used to produce 31.62 billion litres of ethanol. But with oil prices tanking — WTI crude was quoting at $53-plus two months ago — mills will not find it attractive to divert cane for ethanol. Brazil’s mills, which have started crushing (the Indian season is from October), are seen to produce up to 36 mt of sugar and hardly 26 billion litres of ethanol this year.
How will this affect India?
Dip in sugar consumption, together with higher Brazilian output, is bad news for both Indian sugar mills and cane farmers. Before COVID-19 happened, the Indian industry was expecting to export 5.5-6 mt of raw sugar in 2019-20. Mills had already entered into contracts of some 3.8 mt, out of which 3.05 mt have been shipped out so far. With ex-factory realisations from exports at Rs 2,250-2,400 per quintal and the Centre providing a subsidy of Rs 104.48 (it was termed lump-sum assistance towards defraying marketing, internal transport, port handling and ocean freight expenses), the industry’s woes from excess stocks were seemingly behind it. This was to be aided both by exports and lower production (26 mt, from 33.2 mt in 2018-19).
The current plunge in world prices, plus Brazil’s likely production surge, would upset these calculations. Naiknavare, however, is counting on Indonesia’s increased import requirements and its decision last month to slash the duty on Indian raw sugar from 15% to 5%. Indonesian refiners are projected to import 3.3 mt of raws this year, up from 2.6 mt in 2019. “They buy mostly from Thailand, which is experiencing a bad drought that could lead to its production falling from 14.6 mt in 2018-19 to 9 mt. It opens up an opportunity for us,” he says.
What is the situation with respect to cane farmers?
Exports slowing down and not much domestic lifting of sugar by institutional consumers has significantly undermined the ability of mills to make cane payments. Uttar Pradesh’s factories have till now crushed cane worth roughly Rs 32,000 crore in the 2019-20 season, but managed to pay only Rs 16,456 crore. The state government, last week, announced a scheme of mills giving “willing farmers” one quintal each of sugar for the next three months, in lieu of cane payments due to them. Maharashtra mills, too, had paid only Rs 11,310 crore out of their total cane dues of Rs 12,539 crore as on April 15.
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Moreover, the industry’s problem is not from sugar alone. The lockdown has reduced offtake of alcohol, be it potable liquor or ethanol for blending with petrol. UP mills, according to the state’s cane commissioner Sanjay Bhoosreddy, may produce around 100 crore litres (one billion) of ethanol this season, compared to 51.5 crore litres in 2018-19. But with cars and two-wheelers not running, oil market companies aren’t very keen to procure ethanol.
Are other agri-commodities impacted?
Prices of corn, which is also used for making ethanol, fell to their lowest since September 2009 at Chicago on April 21. Likewise, palm oil, again a feedstock for bio-diesel, ended 7.5% lower at the Bursa Malaysia futures exchange. Corn prices can, in turn, drag down other cereals, just as palm oil could to soyabean and other oilseeds. They are all ultimately linked to oil, whose prices matter as much to petroleum companies as farmers.
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