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Oil Price Impact on Sugar Prices

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April 24, 2020

Why in news?

The prices of raw sugar for May 2020 delivery at New York crashed to 9.75 cents per pound, the lowest closing for a nearest-month futures contract since June 2008.

Click here to read on oil price crash

Why have global sugar prices collapsed?

  • All commodities have taken a demand hit from subdued economic activity and lockdowns imposed to combat the COVID-19 pandemic.
  • But sugar is one commodity that, until quite recently, was on growth phase.
  • [Most estimates showed global production in 2019-20 (October-September) to fall short of consumption by 8-9 million tonnes (mt).]
  • One reason for the collapse now is the closure of restaurants, weddings and other social functions not taking place.
  • People are also 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 demand for sugar is thus obvious.
  • Sugar consumption in India alone is said to dip by 1.5-2 mt in 2019-20, from the normal 25.5-26 mt levels.

Have oil prices played a role?

  • 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) to be blended 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 falling, mills will not find it attractive to divert cane for ethanol.
  • Brazil’s mills are thus seen to produce up to 36 mt of sugar and hardly 26 billion litres of ethanol this year.

Will this affect India?

  • 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.
  • The sugar industry’s woes from excess stocks are thus slow to happen aided by both exports and lower production.
  • However, dip in sugar consumption, together with higher Brazilian output, is unfavourable for both Indian sugar mills and cane farmers.
  • Nevertheless, in Indonesia, there is an increased import requirement.
  • Also, it decided recently to slash the duty on Indian raw sugar from 15% to 5%.
  • Indonesian refiners are projected to import 3.3 mt of raw sugar this year, up from 2.6 mt in 2019.
  • They buy mostly from Thailand but Thailand is experiencing a bad drought which could lead to its production falling.
  • This offers an opportunity for India.

What is the situation with respect to cane farmers?

  • Decreasing exports and falling domestic use of sugar by institutional consumers has significantly undermined the mills' ability to make cane payments.
  • E.g. Uttar Pradesh’s factories have till now crushed cane worth roughly Rs 32,000 crore in the 2019-20 season.
  • But they have managed to pay only around Rs 16,400 crore.
  • The state government recently announced a scheme of mills giving “willing farmers” one quintal each of sugar for the next 3 months, instead of payments due.
  • Moreover, the industry’s problem is not from sugar alone.
  • The lockdown has reduced off-take of alcohol, be it potable liquor or ethanol for blending with petrol.
  • With cars and two-wheelers not running, oil market companies are not very keen to procure ethanol.

What are the other implications of oil price fall?

  • The oil price crash has affected other agri-commodities as well.
  • Prices of corn, which is also used for making ethanol, fell to their lowest since 2009 at Chicago.
  • 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 do to soyabean and other oilseeds.
  • All these are ultimately linked to oil, whose prices matter as much to farmers as petroleum companies.

 

Source: Indian Express

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