Govt to pump in more sugar ahead of festivals
Govt prepares to pump more quantities into the open market as festivals creep closer and a sharp rise in domestic sugar prices is expected in coming times.
By Nidhi Nath Srinivas, ET Bureau |
NEW DELHI: Punters betting on a sharp rise in domestic sugar prices could lose their shirts as the government prepares to pump more quantities into the open market as festivals creep closer. The food ministry may ask mills this week to start selling extra sugar to cool down unprecedented volatility in the cash market.
Prices have increased by more than Rs 100 per quintal over the last one week only. Sugar futures on Tuesday hit the upper circuit on NCDEX. That has led the ministry to closely examine likely causes that include hoarding by traders, speculative activity, and mills reneging on their free sale quota.
"We are aware of the sudden sharp volatility in prices and undertaken an exercise to look at price trends in the last fortnight. We are going to take immediate steps to check this kind of volatility, and one step would be additional release of free sale quota," a senior official said.
The government���s intervention would come not a moment too soon for consumers.
"There is now a fear psychosis among buyers. Since prices have climbed so fast, buyers may no longer be willing to wait for the market bottoming out. Even if there is a 50 paise per kg drop in price, consumers will rush to resume buying instead of waiting for the prices to cool down to a level justified by physical demand-supply fundamentals," said a Mumbai-based trader.
According to industry sources, however, mills have been reluctant to sell sugar till now because the market price was below their cost of production.
"How can mills sell at Rs 14 per kg ex-factory when their cost of production is Rs 15 per kg ex-factory? That is why mills have been unwilling to sell their free sale quota and the 2 million tonne (mt) buffer stock sale permitted by the government. Prices have to rise to at least Rs 16/kg ex-factory for mills to start offloading stocks," said a leading mill owner in Mumbai.
That price level has now been crossed in most states, including Maharashtra, Tamil Nadu and Uttar Pradesh.
"We can now expect some mills to start liquidating stocks. They actually have little choice, given expensive working capital loans and pressure from banks. Even the off-season maintenance work is going slow in most factories due to a cash crunch. Exports have dwindled considerably," he added.
Interestingly, government officials also privately acknowledge that it may not be wise to let sugar prices to drop below the magic figure of Rs 16/kg.
Now that courts have ruled in favour of farmers being paid Rs 12.50/kg for cane, very few mills would be efficient enough to sell sugar at less than Rs 16/kg.
"If prices fall below that, mills won���t be able to pay farmers and also turn sick. The whole cycle of bailing them out would re-start. So inflationary pressures apart, it may not be very sensible to create a drastic drop in market prices," sources said.
The sugar market has been kept buoyant in recent weeks by a smaller-than-expected free sale quota for this quarter,
rising international sugar prices, coupled with news that there may be a decline in India���s output next season as acreage drops. Miller associations have been also deliberately trying to keep investor sentiment upbeat by talking of a drastic decline in output.
However, with 12 mt sugar finding no takers in the current season and a likely production of 23 mt in the forthcoming season (starting October 1), punters going long on Indian sugar may be taking on more risk than usual.
Prices have increased by more than Rs 100 per quintal over the last one week only. Sugar futures on Tuesday hit the upper circuit on NCDEX. That has led the ministry to closely examine likely causes that include hoarding by traders, speculative activity, and mills reneging on their free sale quota.
"We are aware of the sudden sharp volatility in prices and undertaken an exercise to look at price trends in the last fortnight. We are going to take immediate steps to check this kind of volatility, and one step would be additional release of free sale quota," a senior official said.
The government���s intervention would come not a moment too soon for consumers.
"There is now a fear psychosis among buyers. Since prices have climbed so fast, buyers may no longer be willing to wait for the market bottoming out. Even if there is a 50 paise per kg drop in price, consumers will rush to resume buying instead of waiting for the prices to cool down to a level justified by physical demand-supply fundamentals," said a Mumbai-based trader.
According to industry sources, however, mills have been reluctant to sell sugar till now because the market price was below their cost of production.
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"How can mills sell at Rs 14 per kg ex-factory when their cost of production is Rs 15 per kg ex-factory? That is why mills have been unwilling to sell their free sale quota and the 2 million tonne (mt) buffer stock sale permitted by the government. Prices have to rise to at least Rs 16/kg ex-factory for mills to start offloading stocks," said a leading mill owner in Mumbai.
That price level has now been crossed in most states, including Maharashtra, Tamil Nadu and Uttar Pradesh.
"We can now expect some mills to start liquidating stocks. They actually have little choice, given expensive working capital loans and pressure from banks. Even the off-season maintenance work is going slow in most factories due to a cash crunch. Exports have dwindled considerably," he added.
Interestingly, government officials also privately acknowledge that it may not be wise to let sugar prices to drop below the magic figure of Rs 16/kg.
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Now that courts have ruled in favour of farmers being paid Rs 12.50/kg for cane, very few mills would be efficient enough to sell sugar at less than Rs 16/kg.
"If prices fall below that, mills won���t be able to pay farmers and also turn sick. The whole cycle of bailing them out would re-start. So inflationary pressures apart, it may not be very sensible to create a drastic drop in market prices," sources said.
ADVERTISEMENT
The sugar market has been kept buoyant in recent weeks by a smaller-than-expected free sale quota for this quarter,
rising international sugar prices, coupled with news that there may be a decline in India���s output next season as acreage drops. Miller associations have been also deliberately trying to keep investor sentiment upbeat by talking of a drastic decline in output.
However, with 12 mt sugar finding no takers in the current season and a likely production of 23 mt in the forthcoming season (starting October 1), punters going long on Indian sugar may be taking on more risk than usual.
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