It's all about sugar as prices surge and supply fears grow

You don’t want to be in the ethanol business right now unless your feedstock has nothing to do with sugar. We imagine “food vs fuel” in terms of grain shortages, but where food and fuel actually collide is on the global sugar markets. “While sugar is widely available in the west and its price is rarely considered, it is an essential source of cheap calories in emerging economies where surging sugar prices are driving food inflation,” writes Jack Farchy in Britain’s Financial Times.

This year Brazil, normally the world’s top sugar producer, had a sugar cane harvest significantly below normal, with scarcity pushing the price of sugar up 85 percent to a 30-year high. High prices in turn led millers to switch away from ethanol and toward table sugar, pushing up prices at the pump just as policy makers struggled to control inflation. With the mills unable to produce enough ethanol to meet market demand, there is a dim outlook for owners of Brazil’s flex-fuel cars which normally run on less expensive ethanol and will now have to switch to gasoline. More than 90 percent of all cars sold in 2010 were flex-fuel models.
Normally at least some of the global shortage would be offset by harvests from other important growing areas like Russia and Europe, but this year their production too has been lower than normal. That leaves India, the world’s second largest sugar producer, which by most indications will have one of its largest harvests in recent years. That’s the good news.

The bad news is that this year India may not have enough surplus to meet global demand. Here’s how Economic Times commodities editor Niti Nath Srivivas saw the situation at the beginning of this year.

“Globally, sugar demand is rising faster than supply. To compound the problem, bad weather and floods will compel Pakistan, Russia and China to import more sugar than usual over the next six months. But traditional exporters Brazil and European Union don’t have bumper crops. So exporting countries will not have sufficient spare sugar to meet extra demand from importers. Some market analysts say the gap could cross 2 million tonnes in the first half of 2011. This means prices would be high. Unless someone walks in with extra sugar. After a good monsoon, there is a good chance that could be India, the world’s second largest producer after Brazil. If we produce around 24mn tonnes  — a bit more than our annual consumption – we could export 2 mn tonnes. That would keep global prices firm but steady.”

But that was before the National Food Security Act created the National Food Security Programme, a top priority internal customer competing for the country’s food supply. This year the national government exported a million metric tons of sugar in two 500,000 tonne sales. But after the most recent sale Food Minister K. V. Thomas announced that India will not consider any further sugar exports in 2010/11. He said his ministry had an alternative mechanism in place should prices rise. The government would intervene in the market and not allow prices to “hit the roof”, as had happened last year. He said the mill owners had been warned against raising prices of sugar and an assurance had been drawn from them before the various recommendations for allowing the export were accepted.”

Commodities editor Niti Nath Srinivas has written of the Food Security Act as a setback for markets and people in need alike. Speaking of its impact on wheat, she wrote that it will affect first the urban poor and migrant labour subsisting on dal-roti and samosas by the roadside. The middle class will follow. “And every Indian will bear the inflationary impact of the government’s Rs 95,000-crore grain shopping bill when it doesn’t have enough money in its wallet.”

So now you know. Sugar isn’t so sweet.

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