Context: It is not only oil that has tumbled with prices of West Texas Intermediate grade, recently prices of raw sugar for May delivery at New York crashed to the lowest since 2008.
More about the news:
- Even commodities such as corn(used for making ethanol) and palm oil(feedstock for biodiesel) have seen price declines following the slide in crude as they are ultimately linked to oil.
- 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 was on a bull run, until recently.
Reasons for this collapse in sugar prices:
- Slide in demand:
- 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. For example, the sugar consumption in India alone to dip by 1.5-2 mt in 2019-20, from the normal 25.5-26 mt levels.
- 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 tend to divert cane for making ethanol (alcohol of 99%-plus purity) that is used for blending with petrol.
- With oil prices crashing, mills will not find it attractive to divert cane for ethanol.
How will this affect India?
- Production-export interplay
- Both exports and lower production(to maintain demand-supply equilibrium) aid cane farmers in realising a better price for their produce. For example, ex-factory realisations from exports is Rs 2,250-2,400 per quintal and the Centre provides a subsidy of Rs 104.48.
- Dip in sugar consumption(domestic and global), together with higher Brazilian output, is bad news for both Indian sugar mills and cane farmers.
- The current plunge in world prices, plus Brazil’s likely production surge, would upset these calculations.
- Impact on 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.
- For example, 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 recently 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.
- Problem faced by industry:
- Moreover, the industry’s problem is not from sugar alone.
- The lockdown has reduced offtake of alcohol - potable liquor or ethanol for blending with petrol.
- For instance, UP mills may produce around 100 crore litres (one billion) of ethanol this season(51.5 crore in 2018-19).
- But with cars and two-wheelers not running, oil market companies aren’t very keen to procure ethanol.
Other alternatives available to India
- However, there is a hope from increased import requirements from Indonesia and its decision last month to slash the duty on Indian raw sugar from 15% to 5%.
- The increased demand from Indonesia is on account of Thailand, a major supplier to Indonesia, experiencing a bad drought.
In this backdrop providing a relief package for sugar mill owners and cane farmers by the Government of India is the need of the hour.