As the holidays approach and the year begins to wind down, it’s time for reflection on what could have been, what should have and what really was. Take India, for example. They could have exported and taken advantage of high prices. Mills should have raked in profits from those exports to reinvest in mill upgrades.
But as we all know, what really was was a series of blunders and bureaucratic ineptitude that mean exports didn’t come when they should have and now mills are suffering more than before.
We knew this would happen though. It always happens when India has the opportunity to take advantage of a bull market. Back in August, in this very column, we called the ball and predicted India would miss out on the opportunity to benefit from high sugar prices, and we knew it would be this bad.
In the August 12 column, we said, ”The decision to take advantage of high prices may not be international at all but may be in part due to the fact that prices have slipped so much inside India, as much as 20% to the point where prices are below production costs, causing concern that mills may not be able to pay farmers. Bringing in cash from exports will help ease those concerns and keep striking farmers under control.
If India hopes to take advantage of current high prices, they’re going to have to react quickly to issue export permits or risk prices plummeting as happened the last time they announced exports. India’s bureaucratic government was a hindrance before, but if it can get its act in gear in time, it just might be able to benefit.
Or not. There’s always that chance too.”
Sadly, India has fulfilled its own self-fulfilling prophecy. In Uttar Pradesh, thanks to a State Advised Price nearly 20% higher than last year combined with sugar prices 20% lower than last year, production costs are running at INR33 per kg while ex-mill prices are at INR30.5 per kg. That means in just the two months since the new season started on Oct. 1, mills have lost INR2.20 billion (US$42 million). It’s expected that mills will have run out of working capital within two months, leading to record arrears in cane payments for farmers.
This is where the real irony lies. The government wanted to shore up votes from cane farmers, so boosted the cane price to make them happy. But they created a situation where they can’t make enough money to pay the farmers, so rather than farmers getting more money, they’ll get nothing. Good plan.
It’s no wonder that mills have gone to court to get the SAP reduced. With so much sugar supply around, weighing down on local sugar prices, they can’t even break even in the domestic market. Trying to export, if it were even possible, isn’t really an option either. As the state is landlocked, it typically sells its export licenses to millers closer to port. But premiums on those licenses have fallen by nearly a third to INR2300 to INR2500 a tonne because of poor export demand.
Instead of UP exporting, the brunt of the responsibility will fall on Maharashtra. There the SAP isn’t nearly as high and production costs are much closer to breakeven at around INR30 per kg. Mills in Maha are still likely to rack up losses and have a hard time paying farmers, but it won’t be nearly as bad as in UP. Maha is also likely to be in a better position to take advantage of exports, but exporting now certainly isn’t what it was a few months ago.
Back in August, when the writing on the wall was clear that prices would come down later in the year and it was a now-or-never, do-or-die situation for India, prices were still high enough to offer mills a good margin. Even last week, mills still would have gotten a margin of US$38 per tonne over local prices, but white sugar has fallen to US$596.30 per tonne from US$624 a week or so ago. Those prices could easily go down even further, thanks to the EU announcing exports around the same time India said it was finally ready to get into the market.
Of the million metric tonnes that India has approved for exports, licenses for only 37,000 tonnes have been approved. That means that sugar will leave India in a trickle rather than a steady stream or one big go. The benefit of the slow trickle is that it won’t flood the market and send prices crashing down to the floor, but it also reduces the opportunity to price in the whole lot at a higher level and eek out the last bit of profit that mills so desperately need. Plus they risk someone else coming in to price their whole lot in one go, leaving them with the crumbs.
As time goes on and prices slip, the situation is only going to get worse for India. It’s a shame that they couldn’t get their political game in order quick enough to cash in. The European Union is known as a bureaucratic mammoth that moves slowly and reacts even slower, yet even they were able to get a mechanism in place in order to shift its sugar while the getting was still good. If India can’t keep up with the Europeans, then they’re truly in for a world of hurt.