sugaronline.com

These days, India is the last place you want to own a sugar mill. Ok, that’s probably Sri Lanka, but in India it’s gotten to a level of bad not seen in a very long time. Rather than the usual sort of ‘bad’ that one finds in the Indian sugar industry, where they have made a misjudgement and had to import at 30-year highs, instead they’re stuck with too much sugar and aren’t allowed to get rid of it.

So yea, that kind of bad.

Indian mills have been pushing the government to allow additional sugar exports since June, when it was already apparent that the 2010/11 season would produce 23 million metric tonnes and indications were that 2011/12 could be more than 5% higher than that. Back in April the government allowed half a million tonnes but by June the request was already for another 1.5 million more.

But even in June, the government was making noises that it wouldn’t make a decision on fresh exports until November or December. Considering that domestic prices had already fallen by 18% at this point, it wasn’t a good sign for holding off on more exports.

Part of the problem is that the food minister KV Thomas is very cautious and wants to be sure that a weaker-than-planned monsoon doesn’t mean that sugar production will drop as soon as exports are approved. Then there’s agriculture minister Sharad Pawar who is very pro-mill and as such is very keen on exports explaining why he has been pushing to get them approved. And is at loggerheads with Thomas.

In fact, it’s been Pawar who has been making noises that sugar exports could be approved earlier, getting the mills’ hopes up rather than keeping them reasonable. In fact, he too has been pushing since June and at one point it looked liked he would be successful. He managed to get a total of 2.2 million tonnes of exports released in 2010/11 as of July but there was need for more.

It was right around that same time that discussions flared up around the idea of decontrol of the sugar industry, at long last. There were delegations from sugar producing states meeting with the Prime Minister, ministers were meeting officially and unofficially, and there were expectations from the mills that at the very least the levy obligation and the regulated release mechanism might be dropped in the first stages of reform.

But months have passed with all parties silent on the reform issue. Perhaps that’s because everyone is worried about the need for exports, or perhaps it’s because the decontrol issue has been pushed aside once again.

Yet since July, the push for exports has gotten louder, reaching a fever pitch. There were some indications that there could be a decision on new exports in mid-October. At that point, Pawar was saying that export approvals would come in batches of half a million tonnes at a time, which probably would have been fine with millers as long as they were approved.

They weren’t.

Even Thomas, who had been so cautious about exports, was saying that half a million tonnes could be approved for export by the end of October with another half million tonnes released by the end of November. He was even open to a million tonnes at a time if the mills promised to import at whatever price necessary if they had exported too much.. Exports for 2.6 million had been approved by the end of September. For him, the key was to get through Diwali, which should indicate how the next season’s crop was going to turn out.

But even then, Mr. Cautious was wrong and decisions on exports were delayed again. And by this point in the year, ICE futures prices had already dropped 21%, meaning that the profits mills could finally rake in thanks to their ability to export at the right time was quickly slipping through their fingers.
 
Despite the fact that the decisions to approve exports kept getting postponed, there was still hopes that they would come and in enough tranches to help local sugar prices as well as take advantage of world prices before they slipped further. There was talk the government was ready to approve 2 million tonnes of exports for 2011/12, again in small batches, but the meeting set for mid-October was moved to early November because some of the ministers weren’t available for the meetings.

But then the meeting in early November was postponed and now the hope is that the ministers will finally meet on Nov. 21, a full five months after mills began demanding more exports and a full month after exports were already expected for approval.

In the mean time, the situation domestically has worsened. Mills now say that exports need to be around 4 million tonnes, rather than the 2 million tonnes that the ministers are expected to vote on. But sugar production seems to be worsening in some places, with Maharashtra production already down 20% on the year. This does not bode well for a positive answer from the ministers.

Then there’s the problem that the mills have now found themselves in thanks to various states imposing higher sugarcane prices so that farmers will keep growing cane. The price mills in Uttar Pradesh must pay for cane now puts sugar production cost at between INR26 and INR28 per kilo of sugar yet sugar prices are only at INR28. According to analysts, an INR2 loss per kilo on 6 million tonnes of sugar would wipe out the industry entirely.

In Maharashtra, cane prices have also been lifted but cooperative banks in the state who lend out most of the credit lines to mills are bankrupt with little chance of a bailout by the central government, so even though farmers are getting theoretical prices closer to what they have been demanding through riots and protests, there isn’t the liquidity at the mills to pay the farmers.

The government’s continued failure to approve sugar exports has turned a golden opportunity for the industry to finally cash in on high world prices and reinvest in its industry into a disaster that it will have a difficult time digging itself out from under.