Prices to rise as production falls short
New Delhi: The effects of drought in parts of the country over the past two years are set to impact prices of sugar and confectionary items, with shortfall in sugar production in India causing a demand-supply gap.
A research report by Rabobank has predicted that India would witness major a shortfall in production during this financial year and will have to import sugar, which will push prices upwards.
“India, the world’s second-largest producer of sugar, will witness a fall in production by 3.7 million tonnes due to consecutive droughts in 2014-15 and 2015-16 and will become a net sugar importer in 2016-17,” Rabobank analysts Sudip Sinha and Kelvin Chow said in the report.
Since mid-April, worldwide prices of raw sugar have risen by 30 per cent as the market started factoring in potentially lower global sugar output in this year.
Domestic sugar prices across Asia also reflect the tighter supply situation.
In Mumbai, sugar is retailing at Rs. 41 per kg, and the prices have gone up by Re.1 in the past three months, mostly due to inadequate supplies. As per figures with the Indian Sugar Mills Association, production in the state has dropped in the past year.
“Higher price trend is likely to persist over the next few quarters and will have substantial impact on Asian Food & Beverage (F&B) corporate margins” The report ‘Hurry Cane: Managing Higher Sugar Prices in Asia’ said.
According its estimates, Asia is heading towards its first sugar deficit in over five years, and this is being led by India. “Sugar production in Asia is expected to be significantly lower in the 2016-2017 sugar season, as the 2015 El Niño-induced drought pulled output down to a five-year low. For 2015-16, the forecast is that Asia will witness a deficit of an estimated two million tonnes,” the report said.
While Europe and Brazil could see improved production next year, the world is expected to face a sugar deficit of 5.5 million tonnes in the next sugar season, it said.
While households will have to shell out more to meet their regular demand of sugar, that too in the upcoming festival season, prices of confectionary products and soft drinks may go up if the manufacturers decide to pass on the additional burden to consumers. The production cost of dairy items, mainly condensed milk and ice cream, will also go up, putting pressure on the manufacturers’ profit margins.
The largest sugar consuming sectors are processed food-based products, confectionery and the traditional sweet-making industries, which will bear the brunt. “The twin impact of sustained demand and lower 2015-16 production has pulled Asian sugar inventory to historic lows… sugar prices in the region have increased by 30-50 per cent since 2015,” the report said.
With subdued production expected during this year and sustained growth in demand, prices would remain high until the fourth quarter of 2016. In India, domestic prices have risen over the past 6 months and if users are slow to react, it could mean ballooning costs and a squeeze on profit margins, it said.
