Sugar imports hurtful for local farmers and factories

Sugar imports hurtful for local farmers and factories

Last Updated: Mon, Oct 15, 2012 19:39 hrs

For smart traders, arbitrage is a commonly used tool for simultaneous buying and selling of shares and commodities, taking advantage of differences in prices in two markets. Countries like India, having radically reformed their global trade practices, particularly by giving free access to foreign products and services to their markets, automatically come within the pale of arbitrageurs. We are now witness to arbitrage play in sugar involving our country. This is because sugar in India commanding a nice premium over the world market is an incentive for traders to import and sell it here. At this point, Indian import duty of 10 per cent is no barrier to sugar of foreign origin travelling to our shores. For the reason that imports are taking place, export interest has ebbed away despite local surplus.

In the past, India, the world’s second largest producer but biggest consumer of sugar, exercised the import option to cover domestic supply shortfall and also to ensure that the new season would open with reasonably comfortable stocks. So we imported 2.4 million tonnes (mt) in 2008-09 when domestic production collapsed to 14.54 mt from the previous season’s nearly 26.4 mt. Again in 2009-10, we imported sugar of a much larger volume of over 4 mt, anticipating another season of setback in output. In a pleasant surprise, however, for both the government and industry, production that year turned out to be close to 19 mt. Unlike those two years when imports helped in overcoming the domestic supply deficit, foreign sugar is now coming in times of plenty. After all, the 2012-13 sugar season, which began this month, opened with stocks of at least 6 mt and production aided by the late spurt in the monsoon supporting growth of sugar cane will be between 24 mt and 24.5 mt.

Therefore, for three years in a row, Indian production will be ahead of consumption. The country’s requirements for the current year are an estimated 22 mt, or at least 2 mt more than production. In fact, the certainty of enough sugar to go by during 2012-13 led Indian Sugar Mills Association (Isma) to say “there might be an opportunity to export some of the surplus.” At the same time, it felt the need to request the government to ensure that imports did not materialise. Incidentally, in an attempt to tackle overflowing stocks, the country exported 3.2 mt of sugar last season. Had not at a later stage of 2011-12, domestic sugar prices started commanding a hefty premium over London sugar futures, our exporters would have signed and executed some more deals. Moreover, there would not have been an occasion for factories to cancel some export contracts. Uncertainty about monsoon behaviour, which has a significant bearing on cane output and speculation about crop loss in the country’s largest sugar producing state Maharashtra was the main reason for sugar prices to climb to a level much improving cash flow of factories.

In support of imports, the argument, which though appears specious to many industry officials, is advanced that in a season when Maharashtra’s sugar cane production could fall close to 60 mt from 78.93 mt in 2011-12, availability of foreign origin raw sugar would allow better local factory capacity utilisation. An argument like that was, however, never heard in the past. Whatever it is, the fact remains that some factories in Maharashtra and Karnataka have signed contracts for import of 450,000 tonnes of raws. India’s advance authorisation scheme (AAS) under grain-to-grain formula allows import of raws at nil duty, provided the white sugar derived on processing is exported in full. No one is going to make an issue if raws imports come through this route. But the present set of importers, instead of shipping out the processed white sugar, want the export obligation redeemed in three years. Are they not thereby trying to take advantage of a loophole that the government unwittingly left in import rules? Whatever that may be, the fact that raws are coming from Brazil and white from Pakistan, to start with 5,000 tonnes and more deals likely to follow, has sent local ex-factory sugar prices down by about Rs 1,800 a tonne.

Since the first set of import contracts, world prices of the sweetener have improved. Most brokers are not, however, sure for how long ICE March raw and LIffe December white will be held at their current levels in view of the world going to have another surplus sugar year. In any case, importers now have the benefit of an appreciated Indian currency vis a vis the US dollar. What could New Delhi possibly do when foreign sugar comes in when the nation has surplus to manage? “The issue is to protect our turf. Against 10 per cent now, sugar earlier would invite customs of 60 per cent. Considering grave implications of imports, the duty should be 30 per cent. The Rangarajan committee has recommended sharing of profit on sugar sales between factories and cane growers. The recommendation is intended to make cane growing for 50 million farmers a rewarding pursuit and the industry a thriving proposition,” says former Isma president OP Dhanuka. But imports could be a devastating experience for farmers and factories.

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