London/New Delhi: Uncertainty over progress of the delayed monsoon is complicating India`s sugar policy, raising the risk it will halt sugar export subsidies in a move that would buoy world prices.
A poor monsoon season cuts exports, stokes food inflation and leads to lower demand for industries ranging from automobiles to consumer goods, while even a slow start can delay exports of some crops and increase the need for imports.
The government will prefer to see the impact of monsoon rains before extending current incentives for raw sugar exports.
Removing the incentives would be bullish for international prices because exports from India would drop.
"If the monsoon is bad, the government won`t want to see exports and will want to keep sugar in the country," said Robin Shaw, sugar analyst with London-based broker Marex Spectron.
"If the monsoon is okay, the government will not feel the need to prevent exports."
Analysts and dealers noted, however, that much of Indian sugar production was irrigated, and that although monsoon rains were below average, reservoir levels were adequate for now.
Weak rainfall in India since the start last month of the monsoon season has raised concerns of a first drought in five years, although weather experts are hopeful rains will revive in the next week.
"In my opinion the government will wait to see how monsoon rains pan out and how it impacts the cane crop before extending incentives for raw sugar production for exports," said Mukesh Kuvadia, secretary general of the Bombay Sugar Merchants Association.
"It does not make sense to prop up exports and then import."
Current domestic sugar prices are lower than global prices, making imports unattractive. Raw sugar exports are not taking place as mills have already sold most of their raw sugar stocks.
"On both the import and the export front, it`s status quo, so there will not be a major impact even if the government issues an official order to increase the import tax to 40 percent from the current 15 percent," Kuvadia said, referring to a recent announcement to raise the duty.
"In a way, everything hinges on this year`s monsoon rains."
According to the latest shipping data from Williams this month, Brazilian raw sugar is flowing briskly to India, before implementation of the planned sugar import duty increase.
Analysts said the bulk raw sugar lined up at Brazil`s main sugar port Santos, bound for Kandla port in western India, will be for refining, presumably by Shree Renuka Sugars Ltd , and re-exported from India.
Refining and re-export activity, or tolling, is exempt from the import duty.
An Indian press report has referred to moves by Indian authorities to wind up raw sugar export incentives in September, a year earlier than expected.
Traders said it did not make sense to prop up exports in the 2014/15 season, then trawl the global market the following year.
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Large-scale exports early next season could lead to shortages the following year because of patchy monsoon rains, Dharmender Bhayana, partner at Sugrain Trading LP, a Delhi-based trader, said.
"If a drought ravages the cane fields, sugar production will drop in the 2014/15 and 2015/16 seasons. The current year began with a large surplus or carryover stocks from the previous year, but we are going to see the drawdown now."
Sugar stocks at the start of the current season were 8.8 million tonnes, up from 6.1 million tonnes in the previous year.
Trade officials say stocks are expected to fall by a million tonnes by Oct. 1, 2014, sufficient for nearly 3-1/2 months of consumption.
The announcement to raise the import duty was an attempt by the authorities to help cash-strapped mills in India to reduce their huge payment arrears to cane farmers.
Weak world sugar prices, due to years of surpluses, have eroded mills` revenues, while Indian cane farmers receive protected prices.
Increased export sales by mills, aided by the incentives, would also boost mills` revenues to help them clear some of their USD 1.84 billion arrears.
"We are going to see some jump in (domestic) sugar prices and it is going to improve mills` financial condition, necessary to clear huge cane dues," Bhayana said.
"It is in the interest of all stakeholders – mills, farmers and the government - to let sugar go up slightly, as prices have been depressed for a very long time."
