Aug 28 / Alef Dias / Natália Gandolphi

Sugar and Ethanol Weekly Report - 2023 08 28

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"Weather challenges have a pronounced consequence on India's food inflation, which jumped from 4.7% in the previous month to 11.5%. Sugar was one of the products that saw its domestic price rise in recent months, leading the government to consider restrictions on exports."

Risks of an export ban increase in India

  • Over the last few months, India has grappled with numerous weather-related hurdles that have severely impacted various agricultural markets. The most pronounced consequence of these challenges is the significant surge in food inflation, escalating from 4.7% in the preceding month to 10.6%.

  • Local sugar prices haven’t escaped this dynamic. Monsoon rainfall in vital cane-producing areas such as Maharashtra and Karnataka, responsible for over half of India's sugar output, fell below average by up to 50%. India's sugar production might decrease by 3.3% to 31.7 million tonnes in 2023/24 according to ISMA.

  • Consequently, rumors of a ban on India’s sugar exports are increasing. The government aims to ensure adequate sugar availability for consumption, ethanol production, and maintain a 6 million tonne closing stock.

India has been facing a myriad of weather challenges in the past few months which have disrupted agricultural markets, given the country’s standing as producer and exporter. The greatest symptom of these challenges is the food inflation, that climbed to 10.6% from 4.7% the month prior, led especially by a 214% month-on-month jump in vegetable prices, but with consequences to many other products – including sugar.

Consequently, headline inflation also accelerated. India’s CPI jumped to 7.4% year on year from 4.9% in June, a second straight month of gains – breaching the upper end of India’s Reserve Bank 2%-6% target range in July for the first time in five months — and by a wide margin.

Image 1: Headline and Food CPI – India (YoY,%)

Source: Refinitiv

In addition to the high food inflation, weather hasn’t been great for the sugar crop in India so far. With elections coming in 2024, India’s authorities are taking measures to control food inflation – and sugar hasn’t escaped this reality.

India may ban sugar exports for the first time in 7 years

According to three government insiders, India may prohibit sugar mills from exporting in the upcoming season from October onwards. This will mark the first halt in shipments in seven years, and it is due to diminished cane yields from the insufficient rainfall seen so far.

In response to the reverb created by this announcement, India amended its stance, and will determine its 2023/24 sugar exports based on forthcoming estimates of sugar cane production.

Image 2: NOAA Drought Monitoring Index (Aug 15 to Aug 20)

Source: USDA

The government's focus is on ensuring ample sugar availability for consumption, ethanol production, and maintaining a 6 million tonne closing stock for the season. Last season, India permitted mills to export only 6.1 million tonnes of sugar, a significant reduction from the record 11.1 million tonnes the previous year.

Stringent measures are being taken to prevent uncontrolled exports and guarantee domestic supply.

Rainfall during the monsoon season in key cane-producing regions like Maharashtra in the west and Karnataka in the south, responsible for over 50% of India's sugar production, has fallen notably short this year, up to 50% below the average levels.

Local sugar prices surged this week to the highest level in 2 years, due to the extreme drought conditions reported in the country.

Image 3: India’s Raw Exports (‘000 MT)

Source: USDA

Image 4: Sugar Prices Mumbai – India (INR/qtl)

Source: Bloomberg

In Summary

India's recent weather challenges have disrupted agricultural markets, leading to significant food inflation of 10.6%. This surge has also pushed headline inflation to 7.4%, breaching the Reserve Bank's target range. Amidst this, sugar crop conditions have been poor due to below-average precipitation in key cane-producing regions.

Concerns about domestic supply may lead India to halt sugar exports for the first time since the 15/16 and 16/17 crops – providing another important bullish fundamental for sugar prices.

Weekly Report — Sugar

Written by Alef Dias
alef.dias@hedgepointglobal.com
Written by Natália Gandolphi
natalia.gandolphi@hedgepointglobal.com
Reviewed by Lívea Coda
livea.coda@hedgepointglobal.com
www.hedgepointglobal.com

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