Trade with Commodities: Sweeten your returns with sugar The prices may remain firm in the short term due to the high demand and a likely drop in next year’s output.

Sugar is the only food item that is extracted from two different plants, sugarcane and sugar beet, and is among the most important agro-based industries in the world. Sugarcane and sugar beet grow in very diverse climatic regions and account for nearly 80% and 20% of the world's sugar supply, respectively. Sugarcane has been witnessing a metamorphosis, from that of a sweetener to an alternate fuel, which has changed the structure of the sugar sector.
    India is the second largest producer of sugar in the world and the domestic sugar industry is one of the largest agro-based industries, after cotton textiles. It is a highly regulated industry, wherein the entire value chain, from the price of sugarcane to the distribution of sugar and the use of its byproducts, is under the regulatory purview. Besides being the chief raw material for the sugar industry, sugarcane is also used extensively in two cottage industries—gurand khandsari—which account for over 30% of sugarcane usage.
    Sugar production is centred on a few countries, mainly Brazil, which accounts for over 22% of global production, followed by India (15%), EU (10%), and China (8%). While global sugar production and consumption have increased considerably since the 1990s, the rise in production has been intermittent due to the cyclical nature of the sugar producing crops, which has a large bearing on global sugar prices. In 2011-12, the global sugar production was 172.12 million tonne and the consumption was 167.7 million tonne, a surplus for the second consecutive year.
    The average annual ICE (IntercontinentalExchange) sugar prices were only 9.9 cent per pound in 2007 due to the global supply glut. However, a significant price increase was witnessed from 2007 to 2010 due to a lower output in 2008-10, coupled with a rising conversion of sugarcane to ethanol in Brazil. In 2011-12, there was again a sugar surplus of about 5.5 million tonne on account of higher global output, except in Brazil, which saw a 20% drop in output. This has led to a drop in the monthly average Liffe (London International Financial Futures and Options Exchange) prices in the current year from $799 per tonne in July 2011 to $566 per tonne in May 2012.
    Though India is among the largest producers of sugarcane, the yield and the sugar recovery rate is 46 tonne per hectare and 10.2%, respectively, which is much lower than the world average. Indian sugar production has grown at a CAGR of 2.4% over the past 12 years and was around 26 million tonne in 2011-12. However, it has been characterised by fluctuations of surplus and shortages due to the cyclical nature of production.
    The domestic consumption has increased from 16.2 million tonne in 2000-1 to over 22 million tonne in 2011-12. Due to the consistent rise in demand and fluctuations in production, India's sugar status as a net importer/exporter changes frequently.
    Currently, the domestic as well as global sugar markets have huge sugar inventories, which has led to a decline in prices. However, due to concerns over Brazilian sugar output, along with a higher demand in June and July ahead of Ramzan, the global sugar prices are expected to remain firm in the short term. However, sharp gains may be capped due to sufficient supplies. In the domestic market, the stocks are sufficient to meet domestic and export demand, but the downside in prices will be restricted. This is because the next year's crop is expected to fall due to a drop in output in Maharashtra and Karnataka. If the monsoon continues to remain below normal, it will have a significant impact on the cane crop output for 2012-13 and may support the upside in prices.
Tips for first-time investors
Sugar production follows a cyclical pattern, where 2-3 years of high production is followed by 2-3 years of lower produce. So, keep an eye on the cycle. The weather conditions in the major sugar producing nations affect the yield and recovery rate of sugar from cane and, thus, impact the output and prices. Also, the sugar industry in India is highly regulated and, hence, the monthly release mechanism, changes in trade policies, and declaration of the fair remunerative price of cane has a large impact on sugar prices.
Trading strategies (1-2 months)
The NCDEX August sugar prices are currently trading at about 2,955 per quintal and are expected to trade at 2,900-3,020 per quintal in the medium term.