Sugar futures ban lifted on upbeat outlook

THE commodity market regulator has allowed the ban on sugar futures to lapse, paving the way for trading, an important step towards lifting all government controls over the industry.
    "We have allowed to lapse the ban on sugar futures trading today," BC Khatua, chairman of Forward Markets Commission (FMC), said on Thursday.
    A decision on launching new contracts will be taken in 2-3 days in consultation with the sugar industry and commodity exchanges, he said. Shares of sugar companies rallied after the decision.
    The launch of new contracts, when it happens, will be a resounding validation of the growing belief that futures trading is not the prime mover of sugar prices. Retail sugar prices had shot up to a record 50/kg in January this year due to very tight production (14.5mt) in 2009-10 when the futures trading ban was in place. Currently, the prices are around 30-32/ kg, close to 40% drop. India is the largest consumer of sugar. Trading in sugar futures was banned for six months in May 2009 to rein in soaring prices. Later, the ban was extended till September-end.
    "Futures trading in a commodity is a mechanism for price discovery and price risk management and not a mechanism to control the prices nor is it responsible for price rise in any commodity," the government had admitted in Parliament in reply to a question on sugar futures. However, lack of clarity on sugar production caused the delay in lifting the ban.
    Leading commodity exchanges such as Multi Commodity Exchange and National Commodity Derivatives Exchange, where sugar futures are largely traded, said they were ready with new contracts and are awaiting FMC approval. "Against the backdrop of projections of bumper sugar production this year, there would be no other option than to allow hedging," Indian Sugar Mills Association (ISMA) director general Avinash Verma.
    The mood among the players is far from one of joy. "This is step towards decontrol of the sector. But the full potential of futures trading in sugar can only be achieved once sugar price is market determined and all government controls are removed," said Ajit Shriram, director, sugar at DSCL.
    The government is yet to dismantle two key speedbreakers to optimum price discovery on futures trading platform. The monthly sugar release system, which continues to remain, is the most powerful weapon for intervention in the market in the event of unusually high sugar prices and relaxation of stock holding strictures on traders.
    The Centre can even increase sugar releases mid-month with a view to checking perceived a price rise, curtailing the efficient functioning of the futures market. The FMC decision comes amid forecast of record sugar production in 2010-11 (24mt-25mt) by both the industry and the government. In addition to a carryover of around 5mt of sugar, the availability would be 30mt compared to a home consumption of only 23mt. This has resulted in apprehensions that unless hedging is allowed, the bottomline of sugar mills will plummet in tandem with plunging sugar prices.

Round I of ethanol battle goes to Maha sugar lobby

IT WAS a big win, at least for now, for the powerful Maharashtra sugar lobby when the three ministers from the state on the ethanol GoM clinched the contentious price of Rs 27/litre for ethanol at the CCEA on Monday. Under intense lobbying from ministers Vilasrao Deshmukh, Murli Deora and Sharad Pawar, the price of ethanol, although only an interim one at present, was pegged at the CCEA at the same level endorsed twice by the GoM.
    Pressure from the Maharashtra lobby had pushed the issue for endorsement by the CCEA earlier too, moving it out of the purview of the GoM on ethanol. However, strong opposition from DMK leader and Chemicals minister MK Alagiri who has been batting for the chemicals and potable alcohol industry, demanding a "fair" long term price for ethanol forced the ethanol pricing issue back to the GoM.
    Tamil Nadu is among the three states in the country (including Maharashtra) that earn substantially from excise duties on potable alcohol. The DMK leader argued that the GoM was set up not to decide on the price of ethanol but to reconcile differences between the many stakeholder ministries on the issue of price.
    But while the battle may have been convincingly won, the war on ethanol pricing and availability for consumers other than the Ethanol Blending Programme (EBP) may still hot up even as the expert panel under Planning Commission member Saumitra Chaudhuri comes up with a long term "fair" price for the commodity.
    The expert panel was vested with the brief to come up with a long term price at the behest of the minister from DMK, an old ally of Congress. Although the Monday's price is only an interim one, the Maharashtra lobby views this as pre-emptively suggesting a level of long term price to the expert panel, .
    Mr Alagiri also forced the GoM to be reconstituted to include non conventional energy member Farooq Abdullah in order to give the ministerial panel a semblance of balance, but failed in this objective since Mr Abdullah was pre-occupied with the issue of trouble in his homestate.
    Worse for the chemicals minister from Tamil Nadu, finance minister Pranab Mukherjee, who heads the committee, preferred to throw his weight behind the powerful Maharashtra clique, contending at the GoM that the chemical and potable alcohol industry import ethanol for its use if it fell short on account of supply to the ambitious Ethanol Blending Programme.
    Interestingly, Mukherjee is seen by the ruling DMK leadership in Tamil Nadu as being pro-Jayalalithaa. TN is one among three states in the country that earn the highest excise duty from alcohol supplied by the sugar industry. As expected, the decision boosted sugar stocks for all key players including Bajaj Hindusthan, Balrampur Chini and others instantly. Sugar mills, central to Mr Pawar's constituency, were expected to be biggest, if not sole, beneficiaries.