Sugar price drops as India agrees export subsidy

(Agrimoney) – Sugar futures extended losses, retreating towards contract lows, after India approved bowed to pressure from its cash-strapped mills and agreed an export subsidy for the sweetener.

Raw sugar for May stood 2.6% lower at 14.62 cents a pound in late deals in New York, 0.25 cents from matching the contract low set earlier this month.

The decline was attributed in part to reduced concerns over dryness in Brazil, with excess rain now becoming an issue in some parts of the key Centre South region.

“Ironically, the banks of the Tiete river in Sao Paulo overflowed over the weekend causing some evacuations and damage to dwellings alongside it,” said Nick Penney, senior trader at commodities trading house Sucden Financial.

“This at a time when water rationing is being considered due to critically low reservoir levels.”

Huge arrears

However, investors also flagged reports that India had passed long-awaited decision to reintroduce a subsidy on raw sugar exports, this time pegged at 4,000 rupees ($64) a tonne, compared with 3,371 rupees a tonne when the previous perk lapsed in September.

While the introduction last year of an export subsidy attracted criticism of India at the World Trade Organization, the government has come under extreme pressure from the country’s sugar mills to agree a deal.

A fall in sugar prices to their lowest in some three years has, when mills face paying state controlled cane prices, mean processors “are finding it difficult to generate funds for making payments to cane growers”, besides to “meet their day-to-day financial requirements like payment of wages”, the Indian Sugar Mills Association said.

Cane payment arrears stood at 123bn rupees ($2.0bn) as of mid-month, and could top the record 130bn rupees by the end of the month, ISMA said.

‘Hardly any time’

Meanwhile, time is running out for the export subsidy to work, the association said, with raw sugar production by the industry, which typically produces white sugar, only 64,000 tonnes so far this season, compared with 793,000 tonnes a year ago.

Only about 1-1.5 months “are left in the current season” for producing raw sugar, ISMA said, noting that mills had already produced some 16.7m tonnes of (mainly white) sugar, out of a forecast 26.0m tonnes for 2014-15.

“Mills will produce raw sugar only after export contracts are finalised.  Therefore, there is hardly any time,” the association said.