The Hindu Business Line : What higher sugar release portends

THE Government is probably trying to kill two birds with one stone; and it may succeed. The latest decision relating to sugar free-sale quota appears to be intended to meet more than one objective. There has been concern in recent weeks over rise in prices of sugar and rise in sales by mills armed with court orders.

Now, in an attempt to control the rising trend in open market sugar prices and possibly to discourage mills from going to the court, the Government has hiked the open market free-sale quota for the April-June quarter to 45 lakh tonnes, up over 70 per cent from the 26 l.t. released for the same quarter last year.

Such a large release is expected to dampen the market sentiment which has been turning bullish in the wake of imminent decline in sugar production this year. Estimates of sugar production for the year vary from a low of 155 l.t. to a high of 170 l.t. It is unclear at this point of time what the actual number would turn out to be.

Some officials at the Centre had expressed concern over rising sugar and edible oil prices in recent weeks, while the industry and trade has begun to look at import as a distinct possibility. Will the higher release dampen sentiment? Apprehensions of a crash in prices following release of the expanded quota may turn out to be misplaced. This is primarily because demand for sugar is now being driven by higher incomes especially in rural areas resulting from a significant rebound in farm output. With higher income comes the propensity to consume more, especially of essential food products of daily use.

Higher quota would also exert some discouraging influence on sugar mills, many of which had been liquidating stocks by obtaining court orders. Indeed, many believe, but for such releases, open market sugar prices would have risen even further.

Mills intending to seek court orders for liquidating excess stocks will now have to take into view the capacity of the market to absorb additional quantities. Talks of imminent import of raw sugar are already doing the rounds in the market. If such imports do materialise, prices could come under some pressure. Consumers would of course be the beneficiaries.

In recent weeks, speculators have been having a field day building inventory in anticipation of further price spikes. They could be in for some disappointment if the aforesaid factors combined to exert a downward influence on the market.

The July-September quarter is expected to witness a quantum jump in sugar consumption because of the series of festivals during those months. It would be advisable to let the mills liquidate as much stocks as possible before the beginning of the next season so that the overall inventory of the industry is brought down to manageable levels. That would create conditions appropriate for total decontrol of the industry.