Wednesday, August 16, 2017


A broad analysis of the sugar market from 2009 onwards till July 2017 reveals that mega trend of the sugar prices has remained bullish.  
“Retail” sugar prices ascended from Rs 29/kg in 2009 to Rs 32-35/kg in 2014—higher by 20%. In the recent past, sugar climbed up from Rs 31/kg in 2015 to Rs 39/kg in 2016 –an uptick of 24% and then to Rs 43/kg in 2017, another upside of 10 %. (Data -Price Monitoring Cell, Deptt of Consumer Affairs).   Sugar is retailed at Rs50/kg in Srinagar.
 On pan India basis sweetener’s price climbed north by 34% in last two years. This is when international market is down by about 40% in a year –from 22c/lb to 13.50 c/lb (raw values). (See chart). If import is made now, refined sugar will cost Rs 27/kg without any duty. After provisioning for margin of whole sale and retail, imported sugar may not cost more than Rs32/kg to consumer at zero duty.  India is thus exposed to a counter reality where sugar is sold at Rs42-43/kg when Sugar cane cost is Rs230/qtl.( According to CACP net return on sugarcane is highest at 52% on all India basis with crop duration of 12months.)
Press  release issued by GOI on 14th July 2017 states that “The annual rate of inflation, based on monthly “wholesale” price index (WPI), stood at 0.90% (provisional) for the month of June, 2017 (over June,2016) as compared to 2.17% (provisional) for the previous month”. Thus   whole sale inflation in India is less than 1%. But sugar has bucked the trend with WPI as 30% for 2016-17 and 11% for 2017-18. Retail inflation (mentioned above)and wholesale inflation are thus well synchronised!!!
Sensing the current scenario, stocks/shares of sugar mills are well supported. Most of the major mills shares have crossed 50% upside and some others have breached 140% rise in a year (see Chart) , indicating super profits. Mills in UP have done exceptionally well as compared to those in West and South of India. This is good time for the mills to have an in house stabilization fund to act as buffer for adverse market conditions.
In 2009-14, whenever retail values exceeded Rs40/kg, counter measures were initiated to drag down price to Rs 35/kg or so. Recently too Government initiated three step intervention to manage sugar prices –first by authorizing quota of duty free import of 0.5 million tons (mt) between April –June 2017. Second, in early July2017 it hiked import duty from 40% to 50% to keep prices firmer and stable, by preventing cheap imports. This second step is in contradiction to the first step of allowing 0.5mt imports to soften local prices.
Now in August2017, the same Ministry is reportedly contemplating third step of allowing another import tranche of about 0.25-0.3mt (originally thought to be of 0.5 mt). The third step negates the action of raising the duty done in the second step.
 Thus authorities lack clarity on policy—whether prices should remain firm or whether they are to be pulled down. Net result of this flip flop and pull-push policies is that sugar prices are bound to remain in the region of Rs43-45/kg at retail level at major centers Delhi, Mumbai, Kolkata, Chennai, Guwahati  (see chart)
During festive season of Sep-October 2017, demand pressure will ensure that sugar touches a new high. Sugar balance sheet indicates opening stock of 4 mt as on 1st October 2017—which is tight in any case. Had Government desisted from hiking duty to 50% in July 2017, some imports with lower global prices would have landed to keep local values in check.  
Operational procedure for registering imports via DGFT and subsequently ensuring timely shipments is very challenging.  Raw sugar imports from Brazil—if allowed under Advance Licensing Scheme cannot land at Indian ports before October 2017. Refined sugar shipments from Thailand appear to be the only possibility provided total tonnage and conditions of imports including custom duty if any is notified yesterday.
Sugar availability in North-East and South of India is a cause of concern and any shortage on immediate basis has to be made good through UP millers. Next year too, unless imports of 1 mt are made—we may see even higher sugar prices-may be Rs 50/kg, from existing Rs 44/45 pkg in the major Indian cities.
It will be thus expedient to affect more imports immediately to restrain further spike in prices. Sugar prices above Rs 36-37/kg give super profitability to Indian mills. Time has come to protect the consumer and somehow narrow the gap between rate of sugar inflation and general inflation which is less than 1%.

Wednesday, August 9, 2017


Bangladesh is experiencing severe scarcity of rice this year. Government of Bangladesh (GOB) initially determined “import demand” of 1.2 million tons (mt) of rice which later escalated to 1.5mt due to crop losses, caused by heavy floods in the country.  75% requirement of Bangladesh is of parboiled (PB) rice while balance 25% is of white rice (WR).
After 2011, it is the first time in May 2017 that GOB is seeking supplies from Vietnam, Thailand and Cambodia on G to G (government to government) basis by dispatching official delegations and simultaneously issuing import tenders of 50000 mt each.  Five tenders have so far been opened. No serious attempt appears to have been made by GOB with Indian Government to cover their requirements from India on G to G basis. Some shipments of Indian rice- about 1.5 lakh mt - have been made through land/sea routes by private trade. Meanwhile rice prices in Dacca—have risen from 28taka/kg to 45 taka/kg—higher by 61% in last three months. (See chart)
India is, not only, the world’s largest exporter of rice of about 11-12 mt annually (both basmati and non-basmati) it also enjoys supremacy in global PB rice trade which is the major demand component of Bangladesh. Logistically too India is a neighboring country; much closer than Vietnam, Thailand and Cambodia; cargo can reach same day to Bangladesh via land route or less than 3-4 days through sea. India can thus offer prices on delivered (CIF) basis which other bidders may not be able to match for same quality. It seems that GOB has not done serious recce and thus they are contracting rice on customized and elevated prices, rather than market prices, under G to G deal done so far.   
Graphic below indicates that G to G deal with Vietnam (annual rice export 5-6 mt) concluded in May 2017 of 0.2mt for 5% broken PB rice is priced at $470/t CIF which is much higher than the PB rice sourced by GOB against their 1st tender of May 2017 at $427.85 /t CIF— cheaper by about $43/t.  It is well known that Vietnam is an inefficient producer of PB rice of limited scales.
 Likewise 50000 t, 15% brokens WR contracted at $430/t CIF from Vietnam under the official deal is higher by $23/t or $406.48/t CIF. G to G deal is expensive—while tendered supplies are substantially cheaper.  Has Vietnam been able to make deliveries faster than those awarded against tenders is unclear. Five tenders amply reveal that PB rice for Bangladesh ranges around $ 420-$440/t CIF.
GOB also had extensive negotiations with Thai counterparts twice but no conclusion could be arrived at.  According to trade sources, Thais want to do business on FOB basis –that is-- Thai suppliers do not want to undertake obligations of hiring vessels and for being held liable for claims of quality and quantity at discharge port. GOB perhaps cannot deviate from the established procedure of CIF contracting and thus discussions remained inconclusive. Thais too indicated exorbitant values-- even higher than Vietnam.
Another MOU is reportedly signed by GOB with Cambodia (around end July-early August2017) to import one million tons rice within five years. Pricing of rice, if any, is not in public domain.  Long term understanding in commodity trade seldom materializes.  Cambodia’s official export is about 0.5 mt, while balance 0.6mt is cross border unofficial trade with Vietnam and Thailand.  Cambodia is not adept in shipping break bulk cargos and makes shipments through containers. It will be na├»ve to seek 0.2 mt rice in a year from Cambodia on break bulk basis
It is true that while GOB approached GOI in the past (during UPA rule) to augment their supplies through FCI but FCI adopted an inflexible stance of delivering rice on as is where is basis and that too at Indian ports only. This perhaps discouraged GOB from taking any proactive approach for Indian rice under G to G business.  Also FCI’s rice export through PSUs is not feasible as this entails additional operations like re-bagging, printing on bags, cleaning, up- grading (from 15% brokens to 5% for PB rice and to 15% from 25% for WR), transit losses etc. which PSUs cannot undertake. 
The only way a commercial transaction through PSUs can be structured is by having private partnership with rice millers/traders who have demonstrated past performance of undertaking exports in past 3-4 years. The PSU too should have exported rice commercially. GOB should be able to approach through diplomatic channels for such a deal through Indian PSUs.  Market players indicate that some discussions of GOB with Indian PSUs have taken place but then abandoned.
It is also feasible that if private trade from India is willing to match tendered price in the current bidding then such a bidder could also be considered for additional 50000mt or more.
It is not sufficient to have paper contracts or low/high prices but such contracts and prices should be able to translate into physical deliveries of rice for the people of Bangladesh. Rice prices in India are likely to soften in next 60days when new paddy arrives. Estimates of Indian rice production are 108-110mt. GOB may ponder if Indian grain/agencies can meet their requirements as it is doing for 1.25 billion population of this subcontinent and other countries of Asia, Africa, Europe and USA. 



Thursday, August 3, 2017


Three agro-commodities namely— edible oils, sugar and wheat-- are engaging immediate attention of the government with respect to custom/import duties. Reasons-- their prices abroad are much lower than in India. Domestic production of edible oil by oilseed crushing / refining units and sugar by sugar mills will stand to lose if duty free import is permitted or insufficient duty is applied while farmers will suffer if duty free import of wheat is authorized. (Why prices abroad are lower and higher in India, is not the narrative of this article)
Thus government provides stakeholders (including farmers) protection by making imports expensive.  Current duty on crude/refined oil varies 7.5% to 20%; sugar is 50%; wheat import at 10%. “Import demand” for edible oil varies between 65%-70% (see chart) of annual consumption, imported sugar requirement is about 2% of local production this year and wheat import is about 4-6% of domestic output. 
At the same time, government is obliged to shield consumers by discouraging inefficient production and processing.

Edible oil industry has represented that import duty may be increased to 20% on crude oil-  specially crude palm oil(CPO)-(from current 7.5%) and 35% on refined oil ( from current max 20%)  to support crush parity so that local prices of oils may rise while oil meal exports become viable. Prices of palm and soy oil are interlinked or to say the spread between the two has a relationship –that is if CPO values go up domestically or abroad, a definitive upswing takes place in soy oil and others soft oils as well. 
 A chart of declining trend in the local crude palm oil prices in rupees/10kg is show cased, which implies that realization of oil seed farmers could drift down.  Currently oilseeds prices fetch 10-15% below MSP for soybean, rapeseed and ground nut while last year market prices were higher by 20-25% than MSP.
Industry also espouses case of farmers for future growth of oilseed production. However when there is 65%-70% “import dependency” on edible oil, then a very large section of consumers, including farmers, are exposed to oil inflation with elevated duty. Authorities will have to rationalize whether hike in duty will be justified so far as consumers are concerned.
About 2 million tons of oil is transiting either at ports/custom bonding or in the pipeline.  It will be bonanza for those who are positioned for these stocks. But that is how market operates.

Government raised duty on sugar from 40 to 50% on 9th July 2017 to isolate local prices from possibility of cheaper imports. Domestic prices naturally soared. But around third week of July Government has written to industry as to why prices of sugar have flared up!!  When the raison d'etre of hiking duty was to keep local prices firmer, then officialdom needs introspection of their own actions.  Moreover August/September period is tail end of sugar season and prices shall spike anyway. 
Range of the duty varies from 0% to 50% as pictured below. In last 6 years, duty is modified 6 times!!  Incorrigibility/ sensitivity of sugar market is such that, in April 2017 “duty free” import of 0.5 mts of sugar was authorized, but in July2017  duty was enhanced from “40% to 50% to curb imports”.

Accompanying graphic displays flip-flop on wheat duty. In a span of less than three years, duty is notified seven times. It demonstrates predicament of policymakers in deciding quantum of duty and applicability of its duration. Importers of wheat remain nervous of any abrupt change in duty structure.  With rising demand wheat import is likely to be a long term proposition.

Above illustrations indicate that duty determination is a very challenging exercise. Market volatility and pressure groups can create arbitrariness in fixing the percentage of import duty and the duration of applicability.

At a time when PSD(production supply and demand) data, duties/tariffs and price movements are known internationally and nationally, Government may create an algorithmic application (ALGO) that can give transparent guidance-- to Government and the industry-- to trigger duty changes, up or down,—so that objectivity is maintained.

ALGO programming is wide spread in commodity and other stock exchanges.  ALGO can perform calculationsdata processing and automated reasoning tasks including decidability through computers at electronic speed based on input and output requirements. Why not apply ALGO for import/export duties also? Any well-known IT company can come up with computational process—if authorities take a call.

International and domestic prices can be tracked through commodity exchanges while each price tick signifies mutations in supply/demand including weather related issues. Government can predefine its target of high and low prices in domestic market or align them with MSP to regulate imports by duty or prohibition of imports by analyzing overseas prices through speed of ALGO. Each commodity will have well configured ALGO and that will remain in public domain. Inputs and outputs of such an ALGO would be available on real time basis to all and sundry on the website.

Lobbying by association or groups will then be minimal. Even farmers will have satisfaction of rational decision making process.  Though no system may be perfect but algorithmic guidance will have less imperfections.  Of course government may have final word on percentage of duty to be levied but then basis of duty determination/ any deviations thereof or discretions applied to the guidance of ALGO, will be known to one and all.