Summer is here, and so is our craving for fizzy drinks and ice creams. But with sugar prices likely to go up, we could be shelling out more to stay cool this summer.

The international market has witnessed a recent surge in sugar prices. One of the key factors is the likelihood that India wouldn’t allow additional exports. And India’s expected pause is mainly due to a fall in the production of sugarcane due to untimely rains and moves towards fulfilling its carbon-reduction commitments i.e. the ethanol-blending programme.

With the likelihood of extreme heat waves this summer, demand for sugar will go up, especially when supply is limited due to a fall in production.

Sugar prices have increased 4.5% in a week in Kolhapur, the sugar bowl of Maharashtra, from Rs 33 per kilogramme to Rs 34.5/kg ex-mill. “The seasonal increase in demand coupled with lower production figures is the reason for increase in sugar prices,” Abhijit Ghorpade, a sugar trader in Maharashtra, had told ET.

Brokerage JM Financial said that sugar prices had gone up in the past few days, but an exceptional rally was unlikely. “Given reduced exportable surplus from India, global (raw/refined) sugar prices have rallied 11% in the past 10 days. Domestic prices, too, have risen about 7-8% in the past 10 days and we believe another 5-7% price rise is likely over the next four-six months. However, we think an exceptional rally is unlikely given the government’s direct/indirect controls on the sugar sector,” JM Financial said a week ago.

The factors that affect sugar prices

A host of factors such as weather, supply and demand, push for ethanol, competition from other sweeteners, health concerns and consumer preferences, affects the price of sugar.About 70% of the sugar in India is manufactured using sugarcane, according to Indian Sugar Mills Association (ISMA). Being a water-guzzling crop, sugarcane poses a serious threat. On an average, 1kg of sugar requires about 1,500–2,000 kg of water, according to a NITI Aayog estimates. Pressure on water due to sugarcane cultivation in states such as Maharashtra has become a serious concern. Heatwaves, untimely rains and depleting water level directly affect the sugarcane production leading to disruption in demand and supply cycle.

Due to the rising number of diabetic people, there has been a shift towards other options like stevia. But this other option is still at a nascent stage.

As per a NITI Aayog report, 35% of sugar is used in household consumption and 65% goes for industrial uses, including beverages and food manufacturing. So, any fluctuation in prices will hit the kitchens as well as contribute to the rise in prices of various FMCG goods.

A fall in sugar production?

Various research agencies have forecasted a fall in sugar production this season. According to the Industry body National Federation of Co-operative Sugar Factories (NFCSF), India’s year-on-year sugar production is expected to fall by 10% in 2022-23. It has pegged sugar production at 325 lakh tonne against 359.25 lakh tonne in the previous year.

In the first six months of 2022-23, sugar production fell 3 per cent to 299.6 lakh tonnes. Earlier, the output stood at 309.9 lakh tonne in the corresponding period of the previous year, as per industry body ISMA, which projected production for 2022-23 to 340 lakh tonnes against 358 lakh tonnes in the 2021-22 marketing year.

Maharashtra, which accounts for more than one-third of India’s sugar production, witnessed a fall to 104.2 lakh tonne from 118.8 lakh tonne, with output in Karnataka also declining to 55.2 lakh tonne from 57.2 lakh tonne. In the state, the picture appears grim as it could churn out nearly 16% less sugar than previously estimated as mills are closing early due to limited availability of sugar cane, said a Reuters report. In 2021-22, Maharashtra sugar mills were operational until mid-June, but this year, out of 210 sugar mills that started operations, 155 mills had stopped crushing as of March 26, the report said.

Domestic price rise

The domestic market for sugar has seen a recent increase in prices, especially in Uttar Pradesh, reported Centrum Institutional Research. It expected a further rise in sugar prices. “We anticipate further increases (in prices) in the coming months as demand for sugar is expected to surge during the summer season,” Centrum said in a recent research note.

The industry is also expecting a price rise in the coming months. “Soft drinks and ice cream manufacturers’ are expected to consume more sugar this year as we are expecting a severe summer,” said Prakash Naiknavare, Managing Director, NFCSF, in a release.

India’s carbon commitments

India normally produces a surplus of sugar. According to government data, in a normal sugar season, the production of sugar is around 320-360 lakh metric tonne (LMT) whereas domestic consumption stands at around 260 LMT which used to result in a huge carry-over stock of sugar with mills.

In order to solve this surplus problem, India is encouraging sugar mills to divert excess sugarcane to ethanol. India has a fixed target of 20% blending of fuel-grade ethanol with petrol by 2025. In sugar seasons 2018-19, 2019-20, 2020- 21& 2021-22 about 3.37, 9.26, 22 & 36 LMT of sugar respectively have been diverted to ethanol, said the official data. In the current sugar season 2022-23, about 45-50 LMT of excess sugar is targeted to be diverted to ethanol.

By 2025, it is targeted to divert 60 LMT of excess sugar to ethanol, which would solve the problem of high inventories of sugar, and improve the liquidity of mills, thereby helping in the timely payment of cane dues of farmers.

As per the official data, in the past three ethanol supply years, the revenue of about Rs. 48,573 crore has been realized by sugar mills from the sale of ethanol to oil marketing companies.

As part of its carbon-reduction commitments, India has launched the ethanol-blended-petrol (EBP) programme to mix this biofuel with petrol to reduce the consumption of fossil fuel. Earlier, the government announced the achievement of E10 target, that is, the petrol used in the country had to have 10% ethanol in it. The country saved as much as Rs 53,894 crore in forex from 10 per cent blending besides it benefiting the farmers.

India is likely to take a call on the additional exports of sugar and this is what will tell whether there will be any upswing in the prices in the upcoming summer season.

Pause on additional exports

India, the world’s second-largest sugar-producing country after Brazil, is unlikely to permit additional sugar exports this year. The food ministry has allowed 6 million tonnes (60 LMT) of sugar exports for the current 2022-23 marketing year (October-September). Out of which, about 4 million tonnes (40 LMT) have been exported so far, as per the trade report. India exported a record 11 million tonnes (110 LMT) of sugar in the previous year. Now, the sugar industry is expecting the government to allow additional exports of around 2 million tonnes (20 LMT) in a second tranche.

It is after 2004-05 that global prices soared over domestic rates. Maharashtra mill operators and experts told TOI that the sugar prices in the global market had touched Rs 45 per kg, while it is selling at Rs 34-36 per kg in the domestic markets. But no sugar mill in the country has any export quota left. Several mill operators told TOI that they were unable to cash in on the rising prices of sugar in international markets as they have exhausted the first quota. They said they were assured of a fresh export quota but it has not materialised yet. They feel that fresh exports are allowed, they will be in a better position to pay off the loans.