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Date Submitted: 08/25/2010 10:25 AM

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Sugar in 2009:

Since the start of 2009, sugar prices have almost doubled. The price spike is mainly explained by unfavorable weather—too little rain in India and too much in Brazil. India’s sugar production fell by almost half last year, turning the country from the second-biggest producer to the biggest importer. Combination of lower area under sugarcane cultivation (decline of 13%), lower sugarcane production yields due to scanty rainfall (decline of 12%), lower recovery of sugar from sugarcane by millers and higher diversion of sugarcane (more than 50%) to alternate sweetener manufactures like Jaggery and Brown Sugar resulted in a steep fall in sugar production in India. In order to make matters worse, credit crunch put lot of Brazilian sugar producers in trouble. Also, lot of sugar companies in Brazil were setup to only produce ethanol and therefore could not pick up the slack left by busted sugar millers.


Reasons to not put on sugar trade:

The global sugar inventory balance is set to be the tightest in the last two decades. Sugar prices are already at their peak levels. It never pays to underestimate the power of high prices to cure high prices. Higher prices attract more farmers to plant the cane and supply catches up with the demand eventually. Some of the problems in Brazil stem from inability of millers to add more sugar milling capacity due to credit crunch. That situation is changing as credit market continues to improve and millers get financing to expand their capacity. I would also not like to bet on the repeat of poor weather conditions next year as well. It is also important to keep in mind that sugarcane is a hardy crop which can sustain harsh weather conditions. Sugar millers story in India does not give me any comfort level. Sugar industry is highly cyclical and capital intensive industry with heavy government intervention. Sugarcane price, which is the raw material for the industry has no linkage to the price of the end product i.e. sugar....

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