Editorial – 12th August 2016
Just make it stop!
By Meghan Sapp
India is trying to tame its sugar prices
by potentially ending sugar futures
trading.
There’s an old joke about a patient who goes
to the doctor and explains that every time he
hits himself on the head, it hurts. So the
doctor looks at him strangely and says, “Then
stop hitting yourself.”
Apparently that is the prescription the Indian
government wants to prescribe to ease rising
sugar prices: to ban sugar futures trading.
For some, that may sound like an easy fix to a
problem but for others it whiffs of
government interference in markets and a
hindrance for the sugar industry in its
attempts at price discovery. The country is
feeling the global deficit at home, thanks to
Maharashtra losing 40% of its production due
to on-going drought and there’s likelihood
that imports aren’t too far off in the distant
future.
Prices are rising quickly, with Mumbai retail
prices up 48% on the year while Delhi prices
are up 45% on the year so it’s no wonder the
government is looking for ways to keep the
masses from stirring up into a riot over high
sugar prices.
Looking at the global market, sugar futures
are indeed higher and the bull run is expected
to keep going until the deficit swings back
into a surplus but prices, currently hovering
around 20 cents per pound, are heading in the
direction of the 50 cents or more per kilo
found in Indian retail markets. There is little
place for the government to hide: sugar prices
are going to continue rising with NCDEX
sugar futures trading or without it.
© Sugaronline, 2016 www.sugaronline.com
The biggest concern is the direct impact that
sugar futures have on ex-mill prices, as
futures trading are intended to be a price
discovery mechanism. The challenge
therefore is the lack of liquidity in the market
where price shifts can happen very quickly
without really indicating a shortage in the
national sugar market or the need for prices to
jump or slide at a moment’s notice. And
that’s exactly why the government wants to
nip the problem in the bud. They’ve done it
before with garbanzos, another major staple
whose futures were suspended last month
after raising trading margins 75% failed to
dissuade speculators.
Because this is India, there’s always a little
twist that makes one smirk. In this case, it’s
the fact that district administration officials
sold sugar confiscated from mills for failure
to pay farmer dues using the NCDEX, getting
much higher prices than they would in local
markets. With those funds, they were about to
pay farmers dues directly much faster than
otherwise, making everyone happy. Except
those who then had to pay higher prices at the
millgate, perhaps.
But rather than halting sugar trading as the
government proposes, why not look at the
underlying problem that is the lack of
liquidity? Why is there so little volume being
traded on the market in the first place? Could
the contract terms use adjusting? As a top
sugar consumer and producer globally, it
makes sense that it should have a functioning
sugar futures contract that would have the
liquidity required to ensure proper price
discovery. Getting NCDEX to get a contract
in place that promotes and encourages use of
the contract should and could be in
everyone’s interest.
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