Oil price crash impacts sugar (Indian Express)

Mains Paper 3:Economy 
Prelims level: Sugar Prices 
Mains level: Oil prices implications on Sugar 

Context:

• The prices of raw sugar for May 2020 delivery at New York crashed to 9.75 cents per pound, the lowest closing for a nearest-month futures contract since June 2008.

Why have global sugar prices collapsed?

• All commodities have taken a demand hit from subdued economic activity and lockdowns imposed to combat the COVID-19 pandemic.
• But sugar is one commodity that, until quite recently, was on growth phase.
• One reason for the collapse now is the closure of restaurants, weddings and other social functions not taking place.
• People are also avoiding ice-creams and sweetened cold beverages that might cause throat infections.

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Have oil prices played a role?

• The juice from crushing sugarcane can be crystallised into sugar or fermented into alcohol.
• When oil prices are high, mills (especially in Brazil) tend to divert cane for making ethanol (alcohol of 99%-plus purity) to be blended with petrol.
• In 2019-20 (April-March), only 34.32% of cane crushed by Brazilian mills went for manufacturing 26.73 mt of sugar.
• The rest was used to produce 31.62 billion litres of ethanol.
• But with oil prices falling, mills will not find it attractive to divert cane for ethanol.
• Brazil’s mills are thus seen to produce up to 36 mt of sugar and hardly 26 billion litres of ethanol this year.

Will this affect India?

• Before COVID-19 happened, the Indian industry was expecting to export 5.5-6 mt of raw sugar in 2019-20.
• Mills had already entered into contracts of some 3.8 mt, out of which 3.05 mt have been shipped out so far.
• The sugar industry’s woes from excess stocks are thus slow to happen aided by both exports and lower production.
• However, dip in sugar consumption, together with higher Brazilian output, is unfavourable for both Indian sugar mills and cane farmers.
• Nevertheless, in Indonesia, there is an increased import requirement.
• Also, it decided recently to slash the duty on Indian raw sugar from 15% to 5%.
• Indonesian refiners are projected to import 3.3 mt of raw sugar this year, up from 2.6 mt in 2019.
• They buy mostly from Thailand but Thailand is experiencing a bad drought which could lead to its production falling.
• This offers an opportunity for India.

What is the situation with respect to cane farmers?

• Decreasing exports and falling domestic use of sugar by institutional consumers has significantly undermined the mills' ability to make cane payments.
• E.g. Uttar Pradesh’s factories have till now crushed cane worth roughly Rs 32,000 crore in the 2019-20 season.
• But they have managed to pay only around Rs 16,400 crore.
• The state government recently announced a scheme of mills giving “willing farmers” one quintal each of sugar for the next 3 months, instead of payments due.
• Moreover, the industry’s problem is not from sugar alone.
• The lockdown has reduced off-take of alcohol, be it potable liquor or ethanol for blending with petrol.
• With cars and two-wheelers not running, oil market companies are not very keen to procure ethanol.

Other implications of oil price fall:

• The oil price crash has affected other agri-commodities as well.
• Prices of corn, which is also used for making ethanol, fell to their lowest since 2009 at Chicago.
• Likewise, palm oil, again a feedstock for bio-diesel, ended 7.5% lower at the Bursa Malaysia futures exchange.
• Corn prices can, in turn, drag down other cereals, just as palm oil could do to soyabean and other oilseeds.
• All these are ultimately linked to oil, whose prices matter as much to farmers as petroleum companies.

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Prelims Questions:

Q.1)With reference to the Bank Sakhis, consider the following statements:
1. Bank Sakhis are Self-Help Groups (SHGs) women working as Business Correspondents for banks.
2. As a part of the Rural Financial Institutions Programme (RFIP), National Bank for Agriculture and Rural Development (NABARD) and GIZ initiated this project in 2012 to overcome a major challenge in ensuring financial inclusion of rural low-income households.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer.................

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Mains Questions:
Q.1) How oil price crash impacts sugar? What it means for India?