The craving of Indians for sugar drove up spot prices last week, but the

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scenario is likely to change after August on fears that the government would release more of the commodity in the domestic market.

Spot sugar prices rose by Rs 100-120 a quintal in the week up to July 18. On Friday, M-30 prices increased to Rs 1,670-1,700 versus Rs 1,535-1,625 a week ago. Globally, raw sugar prices have risen 26 per cent this year fuelled by crude oil prices that bolstered demand for biofuel, including ethanol, which is made from sugarcane.

“We can expect prices to touch up to Rs 1,800 a quintal. However, this trend will continue only till mid-August. After that, we are anticipating a drop in prices due to factors like excess supply in the market,” said a senior official from the Indian Sugar Mills Association (ISMA).

ISMA officials said the government could allow sugar companies to offload their entire produce in the open market from the new crushing season, which starts on October 1.

For the July-September period, the government decided to release three million tonnes (mt) of free sale quota in the open market against 3.6 mt in the same period last year. The quota was fixed at 1.2 mt. Experts also expect panic selling of the commodity in late-September as the government is set to decontrol the sugar industry effective October 1.

“Given such circumstances, sugar prices will certainly not get back to the levels that they are trading right now, even though farmers are happy with the current prices,” an industry participant said. Prices in the current range might be an incentive to make sugar farmers continue cultivating cane. Over the last year or so, cane farmers have started shifting production to other cash-rich crops, like oilseeds, rice and corn.

Going forward, there might be tightness on the supply side, though the country is comfortably placed with regard to sugar supply this year (October 2007-08).

On July 17, the National Federation of Cooperative Sugar Factories had cautioned that the country’s production will be weak in the coming crop year. It estimates an output of only 20 mt. This is lower than the statistics given by the International Sugar Organisation, which projected a decline in the country's sugar harvest to 22 mt.

However, with the monsoon eluding major sugar producers — Maharashtra, Tamil Nadu, Andhra Pradesh and Karnataka — the output is likely to be around 21 mt, according to the ISMA official. This will bring the total available sugar for 2008-09 to about 29.5-30.5 mt taking into account an estimated carry-forward stock of nearly 8-9.5 mt. If internal consumption stays at 22.5 mt and exports around 1.5-2 mt, we will have a carry-forward stock of around 6.2 mt entering the 2009-10 year.

The new set of data released both by ISO and the Sugar Federation has ISMA revising its import projection upward to 2.5 mt from the earlier estimate of 1.5mt.