New Delhi, April 14 - The shortfall in India's sugar crop drove global prices to six-months highs last month, but longer-term investors should be watching an even more bullish trend: unstoppable demand growth in the world's top consumer.
With a deeply embedded sweet-tooth culture that accounts for a tiny share of the typical family's food budget, India's demand for sugar is said to be nearly recession-proof; and growth is quickening as the country's rural majority -- too poor in the past to indulge -- taste more of the sweeter things in life.
Those trends may spell more volatile years ahead for sugar traders more focused than ever before on India, which has turned abruptly from exporter to importer this year as output halves from its peak two years ago after sugarcane crops were squeezed.
To meet the shortage, India eased imports of raws in February and on Monday announced that it would allow tax-free import of up to 1 million tonnes of white sugar, news that may stoke fresh gains in London futures <LSUc1> already up 27 percent this year.
"Sugar is the cheapest source of energy in India. For a low-income family, it is the only source of energy because it is very cheap," said Meka Narasimha Rao, an official at the Indian Sugar Mills Association (ISMA).
Sales of ice creams, soft drinks, chocolates and cakes have surged as people thronged to eateries in new, swanky malls that have come up in recent years even in smaller cities, encouraging firms like unlisted Kwality Group to expand.
"The industry trend shows a growth of 22 percent in our business over the last year and we see the whole pattern quite positive for our industry and hence our expansion plans," said Nitin Luthra, chief executive of Kwality, a lead leading ice cream and confectionary firm.
Sugar demand is also being fuelled by higher incomes in rural areas, home to two-thirds of India's billion-plus people.
Farm incomes have risen, helped by generous increases in state-set prices for grains, helping even motorcycle makers and mobile phone firms report handsome gains in rural areas that appear to be better insulated from the global recession.
N. Ramanathan, managing director of Punni Sugar, said rural prosperity had allowed many consumers to switch to sugar from alternatives such as jaggery, a coarse, dark sweetener.
"We are witnessing less and less cane being diverted for jaggery, a major indication that people in the countryside are consuming more sugar and less jaggery," he said. Even for low-income families, a rise of 10 percent in sugar price, increases the household expense by less than 1 percent, showed a study by market research firm AC Nielsen.
PER CAPITA GROWTH AHEAD
The gap between urban and rural consumption is wide -- a study in the 1990s found that city-dwellers consumed as much as three times more sugar than those in rural areas.
Nationwide, India still lags both developed regions such as the United States and Europe, as well as developing nations like Thailand and Mexico in per capita sugar use. Top producer Brazil tops the rankings as it uses sugar to make transport ethanol.
And while Chinese consume half as much sugar on a per capita basis, they use more in the form of sweetened drinks that some experts say show India's potentially explosive growth potential.
India consumed only a single bottle of soft drink a year on a per capita basis against seven in China, says Yatin Wadhwana, managing director of the Indian arm of Sucden.
"Even if you say we go from what we are today to something about what China is, there would be a sevenfold increase. That is 3.5 million tonnes. You see the difference just purely in terms of soft drink consumption as potential growth," he said.
Indian consumption has grown 3-5 percent annually in the past five years and trade body ISMA expects demand to rise 1.5 million tonnes a year, or 4.4 percent, this year, even as economic growth slows sharply from nearly 9 percent.
"And that is a conservative estimate," said Shanti Lal Jain, director general of ISMA.
SUGAR, SUGAR EVERYWHERE
India's ubiquitous sweets shops do brisk business across the country, catering to numerous Hindu festivals, weddings, birthdays or any happy occasion, as gobbling and distributing sweets is the traditional way of celebrating anything.
"It is very hard to imagine Indians will not greet guests with sweets or serve less in marriages due to high prices. That is not going to happen ever," said Monica Mishra, a homemaker.
Government and corporate offices routinely see executives devouring boxes of syrupy, traditional sweets at birthdays, promotions, farewells, the launches of major business initiatives or even at car purchases by colleagues.
Ultimately the steady rise in demand should buoy prices, encouraging traders to expand cultivation after several years in which surging grain prices overtook sugarcane territory -- and for some in the industry, another potential supply glut is a greater risk than years of imports.
For the moment, however, traders are on alert for the first crystals of refined sugar expected to be bought under a duty-free scheme confirmed on Monday.
"If next year's production stands below 20 million tonnes again, the stock situation will be unsustainable in India and will require substantial imports," Sucden said in a report.
