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Sugar prices revive on Indian subsidy hiccup

Sugar prices recovered from their weakest close in three years after India, the second-ranked producer, deferred a decision on export subsidies, while Brazil's real recovered too.

Raw sugar futures for March, which closed the last session at 14.74 cent a pound, the weakest finish for a spot contract since June 2010, rebounded to 14.93 cents a pound in early deals in New York, a gain of 1.3%.

London white sugar for March, which on Monday fell below $400 a tonne for the first time since 2009 for a spot contract, was 1.1% higher at $407.40 a tonne.

The gains followed the failure by India's Cabinet Committee on Economic Affairs to decide on a subsidy on sugar exports which has been seen by investors as an extra weight to price, in potentially lifting India exports this year to some 1.5m-1.7m tonnes of raw sugar and 500,000-700,000 tonnes of white sugar.

Subsidy dispute

The committee's deferral was down to a "paucity of time", KV Thomas, the Indian food minister, told reporters after the meeting.

"The sugar proposal could not be taken up for discussion."

The postponement also comes amid talk of a dispute over the level of subsidy.

The agriculture ministry, said to favour support of 3,500 rupees ($55.86) per tonne of raw sugar, and the food ministry, which is pressing for a lower level of 2,000 rupees ($31.92) per tonne, reducing the threat of depleting domestic supplies.

With domestic production costs reckoned locally at about $420 a tonne (19.0 cents per pound) for raw sugar, above international market rates, the level of subsidy is crucial to the level exports likely to be incentivised.

Legal complication

However, failure could ultimately derail the subsidy plan altogether, with the approach of Indian elections potentially leaving a decision open to legal challenge.

"It is now getting late. If no decision is taken soon, then by law there can be no decision until after the forthcoming elections," London broker Marex Spectron noted earlier this week.

"Any subsidy will become illegal if it is made too close to the up-coming election."

Furthermore, operationally, the later in the crushing season in which a decision is made, "the harder it will be to implement it", given that Indian mills typically produce white sugar rather than raw sugar.

Currency factor

As an extra support for sugar prices, the Brazilian real set course for its first gains against the dollar in nine sessions, and fears over emerging market currencies wane.

The real gained 0.5% to R$2.42 to $1 as of 12:30 UK time.

Some analysts view the weakening of the real as key to the latest slide in sugar prices to three-year lows, in improving the dollar value of an asset of which Brazil is the top producer and exporter.

"Over the past fortnight, ICE sugar prices have fallen 4-5% in dollar terms but are largely flat in real terms," Luke Mathews at Commonwealth Bank of Australia said.

'Increase in demand needed'

However, Societe Generale highlighted the importance of supply and demand fundamentals in depressing sugar futures, saying that its own research indicated that these factors, rather than emerging market jitters, explained the great majority of price moves.

"Sugar prices remain pressured by a larger-than-expected global surplus, a strong start to the Thai harvest… and tepid demand," said SocGen analyst Christopher Narayanan.

The role of low prices in depressing sugar output, including switching Brazilian mills to make ethanol from cane rather than sweeteners, "may become increasingly important" if it continues into the next Brazilian harvest period, which ramps up in April.

However, for now "an increase in sugar demand is needed to help sustain any rally in sugar", Mr Narayanan said.

"With the global surplus estimates growing… the world seems to be amply supplied, and projected to remain so for the foreseeable future."

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