India sweet tooth just got more expensive as sugar output slides

Satisfying the sweet tooth of the world's biggest sugar-consuming country is getting a lot more expensive.

At a time when demand in India is the highest ever, domestic output will drop for the fourth year in five, creating the first deficit since 2010, as prices surge. SGS SA, a researcher hired by Bloomberg to survey farmers in top cane-growing regions, said reduced planting because of drought means production will fall 8.4 per cent to 23.016 million tonnes (mt) in the year that began October 1.

The smallest Indian crop since 2010 means the country will have to import supply, eroding global inventories that were the largest ever last year. After several smaller harvests in Brazil, the top grower and exporter, world output has failed to keep pace with record demand. Sugar futures in New York touched a four-year high in September, while Indian retail prices in September were 26 per cent higher than a year earlier.

“India’s consumption is high relative to supplies,” which are tightening as output drops, said Donald Selkin the New York-based chief market strategist at National Securities Corp who helps manage about $3 billion. “You can see that sugar market is inverted, and that's a pretty bullish sign.”

The global benchmark contract on ICE Futures US in New York has surged 47 per cent in the past year to 21.65 cents a pound on Wednesday. Prices could climb as high as 24 cents, Selkin said. Sugar futures in Mumbai are up 28 per cent in the past year to Rs 3,376 ($51) per quintal (220 pounds). That's helped to boost the share of producers including Balrampur Chini Mills Ltd and Dhampur Sugar Mills Ltd.

India’s growers are dependent upon annual monsoons. The four-month rainy season affects sowing of both summer and winter crops and directly waters more than half of all farmland. Rainfall was 14 per cent below a 50-year average in 2015, following a 12 per cent shortfall in 2014, data from the meteorological department show.

Fewer acres

The prolonged moisture deficit led farmers to reduce the amount of land used to grow sugar cane by 5.1 per cent, according to SGS, which surveyed 869 farmers between September 24 and October 18 across six states, including top producers Uttar Pradesh and Maharashtra. The results have a 95 per cent confidence level with a margin of error of 3.27 per cent.

“Previous dry years caused a drop in acreage,” Mark Oulton, global agricultural market research manager with SGS, said by phone.

Planting declined in Maharashtra, Karnataka and Gujarat, while farmers increased area in Uttar Pradesh, Tamil Nadu and Andhra Pradesh, SGS said. Fewer acres were offset in part by a two per cent increase in national yields, Oulton said. About 9 per cent of crops were in bad condition, up from 5.5 per cent in the 2015-16 survey, though farmers reported 30 per cent in good condition, up from 20 per cent a year earlier, according to the report.

Smaller harvest

As a result, cane production will decline 3.2 per cent to 340.85 mt this season, according to SGS. About 66 per cent of the crop will be crushed to make sugar, according to SGS. The rest will be used for livestock feed, seeding and jaggery, a local sweetener. To reach its forecast of sugar output, SGS used a sugar-extraction rate of 10.3 per cent for each ton milled, the average of 14 years through 2014 reported by the country's cooperative producers.

The harvest will shrink 14 per cent in Maharashtra, 12 per cent in Tamil Nadu, and 37 per cent in Karnataka, SGS said. Output will increase 12.7 per cent in Uttar Pradesh.

Bloomberg