Mumbai: Reeling from dire monsoon rains that mean India has no choice but a second consecutive season of sizeable sugar imports, traders are now starting to price in a likely third year in 2010-11 as farmers fail to sow more cane.
Despite the strong economic incentive offered by millers as cane prices race to historic highs, farmers in the world’s biggest consumer face a range of disincentives for planting more cane: the rising price of shorter-cycle food crops; the need for captive buyers, limited in number; and the scarcity of water.
Taken together, those factors are likely to delay a supply recovery, supporting a price surge caused by expectations that this year’s crop -- smallish to begin with, then choked by delinquent monsoon rains -- will again fail to meet demand.
“The 2010-11 crop will be better but we will still need to import. That’s for sure,” said Kushagra Nayan Bajaj, joint managing director at Bajaj Hindusthan Ltd, the country’s biggest producer.
Few analysts are prepared to put a number on imports that are more than 15 months away, but even modest purchases would threaten to add more fuel to raw sugar futures that rocketed to a 28-year high last week while refined sugar hit a record.
Indian spot sugar prices also set new highs last week on robust festive demand and thin supply.
India has contracted to import an estimated 2.9 million tonnes in the year to September 2009, an abrupt shift from years as a net exporter of the sweetener, and analysts and traders expected another 4.5 million tonnes in the coming year in order to meet demand of some 24 million a year.
The government blames the weather.
“Rains have changed the situation, otherwise there would have been more acreage under cane this year,” farm minister Sharad Pawar told lawmakers in Parliament earlier this month.
RISING MONSOON DEFICIT LIFTS ALL FOODS
But one of the obstacles is price: Although the government raised the minimum price that mills must pay farmers for sugarcane in the new season from October 2009, the measure came too late to encourage an expansion this year -- and, at this point, is still lagging the margin on other crops.
The prices of pulses and vegetables have doubled on patchy monsoon season rainfall that threatens to make this year’s monsoon, which usually runs until September, the driest since 2002.
Monsoon rains, the main source of irrigation for farms, are so far 29% below normal. Sugar acreage stood at 4.25 million hectares by 12 August down 3% versus last year.
“Monsoon rainfall is not showing any sign of revival. It will keep a tab on acreage and the supply situation will remain tight in 2010-11 as well,” said Ashok Jain, president of the Bombay Sugar Merchants Association.
Moreover, cane takes 12-18 months to mature, occupying land that could otherwise be used to produce 2 to 4 other crops in the same period, says Balasaheb Patil, president of the Sahyadri co-operative sugar factory in western Maharashtra state.
There are other problems as well.
Unlike major food crops that can be sold anywhere, farmers need a captive buyer for sugar cane, limiting cultivation to certain pockets around mills, said Ashwini Bansod, a senior analyst at MF Global Commodities India Ltd.
Besides, lower cane supplies from 2009-10 planting will result in thin availability of ratoon crop for 2010-11. Ratoon is the root stub of cane after the first harvest that remains in the ground to grow again for a second harvest.
While farmers in Maharashtra have already started cultivating cane for the 2010-11 crushing season, those in northern Uttar Pradesh state will start cultivating from February, but the weak monsoon means these regions will struggle to keep acreage intact.
The swing factor, as ever, will be carry-over stocks.
Inventories at the beginning of the new season in October 2009 are pegged below 4 million tonnes, compared to 10 million tonnes a year ago.
But the price disparity between domestic and overseas prices may deter Indian millers from importing a large quantity in 2009-10, said Prakash Naiknavare, managing director of Maharashtra State Co-operative Sugar Factories Federation Ltd.
India’s sugar output in 2009-10 is expected to reach 16-17 million tonnes, far lower than the initially estimated of 20 million tonnes, industry officials say.