India's sugar stockpile threatens to drag down global prices

India’s government is spending 62.68 billion rupees ($873 million) to subsidize exports in an effort to cut the nation’s record stockpiles. The move is drawing ire from rival growers in Brazil and Australia, who say the policy is depressing world prices and hurting their farmers. Meanwhile, hedge funds are betting declines for futures will continue.

The subsidies are just another blow to the market that’s already suffering from oversupply. A weaker currency in Brazil, the world’s top producer and exporter, has encouraged a flood of shipments. Meanwhile, demand growth is slowing in developing countries over health concerns, and threats to the global economy could further hurt consumption. Even though world inventories are forecast to drop, the excess hoard is still big enough to satisfy annual consumption in India and the European Union, the top consumers.

“World inventories are still pretty high, and they have been for several years," said Darwei Kung, head of commodities and portfolio manager at DWS Investment Management Americas Inc., which oversees $2 billion.

In the week ended Aug. 27, money managers increased their net-short position by 10% to 171,606 futures and options contracts, data from the U.S. Commodity Futures Trading Commission showed Friday. The figure, which measures the difference between bets on a price increase and wagers on a decline, was the most bearish since May.

The short-only holdings climbed for a fourth straight week.

India isn’t the only producer adding to world supplies. Thanks to the new trade agreement struck between the U.S. and Mexico, the Latin American country is likely to push even more supplies of the sweetener onto the market.

Under the new accord, the amount of sugar Mexico can ship to the U.S. has been reduced. That comes at a time when the first country is already holding big stockpiles, and “warehouses are full," said Pablo Sherwell, head of food and agribusiness research for Rabobank International. As a result, Mexico will likely try to export as much as 500,000 metric tons into the world market to clear some storage space before the next season begins on Oct. 1, he said.

Still, there are reasons bulls shouldn’t give up hope. In Brazil, more sugar cane is being used to produce ethanol, which could cut output of the sweetener. Adverse weather can hurt harvests in other regions, and analysts at Citigroup Inc. and Rabobank International predict the market will eventually shift into deficit.

“People are looking at India and thinking the outlook is not particularly constructive," said John Stansfield, an analyst with Sopex Group in London. “Gradually, it will become apparent that the Indian crop will not be as big, and that the crop is also being affected in Europe by poor weather. But getting through the short-term oversupply is another matter."