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 percent to 23.016 million metric tons in the year that began Oct. 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 percent 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 U.S. in New York has surged 47 percent 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 percent in the past year to 3,376 rupees ($51) per 100 kilograms (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 percent below a 50-year average in 2015, following a 12 percent shortfall in 2014, data from the meteorological department show.
The prolonged moisture deficit led farmers to reduce the amount of land used to grow sugar cane by 5.1 percent, according to SGS, which surveyed 869 farmers between Sept. 24 and Oct. 18 across six states, including top producers Uttar Pradesh and Maharashtra. The results have a 95 percent confidence level with a margin of error of 3.27 percent.
“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 2 percent increase in national yields, Oulton said. About 9 percent of crops were in bad condition, up from 5.5 percent in the 2015-16 survey, though farmers reported 30 percent in good condition, up from 20 percent a year earlier, according to the report.
As a result, cane production will decline 3.2 percent to 340.85 million tons this season, according to SGS. About 66 percent 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 percent for each ton milled, the average of 14 years through 2014 reported by the country’s cooperative producers.
The harvest will shrink 14 percent in Maharashtra, 12 percent in Tamil Nadu, and 37 percent in Karnataka, SGS said. Output will increase 12.7 percent in Uttar Pradesh.
The SGS production estimate is in line with the Indian Sugar Mills Association, which pegged sugar output this season at 23.4 million tons this season, trailing domestic demand at 25.5 million tons. The U.S. Department of Agriculture predicts consumption will rise for a seventh straight year to an all-time high.
A year ago, SGS predicted Indian production at 23.08 million tons, less than the final tally of 25.1 million by the Indian Sugar Mills Association. In 2014, the estimates were closer. SGS predicted 24.42 million tons, compared with 24.55 million by the government and 24.39 million from the mills association.
Conditions are showing some signs of improvement, and with higher prices and good weather, farmers may expand the area sown for the 2017-2018 season, SGS’s Oulton said.
While this year’s monsoon missed a forecast for above-normal showers, rainfall was 97 percent of the 50-year average of 89 centimeters (35 inches) between June and September, a level considered normal, according to the Indian Meteorological Department.
“Good rains this year will definitely boost planting for 2017-18,” Sanjeev Babar, managing director of Maharashtra State Cooperative Sugar Factories Federation, said by telephone from Mumbai on Tuesday.