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Drought Threatens India’s Sugar Exports as Prices Rally

The worst monsoon in India in three years is hurting the sugar-cane crop, stoking concern that the world’s biggest consumer may restrict exports to cool the highest domestic prices in 19 months.

The crop in the southern and western parts of India is in need of urgent rainfall, said Narendra Murkumbi, managing director of Shree Renuka Sugars Ltd. (SHRS), which has mills in Maharashtra and Karnataka states, among the nation’s top three growers. A rally in domestic prices since the beginning of June has reduced demand for Indian exports, he said.

More than 50 percent of India faces threat of a drought after receiving below-average monsoon rains in the past two months, threatening crops from rice to cotton and oilseeds. The government extended a ban on exports of sugar, rice and wheat in 2009 after the weakest monsoon in almost four decades. Any curbs on Indian shipments this year may boost global sugar prices, said Sudakshina Unnikrishnan, an analyst at Barlcays Plc.

“If the monsoon rains continue to underperform and the threat of drought looms large, then we are likely to see some form of restrictions on sugar exports,” Unnikrishnan said in a phone interview from London yesterday. “That of course will support international prices.”

Raw sugar for October delivery fell 0.3 percent to 22.49 cents a pound on ICE Futures U.S. at 3:16 p.m in Mumbai. The most-active contract gained 7.8 percent in July for a second monthly advance.

Crops Shrivel

India’s sugar production may fall to 24 million metric tons in the harvesting season starting Oct. 1 as dry weather shrivels crops in Maharashtra and Karnataka, Yatin Wadhwana, managing director at Sucden India Pvt., said in an interview yesterday. The harvest in Uttar Pradesh state, the biggest grower, and Tamil Nadu state may increase next year, he said. Output will total 26 million tons this year, the Indian Sugar Mills Association said July 2.

Maharashtra’s output will probably decline 22 percent to 7 million tons next year, Vijay Singhal, the state’s sugar commissioner, said July 30. The harvest in Uttar Pradesh may climb 10 percent to 7.6 million tons, said Shyam Lal Gupta, secretary of the Uttar Pradesh Sugar Mills Association.

“There is no rain in the sugar belt in Karnataka,” said A. Ramakrishna, secretary of the South Indian Sugar Mills Association. “Reservoirs are depleting. We are keeping our fingers crossed, hoping for rains.”

Prices Surge

Futures have rallied 26 percent in Mumbai since the beginning of June on speculation the weak monsoon will reduce cane yields. The August-delivery contract rose as much as 1.8 percent to 3,578 rupees ($64) per 100 kilograms on the National Commodity & Derivatives Exchange Ltd. today, the highest price for the most-active contract since December 2010.

The rally has made exports from India uneconomical and no fresh deals are being signed, Shree Renuka’s Murkumbi said.

“India’s absence would be felt more in the international white sugar market,” he said. “The Asian white sugar market would tighten up considerably.”

Shipments totaled 2.84 million tons since Oct. 1 and another 159,000 tons are yet to be shipped, according to the mills association.

Sugar supplies will be enough to meet India’s domestic demand next season, Murkumbi said.

As many as 400 of the country’s 627 districts have received less-than-average rainfall this year, affecting output of rice, coarse cereals and lentils, Sharad Pawar, India’s farm minister, said on July 31. Rain in the past two months has been worse than in 2009, he said. The precipitation in the June-to-September rainy season three years ago was the third-lowest since 1901, according to the country’s weather office.

Inflation Concern

“In India, the big concern is about food price inflation,” Barclays’ Unnikrishnan said. “It’s not just sugar, there are lot of other crops that are going to be impacted. Potentially, what we could see is the government getting concerned and putting some sort of export restrictions.”

Prime Minister Manmohan Singh had been expecting normal rains to harvest a record grain crop for a third year in a row and to cool inflation, which exceeded 7 percent for a fifth straight month in June. Below-average rain may curb exports of rice, wheat, sugar and cotton and increase imports of cooking oils, Espirito Santo Investment Bank research said July 30.

The area under sugar planting across the country climbed to 5.28 million hectares from 5.09 million hectares a year earlier, according to the ministry of agriculture.

The monsoon, which brings more than 70 percent of India’s annual rain, is 19 percent below average since June 1, according to the India Meteorological Department. With July being the critical planting month, “there may be major negative implications if rains do not pick up,” the World Bank said in a report on July 30.

To contact the reporters on this story: Pratik Parija in New Delhi at pparija@bloomberg.net; Swansy Afonso in Mumbai at safonso2@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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