India's sugar industry, plagued by problems of plenty, is in for more trouble with forecasts of a bumper crop for the second year in a row. Sugar output in the year starting October could exceed 28 million tonnes, 1 million tonnes more than the projected record production this year.
The industry's woes started last October when the new season began with an inventory of 4 million tonnes of sugar. Trade officials say stocks at the end of the season would amount to 10 million tonnes, compounding the industry's problems.
"Now, what are you going to do with all the stocks, are you going to sink it in the sea?" asked Shanti Lal Jain, director general of the Indian Sugar Mills Association.
Last week, the International Sugar Organisation put the global supply surplus at above 9 million tonnes this season, compared with its previous forecast of 7.2 million made in February. Bumper supplies led by Brazil have pushed sugar futures to a 16-month low of $310 per tonne in mid-April. The benchmark August contract is around $335 per tonne.
India's prospects are being hemmed in by the glut, which some industry analysts believe could persist into the season starting October 2008. "Something needs to be done, and done urgently. This problem is going to become more and more gigantic," Jain said.
The government last month said sugar mills in coastal areas would get a subsidy of 1,350 rupees a tonne, while those in the north of the country would receive 1,450 rupees per tonne to help prop up exports. But the incentive was meant only for white sugar.
Analysts said the move has not helped much as buyers in the region, including Bangladesh, Pakistan and Middle East nations, have recently set up their own refineries, blunting demand for Indian white sugar. "If the situation has to change, the only way is for India to become a regular exporter, and that too of raw sugar," Jain said.
"In raw sugar, India has a distinct advantage in freight costs over Brazil and Thailand in exports to the region. But what it needs is a policy mechanism to boost its exports." The strengthening rupee, hovering close to a nine-year high for a month, has also blown a hole in exports with margins falling by 10-20 percent.
"There has been a slowdown in exports because even domestic prices are better than exports now," said Ajit Chougule, secretary of Maharashtra State Coop Sugar Factories Federation Ltd Local prices have fallen to about 12,000 rupees ($295.8) per tonne, from about 18,000 rupees a year ago.
"The government has done the damage and they should know how to control it," said M. Manickam, managing director of Sakthi Sugar, referring to a ban on exports in July last year which industry officials say is the root cause of the problem. Since then, the government has tried hard to help sugar cane farmers get paid by mills on time and reduce stocks through export incentives.
Industry officials said the government was also thinking of doubling the buffer stock to 4 million tonnes from 2 million tonnes, which they said might help prices stabilise briefly.
But trade officials say help was too little and too late. Profits of many sugar companies have nose-dived in the January-March quarter, with domestic prices falling below production costs and no sign of a recovery for months.
"Next year will be even worse," said G.S.C. Rao, executive director of Simbhaoli Sugar. "Sugar companies are likely to register heavy losses unless the government and state government do something to improve the situation," he added.
Analysts said the cycle of low prices was expected to continue for more than a year. "There is no hope of recovery in prices until the next season. It will be more or less flat at these levels, may be 4 to 5 percent here or there," said Shardul Sharma, an analyst at Sharekhan.