Sugar has a unique position in the world as one of the most government regulated commodities in domestic markets, but with over 30 percent of world production moving in international trade. The current rise in international sugar prices is being driven by weather in India and Brazil and by government policies in India.

India is the world’s largest consumer of sugar at 23.0 million metric tons (MMT) raw value in the 2008/09 (October/September) marketing year. Human consumption of sugar in India is up 35 percent from 10 years ago and double the consumption of 20 years ago. India is also the second or third largest producer behind Brazil and trades positions year-to-year with the EU. It had a record large crop in 2006/07 at 30.8 MMT and its second largest crop in 2007/08 at 28.6 MMT before a decline to 16.8 MMT in 2008/09 due to poor monsoon rainfall. Higher acreage in 2009/10 was expected to lead to a recovery in production to 20.6 MMT according to earlier estimates from the Foreign Agricultural Service (FAS) of USDA. The latest projections from government officials and private market analysts are 15-17 MMT.

According to the U.S. Agricultural Attaché in India a normal production cycle is 6-8 years includes 3-4 larger crops followed by two 2-3 smaller crops. A crop of 20.6 MMT for 2009/10 would have been an average crop for the last 10 years, but well short of increased demand in recent years. India’s carryover stocks grew to 9.9 MMT at the end of the 2006/07 marketing year, declined slightly to 9.1 MMT for 2007/08 before plunging to an expected 4.5 MMT on September 30 of this year, the second lowest in the last 15 years after 4.2 MMT in 2005/06. The previous cycle high in carryover was 12.0 MMT in 2000/01. If carryover at the end of the 2009/10 year declines to 4.0 MMT and production is 16.0 MMT, imports would need to be 6.5 MMT. The most sugar India imported was 3.4 MMT in 2003/04; this year’s imports were 1.8 MMT. Some analysts are assuming imports will be 5.0 MMT with the remaining shortfall met by lower consumption. This would put consumption near the 2005/06 level of 21.2 MMT.

When India had two large crops in 2006/07 and 2007/08 they exported 2.7 MMT and 5.8 MMT, respectively, both record years. Had they only matched the record exports of 1.7 MMT in 2002/03, carryover by the end of 2007/08 would have grown to a new record of 14.7 MMT, 64 percent of consumption. A three months supply, 5.8 MMT is the target stocks level. The Indian government made the right decision in allowing sugar to flow to other markets, but should have allowed more exports from the record large 2006/07 to avoid a sharp decline in market prices and kept the record large acreage in sugar. Acreage declined modestly in 2007/08 from 12.7 million acres to 12.4 million acres, and then declined 12.1 percent in 2008/09 to 10.9 million acres as market prices remained depressed. Acreage was expected to recover in 2009/10 to 11.9 million acres, but that will probably not happen.

A reverse shift to large imports was also not easy to execute. As the smaller crop in the 2008/09 marketing year began to develop, domestic sugar prices began to increase in July of 2008, went sharply higher in early 2009, and were 45 percent above a year earlier by early this spring. The Indian government was facing an election in May of 2009 and began allowing the sale of government stocks in the summer of 2008. They did not want to make farmers unhappy, but by late winter they finally allowed duty free imports. The government recently extended duty free imports of refined sugar until November and raw sugar until March of 2010.

The market is also being jostled by weather problems in Brazil, the world’s largest producer and exporter of sugar in 2008/09 at 32.4 MMT and 20.3 MMT. Heavy rains in the Center-South of Brazil, supposedly due to the El Nino effect, have slowed harvest and are resulting in lower yields. The harvest season in the Center-South continues through the end of the calendar year and the weather may stay wet. In May of this year the U.S. Agricultural Attaché in Brazil was already expecting the percentage of the sugarcane crop to be used for sugar to increase from 40.4 percent in 2008/09 to 42.5 percent in 2009/10. How much more of a shift occurs will be determined by how much India draws on the market, crop outcomes in other countries and the price of ethanol. Raw sugar prices are now approaching $0.20 per pound, up 67 percent for the year, but the continuing economic slowdown may somewhat limit further price increases.

Before these weather problems, FAS-USDA projections showed world sugar production and consumption for 2009/10 about in balance at 159 MMT and ending stocks of 31 MMT. That consumption level would have been record large and will likely not be achieved with higher prices. Stocks would have been about the same as the recent low of 30.2 MMT in 2005/06 and at the low end of the 30-40 MMT range of recent years. The production shortfall will by necessity result in lower use.

Agricultural commodity markets by their nature have wide swings in market prices because market demand is relatively inelastic when crops are large or small because consumers demand about the same amount. Politicians want to keep market prices low for consumers and high for producers, even in the same country. Free trade is the best way to shift supplies around the world to lessen shocks on any country or region, but that can only happen when the political process allows products to flow and participants believe that markets will be allowed to work.

Economic growth in India will continue to increase demand for sugar and other crops and make them more price inelastic. As demand grows there will be less room for major fluctuations in supplies and international trade will become more important. This will be true for all developing countries with rising incomes, not just the big ones like India and China.

Countries that are major producers and consumers of commodities have an obligation to avoid shifting all the cost of adjustments onto the rest of the world.
India gets good marks for partially opening markets to the world, but more needs to be done to avoid domestic supply imbalances. Government managed prices prevent orderly market adjustments and ultimately hurt producers and consumers.