As India waits for the first monsoon rains for the 2010 growing season, it continues to cope with past sugar policies that led to the large 2006/07 and 2007/08 marketing year crops and the short 2008/09 and 2009/10 crops. The government actively intervenes in the sugar market to protect producers and consumers, but its policies add to market price swings rather than tempering them. As the world’s largest consumer and second largest producer of sugar, India plays too important a role in world supply and demand for sugar to not explore policy alternatives.

According to the U.S. Agricultural Attaché in New Delhi, sugar production in India in the 2009/10 marketing year (October 2009 to September 2010) is estimated at 19.56 million metric tons raw value (MMT), up from 16.13 MMT in 2008/09, but about one third lower than the 30.78 MMT achieved in 2006/07 and 28.63 MMT in 2007/08. Sugarcane area harvested for 2010/11 is projected at 4.80 million hectares, up 12.9 percent from 4.38 million hectares in 2009/10, but short of the 5.15 million hectares in 2006/07. With a slight increase in sugarcane yield per hectare harvested, production in 2010/11 should be 24.7 MMT.

Domestic consumption for 2010/11 is projected at 24.50 MMT, up 4.3 percent from below trend 2009/10 consumption and consistent with the 3.7 percent average annual growth since 1991. Imports for 2010/11 are projected at 1.2 MMT, down from imports of 4.50 MMT in 2009/10 and 2.8 MMT in 2008/09, in contrast with exports of 5.83 MMT in 2007/08 and 2.68 MMT in 2006/07. The change from exports in 2007/08 to imports in 2009/10 was 10.33 MMT, about 20 percent of world exports. Stocks at the end of the 2010/11 marketing year are expected to be 5.36 MMT, short of the three months consumption target for carryover stocks.

A report from the Economic Research Service of USDA, Indian Sugar Sector Cycles Down, Poised To Rebound by Maurice Landes, provides background information on Indian policies. He noted in the introduction, “The downturn in Indian production is primarily due to a policy-induced cycle that has become increasingly pronounced.” Most of the variation in sugar output is driven by changes in sugarcane area because 91 percent of the crop is irrigated and yield is most impacted by the amount of newly planted area. A planting is kept for three years with the highest yield occurring in the first year. When planting incentives decline, fewer new plantings are made and yields decline because more of the crop is the lower yielding second and third year crop. Area declined from 5.04 million hectares in 2007/08 to 4.38 million hectares in 2008/09 and 4.25 million hectares in 2009/10.

India’s national government provides a price guarantee for sugarcane producers. The Commission on Agricultural Costs and Prices sets what is now known as Fair and Remunerative Prices (FRP). Some state governments in major sugar producing area set higher State Advised Prices (SAP) that sugar mills are required to pay growers. The national government finances the FRPs, but sugar mills have to pay the difference for the SAPs and cover any losses they may incur. The SAPs usually have little connection to market prices for refined sugar produced by the mills.

Landes found “a strong but lagged relationship between changes in the SAPs for sugarcane and changes in area harvested.” The reduction in area harvested in marketing year 2008/09 was preceded by sharply lower SAPs in 2007/08 as was also true of the decline in acreage in 2003/04 and 2004/05. Large increases in national minimum support prices for wheat and rice in 2006/07 and 2007/08 also allowed those crops to compete for irrigated acres in 2008/09 as sugar price declined due to the second consecutive large sugar crop in 2007/08. When market prices go down and SAPs remain high, sugar mills suffer losses and defer making payment to sugarcane producers which encourages switching to other crops. Sugar mills were able to recover financially with higher market prices for sugar in 2008/09 and grower payments are not likely to be delayed for the 2009/10 crop.

The national government also micromanages the sale of refined sugar into the wholesale and retail markets. Mills must sell 10-20 percent of their production at below market prices to the Public Distribution System to provide sugar to low income consumers. The other 80-90 percent is sold at market prices, but the government sets quarterly quota for sales rather than let prices pull sugar onto the market in response to consumer demands. Excess government buffer stocks that accumulate in good crop years are sold into the market in succeeding crop years. International trade in raw and refined sugar is controlled by adjusting import tariffs, export quotas, and financing to encourage or discourage trade. Last year saw additional interventions to control inventories, hoarding and other “speculative tendencies.” Sugar futures markets allowed in 2001 were suspended in May of 2009 until September of 2010.

According to Landes, India has the potential to further increase sugar production if profitable compared to other crops. Sugar occupies about 5 million hectares, 91 percent of which is irrigated. Total area cropped is 142 million hectares with 60 million hectares irrigated. Sugarcane yields per hectare may continue to increase as sugar shifts from the subtropical north to the tropical south. Sugarcane yield at 68 metric tons per hectare is similar to China, but lower than other major producers like Australia at 88, Columbia 82 and Brazil and Mexico at 75 metric tons per hectare.

As India’s economy grows demand for sugar is expected to grow as will demand for other products like poultry meat and milk products. Government management of production and consumption will become more difficult. India needs to pursue market opening policies as other countries have and gain economic efficiencies for producers and consumers. This can be done without removing assistance for low income consumers and provide an income safety net for farmers. India has shifted its policy problems to the rest of the world by exporting when domestic supplies are large and removing import restraints when domestic supplies are short. India needs to allow a larger role for market forces, including opening export and import markets on a consistent basis, to balance out supply and demand to the economic benefit of domestic producers and consumers and their international partners.