New Delhi, June 25 - India on Thursday agreed to raise the minimum price that mills must pay to farmers for sugarcane by a third to a record high, likely encouraging farmers in the world's No. 2 producer to plant more and curtail imports.
The government will increase the price to 107.76 rupees per 100 kg in the new season from October from 81.18 rupees per 100 kg in 2008/09, cabinet spokesman and Home Minister P. Chidambaram said. It was at the high end of the market's expections.
"The price is higher than what we had recommended. The production of sugarcane should definitely go up compared to last year. But by how much? That can only be guesswork now because the monsoon's progress is very, very uncertain," said S.L. Jain, the director general of the Indian Sugar Mills Association.
The crop outlook has been clouded by a downgrade to the country's vital summer monsoon, which the government said on Wednesday would deliver only 93 percent of the long-term average, coming in below normal for the first time in four years.
India is the world's biggest sugar consumer, its second-biggest producer and normally a net exporter, but it was forced into near record imports this year after stagnant domestic prices discouraged farmers from growing cane, shifting to more lucrative crops as the government raised rice and wheat prices.
U.S. sugar futures <SBc2> have surged nearly 40 percent since the start of the year as India's unexpected demand tightens the market, hitting a three-year high on Thursday as a downgrade to the Indian monsoon outlook stoked crop concerns.
The decision comes at the tail end of the planting season and should encourage more farmers to plant sugarcane instead of other crops, although the majority of India's cane is already sold to domestic mills at market prices higher than the minimum.
Some analysts opined it may be too little, too late.
"This delayed decision won't improve supply in the next cane year as sowing of cane in India has almost completed," said Ajeet Kumar, research analyst with SMC Indiaonline.
India is the world's biggest sugar consumer with demand hovering around 23 millions tonnes, nearly one-seventh of world use, and demand continues to grow swiftly as its increasingly wealthy 1.1 billion people satisfy the national sweet tooth.
But production in the year to September 2009 is expected to collapse 44.5 percent to just 14.7 million tonnes, creating a shortfall that has forced companies to contract to import about 2.5 million tonnes of raw sugar and contributing to a global supply deficit estimated at nearly 8 million tonnes.
India had exported a record 5 million tonnes of sugar in 2007/08.
The government, striving to strike a balance between keeping domestic prices under control without increasing its reliance on imports, has already taken several measures this year to encourage more supply, including suspending import tariffs on raw and white sugar and placing a limit on sugar stockpiles.