GLOBAL sugar prices are likely to drop as Brazil and India, the world’s two largest producers, expand land under cane cultivation, jack up production, and also flood the international markets with the sweetener.

Sugar prices touched an 18-month high in mid-January, climbing by nearly 15 per cent over the past few weeks – raw sugar prices have flared by 30 per cent this year – but are likely to witness declines over the coming months, as exports from India are expected to surge.

Prices fell sharply by 20 per cent in 2006 and nearly eight per cent last year. With both Brazil and India reporting good production, prices are likely to decline sharply in 2008.

According to analysts, global sugar production will top demand by over 10 million tons in the sugar year ending September 30. Attracted by the recent high in sugar prices, Indian producers are looking at aggressive forays in the international markets.

While the Indian government estimates that sugar production might fall to 26 million tons for sugar year October 2007 to September 2008, the industry is bullish on the production and exports front. Sharad Pawar, the federal agriculture minister, had portrayed a gloomy scenario last month, scaling down industry forecasts of 31 million tons of production to 26 million tons.

According to Pawar, low yields in some states will adversely affect production during the year. Likewise, many farmers in states like Maharashtra were disenchanted with low sugar prices last year, and had shifted to other crops.

The sugar industry is confident that sugar production will not fall so low, though it is unlikely to touch the 2006-07 level this year. The Indian Sugar Mills Association (ISMA) has scaled down earlier projections of 31 million tons, bringing it down to between 27 and 27.5 million tons. According to Shanti Lal Jain, director-general, ISMA, production is likely to touch 27.5 million for the year ending September 2008.

Production in the October-December quarter saw a sharp fall to six million tons, as against 7.3 million tons in the same quarter in the previous sugar year.

Last year, the industry had seen a record production of 28.4 million, leading to a virtual glut, and a sharp fall in prices, in the domestic market. But this discouraged farmers, many of who have switched over to wheat and oilseeds.

Jain, however, does not buy the story of farmers moving over to other crops. He points out that with the commodity fetching a good price, farmers are unlikely to cut planting cane this year.

Other analysts though worry that while production might cross 27 million this year, in 2009 there could be a fall of nearly five million tons, leading once again to a spurt in prices.

SUGAR is one of the most politically sensitive crops in India – along with onions and potatoes – and the central government is leery of allowing any sharp fluctuation in prices. If production dips dramatically in 2009, a crucial election year, the United Progressive Alliance (UPA) government may be in deep trouble.

It is also a highly controlled commodity, with the government having a major say in matters relating to production, exports, pricing and other crucial aspects. When sugar production is low, the government imposes a ban on exports, as happened last year. The ban was revoked only in January 2007, but it impacted exports.

As against 1.7 million tons of exports last year, the industry has already contracted to export about three million tons. This may rise to 3.5 million tons by the end of the season, but only if there is a narrowing down in the difference in the domestic and international price of the commodity.

The International Sugar Organization estimates that India will continue exporting three million tons of sugar every year for the next two to three years.

Sugar mills are keen on selling in the domestic market, where prices are at about $350 a ton, as against $300 to $320 internationally. Exporters have already shipped over a million tons of sugar in the current crop year – mainly to the Gulf – and with the crushing season on in full swing, expect to wrap up another two to 2.5 million tons of exports before the onset of the monsoon.

India’s annual domestic consumption is around 20 million tons. Last year’s record production saw inventories climb to 14 million tons in October last year; and could touch 17 million tons over the next six months, despite a spurt in exports.

Production and supply of sugar – both to the domestic and international markets – is highly regulated by the government, which decides on the quantity of sugar that a mill can sell in the market. About 100,000 tons are released every month for sale through the public distribution system.

With the end of winter and the onset of the festive season, the Food and Civil Supplies ministry has raised the supply quota by a hundred thousand tons in February to 1.4 million tons. This has brought down prices significantly.

In March, about 1.6 million tons will be available for sale in the open market, but an additional 200,000 tons carried over from the previous months will add to the glut in the market, resulting in another sharp fall in prices.

THE two biggest producers of sugar in India are Maharashtra and Uttar Pradesh, which together account for 60 per cent of the production. In Maharashtra, where politicians from the ruling Congress and the Nationalist Congress Party (NCP) – whose chief, Sharad Pawar, is the federal agriculture minister – control the industry.

Maharashtra is expecting a fall in sugar production this year – from 9.2 million tons last year to around 8.5 million tons – because of delay in the onset of the crushing season. But worse is in store for the ailing industry next year. According to Rajagopal Devara, the state’s sugar commissioner, next year production is likely to dip drastically to six million tons.

Devara attributes the likely fall to the reduction in the area under cane cultivation and diversion of cane to ethanol production. The Indian government last year made it mandatory for oil companies to go in for five per cent blending of ethanol with petrol, primarily to encourage cane consumption and help farmers, and incidentally also to encourage ‘green fuel.’

State governments have also been given the freedom to raise this to 10 per cent. With ethanol prices fixed for three years, irrespective of the fluctuation in production and demand, sugar mills are expected to expand ethanol production.

The government now allows sugar factories to produce ethanol from sugarcane directly, instead of just from molasses. Thanks to the fixed returns on ethanol, many of the factories in Maharashtra —controlled by politicians — are planning to shift in a big way to ethanol production.

This, combined with the expected decline in sugar production, could lead to a sharp spurt in the price of the sweetener in the run-up to election year 2009.

The likely shortfall in sugar production has already led to a spurt in sugar prices in Maharashtra. They shot up by about 10 per cent last month, and export contracts are also dwindling, as mills are more interested in the lucrative domestic market.

The Indian government has also been subsidising sugar exports, which has come in for sharp criticism from Brazilians. Top Brazilian industry officials confronted counterparts from India at a sugar conference in Dubai this month, accusing the government of providing subsidies worth $170 million to exporters.

The Indian government claims that subsidies are a temporary measure and will be discontinued over the long run. Exporters from India have captured a large chunk of the Gulf market, pushing Brazilian sugar exporters to the sidelines in recent years.