Soaring price of sugar

The price of sugar has reached a 28 year high. The main cause is a massive drop in sugar production in India – the second largest producer of sugar in the world behind Brazil. India accounts for 36% of global sugar production and during 2008/2009, its year-on-year production fell by 45%.

As India consumes 15% of global demand for sugar, it will need to import sugar instead of export it for the second year running. This is set to drive international prices up even further.

The decline in Indian sugar production has three origins. Firstly, the monsoon on which India relies for its crop irrigation has failed to materialize. This has followed a warning by scientists at a water management conference in Sweden this month that South and East Asia will need to spend billions of dollars improving water management systems or face a water potential crisis.

Another reason why Indian sugar production has fallen so drastically is Indian farmers planted less sugar cane last year when other shorter-cycle crops became a better-paid and more profitable use of their land. This switch to other crops has been partly blamed on a ban on sugar exports. The Indian Government has now lifted the ban but production still isn’t likely to meet demand until 2011.

Lastly, the Indian Governments regulatory mechanism for sugar has also been cited as a contributory factor in the soaring price of sugar. Currently, the Government set the price the millers pay the farmers for the sugar cane. They also set how much millers can sell each month, and require millers to sell 10% of their output at a cheaper price to the poor. The system is said to be rife with corruption and there have been calls for the Government to source sugar directly for the poor, or have one set price.

The price of sugar in the future is likely to remain high as production struggles to keep up with demand. This demand is likely to increase even further as sugar cane is used to manufacture ethanol – a high-octane biofuel used to power cars. Ethanol is currently gaining production in Asia.

On the positive side, the price increase in sugar is slow moving, Manufacturers have the opportunity to manage the situation to prevent supply shortages.

© Positive Purchasing Ltd
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