India could soon become the world’s largest sugar producer but here’s why that’s a problem

• India is set to produce 35.5 million tonnes of sugar between October 2018 and September 2019, a 10% jump from the previous year.
  
• As a result, India will unseat Brazil as the world’s largest producer of sugar.
  
• However, this is largely because Brazil is converting its surplus sugarcane produce to ethanol, which is in higher demand than sugar and more profitable.
  

India, which is the world’s largest consumer of sugar, is set to produce a record yield of sugarcane in the current financial year. This is largely because sugarcane farmers are assured of a government-mandated fair price from sugar mills that exceeds their costs by a significant margin.

According to data from the Indian Sugar Mills Association, the country’s sugarcane farmers will produce 35.5 million tonnes of sugar between October 2018, when the crop season starts, and September 2019. This is a significant jump over the 32.2 million tonnes it will have produced by the end of 2017-18.

In doing so, India will unseat Brazil as the world’s largest producer of sugar. However, this isn’t because Brazil is producing less sugarcane or is less efficient. It’s simply because Brazil is doing a better job at converting its surplus sugarcane stocks to ethanol, which is produced through the fermentation of sugarcane.

Brazil’s sugar output for 2018-19 is expected to fall by 22% to 30 million tonnes as it diverts inputs towards ethanol production, which is in higher demand and more profitable. Given the depressed prices of sugar in global market, Brazilian producers found that it made more sense to prioritise ethanol, which is an alternative fuel.

When “too much” becomes a bad thing

The robust levels of sugar production in India have contributed to a decline in market prices to the point at which sugar is being sold at below its production cost and mills are recording huge losses, a result of which is that farmers aren’t getting paid. This has forced the government to set a minimum price of ₹29/kg for sugar, which is above global prices, hence hurting the product’s global competitiveness.

In addition, India only consumes 25 million tonnes of sugar, which means that it will likely have 10 million tonnes of surplus production in 2018-19. However, the country does not have the distillery capacity to convert it’s excess sugarcane into ethanol. To make matters worse, the current minimum prices of ethanol in India do not make its production financially viable.

So, in essence, India has no choice but to ship the excess stocks. However, the level of demand for India’s low-quality white sugar isn’t sufficient. Besides, even if all the surplus stocks are exported, not only will this contribute to a global gut in sugar, but it will also serve to depress prices further.

Taking note of this, the Modi administration approved a ₹44.4 billion financing package to improve domestic ethanol production capacity, but it will take some time for the programme to start showing results. Concurrently, in April 2018, the government of Maharashtra, the state that produces the second-largest amount of sugar in India, was said to be planning an export subsidy scheme for sugar producers. The Indian government is also trying to make a push for sugar exports to China.