>India cane price dispute could further cut 09-10 sugar output

New Delhi - India's sugar output may fall further in the crop year starting Oct. 1 because an ongoing dispute over price between cane farmers and mills in Uttar Pradesh, the nation's second-biggest producer of the crop, is prompting growers to sell their output to companies that make molasses - an ingredient for making alcohol.

The state is already reeling under a sugar shortage this year due to a lower output following weak rains. The area under the crop is estimated to drop by 16% this year to 1.8 million hectares. It is expected to produce 4 million-4.5 million metric tons of the sweetener, a volume that may fall further if cane is diverted to molasses manufacturers, who are offering better prices.

"We are being offered INR300/100 kg by molasses manufacturers and most of them are paying part of this as advance," said Virinder Mohan Singh, convener of the Kisan Mazdoor Sangathan, a farmers' lobby group. That's more than double the INR140/100 kilograms that sugar mills are offering, he said.

The tussle may result in a further increase in local prices, and force the world's largest consumer of the sweetener to step up imports. India may need to ship more than the estimated 5 million-5.5 million tons if output is below the forecast of 16 million-17 million metric tons because of the dispute. Sugar prices in the Asian nation have already risen by 70% in the past one year because of lower output.

"If the diversion to molasses is not controlled, then there could be a drop in output," said S. Gupta, secretary of the Uttar Pradesh Sugar Mills Association.

While disputes such as this aren't uncommon, and had delayed the crushing by a month in the current year, the fall in area and crop output has compounded the problem by setting off a scramble for sugar cane. The nation's output of the crop may fall from a peak of 26.3 million tons in the year ended Sept. 30, 2008.

Usually, 40% of the crop is sold to sugar mills and another 40% to molasses makers, while the rest goes to smaller mills, Uttar Pradesh state government officials said.

Indian sugar mills aren't able to pay a higher rate because the price to be paid to farmers is fixed by the government.

"As the retail sugar prices have nearly doubled, we expect the state government to double the mandatory purchase price also to help the farmers," the farm lobby group's Singh said.

The lobby is seeking a rise in state-set prices to INR280 from INR 140/100 kg paid in the current year. Wholesale sugar prices have risen in to INR2,900 per 100/kilograms Friday from INR1,700/100 kg a year earlier.

"The threat of diversion to molasses is very high this year and will be much more than last year," said Ajeet Kumar, a research analyst with commodity brokerage SMC Global Securities Pvt.

The price of an intermediate product from which molasses is made have touched multi-year highs, Kumar said. Smaller manufacturers have already started purchasing cane since the beginning of September, he said.

Molasses is processed into country made liquor, whose output has risen sharply in recent months.

Besides increasing the state-set price, the government must set a minimum mandatory sugar cane quantity that farmers are needed to sell to mills in order to discourage diversion, Kumar said.

Source: COMMODITIESCONTROL