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As Indian Sugar Production Falls, World Prices Surge

World sugar prices have reached their highest in nearly 30 years, as sugar cane output in India - formerly a big exporter - drops. Heda Bayron in Bangkok reports on the souring future of India's sugar industry and the challenges faced elsewhere in Asia.

Sugar cane production in India has fallen, as farmers over the years shifted to better-paying food crops. Production in the year ending in September is estimated to drop 40 percent to 14.8 million tons.

S.L. Jain is the departing director-general of the Indian Sugar Millers Association. He says the sugar industry today faces a "critical" time that could spell the end for the country's status as major exporter.

"There has been an increase of 72 percent in food crops price by the government of India, sugar cane only 24 percent. So therefore it is not a competitive land with food …. We are happy if we can meet our requirement which is increasing every year because population is increasing. Maybe in good times when the weather is very good …, but I cannot see any exports of sugar taking place from India," said Jain.

About 36 percent of global sugar production comes from Asia.

Bad weather in many sugar cane growing countries, such as Brazil, and the shift to other crops in some places is contributing to a global shortfall in sugar.

For instance, in Vietnam, some mills temporarily shut down this year because of lack of sugar cane.

Prices have surged to 28-year highs - to about 50 cents a kilogram. India, the biggest consumer of sugar, will have to import millions of tons this year to satisfy its annual consumption of 22.5 million tons.

And if India permanently stops exporting sugar, prices could go even higher. Until recently, India was the second biggest supplier of sugar after Brazil. Thailand has now moved into that spot, but it cannot produce enough to satisfy global demand in the short term.

Jain says the situation in India is exacerbated by government intervention. The government sets the price that millers pay farmers for sugar cane, and also says how much millers can sell each month. It requires millers to sell 10 percent of their output at a cheaper price to the poor.

"There's a lot of corruption going on, so many middle men are created. It should only be one price. And if the government wants to make two prices, let the government procure sugar directly, have a proper system and give it to the poor people…. When the price is double, everyone wants to do something. This system has to be corrected," said Jain.

In contrast, in the Philippines, the government uses none of India's control mechanisms. The Sugar Regulatory Board monitors the domestic supply of sugar, but it does not impose prices or quotas on the industry. Archimedes Amarra, executive director of the Philippine Sugar Millers Association, says there is no shortage this year.

"We are still producing a surplus. But the fact is the Phil sugar industry is not focused toward being an export-oriented industry. Our primary objective is just to produce enough for our domestic market. But in order to stabilize prices in the domestic market we do export the surplus that we produce," said Amarra.

Raw sugar production in the country has been increasing since 2005. Most of the country's sugar exports go to the United States, because of a long-standing preferential trading agreement.

Now the industry is gearing up to meet growing demand for ethanol, which can be made from sugar cane and used to power cars. As biofuel production gains ground in Asia, market experts say, it could push sugar prices even higher.

Amara says new areas in the Philippines are available for biofuel expansion.

"We can afford to allocate about 10 percent of our total production for ethanol. However, if the ethanol requirement increases beyond the 10 percent, well, we are trying to encourage ethanol producers to open up new areas rather than existing areas," he said.

The rise in sugar prices has left many in Asia worried that traditional sweets for two coming holidays - the end of Ramadan and the Chinese Mid-Autumn festival - will be more expensive. Sugar industry experts say unless sugar cane production rises quickly, consumers will pay more for holiday treats.