Sugar output in the world’s second-biggest producer may shrink further as mills in some states shut early after drought curbed cane supply.

Production in the year that began Oct. 1 is set to total 20.4 million metric tons, according to the median estimate of six traders and analysts surveyed by Bloomberg. That’s the lowest in seven years and 9.3 percent below the government’s forecast. India may import 1.7 million tons of sugar, according to the survey.

Despite the outlook for shrinking supply boosting domestic prices 11 percent since the start of December, the country has maintained an import duty of 40 percent on sugar. India shouldn’t ignore the price rally as it shows there is potential tightness, said Michael McDougall, senior director at Societe Generale SA in New York. A possible El Nino, flagged by Australia’s weather bureau, may affect the Indian sugar cane crop that will be harvested next season, he said.

“If there is any issue with the monsoon this year then India will be in trouble,” McDougall said by phone from New York. “We know the government wants to avoid imports. They have to monitor the position of the crop and then decide. It’s expected that next year’s crop is going to be good, but nothing is guaranteed until the monsoon is there. It’s better to hedge your bets when the global market is well supplied, it’s better to be safe than sorry.”

The Indian Sugar Mills Association last week cut its production estimate 9 percent to 21.3 million tons, citing cane shortages that prompted some mills to shut earlier than usual in Maharashtra and Karnataka. Lower-than-expected output this season may not mean there is a shortage and the country doesn’t need imports as higher sowing in Maharashtra and Karnataka will help India produce more than the domestic requirement in 2017-18, it said Jan. 25.

On Jan. 27, ISMA re-iterated that there’s no need to buy sugar from overseas and said some people with “vested interests” were trying to confuse the market by estimating production and consumption with the aim of pushing up global prices or wanting to force India to import the sweetener.

Sugar in New York traded little changed at 20.83 cents a pound on Thursday.

Random Checks

India’s food ministry will randomly check sugar stockpiles at mills and trading firms, according to a government official on Jan. 30, who asked not to be identified because the information isn’t public. The government may impose limits on sugar stockpiles at mills if needed to prevent an increase in local prices and there’s no immediate plan to scrap the import duty, the official said.

Sugar output was 5.3 percent lower than a year earlier by Jan. 15, according to ISMA data. India had 399 mills crushing cane compared with 492 mills a year earlier, it said.

“There could be further downgrades to Indian estimates as mills close early,” McDougall said. “I would prefer to believe market signals rather than ignoring it. There is an expectation that world prices will fall on a potential good crop in Brazil and that will make imports viable for India.”

Source: Bloomberg