India's sugar production for the 2013/14 season is set to fall below consumption for the first time in four years as a water shortage trims acreage in three key states.
The drop could boost global sugar prices as the world's top sugar consumer imports raw sugar to maintain stocks and to take advantage of lower prices in Brazil.
"Farmers in Maharashtra, Karnataka and Tamil Nadu are switching to other crops. If we look at prices, cane is attractive, but water is not available," said a Mumbai-based official with a global trading firm, who declined to be named.
Figures from the Indian Sugar Mills Association show that the western state of Maharashtra and southern Karnataka and Tamil Nadu are likely to produce 12.2 million tonnes, or more than half of India's total production, in the 2012/13 season, which ends on Sept. 30.
India, the world's biggest sugar producer after Brazil, is likely to produce a total of 24.3 million tonnes of sugar in the current year, compared with demand of about 23 million tonnes.
It would then need imports over the following season to maintain opening stock levels for the year starting Oct. 1, 2014, dealers said.
Though the country is likely to start the year starting October 2013 with stocks of 7.5 million tonnes, it would want to maintain these levels going into the next year.
After the 2009 drought sugar production fell sharply, forcing India to make big purchases from overseas markets, which pushed the price of raw sugar futures to 30-year highs.
"It is difficult to estimate sugar output for next year. It depends on the diversion of cane for fodder, monsoon rains and recovery rate," said the trading firm official, who declined to be named. "Right now, we can say around 20-21 million tonnes can be produced."
In 2012 state governments bought cane to offer cheaply or free as fodder when alternative supplies were short because of lack of rain. Cattle become the main source of income for farmers during drought years.
The fodder shortage is likely to rise between March and June this year, raising demand for mature cane as fodder.
"Total cane area in Maharashtra and Karnataka will be down 20 to 25 percent for next season," said Narendra Murkumbi, managing director of Shree Renuka Sugars, the country's biggest sugar refiner.
New plantation is down by nearly 50 percent in both states, Murkumbi said.
"Drought is affecting new plantation and it will even cut availability of