India’s historic droughts drive up sugar and cotton prices

Unusually dry weather in India is threatening the global supply of agricultural commodities including sugar and cotton, raising the specter of prolonged food price inflation.

Benchmark raw-sugar futures in New York jumped to a roughly 12-year high of 28 cents per pound at one point last Wednesday. It was trading at the 26-cent level Monday morning.

The surge comes as the El Nino weather pattern causes droughts in India, which produces around 20% of the world’s sugar.

India suffered its driest August on record this year, according to its Meteorological Department. Rainfall over the June-September period, which falls on India’s monsoon season, also fell to a five-year low.

Sugar cane fields in Maharashtra and Karnataka, which are responsible for more than half of India’s sugar production, have seen lower-than-average rainfall, a source at a sugar company said. The source predicted a 3% decline in output in the 2023-24 year.

Amid poor harvests and rising prices, the Indian government said Oct. 18 that it would indefinitely extend export curbs on sugar, which were slated to end that month.

Thailand and other key Asian producers of sugar are also experiencing dry weather due to El Nino, adding to supply concerns.

Given uncertainties over harvests in the northern hemisphere this year, buyers are competing aggressively for sugar coming out of Brazil, the world’s largest producer, said a source at a different sugar company.

The lack of rain in India is driving up prices of other agricultural products as well.

Cotton futures soared to a roughly 10-month high of 90.75 cents per pound at one point on Sept. 29. They were trading at the 83-cent level on Monday morning.

Yields in the Deccan Plateau are taking a major hit from reduced rainfall. In September, the U.S. Department of Agriculture cut its forecast for India’s cotton yields for the year ending July 2024 by 2%, and cotton exports by 9%.

Speculators have further exacerbated the rise in prices.

Noncommercial traders, which include speculators, held 22,680 net long contracts for cotton as of Oct. 24, compared with 1,678 net short contracts at the end of June, according to the U.S. Commodity Futures Trading Commission.

Net long contracts for sugar also increased to 224,695 from 220,174 over the same period.

In response to the unusually dry weather, India in July banned exports of white rice, with the exception of basmati, to prioritize domestic consumption. The move by the world’s largest rice exporter fueled fears of a supply shortage, pushing the benchmark price of Thai white 5% broken rice to a roughly 15-year high in August.

Higher prices of agricultural goods could ripple throughout the economy. In Japan, prices of cakes and candies rose 11.6% on the year in September, while prices of clothing and footwear rose 3.4%. Both outpaced the 3% increase in the overall consumer price index.

“Weather-based supply concerns for agricultural products are unlikely to be resolved at this point,” said Tsutomu Kosuge of Tokyo-based Marketedge. “The uptrend in prices will continue.”

By Nikkei Asia

Original text available at: https://asia.nikkei.com/Business/Markets/Commodities/India-s-historic-droughts-drive-up-sugar-and-cotton-prices#:~:text=TOKYO%20%2D%2D%20Unusually%20dry%20weather,at%20one%20point%20last%20Wednesday.

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