All India Sugar Trade Association cut its sugar production estimate for the 2022-23 crop year (October-September) to 33.5 million tonnes (mt) from 34.5 mt. The drop in output was confirmed by food secretary Sanjeev Chopra last week. He cited unseasonal rainfall in Maharashtra for a possible shortfall of 200,000-300,000 tonnes from an initial estimate of 38.6 mt, including diversion of sugar to produce ethanol.

Rising prices of milk and sugar, coupled with deficient rainfall during the monsoon season because of a possible El Nino weather pattern, could stoke inflation further in India, potentially forcing the Reserve Bank of India to keep interest rates higher for longer. Further, surging food prices may jeopardize the central bank's efforts to keep the economy growing.

"We were aware of the lower production of sugar. The market has suddenly woken up after the early closure of mills in Maharashtra and Karnataka, creating concerns over supply tightness in the domestic market," an agribusiness executive said, requesting anonymity.

Sugarcane mills in Maharashtra and Karnataka that keep crushing cane until the monsoon arrives June-July have ended their operations earlier than usual due to the low availability of cane. As many as 190 mills in Maharashtra and 71 mills in Karnataka have stopped sugarcane crushing, according to the National Federation of Cooperative Sugar Factories, which added that the mills in the two states crushed nearly 104 mt and nearly 53 mt of cane, respectively, until 31 March.

The early closure of crushing operations signals Maharashtra and Karnataka will produce less sugar. The production of sugar is estimated to fall to 10.5 mt from 13.8 mt in Maharashtra and 5.6 mt from 6.3 mt in Karnataka. With production in the two states expected to fall, industry experts estimate total sugar production for 2022-23 (October-September) to drop to 32.5 mt. Additionally, the diversion of 5 mt sugar to ethanol and exports of 6 mt sugar have contributed to supply concerns. With 11 mt of sugar unavailable for domestic consumption, prices have jumped.

"On top of it, predictions around El Nino indicate that the day temperature will be very high," said Prakash Naiknavare, managing director of the National Federation of Cooperative Sugar Factories, citing the US weather department's February forecast on El Nino. "This has been causing distress to industrial buyers such as candy, biscuit and beverage makers, ice cream and cold drink manufacturers."

The chances of El Niño developing gradually increase from 15% in April-June to 35% in May-July, reaching significantly higher chances of around 55% during June-August, the World Meteorological Organisation predicted in February.

"A sudden demand from the industrial buyers, which accounts for about 65%, has been witnessed amid El Nino fears. Summer demand from industrial buyers typically kicks in small tranches from March onwards to cater to the summer demand. However, the likely supply concern has driven them to buy the commodity in bulk quantities, which pushed up the sweetener prices," said Naiknavare.

Ex-mill sugar prices have shot up by at least ₹300 a quintal in Uttar Pradesh and ₹150-200 per quintal in Maharashtra over the past three weeks and are seen firming up further.

"Prices in Maharashtra and Karnataka are seen to go up by another ₹200 a quintal in coming two weeks as east and north-eastern states turn to the state from Uttar Pradesh to meet their demand," the agribusiness veteran said, requesting anonymity. "The rise in price will, however, be reflected across the country."

The spike in prices has not been substantial in Maharashtra and Karnataka as compared to Uttar Pradesh because mills in the two states are run by financially weaker cooperatives.

The price hike is seen to be passed on to consumers, but not immediately, as the retail in the supply chain gets impacted last. The increase in retail sugar may take about 20-30 days when the fresh batch comes into the supply pipeline. All-India average sugar prices were at ₹41.18 per kg on Sunday compared to ₹40.9 in the corresponding period last year, according to the data by the price monitoring division of the Consumer Affairs ministry. Currently, there is a ₹7 a kg difference between mill and retail prices, including transportation costs and the GST.

"Prices of ex-mill sugar are expected to touch 4,000 rupees a quintal by June unless the government intervenes. If prices hit this level, retail prices are seen going up to ₹43-44 a kg," said Tarun Satsangi, agriculture research head at Origo Commodities India Pvt. Ltd, an agri-tech company. "However, it will depend on how monsoon and El Nino influence weather."

Retail prices of sugar are at the same level it was last year during the same time. If prices of sugar rise, the government has its way to intervene in the retail market and cool down prices. There is nothing to worry about it yet, the food ministry said, issuing a formal response to queries sent by Mint.