SAO PAULO, Oct 24 (Reuters) Currently tight profit margins for the Indian sugar industry brought on by rising cane prices could cause a drop in the country's sugar output, the International Sugar Organization (ISO) said on Tuesday.
The Indian government set higher prices for cane to help growers while international sugar prices are weak. This has forced mills to spend more money to buy raw material when they are getting less for their final product.
''I think India is in a very difficult situation... so I would not be surprised if the next crop might be a bit lower than this season,'' said ISO's executive director, Peter Baron, at a seminar in Sao Paulo, promoted by Datagro consultancy.
The next crop, which will begin planting in November, is expected to decline by at least 20 percent, said Narendra Murkumbi, managing director of Shree Renuka Sugars Ltd - a leading sugar producer in India, who was also attending the seminar.
The ISO had said that India would likely overtake Brazil temporarily as the world's top sugar producer in 2007/08 (Oct/Sept), with sugar output close to 33.15 million tonnes.
But the country's sugar industry is having a hard time paying cane growers, Baron said, which may affect the next crop. Payments have not been made on a regular basis, forcing growers to look for alternative products, mainly wheat.
''High cane prices are not justified by current sugar prices and will bankrupt a large number of Indian mills,'' Murkumbi said, adding he expects a fall of 5 million tonnes in India's sugar production in the next two years.
Indian government subsidies for the sector has boosted cane crop output in recent years. This season, Indian sugar production is expected to be 10 million tonnes higher than the country's consumption, Baron said.
This has caused an imbalance in the world sugar market.
''For the first time India is exporting raw sugar... not because of (competitive) prices but because it cannot find markets for white sugar,'' Baron told journalists after his presentation.
''I'm sure India is not exporting with profit. I don't know whether they are losing money but they don't make much.'' Despite the predicted fall in cane production, Indian sugar exports would rise to 5 million tonnes next season, up from 4.5 million tonnes this crop, due to large inventories.
Murkumbi forecasts sugar output in 2007/08 at 31 million tonnes at most, and at 26 million tonnes the following season.
Shree Renuka Sugar, one of the top five sugar producers in India, is investing in ethanol to diversify its portfolio. The company just bought a distillery and intends to invest around 0 million in ethanol production in the next two years.
The recent decision of the country's government to allow the production of ethanol directly from sugar cane juice should boost investments in this area, Murkumbi said.
''I believe half a billion dollars can be invested in ethanol production by Indian millers in the coming two years,'' he told journalists, adding that, in the same period, many sugar mills will be shut down because of low margins.