The extent of the rally in sugar prices above historical levels has put India's notorious output cycle on ice – potentially opening the way for a third successive year of strong production.

India's tightly-controlled sugar industry typically follows a three-to-five year pattern of soaring output, when tight supplies lift prices, followed by slump, as overproduction weakens values and leaves mills in arrears paying cane farmers, who switch to other crops.

Some cane growers are only now receiving payments from five years ago.

The latest slump in sugar output, to 16.0m tonnes in 2008-09, followed production averaging some 27m tonnes over the previous two seasons, up from a nadir of 13.8m tonnes in 2004-05.

While many investors, after two seasons of Indian sugar output of 25m tonnes plus, expect history to repeat itself in bringing a collapse in 2012-13, "it appears the swing cycle is becoming less extreme", Czarnikow, the sugar merchant, said.

'New phenomenon'

The deterioration in the cycle reflects the persistence of strong sugar prices, which have spent most of the last three years above 20 cents a pound, as measured by New York futures, a level previously not seen since 1981.

Indeed, it has given India a strong market to sell into, a boon enhanced by more timely government permits for exports than in previous seasons.

With this year's shipments set, for the first time, to exceed 2.5m tonnes for a second successive season, India's production surplus  has been "removed from the domestic market", boosting domestic prices.

This in turn has "allowed the authorities to justify increased cane prices, and the industry to limit the arrears that mills would have built up with farmers had the surplus built in-country".

'Every incentive to stick with cane'

With mills prospering, and indeed set for record earnings of 800bn rupees this season on Czarnikow estimates, growers look unlikely to desert cane for now, especially when returns from alternative crops, such as wheat and rice, "have been poor".

"With cane payment arrears largely avoided, it seems that farmers have every incentive to stick with sugarcane," the merchant said.

"As a consequence, the widely-expected downturn in production in 2012-13 may not occur as the swing cycle is reducing in scale."

Global prospects

The prospect of another strong cane harvest in India would ease concerns over prospects for world production in 2012-13 which have decreased with waning hopes for Brazil, the top producer.

Unica, the Brazilian cane industry group, on Thursday forecast cane output in the country's key Centre South region at 509m tonnes, up 3% year on year, but below market forecasts and levels achieved in 2009-10 and 2010-11.