Macquarie poured cold water on ideas that India will remain a sugar exporter next season, and raised doubts over 2013-14 too, saying a weak monsoon and huge arrears in payments to cane farmers will fuel another downswing in the country's production cycle.
The Indian Sugar Mills Association forecast last week that India, the world's second-ranked sugar producer, will export 2.5m-3.0m tonnes of the sweetener in 2012-13, which starts on October 1, with shipments supported by high inventories and production of 25m tonnes.
However, Macquarie, warning that cane yields "will fall sharply in southern states due to adverse weather", cautioned that output would fall further, to 24.2m tonnes, dropping below consumption.
"As India's domestic consumption keeps rising, and production set to fall for the first time in four years, we question whether India can afford to remain a net exporter next season [2012-13]," Macquarie analyst Kona Haque said.
Exports would risk "stocks falling to uncomfortable levels", further inflating domestic sugar prices which have soared 25% since June on fears for the next cane harvest.
And, while failing to detail forecasts further ahead, Ms Haque raised doubts over exports for 2013-14 too, highlighting the "steady pace" of Indian consumption growth and the prospect of a setback to cane sowings from a likely government drive to improve sowings of grains and oilseeds.
"Given the sudden shortfall in world supplies of soybeans and grains following droughts in the US, former Soviet Union and now, India, we expect the government to raise the minimum support prices in the latter crops by more than that for cane.
"This will likely impair plantings for the 2013-14 season - further cementing the downtrend of the Indian production cycle that we believe will start in 2012-13."
'Yields to be impacted sharply'
India has a long history of cyclical sugar output which makes unusual growth from more than three years, before factors such as collapsing prices or mill arrears in payments to cane growers, who are paid a state-set minimum price, spark a decline.
The latest pick-up in production has taken it from a low of 14.7m tonnes in 2008-09, when high grain and oilseed prices tempted growers to switch crops, to 26.3m tonnes this season.
The downswing in output will be fuelled by the weak monsoon rains, which official Indian meteorologists acknowledged earlier this month would be "deficient".
"Coming into the monsoon seasons, states such as Maharashtra and Karnataka were already suffering dry conditions," Ms Haque said.
"As such, yields are likely to be impacted sharply for cane grown."
Furthermore, arrears in payments to growers by mills, while halved since March, remain, at some 4.6bn rupees ($827m), at historically-high levels.
Besides discouraging growers from planting cane, this could drive growers to sell cane for manufacture into makers of gur or khandasari, sweeteners popular in the domestic market, rather than to sugar mills.
The comments, however, failed to prevent a further decline in raw sugar futures in New York, where the benchmark October contract fell 0.6% to 20.32 cents a pound to chalk up an 11th successive session of decline.
"Physical demand [for sugar] seemed to have been frontloaded to mid-2012 and there are worries that demand is now slowing towards the end of the year," Nick Penney at Sucden Financial said.
Furthermore, while funds and speculators "have shed part of their overall net long position", they "still have more to go".
Non-commercial investors have reduced their net long position in New York sugar futures and options by nearly 20,000 contracts, to 63,789 lots, in two weeks, according to regulatory data.