China's move to cut the price of sugarcane for a second consecutive crop year may send a signal to the oversupplied global market it wants to end a stockpiling programme which has sent domestic prices soaring, dealers said on Thursday. With annual domestic demand held at around 15 million tonnes, partly due to competition from alternative sweeteners such as corn syrup, China aims to reduce its bulging stocks and discourage farmers from planting more sugarcane, they said. 

The state reserves are estimated to hold up to 7 million tonnes of sugar, about 4 percent of global output. The world's second-largest consumer has reduced its cane price to 440 yuan ($72.18) a tonne in the year to September 2014, from 475 yuan in the previous year and 500 yuan in the 2011/12 crop year. The Chinese government gave no reasons for the reduction. "I think it's inevitable. Except for Japan, China now has the highest price of cane in the world," said Tom McNeill, director at Brisbane-based commodities analyst Green Pool. "It appears that those high prices can't be sustained." For several years, China has stockpiled crops such as sugar, cotton, soy and corn, paying above-market prices to support farmers. But the policy has driven up domestic prices, led to a build-up in stocks and fuelled a surge in imports. 

Even though Zhengzhou white sugar futures have fallen about 7 percent this year on demand concerns and rising inventory, the front-month contract still trades at a hefty premium of around $400 to London futures, encouraging imports. Imports driven by the controversial stockpiling policy have raised hopes China could help absorb a global surplus of 4.5 million tonnes in 2013/14, as estimated by International Sugar Organisation. 

But the high inventory and steady domestic output at around 14 million tonnes shows that China is awash with sugar. London December white sugar plunged to a more than three-year low of $457.30 on Wednesday, under pressure from weak demand and excess supplies. "The assumption is China wants want to reduce stock piles which have been built up over the last couple of years," said a regional dealer. 

"It is a policy that can quickly be reversed, so they could aim for lower production in 2014/15. Once stocks are reduced they can increase again." It is unclear if China will continue the stockpiling programme in the current crop year, but the government may be formulating ways to prevent upsetting farmers. "I think the government is acknowledging this by lowering cane prices, and at the same time it is looking to change the way farmers are remunerated," said McNeill at Green Pool. "That is to put some of it into a subsidy, rather than buying sugar stocks to support sugar prices. That will allow the government to simply pay the money to the growers direct, without keeping the domestic prices of sugar very high which allows excessive imports."