Indian traders will export raw sugar to Iran for March and April delivery, five trade sources said, the first Indian sugar sales to Tehran in at least five years as Iran struggles to secure food supplies under sanctions imposed by the United States.

Under the sanctions, Iran is blocked from the global financial system, including using US dollars to transact its oil sales. Iran agreed to sell oil to India in exchange for rupees but it can only use those rupees to buy Indian goods, mainly items it can not produce enough of domestically.

Trading houses have contracted to export 1,50,000 tonnes of raw sugar for shipments arriving in March and April at $305 to $310 per tonne on a free-on-board basis, the trade sources told Reuters this week.

"Oil payments have piled up in UCO Bank. Iran is keen to utilize the payments to buy sugar and other food items," said one of the sources, a Mumbai-based dealer with a global agricultural trading firm, who asked not to be identified as he was not authorized to speak to media.

Iran's state buyer, the Government Trading Corporation (GTC), purchased the sugar to ensure ample supplies in the coming months, said a second source, a Mumbai-based exporter. Iran usually buys sugar from Brazil, the world's biggest producer and exporter of the product.

"Iran could import as much as 4,00,000 tonnes of raw sugar from India in 2019 as its local production is not enough to fulfil the demand," he said.

Cargill, Bunge and other global traders have halted food supply deals with Iran because the new US sanctions have disrupted the banking systems used to settle payments, industry and Iranian government sources said in December.

Iran is paying a premium of as much as $7 per tonne compared to other buyers as traders are anticipating a risk of a delay in payments, said a third source, also based in Mumbai, who did not want to be identified because of the sensitive nature of the US sanctions.

The exports will help reduce swelling sugar inventories in India, the world's second-biggest sugar producer, but could weigh on global prices that have risen 8.9 per cent so far in 2019 to 13.1 cents per pound as of Monday.

India-Iran ties

During the last round of US sanctions that ended in 2015, India was one of the few countries that continued to trade with Iran. India is Iran's biggest supplier of premium basmati rice and Indian rice traders have extensive business relationships in the country.

US President Donald Trump pulled the United States out of a multilateral nuclear deal with Iran in May and reimposed sanctions on Iran's vital oil industry from November.

Since the renewal of the sanctions, India's soymeal exports to Iran have also surged to overcome a shortage of animal feed.

A few Indian sugar traders are hesitant to open trade with Iran because of the sanctions and have carried out their sales through existing connections in the rice and soymeal sector, said a New Delhi-based sugar dealer with a global trading firm.

“A few trading houses fear selling sugar to Iran could hurt them in future. They are now helping rice and soymeal traders in arranging sugar shipments,” he said.

Iran is expected to import 535,000 tonnes of sugar in the 2018-19 marketing year ending on September 30, according to the International Sugar Organisation (ISO). The country's demand of 2.54 million tonnes outpaces production of around 2 million tonnes, the ISO said. Iran bought 720,000 tonnes of the sweetener in 2017/18, the ISO said.

Indian sugar mills were struggling to export a domestic surplus until recently. However, they have resumed signing export contracts as a recovery in global prices and a softening rupee narrowed the difference between local and overseas prices, dealers said.

Mills have shipped around 1 million tonnes of sugar out of 1.8 million tonnes contracted for exports so far in 2018-19, said the first Mumbai-based exporter.

India is set to produce a sugar surplus for the second straight year in 2018-19, putting pressure on mills to export so they can make payments to farmers.