India Changes Ethanol Procurement Policy to Curb Sugar Prices and Protect Supplies

Last year, 29 lakh tonnes of sugar were used to produce ethanol, reducing the quantity available for other uses.

The oil marketing companies issued a tender two days ago to procure 1,100 crore litres of ethanol. The tender excludes purchase proposals for ethanol made from sugarcane juice, sugar syrup and B-heavy molasses. However, procurement of ethanol produced from maize, broken grains, surplus rice purchased from the Food Corporation of India (FCI), and C-heavy molasses remains open.

C-heavy molasses is a by-product left over after the sugar manufacturing process and contains only a minimal amount of sugar. Its use for ethanol production therefore does not significantly reduce sugar availability. The policy change indicates that the government intends to rebalance the raw materials used in ethanol production rather than halt the ethanol programme.

Sugar production faces additional risks from weather conditions and crop damage. El Niño has severely affected sugarcane cultivation in states such as Maharashtra and Karnataka. In several areas of Uttar Pradesh and Bihar, floods, diseases and pest infestations could also affect sugarcane yields.

These challenges have raised concerns about a potential decline in sugar production. India's annual sugar consumption stands at around 300 lakh tonnes, while production this year is estimated at approximately 280 lakh tonnes. With an anticipated gap between domestic demand and production, precautionary measures have become necessary to maintain supplies and contain prices.

Ethanol Policy Balances Sugar Production and Crude Oil Dependence

For several years, the government has encouraged the blending of ethanol with petrol to reduce dependence on crude oil imports and save foreign exchange. The revised procurement policy must therefore preserve sufficient sugarcane for sugar production while ensuring that adequate ethanol remains available for the fuel-blending programme.

However, increasing the supply of grain-based ethanol also carries risks. Higher demand for maize and rice could put pressure on food security and the availability of animal feed. The government will consequently need to balance the country's food requirements against its fuel needs as it considers increasing the use of grains for ethanol production.

How Will the Policy Change Affect Sugar Mills?

The revised policy could directly affect the earnings of sugar mills. Mills that have arrangements to produce ethanol from sugarcane juice and B-heavy molasses may have to revise their production and sales plans in response to the procurement restrictions.

The government now faces two competing priorities: ensuring adequate sugar supplies to prevent further price increases and maintaining sufficient ethanol supplies for the petrol-blending programme. The effectiveness of the revised policy will depend on how successfully these objectives can be balanced without creating additional pressure on food availability or disrupting ethanol supplies.