The policy that frees sugar mills turns into a chokehold. (Source: Reuters)

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There are times when the government’s policy to encourage sugar mills to make ethanol and mandate blending with petrol looks like a brilliant move. Usually, it’s in times of an abundant sugarcane crop when the surplus does not create the earlier headache it did, for farmers, mills or even the government. It’s a different matter that auto-owners are unhappy with the mandate due to the E20 blend’s impact on mileage and its impact on older vehicles’ internals.

But there are also times when this policy that frees sugar mills turns into a chokehold. We may be headed for one such season, it appears. Consider some of the headlines relevant to the industry. Moneycontrol reported this week that mills may favour sugar over ethanol due to better realisations. It has typically been the other way around. Private weather forecaster Skymet has lowered its monsoon forecast, bringing it down to 85% of the long period average with a 70 percent chance of drought, compared to its initial forecast of 94 percent. And the latest is that the government is considering a lowering or even scrapping of import duties that are at 100 percent at present on the sweetener.

While sugar imports are not feasible at present, it has not stopped domestic sugar prices from rising, taking a cue from global prices. Global prices are rising partly due to elevated crude oil prices and the Super El Nino forecast for 2026-27. The industry has been saying that existing inventory is comfortable and sufficient to meet demand till the new season’s crushing starts. Now, the new season’s expected sugar output has been lowered from the initial estimates. But crushing starts after October and picks up gradually. As of now, the area under sugarcane cultivation has seen only a marginal decline compared to last year. Availability of irrigated water supply should also dull the impact of a weak monsoon on the cane crop. Therefore, cane supply could prove to be adequate after all.

While these factors will play out in the coming quarters, sugar prices have heated up already. Last week, we had pointed out that an 8 percent increase in prices since July could cause trouble for mills. The wholesale price of sugar has risen by another 3 percent to Rs 48.4 a kg from Rs 47 a week ago. That’s a sharp increase that’s taking place even as the festival season demand has yet to emerge, as it’s delayed this year. By the time crushing reaches its peak, the festival season will probably be over. That’s why the government is asking mills to crush early, but they are demurring.

One of the reasons India is having to import sugar, when even a reduced domestic cane crop is adequate to service demand is because of ethanol production. Mills use a mix of cane syrup, B-Heavy and C-Heavy molasses to produce ethanol, with decreasing sugar levels in each (which determines the possible ethanol output).

To protect ethanol output, mills will need to sacrifice a certain level of sugar output. Economically, in the current season, they are leaning towards producing more sugar as it’s more profitable. Ethanol prices made using sugarcane feedstock have not been revised upwards to the extent to which sugar mills have asked for. Unless the government revises ethanol prices upwards, mills will not produce more ethanol. They can be forced to, but they won’t be happy at that.

Alternatively, ethanol is also being made using maize and surplus rice – in fact, non-sugarcane feedstocks have taken the upper hand in ethanol output. While one option could have been to step up production from these feedstocks and reduce that of cane, the areas under rice and maize cultivation have both taken a hit due to the erratic rainfall in the season so far. The area under rice is down by 3.7 percent and under maize by 4 percent. The government may then need to prioritise using grain stocks to cool down inflation and ensure availability rather than use them for producing ethanol.

The government believes the sugar industry is using current market conditions to drive prices higher. While that may be the case, that’s how free markets work. The government has a range of policy measures it can use to drive prices down. Freeing up imports is one solution, but typically international prices increase when that happens, due to the expected increase in demand. Stock limits are another.

Alternatively, ethanol plants can import feedstocks to produce ethanol to reduce demand for cane. But ethanol blending was supposed to lower India’s dependence on imports of crude oil. In times like these, we may simple be able to replace imports of one good with that of another.

There will be second order effects too. Seeing sugar prices rise, farmers are likely to demand much higher cane prices in the forthcoming sugar season. Not yielding to these demands will prove to be politically difficult. A major sugar producing state is Uttar Pradesh which goes to elections next year, giving farmers a good reason to extract a higher price. Those prices have to be ultimately paid by mills. The government cannot ask them to bear the burden of lowering sugar prices and paying farmers higher prices. They will simply let cane arrears build up instead, leading to angry farmers, a political hot potato.

Ethanol was meant to be the release valve for these old, familiar tensions that gripped the sugar industry in past years. It may not function very well this year. 

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