Ethanol Supply in ESY 2026-27: Sugar economics may decide the feedstock mix – Editorial by Uppal Shah
India’s ESY 2026-27 ethanol supply could face challenges as sugar prices and tight availability reduce mills’ incentive to divert sugar. Lower sugar-based ethanol may increase reliance on maize, potentially pressuring maize supplies and prices while complicating the government’s blending targets.
The ethanol supply year 2026-27 could look different from the previous few years. The biggest question may not be ethanol demand, but whether sugar mills will find it economically attractive, and practically possible, to divert sugar towards ethanol.
The sugar sector has remained in the spotlight during the current sugar season because of lower-than-expected sugar production and a sharp rise in sugar prices. At one stage, prices rose sharply, creating concerns over availability and prompting the government to take several measures to keep prices under control.
However, the market has now changed. Ex-mill sugar prices in Maharashtra are around Rs 4,200–4,300 per quintal, while Uttar Pradesh prices are around Rs 4,500–4,600 per quintal.
This matters for ethanol economics.
For a sugar mill, selling sugar at around Rs 42/kg is broadly around the cost-of-production zone for many mills, although the actual position differs from mill to mill depending on recovery, cane cost, finance cost and other expenses. If sugar prices remain above this level, the economic incentive to divert sugar into ethanol becomes weaker. If sugar prices fall below Rs 40/kg, however, the calculation can change, and ethanol may become a more attractive option.
This is where ESY 2026-27 becomes particularly important.
Sugar availability will be a key factor. For the coming sugar season, industry expectations are that sugar production could be below 300 lakh tonnes, while consumption could be around 290 lakh tonnes.
The current season has already demonstrated how quickly the sugar market can change. Sugar prices rose sharply during 2026 on concerns over lower production and festival demand. The government responded with several measures, including restrictions on dealer stocks, limits on stocks held by bulk consumers, duty-free imports of up to 10 lakh tonnes of raw sugar, closer monitoring of sugar stocks and an advisory for mills to begin crushing earlier.
The government has therefore made it clear that ensuring adequate sugar availability for domestic consumption remains a priority.
In ESY 2025-26, out of the total allocation of 1048 crore litres ethanol by the Oil Marketing Companies (OMCs), about 289 crore litres has been allocated to sugarcane-based feedstock resulting in the diversion of about 34 LMT of sugar to ethanol. This was against offers of about 471 crore litres.
In other words, only around 61% of the ethanol offered from sugarcane-based feedstocks received allocation.
The feedstock-wise picture was also revealing:
– Sugarcane juice/syrup received about 165.85 crore litres against offers of around 299.48 crore litres, or about 55%.
– B-heavy molasses received about 110.49 crore litres against offers of around 158.70 crore litres, or about 70%.
– C-heavy molasses received about 12.17 crore litres against offers of around 13.45 crore litres, or about 90%.
-Of the total allocation of about 1,050 crore litres, juice/syrup accounted for roughly 15.8%, B-heavy molasses about 10.5% and C-heavy molasses about 1.2%.
C-heavy molasses has a much stronger chance of remaining part of the ethanol mix, while diversion from sugarcane juice and B-heavy molasses is more sensitive to sugar availability and government policy.
The industry has already seen how quickly ethanol policy can change when sugar availability becomes a concern.
On December 7, 2023, the government directed sugar mills and distilleries not to use sugarcane juice or sugar syrup for ethanol for the remainder of ESY 2023-24. It also said existing offers from B-heavy molasses could continue. The December 15 order subsequently revised the arrangement and asked OMCs to allocate sugarcane juice and B-heavy molasses ethanol, while keeping an overall cap on sugar diversion.
The government then formally allowed sugarcane juice/syrup, B-heavy molasses and C-heavy molasses for ethanol during ESY 2024-25, while stating that diversion would be reviewed against domestic sugar availability. The order was dated August 29, 2024, with the permission applicable from the new ethanol supply year.
The reason for the December 2023 intervention was concern over lower sugar production, particularly after poor rainfall in major producing states. The subsequent relaxation reflected concerns from the sugar and distillery industry and the need to support ethanol supplies and mills that had invested heavily in distillery capacity.
Therefore, if sugar production is again seen as insufficient in 2026-27, the possibility of restrictions on sugarcane juice and B-heavy molasses cannot be ignored.
Assume the industry crushes around 275 million tonnes of sugarcane during the coming season, as currently expected by some industry estimates.
If sugar prices remain attractive, mills will naturally prefer to maximise sugar production. After all, a mill’s first priority is to recover its cane cost and generate cash flow. A higher sugar price gives mills an incentive to produce and sell sugar rather than sacrifice recoverable sugar for ethanol.
The situation becomes even more important for mills carrying high debt and interest costs.
Several sugar-ethanol projects expanded their distillery capacity in recent years based on the expectation of higher ethanol offtake. However, when ethanol allocations are lower than offers or payment realisation is delayed, the distillery does not generate the expected cash flow. Interest costs continue even when the capacity is not fully utilised.
For such mills, the question is no longer simply whether ethanol can be produced. It is whether producing ethanol gives a better return than selling the sugar.
If the government restricts diversion from sugarcane juice and B-heavy molasses because of tight sugar availability, C-heavy molasses could become the main sugar-sector feedstock for ethanol.
At around 275 million tonnes of cane crushing, industry estimates suggest that C-heavy molasses could theoretically support around 274 crore litres of ethanol.
But this entire quantity should not be considered available for ethanol.
C-heavy molasses also has competing uses, including rectified spirit, extra-neutral alcohol and other applications. Therefore, after considering these requirements and other uses such as molasses used in cattle-feed-related applications, the quantity actually available for ethanol could be lower.
A more realistic industry expectation is that less than 200 crore litres of ethanol may be available from final/C-heavy molasses for the OMC programme, depending on cane crushing, recovery, molasses generation and competing demand.
The grain sector will therefore have to carry a bigger burden. Ethanol demand for ESY 2026-27 is expected to be around 1,150–1,200 crore litres.
If sugar-based ethanol contributes substantially less than in previous years, grain-based ethanol will have to fill the gap.
Industry expectations are that grain-based ethanol may need to contribute close to 1,000 crore litres to meet the overall requirement.
That would put significant pressure on maize availability.
If the grain-based requirement rises further, maize prices could remain under pressure from ethanol demand, as the maize balance sheet also looks tight. This would increase the cost of producing grain-based ethanol.
Therefore, replacing sugar-based ethanol with grain-based ethanol is not a simple one-for-one switch. It shifts the pressure from sugar availability to grain availability and maize economics.
The ethanol programme was designed to provide an additional revenue stream to sugar mills and help them manage surplus sugar. That model works particularly well when India has comfortable sugar stocks.
But when sugar production falls significantly, the economics change.
If sugar is available in surplus, diverting it to ethanol can reduce excess stocks, improve cash flow and help mills pay cane dues. If sugar production is only marginally above consumption, the same diversion can tighten the domestic sugar balance.
This is why the 2026-27 ethanol supply year could become a delicate balancing act.
On one side is the government’s ethanol-blending target and the need to maintain adequate ethanol supplies for OMCs. On the other is the need to ensure adequate sugar availability at reasonable prices.
The government’s decision on sugarcane juice and B-heavy molasses could therefore become one of the most important policy decisions before the new ethanol supply year.
India may need 1,150–1,200 crore litres of ethanol in ESY 2026-27. The bigger question is where that ethanol will come from.
If sugar production is below 300 lakh tonnes and domestic consumption is around 290 lakh tonnes, there may be very little room for aggressive sugar diversion.
If sugar prices remain above ₹42/kg, mills may also have little economic incentive to divert sugar into ethanol.
If the government restricts juice and B-heavy molasses diversion, C-heavy molasses alone may not be sufficient to bridge the gap.
That leaves grain-based ethanol, particularly maize, to carry a much larger share of the burden.
The ethanol market is therefore entering a phase in which sugar economics, government policy and maize availability will be closely linked.
For sugar mills, the calculation will be simple: if sugar gives a better return than ethanol, sugar will get priority.
For the government, the calculation will be more difficult. It will have to balance consumer sugar prices, mill economics, farmer payments and the country’s ethanol-blending requirement.
For further inquiries please contact Uppal Shah, Editor-in-Chief, at uppal@chinimandi.com
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Source : ChiniMandi
