Tight Sugar Stocks Keep Prices Firm, Ethanol Margins Under Pressure
India’s sugar prices are expected to stay firm through the first half of FY27 due to tight inventories, despite a modest recovery in production, according to India Ratings and Research. However, ethanol profitability is under pressure as production capacity outpaces demand, creating oversupply and squeezing margins for cane-based ethanol producers.
India’s sugar prices are expected to remain firm through the first half of FY27 due to tight inventories, even as ethanol profitability comes under increasing pressure from oversupply and stagnant prices, according to a report by India Ratings and Research.
In its latest Sugar Watch report, the agency said the sector is entering a phase of structural tightness in inventories despite a modest recovery in production, which will support domestic prices and provide some cushion to sugar mills against rising cane costs.
India’s gross sugar production is projected to recover to around 32.5 million tonne in the 2025-26 sugar season (October-September), up from 29.5 million tonne in the previous season but still below the 34 million tonne recorded in 2023-24. The report noted that the recovery remains below expectations due to lower cane yields and sugar recovery rates, with downside risks persisting until the crushing season concludes.
As a result, closing inventories are estimated to remain around 5 million tonne, marginally below normative levels, thereby underpinning price strength. The agency said this structural tightness is likely to anchor domestic sugar prices through the first half of FY27, supporting mill profitability and revenue stability.
Higher production in the upcoming season is also expected to allow for increased domestic sales quotas, which could aid mill revenues. However, exports are likely to fall significantly short of the permitted 2 million tonne due to depressed global prices and tight domestic supplies.
The report highlighted that rising cane costs will continue to exert pressure on margins. State-advised prices are expected to rise by about 8 per cent year-on-year, while fair and remunerative prices could increase by 4.4 per cent year-on-year in the 2025-26 season. While firm sugar prices may partially offset this impact, cost pressures are likely to intensify in the second half of FY26 and into FY27.
The agency also pointed to global factors, noting that sustained high crude oil prices, partly driven by geopolitical tensions, could lead to higher diversion of cane towards ethanol production in Brazil, potentially supporting global sugar prices. However, exporters may face logistical disruptions and higher freight costs.
On the ethanol front, the report flagged a growing structural imbalance, with capacity expansion outpacing demand growth. It said stagnant ethanol prices, unchanged for the past three years, are weighing on the profitability of cane-based producers.
India’s ethanol demand growth is slowing as the country approaches the 20 per cent blending target, while production capacity, particularly in grain-based distilleries, has expanded rapidly. Against a requirement of 10.5 billion litres, oil marketing companies received offers totalling 17.8 billion litres in the first cycle tender for the 2025-26 ethanol supply year, indicating significant oversupply.
During November 2025 to February 2026, oil companies procured 3.3 billion litres of ethanol, with 64 per cent sourced from grain-based routes. The report expects grain-based ethanol to account for 65-67 per cent of total blending in the current supply year, broadly in line with the previous year.
The expansion of grain-based distilleries, coupled with a sharp correction in maize prices of about 20 per cent year-on-year and increased output of distillers’ dried grains with solubles, has improved the economics for grain-based producers. In contrast, cane-based producers are facing margin compression due to rising input costs and stagnant ethanol prices.
The report also noted that ethanol demand growth, which had expanded at a compound annual growth rate of 40 per cent between the 2020 and 2025 supply years, is now moderating due to constraints such as vehicle compatibility.
It warned that without a clear policy roadmap for blending beyond 20 per cent or diversification of ethanol usage, the oversupply situation is likely to persist, limiting capacity utilisation and profitability improvements across the sector.
The agency emphasised that policy clarity on ethanol pricing and blending targets will be critical for ensuring long-term resilience of the sector.
