Insight Focus
Incentives to increase diversion to ethanol in India remain weak. This will lead to surplus sugar availability in 2026. However large-scale exports will be unviable until domestic prices fall or stocks put pressure on mills’ liquidity.
What are the Latest Prospects for Diversion of Sugar to Ethanol?
Sugarcane ethanol in India is losing market share to grains-based ethanol. As a result, we believe that diversion of sugar to ethanol will not exceed 3.5-4 million tonnes in 2025/26. This is less than the 5 million tonnes that the industry would like to divert and could therefore lead to surplus sugar availability in 2026.
As well as the competition that sugarcane-based ethanol now faces from grains-based ethanol, our view is informed by the returns that mills earn from producing ethanol at the expense of sugar. In order to sustain ethanol blending’s viability in the face of higher cane prices, the Indian sugar industry has asked the government to raise ethanol prices.
Many mills/distilleries have a choice over which feedstocks they use to make sugar or ethanol based on the relative prices of ethanol paid by the oil marketing companies (OMCs).
The government recently raised the price of ethanol made from surplus rice stocks to INR60.32 per litre, which is a 3% increase from its price for the last three years. Unfortunately for the sugar industry, there was no change to prices to be paid to ethanol from other feedstocks, including sugarcane-based ones.
The below chart shows revenue generated by mills in Maharashtra (the main sugar exporting region) based on the type of feedstock used. The government’s reluctance to increase the price of ethanol made from sugarcane means that there’s little incentive for mills to expand the volume of sugar they divert to ethanol, unless domestic sugar prices became weaker.
Sugar prices are higher in Northern India compared to Maharashtra, making it even less attractive to divert sugar to ethanol.
Ethanol producers last week submitted offers to OMCs for the first tender to supply ethanol for the 2025/26 fuel blending programme. Only 27% of the offered quantities were from sugarcane-based ethanol, which is lower than the 30-35% market share that sugarcane ethanol has had during the last two years.
This development strengthens our view that sugarcane ethanol in India is losing market share to grains-based ethanol.
But are Exports Viable?
To manage this sugar surplus, the industry is lobbying the government to permit sugar exports of at least 2 million tonnes in 2025/26, and for the government to make a decision as soon as possible. However, nothing has happened yet.
But, even if exports are allowed, raw sugar exports aren’t viable at current prices.
Domestic sugar prices so far in October have eased marginally to trade at INR 39,000/tonne. The Indian Rupee depreciated slightly again, meaning it has now lost around 3% of its value against the US Dollar since July.
Indian raws exports require a No.11 price of 18.5-19c/lb to match the domestic market. Raw sugar export margins therefore remain negative at today’s prices as mills would lose almost 2-3c/lb on exports compared to selling to the domestic market.
In contrast, margins on exports of low-quality white sugar to regional markets have been positive. Indian shipments benefit from regional freight premiums when supplying these markets.
However, these margins have become less attractive in October following weaker international prices. The thin margins explain why India has reportedly only exported 775,000 tonnes of sugar in 2024/25. This is despite the government allowing them to export one million tonnes.
This indicates that large-scale exports are unlikely until the surplus domestic sugar weighs on prices and mills’ liquidity by building up stocks.
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