Sugar Mills Face Economic Dilemma in ESY 2026-27 as Grain Sector Takes Center Stage

The ethanol supply year (ESY) 2026-27 is expected to be different from previous years, with the biggest question being whether sugar mills will find it economically attractive and practically possible to divert sugar towards ethanol. The sugar sector has been in the spotlight due to lower-than-expected sugar production and a sharp rise in sugar prices.

Currently, 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. For a sugar mill, selling sugar at this price is broadly around the cost-of-production zone for many mills.

If sugar prices remain above this level, the economic incentive to divert sugar into ethanol becomes weaker. However, if sugar prices fall below Rs 40/kg, the calculation can change, and ethanol may become a more attractive option. This year's sugar production is expected to be around 290 lakh tonnes, while consumption could be close to 300 lakh tonnes.

In ESY 2025-26, out of the total allocation of 1048 crore litres ethanol by 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.

However, 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. The grain sector will have to carry a bigger burden, with ethanol demand for ESY 2026-27 expected to be around 1,150-1,200 crore litres.

Industry expectations are that grain-based ethanol may need to contribute close to 1,000 crore litres to meet the overall requirement. This would put significant pressure on maize availability and increase the cost of producing grain-based ethanol.