What is the Sugar Industry High On?

Can Ethanol save the Rs. 80,000 crore sugar industry?

There has never been a sweeter time to work in the sugar industry. 

A few days back, the news was abuzz that sugar prices have risen by 15% globally in a matter of months. This means that Indian sugar exporters can make extra margins. And now, the government has sped up the ‘ethanol blending programme’. 20% ethanol blending with petrol was supposed to happen by 2025, but the deadline has now been shifted to 2023. This announcement has led to a more than 3% surge in sugar stocks at the BSE.

Ehh? What does ethanol have to do with the sugar industry?

Well, enter: Plan B for the sugar industry.

Molasses, a by-product from making sugar, is fermented to make ethanol. The left-over sugar content in molasses determines the quality of ethanol. It’s kind of a trade-off between producing more sugar or more ethanol. But, why does the sugar industry need a Plan B in the first place?

Because it is highly volatile. You see, the government regulates pretty much everything for them. The purchasing price for the raw material (sugarcane), the price for sales, quantity to be sold, everything. Since the government has to optimize for various stakeholders, sometimes its decision might not be very lucrative for sugar manufacturers (Check out our detailed write-up that reveals the complexity of the sugar industry). And so, to hedge (or protect) themselves from such bitter circumstances, the sugar industry is ramping up the production of Ethanol. 

To make the deal all the more sweeter, the government itself is incentivising to produce more Ethanol! Why? 

Well, it is killing multiple birds with one stone!

First, Ethanol is a non-fossil biofuel that will help in the reduction of vehicular pollution. 

Second, it will save foreign exchange required for the import of crude oil and reduce import dependence. 

Third, there has been surplus sugar production in the country since the past one decade. And so, the government is targeting ethanol as an alternative which can be made from cane to take care of excess sugar in the system.

Looks like a smart move? 

Wait, there's more! 

When sugar prices fall because of higher sugar production, the sugar manufacturers find it difficult to pay their dues to farmers. This due amount is called “cane price arrears'' and it has risen to Rs. 23,000 crores, from Rs. 19,200 crores in 2020. Increased production of Ethanol will help the sugar manufacturers improve their cash position and help them make timely payments to farmers.

But, even this safeguarding technique is full of risks.

You see, sugar is an essential commodity. If the perks of ethanol are higher, the sugar manufacturers might not want to produce sugar anymore. 

So, enter: Second-generation Ethanol.

Pioneered by Praj Industries in India, the second generation Ethanol uses a wide range of agricultural residues like rice & wheat straw, cane trash, corn cobs & stover, cotton stalk, bagasse, and empty fruit bunches to produce Ethanol. 

Yes, pretty much all things trash. There is no trade-off between food and fuel that you see in first-generation Ethanol. 

So, going forward, once the second generation Ethanol is ramped up and made more viable, what will the sugar industry do? And, what if crude prices were to globally fall, and producing ethanol is not lucrative anymore? 

Food for thought. Until next time, read on.

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