The government on Wednesday approved an increase in ethanol prices for the 2018-19 sugar season, starting October. The level of the price increase suggests that the centre wants to incentivize ethanol output and investments in capacity addition. But the industry may still be wary, given that these incentives were to paper over the structural cracks in the sugar industry, which may raise the risk of a volatile future.
First, a quick recap of the sugar situation. Farmers want sugar cane prices to increase, even when sugar prices fall. The central government supports this desire with a minimum price that never declines. Sugar mills don’t pay farmers when they are making losses. The government offers sops to the mills to clear arrears. But the government will also not let sugar prices increase because voters have a sweet tooth.
The current season has seen a surge in output. The new season, beginning October, is also expected to see a bumper crop. That has created a problem of plenty, and unpaid cane arrears.
One solution is to divert cane to produce ethanol. The government has asked the industry to invest in ethanol capacity, assuring them of offtake, giving incentives and setting remunerative prices to be paid by oil marketing companies.
Wednesday’s announcement goes one step further by incentivizing sugar mills to divert all their sugar cane juice away from sugar to ethanol. So, ethanol produced from C-heavy molasses will continue to earn ₹43.70 per litre.
In the case of B-heavy molasses, the price has been increased by 11.3% to ₹52.40 per litre. Compared to C-heavy, the sugar output is lower by 20%, while ethanol output doubles. For ethanol produced directly from sugar cane juice, the procurement price has been revised by 25% to ₹59.10 a litre. Here, while sugar output is nil, ethanol output rises six-fold, according to the government statement.
The price difference for 100% juice to ethanol is because this process produces only ethanol, instead of a mix of sugar and ethanol in the B and C categories.
This is a big step for the government, because it allows sugar mills to produce only ethanol. But mills will have to invest in distillery capacity and will also require investments in pollution control, storage and logistics, according to the management of Balrampur Chini Mills Ltd, in their post-results conference call. The company itself is investing ₹207 crore in a new distillery.
There is nothing wrong in giving incentives to a particular industry. In fact, ethanol blending also lowers the fuel import bill. But this is a problem largely of the government’s own creation. If it had allowed cane prices to rise and fall, the crop would do likewise and the market would balance itself. Incentivizing ethanol is an imperfect fix.
When fuel prices decline, oil companies will want to pay lower for ethanol. Falling fuel prices was one reason why ethanol producers in Brazil suffered.
If ethanol prices decline, sugar mills will find their margins crimped because their sugar cane purchase price is fixed. And if the government forces oil companies to pay the same ethanol price, they will suffer.
Also, bad weather can damage the cane crop. When that happens, sugar output will decline and market prices will increase. If companies continue to divert 100% of their sugar cane juice to ethanol, sugar supply position will be tight and cause a spike in prices. That’s what mills would want, too.
But the government will not like that. Even now, it instructs mills to release a minimum level of sugar stocks, to keep prices low. Faced with a spike in prices, it can simply mandate mills to use all sugar cane juice to produce sugar, or worse, it could lower ethanol price. These may seem hypothetical, but not if you have watched the goings on in the sugar industry.
A simple, but clean fix to the sugar industry’s problems is to link the price of cane to the blended realization that a mill earns from sugar, ethanol and cogeneration of power. Instead, what we have is another government-directed adventure that has the potential of turning into a misadventure.