Ethanol, Speculative Buying, Weather: What’s Behind Sugar Prices Surge And Imports?

For the first time in nearly a decade, India is opening the door to sugar imports. The government has allowed duty-free imports of up to 1 million tonnes of raw sugar as domestic prices surge and festive-season demand approaches.

The move has also brought the government’s ethanol policy into industry debate, with a trade expert raising questions over whether the diversion of sugarcase towards ethanol production could have implications for domestic sugar availability.

Economist and trade expert C Veeramani said the episode raises a broader food-versus-fuel policy question.

"Using agricultural output for non-food purposes needs closer scrutiny, particularly if the country eventually has to import agricultural commodities after diverting domestic production towards ethanol," he said.

According to Veeramani, any foreign-exchange savings from reducing oil imports must be assessed against the potential cost of importing food commodities.

"Sugarcane's water-intensive nature should be considered, particularly in regions facing water scarcity... And a more predictable and less restrictive agricultural trade policy would help the frequent shifts between export controls and import liberalisation, preventing uncertainty for producers, consumers and trading partners," he added.

However, industry executives from ISMA and AIDA insist that ethanol diversion is not the reason behind the latest price spike.

Domestic consumption remains the government's first priority and ethanol diversion takes place only after considering domestic requirements, said Deepak Bhallani, Director General of the Indian Sugar & Bio-energy Manufacturers Association (ISMA).

Currently, sugar prices have surged to record levels ahead of the festive season, prompting the government to tighten stockholding rules and allow duty-free imports of 1 million metric tonnes of raw sugar.

Wholesale sugar prices in Kolhapur had earlier risen nearly 20% since the beginning of August to ₹5,350 per 100 kg, while the all-India average retail price stood at ₹52.3 per kg on August 18, according to Consumer Affairs Department data. Prices in some markets in national capital Delhi have climbed as high as ₹65-70 per kg.

Why Are Sugar Prices Rising?

The immediate concern is tightening supplies at a time when demand typically rises sharply between August and November due to festivals such as Ganesh Chaturthi, Dussehra and Diwali.

Wholesale prices had risen 10% in July, with mills releasing stocks gradually and bulk consumers building inventories ahead of the festive season, as per a report by Reuters published on August 5.

The sugar stocks at the beginning of the new season could fall to around 3.5 million tonnes, the lowest level in more than three decades, the report said.

Weather is adding another layer of uncertainty. Experts that Outlook Business spoke with indicated that reduced rainfall in Maharashtra and Karnataka had raised concerns over next season's sugar output, while patchy rains and dry weather have also affected the crop.

The government has nevertheless moved quickly to curb the rally. It has imposed a 15-day stockholding limit on bulk consumers using more than 10 tonnes of sugar a month, effective from September 1 to November 30. Earlier, dealers had been reportedly restricted to holding stocks for no more than 30 days.

Another reason for the spike in prices of sugar is a form of panic or speculative buying in the market. According to Vijendra Singh, President of the All India Distillers Association (AIDA), India has ample sugar stocks for consumption and the current rise in sugar prices is driven by speculative buying rather than any fundamental shortage.

"Consumers and bulk buyers tend to purchase more than they require when they expect prices to rise further, creating additional pressure on demand," Singh said, describing the trend as a short-term price rise.

He added that there was no need for panic buying, as the new crop was around 60 days away and fresh sugar supplies would start reaching the market by mid-to-late October.

He said the country could have a closing stock of 35-40 lakh tonnes by September 30, sufficient to meet demand through October and part of November, when fresh sugar from the new crushing season begins reaching the market.

"The recent rally is instead being driven by speculative buying," Bhallani said, adding that bulk consumers began purchasing stocks for "two months instead of their normal 10-15 days" as prices started rising, creating what he described as "artificial demand".

AIDA's Singh also offered a similar assessment. He said India's monthly sugar consumption is around 22 lakh tonnes and argued that even if next year's production declines by 1-1.5 million tonnes, the country would not face a shortage.

Apart from these factors, it is pertinent to note that around 2.7 million tonnes of sugar was diverted towards ethanol production last year, while another 0.8 million tonnes was exported, amounting to roughly 3.5 million tonnes, according to trade expert Singh.

However, Singh also stated that even a fall of around 1 million tonnes in sugar production would leave sufficient supplies for domestic consumers.

Both ISMA and AIDA officials stressed that India's ethanol programme follows a “multi-feedstock approach”.

"The government assesses crop production, domestic sugar requirements and buffer stocks each year before deciding the level of diversion from sugarcane, maize or rice," Bhallani said.

Singh, similarly, said ethanol should be produced from surplus agricultural output, with food requirements taking priority. "If sugar availability tightens, ethanol production can shift towards other feedstocks such as maize," he said.

Why Is India Importing Sugar Now?

Despite industry assurances over domestic availability, the government has opened the door to imports to cool prices and sentiment.

India has allowed duty-free imports of 1 million tonnes of raw sugar until October 31, ahead of peak festive demand. As per a report by Reuters, preference will be given to importers able to complete shipments by October 15.

The move could quickly add around 300,000 tonnes to the domestic market through port-based refiners, although fresh shipments from countries such as Brazil could take nearly two months to arrive, the report said.

Bhallani said imports could help neutralise negative sentiment even if the country does not face an actual availability crisis. Similarly, Singh said that duty-free imports could reduce panic buying by signalling that additional supplies will eventually reach the market.

Veeramani, however, said imports should put a brake on the pace of price increases, but the extent of relief would depend on international prices, the difference between global and domestic prices, and the availability of exportable supplies abroad. Simply opening imports, he cautioned, does not guarantee immediate supply.

So, for now, India's sugar market reflects a combination of festival demand, speculative stocking, concerns over the next crop and weather uncertainty.

While the E20 programme has revived the food-versus-fuel debate, the industry’s position is mixed over whether diversion of sugar towards ethanol has contributed to the recent rise in sugar prices.

The government's latest response to put stock limits and allow duty-free imports suggests it is trying to contain prices before festive demand intensifies while buying time for the new sugar crop to reach the market.