India ethanol growth capped as sugar diversion falls

The International Sugar Organization has cut its forecast for India's 2026 fuel ethanol production by 0.75 billion liters to 11.3 billion liters, saying the shortfall reflects constraints from the country's blending mandate rather than any shortage of processing capacity, according to the ISO's Quarterly Market Outlook for August 2026.

The downward revision comes as India's sugar diversion to ethanol is expected to fall sharply to 1 million metric tons in the coming season, down from 2.8 million metric tons previously, signaling a policy trade-off between sweetener supply and fuel-blending goals that could reshape domestic feedstock flows in the months ahead.

The cut lands against a backdrop of tightening sugar fundamentals in India.

Indian domestic sugar prices hit record highs during the quarter on concerns over tight supplies in the intercrop period, prompting the government to issue import permits, the ISO said.

Indian wholesale sugar prices were at their highest level since at least 2020, the organization said, a divergence from softer markets in Brazil, China, the EU and Mexico over the same period.

Feedstock shift

With less sugar being routed to ethanol production, the ISO said grain now supplies most of India's ethanol requirement, pointing to growing reliance on maize and other grain-based feedstock to meet blending targets as cane-derived sweetener is held back for food use.

The pattern reflects a recurring tension in India's ethanol policy, where blending mandates have periodically clashed with the government's need to safeguard domestic sugar availability and control retail prices.

The revision to India's ethanol outlook comes even as the global fuel ethanol market continues to expand rapidly. World production is forecast to rise 6.0% to 130.1 billion liters in 2026, against consumption of 127.0 billion liters, leaving a surplus of 3.1 billion liters, the ISO said.

Brazil's output was revised up by 1.76 billion liters to 38.3 billion liters as the country's ethanol-heavy production mix persisted, the organization said, in contrast to India's downgrade, which highlights how the two largest cane-ethanol producers are moving in opposite directions this year.

Brazil moved to a 32% ethanol blend, known as E32, from Aug. 1, adding an estimated 1 billion liters a year to domestic demand, the ISO said. The country's hydrous-to-gasohol price ratio fell to 61.5% in July, its lowest level since September 2018, according to the report, a signal that sugar output remains more attractive than ethanol at prevailing price levels.

Separately, the ISO noted that the US has imposed a 25% tariff on Brazilian ethanol, with a further 12.5% duty stemming from a separate inquiry, adding friction to global ethanol trade even as Brazil ramps up output, a contrast to India, where the constraint is domestic policy rather than external trade barriers.

Sugar backdrop

India's ethanol constraints unfold against a wider sugar market that the ISO has judged tighter than previously thought.

The organization lowered its estimate for the 2025-26 global sugar surplus to 1.1 million mt, down from 2.2 million metric tons projected in May, citing weaker-than-expected output in Center-South Brazil during the first half of the 2026 harvest. For 2026-27, the ISO's first detailed estimate points to a small production deficit of 0.2 million metric tons, assuming that higher prevailing sugar prices will encourage Brazil to favor sugar output over ethanol, the organization said.

Raw sugar prices have already begun to reflect these tightening dynamics, with the average monthly ISA Daily Price climbing to 17.4 cents per pound in August as speculative funds built long positions on concerns over a developing El Nino event, the ISO said.

In the spot market, the Thai raw sugar spot premium was higher in the week to Aug. 27, tracking higher indicative values. Platts, part of S&P Global Energy, assessed FOB premium for Thai HiPol raw sugar spot September shipment higher week over week at 75 points over ICE New York No. 11 October (V) 2026 futures.

For India, that global price backdrop adds further complexity to the ethanol-versus-sugar calculus facing policymakers and millers.

Any push to expand ethanol blending further would likely require continued reliance on grain-based feedstock or a policy recalibration on how much cane sugar can be diverted to fuel use, based on the trends outlined in the ISO's report.

The Asian ethanol market was mixed, with fuel-grade firming while industrial-grade was steady.

Platts, part of S&P Global Energy, assessed the Asian fuel ethanol marker up $3.33/cubic meter day over day at $658/cubic meter, Sept. 2.

Platts assessed the industrial-grade B ethanol price unchanged day over day at $612/cubic meter CFR Ulsan Sept. 2.