As crude oil prices have crashed from lofty levels of above $140 a barrel to less than $40 in the last couple of years, an unexpected industry has been suffering collateral damage — sugar. If this seems far-fetched, you should know that the prospects for sugar producers are quite closely linked to oil prices because one of its main products — ethanol — moves closely in step with oil.
Escalating worries about fossil fuels and their impact on climate change have prompted many countries to explore alternative renewable energy sources. And it is not just the sun, wind or the rivers that offer viable sources of renewable energy. Bio-fuels do too. Bio-fuels produced from food crops such as corn, rice-husk and sugarcane are increasingly being used to supplement, if not substitute, petrol and diesel across countries.
In the world’s largest sugar producing nation — Brazil — flexi-fuel cars seamlessly switch between petrol and ethanol produced from cane, depending on which fuel is more easily available. Nearly a fourth of Brazil’s fuel needs are met, not by crude oil derivatives, but by ethanol produced from crushing cane.
The sugar crunch
If the world’s largest sugar producer can use ethanol to meet such a substantive portion of its fuel needs, why can’t the world’s second largest one, India? After all, it is no secret that the Indian sugar industry is reeling under a glut. The sugar year 2014-15 was the fourth consecutive year in which sugar mills churned out far more of the sweetener than domestic consumers demanded, resulting in the 2014-15 season (ending October 2015) closing with excess inventories of 96 lakh tonnes. Excess sugar output over the last four years has unleashed a plethora of problems.
The excess supply has led to market prices of sugar crashing to multi-year lows. With sugar prices falling below costs of production, most mills are saddled with losses. The losses have, in turn, fuelled working capital problems and led to mills delaying payments to their cane growers. This has prompted the Government to scramble into action. Since last year, it has announced a ₹6,000-crore soft loan package for sugar, an export subsidy and even a hike in the import duty to make sure the domestic sugar economy is shielded from imports. But all this has not really done much to alleviate the domestic sugar crisis.
The ethanol solution
One easy solution to the above dilemma would be to go the Brazilian way and process more sugarcane into ethanol. The process isn’t all that difficult for sugar millers. Today, every tonne of cane crushed produces about 95 kg of sugar, 45 kg of molasses (sugarcane juice after crystal sugar has been extracted) and residual bagasse.
Sugar mills with a distillery attached can process the 45 kg of molasses into about 11 litres of ethanol. Therefore, the realisations on ethanol, if any, can supplement their realisations from sugar. Theoretically, mills can even go the whole hog and directly process sugarcane into ethanol, instead of producing any crystal sugar or molasses. That’s what Brazilian millers do to maximise their revenues during years of surplus cane.
If Indian sugar millers were allowed such flexible switching, sugar supplies in the open market would fall, the producers would earn higher realisations and probably offer cane farmers better prices too. Higher ethanol production is a good idea from a macro standpoint too. Substituting imported crude oil with domestically produced ethanol would save the country sizeable foreign exchange (a McKinsey study in 2015 estimated savings of $1.7 billion if India could maximise its potential on ethanol). It would also earn us much-needed brownie points with the West for shifting to cleaner energy sources. So why isn’t India doing just this?
What’s in the way
Well, attribute it to a combination of politics, commercial considerations and a tug-of-war of vested interests. Realising the enormous potential that exists in cane-based ethanol nearly ten years ago, the Centre had flagged off an ethanol-blended fuel programme (EBP). The programme mandated that oil marketing companies blend 5 per cent ethanol into fuel supplied through their petrol pumps.
But the programme has been mired in problems from day one. First, sugar producers had to invest in fresh distillery capacity to make the processing of molasses into ethanol possible. Given the cyclical nature of the industry, they were keen to do it only in the surplus years for sugar, when open market prices of sugar were in a slump. Then, when sugar millers realised that ethanol could be a source of stable revenues, the oil marketing companies refused to play ball.
Despite the Government mandating 5 per cent fuel blending, oil marketing companies engaged in protracted negotiations with the sugar millers to drive down the prices of ethanol. In the deficit sugar years, producers would try and maximise their output of molasses and potable alcohol that would fetch them high market prices, and drag their feet on ethanol, which was subject to negotiated prices. Thankfully, in 2015, the Government stepped in to mediate and, since then, the oil marketing companies have been floating regular tenders to procure ethanol at a Government-determined price of ₹49 a litre from sugar mills. The Centre has also given the EBP an extra push by requiring oil marketing firms to move to mandatory 10 per cent ethanol blending by next year.
States step in
Now, just as both sectors have arrived at a reconciliation, the State governments have stepped in to play spoilsport.
Given that the molasses churned out by the sugar industry also serves as a key input to potable alcohol manufacturers, State governments have turned increasingly nervous that the EBP could pose a threat to their biggest cash cow — the liquor industry. Many Indian States, including Tamil Nadu and Uttar Pradesh, earn a rather large share of their tax revenues from the sky-high taxes on liquor sales. They have therefore been coming up with roadblocks to the EBP.
Sugar millers in Tamil Nadu are currently lobbying with the State government to lift a production cap of 50 lakh litres a year that it imposes on ethanol production. The Uttar Pradesh government mandates that every sugar producer should ‘reserve” its molasses for use by the liquor industry, before offering it for any other purpose.
States also have a host of barriers in place to restrict the free movement of molasses or alcohol. Draconian laws that effectively prevent Indian sugar mills from directly processing cane into ethanol (they necessarily have to take the sugar-and-molasses route), act as an impediment to higher ethanol output. Policymakers worry that flexi-production options may lead to a shortage of sugar and a flare-up in sugar prices in the deficit years.
However, all this does not mean that India’s ethanol dilemma can never be resolved. Dismantling archaic laws on the sugar production process, forcing Indian States to implement fuel blending norms and allowing free imports and exports of sugar to take care of consumer interests, can all help get the EBP off the ground.
But getting all the warring constituents — sugar mills, cane growers, oil companies and States — to the negotiating table may be the Herculean task before the Centre.