Global Sugar View by McDougall – Episode 20

Indian mills rush for ethanol

The Indian sugar and ethanol industry has had a good winning streak. The mills were able to export a record amount of sugar this year (11.8 MMT+?) They didn’t even need any subsidy to manage it either! Ethanol production as well is booming and prices are attractive enough to spur more investment. By one estimate, perhaps as much as $1.25 billion over the next three years. Arrears to the cane farmers are even down to record low levels.

So what could go wrong?
Well, this week the Indian Food Minister hinted that retail sugar prices will be increased along with ethanol prices. This is rather puzzling given the Indian government’s concern about inflation. Enough concern for the government to first limit wheat exports and then follow that up with restrictions on rice exports. The government is also buying cheap crude from Russia, whose leader this week threatened using nuclear weapons if they lose the war (Special Military Operation). The talk of rising prices in sugar and ethanol also goes against the grain of international prices. Sugar has fallen 8.5% from its peak in July and WTI crude has fallen 20.08%. Worse still RBOB gasoline has fallen 32% since its price peak at the end of July and gasoline demand in the US has been struggling despite falling prices. In fact the average four week gasoline demand is lower than it was back in 1997. The number of vehicles registered now compared to 1997 is now 50% higher.

Why could gasoline demand be so bad?
Well, EV sales form Ford, were up 307% in August and this is not an aberration. The rally in gasoline prices earlier this year has really been a trigger for not only increased sales for electric vehicles, but also US car manufacturers are boosting investment substantially. By 2030 50% of auto sales are expected to be EVs. This migration will mean gasoline (and ethanol) demand will struggle going forward. One analyst thinks that demand actually peaked back in 2005, and he believes that the fuel market next year could see a large surplus.

One other concern is that with the Fed hiking interest rates, the US economy could fall into a recession. That would hurt fuel demand as well. So far the Fed projects 0.2% economic growth for this year, and 1.2% for 2023. But certainly nothing like the 5.7% we saw in 2021. Then again, we still have yet to see the impact of the EU sanctions against Russian crude which begins on December 5th and then Russian gasoline and diesel on February 5th.

But with the price rise of Indian ethanol it is currently as much as 47% more expensive than Brazilian anhydrous ethanol, if we look at the price offered for sugarcane juice derived ethanol. Brazilian ethanol as well will fluctuate with the internal market as well as the external market and they will import or export ethanol as the price differentials change. The Indian market unfortunately has that same safety valve and if international fuel prices fall more, India could be stuck with both high priced sugar and high priced ethanol. Not a good recipe for inflation fighting.


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