The government has prohibited the use of sugarcane juice and B-Heavy molasses for ethanol production in the 2026-27 supply year to curb food inflation. Oil Marketing Companies will prioritize C-Heavy molasses and grains. This policy shift forces sugar mills to recalibrate their production, which may affect profit margins for firms heavily invested in B-Heavy ethanol capacity.
The Indian government has issued a mandate for the 2026-27 Ethanol Supply Year (ESY) that changes the raw materials allowed for ethanol production. For the period running from November 2026 to October 2027, Oil Marketing Companies (OMCs) will not accept ethanol produced from sugarcane juice, sugar syrup, or B-Heavy molasses. This policy move is designed to ensure enough sugar is available for domestic consumption and to keep retail sugar prices stable.
The government has set an overall procurement target of 1,100 crore litres for the upcoming supply year. To meet this, the tender process will now focus on ethanol derived from C-Heavy molasses, damaged food grains, surplus rice, and maize. To maintain supply consistency, the government has set specific procurement prices. Ethanol from C-Heavy molasses is priced at ₹57.97 per litre, while grain-based ethanol is priced between ₹60.32 and ₹66.07 per litre, with an additional incentive of ₹2.79 per litre for maize-based production.
For investors, this policy creates a notable shift in the business model for sugar companies. Historically, many sugar mills relied on B-Heavy molasses to produce ethanol because it allowed them to reduce sugar output while generating higher profit margins compared to traditional sugar production. With B-Heavy molasses now off the table, companies will need to either focus on C-Heavy molasses, which typically offers lower revenue potential, or invest in new equipment to process grains and maize.
This transition presents an operational challenge. Sugar mills that lack grain-based processing capabilities may face lower production volumes or higher costs as they try to upgrade their facilities to handle new feedstocks. Companies that have already invested in multi-feedstock distilleries might be better positioned to navigate these changes. While the fixed pricing for grain-based ethanol offers revenue clarity, the actual impact on profitability will depend on the cost of raw materials and the ability of each company to run its distilleries efficiently.
Investors should monitor upcoming quarterly results and management commentary from sugar companies to understand how they plan to adapt to these new rules. The key monitorable will be whether companies have the necessary infrastructure to switch to grain-based ethanol and how this forced change in production mix influences their overall profit margins compared to previous years when B-Heavy molasses was the primary feedstock.