Sugar industry: The cost of regulation

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With millions of farmers dependent on sugarcane and sugar being an essential household commodity, the government must balance farmer incomes, consumer affordability and mill profitability

By Madhuri SaripalleYash Mohan Gupta

Updated - October 24, 2026 at 11:00 AM.

The recent surge in sugar prices has created a host of challenges for farmers, millers, consumers and policymakers alike. Operating within a complex web of regulations across the upstream and downstream value chain, the sugar industry’s central concern is not merely what drives sugar prices, but who bears the costs of regulation.

Our analysis of five leading sugar companies reveals that revenue-weighted operating margins (EBITDA) fell from 10.8 per cent in FY2021–22 to 8.4 per cent in FY2024–25, recovering only marginally to 8.47 per cent in FY2025–26, despite rising wholesale sugar prices. Financial pressures on mills can, in turn, translate into delayed payments to farmers through cane arrears, creating additional fiscal liabilities for the government.

Profit margin of top 5 companies.

Mills have limited flexibility to benefit from higher sugar prices, as government controls over domestic sales quotas and international trade restrict their ability to respond to market conditions. Ethanol offers an alternative revenue stream, but there is a catch. Between FY2020–21 and FY2025–26, wholesale sugar prices rose by 23 per cent, broadly keeping pace with the 25 per cent increase in cane FRP.

Cumulative growth in prices

Another regulation instrument

In contrast, procurement prices for ethanol produced from sugarcane juice and B-heavy molasses increased by barely 5 per cent, while C-heavy ethanol prices rose by 27 per cent. By making C-heavy ethanol relatively more attractive, the government encourages ethanol production without diverting as much sugar from the market. Thus, ethanol has itself become another instrument of regulation, allowing the government to manage sugar availability while pursuing its biofuel targets.

According to a senior industry executive, ad hoc measures create uncertainty by altering the mills’ product mix. For instance, in December 2023, the government first announced a ban on the use of sugarcane juice/syrup for ethanol production, only to replace it within days with a quantitative cap on sugar diversion for ethanol. This rapid policy reversal affected mills through three channels: capacity utilisation, operational efficiency and margins. The abrupt halt to juice-route ethanol production forced flex plants to switch to B-heavy or C-heavy molasses routes for which they were not necessarily optimised, resulting in temporary idle capacity. Operational efficiency was impacted as the mid-season route changes disrupted the steam balance and the pre-planned coordination between sugar crystallisation and ethanol fermentation.

This directly impacts margins and investment and makes lenders more cautious about financing capacity expansion. Can the mills pass on the costs through higher prices? Mills recover the extra cost if market prices happen to be good that season, for which there is no guarantee. When open market realisations fall short, banks have to meet the losses through bank loans or occasional support from the government.

Against this backdrop of tighter margins and policy uncertainty, mills are investing in flexible distillery capacity allow mills to switch between sugar and different ethanol feedstocks and also diversifying revenue streams from by-products—using bagasse for cogeneration, converting distillery residues into potash or bio-fertilizers, and capturing and liquefying fermentation-generated CO₂ for sale to beverage and industrial users. These investments suggest a broader shift from maximizing sugar output alone towards maximising value from the entire cane output mix. This may also help explain the wide variation in net profit margins across sugar companies. Thus, the industry-wide margin squeeze need not affect firms uniformly: mills with greater operational flexibility and more diversified revenue streams may be better positioned to absorb fluctuations in sugar prices, cane costs and ethanol policy.

Command and control versus market-linked incentives

The extensive regulation of India’s sugar industry reflects its political and economic significance. With millions of farmers dependent on sugarcane and sugar being an essential household commodity, the government must balance farmer incomes, consumer affordability and mill profitability. Brazil offers a contrasting model, where market-linked cane prices and flexibility between sugar and ethanol production help align costs with revenues. While this does not eliminate market or policy risk, but it reduces the potential mismatch between cane costs and realisations from sugar and ethanol. Indian policy makers have a challenging, but not an impossible task ahead.

Saripalle is Professor of Economics & MBA Chair, IFMR Graduate School of Business, Krea University, and Gupta is pursuing Management studies at IIM Tiruchirappalli

Published on October 24, 2026

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