Sugar, ethanol, and gasoline share a complex relationship that is driven by various factors such as global demand, production processes, and government policies. In this article, we will shed light on the relationship between their markets and how they impact each other.

Price Correlation

Ethanol, a renewable fuel, is predominantly produced from molasses, a byproduct of sugar production. Mills crush cane with a high concentration of fermentable sugars (approximately 14%), to extract this renewable fuel which is mainly used in blended fuels, that boosts demand for the substance in line with gasoline.

When crude oil prices rise, the prices of gasoline also go up, leading drivers to shift to ethanol and subsequently, creating an increase in its demand. This surge in demand prompts mills to divert production from sugar to ethanol, thereby potentially increasing its prices. Therefore, the correlation between sugar and oil prices can be attributed to the demand for their respective derivatives, making them interdependent.

Which End-Product To Prioritize First?

The decision over which end product to prioritize- sugar or ethanol, is driven by the prices of these commodities. When sugar prices are high, mills can allocate more resources towards its production and take advantage of the lucrative opportunity. However, when the price of ethanol rises and reaches a point where it is equivalent to or exceeds that of sugar, mills are inclined to prioritize ethanol production instead. This shift towards producing renewable fuel can lead to a shortage of sugar supply, causing its price to increase. Similarly, if the price of sugar becomes more favourable, mills may switch their production priorities to the same, which could reduce the supply of ethanol and increase its price.

Government Policies

The intricate relationship between sugar, ethanol, and gasoline is heavily influenced by government policies. For instance, the Indian government’s move to make E10 the nation’s standard fuel by 2022, was successfully achieved moving ahead with aspirations for E20 blending to become the new norm and nation’s standard by 2025. As an added advantage, all cars manufactured in India starting from 2023 must be E20 compatible, perfectly aligning with this forward-thinking initiative. This will not only boost the production of this renewable fuel more than sugar but also tackle higher gasoline prices.

OFB’s Insight

The increased production of ethanol from sugarcane in Brazil can help to stabilize sugar prices, while the Indian government’s promotion of ethanol as a biofuel can lead to increased demand for the same. The interplay between these factors and the crude oil price determines the prioritization of the commodity and the decision whether sugar or ethanol is to be produced along with driving advancements in biofuel technologies.