India puts food before fuel as El Niño dents ethanol ambitions

Putting food before fuel means India will reserve scarce crops such as corn, sugarcane, and rice primarily for people and livestock, rather than converting them into ethanol. That could weaken the country’s E20 program, which aimed to blend 20% ethanol into petrol and reduce imported-oil dependence.

El Niño cut monsoon rainfall by nearly 13% from normal levels. Crop shortages then pushed corn and sugar prices up about 40%, while rice prices rose 20%. The government also told oil companies not to buy sugar-based ethanol for the new season and reduced the purchase price of corn-based ethanol.

Industry insiders expect blending to fall to 15% to 17%, or around 15% according to one expert. This would reverse recent progress and create overcapacity at distilleries built for roughly 20 billion litres of annual production. It could also increase India’s reliance on imported crude oil.

Ethanol is a type of alcohol that can be produced from plant materials, including sugarcane, corn, and rice. When used as a biofuel, it is mixed with petrol before the fuel reaches vehicles. The blend is named for its ethanol share, so E20 contains 20% ethanol and 80% petrol by volume.

India’s program uses domestically produced ethanol to replace part of the petrol that would otherwise come from imported crude oil. Sugar-based, corn-based, and rice-based feedstocks can be processed by distilleries into ethanol. The government then sets purchasing arrangements and prices for oil companies and producers.

The system connects fuel policy directly to agriculture. A good harvest can support higher blending, while drought and food inflation can restrict it. The article also notes concerns from motorists and automakers about fuel efficiency and engine wear, prompting the government to say it would not raise the ratio above 20%.

India’s original E20 target was to blend 20% ethanol into petrol. The government reached that milestone about five years ahead of schedule after blending quadrupled over six years, helped by several strong monsoons. The target became a central part of its effort to reduce imported-oil use.

That progress is now under pressure. G.K. Sood, an agribusiness chairman and food-policy expert, said the blending rate could fall to around 15% in the current supply year. Four ethanol producers gave Reuters a somewhat wider expectation of 15% to 17%, depending largely on corn prices.

The decline would put India below its official goal and reverse recent gains. It would also leave distilleries with excess capacity, because producers expanded facilities to about 20 billion litres a year in anticipation of growing demand. The scale of the fall will depend on feedstock availability, crop prices, and government purchasing decisions.

El Niño brought unusually weak monsoon conditions to India. Rainfall fell nearly 13% below normal, leaving farmers across several states with less water. That reduced confidence in planting and threatened supplies of corn and sugarcane, two important ethanol feedstocks. Rice, another possible feedstock, also became more expensive.

The shortage appeared in prices. Corn and sugar rose about 40% to record highs, while rice climbed 20%. Industry estimates suggest corn production could fall as much as 15% from the year’s record 55 million metric tons. Farmers affected by drought may not have enough water to plant more corn during winter.

These conditions make ethanol more costly and less available. Producers must compete with food users for the same crops, while the government faces pressure to protect food supplies. Rice stockpiles provide an alternative, but using them for ethanol would cost the government because it sells rice to producers at roughly half its purchase and storage cost.

India may choose food over fuel because the same crops can serve two competing needs. Corn, sugarcane, and rice can support ethanol production, but they also help feed people and animals. When drought reduces harvests, diverting more of those crops to fuel can intensify shortages and raise food prices.

The pressure is already visible. Corn and sugar prices rose about 40%, rice prices rose 20%, and retail food inflation reached 7.74% in September. Ethanol producers have also increasingly used damaged grains, raising concerns about animal-feed availability. These signals make food security especially urgent.

Rice stockpiles could keep ethanol plants operating, but the government would pay heavily. It sells rice to ethanol producers at roughly half the price it pays to buy and store the grain. During a drought, accepting lower fuel blending can therefore protect supplies and limit food-price pressure, even though it increases oil-import needs.

Lower ethanol blending would mean petrol contains less domestically produced fuel and more petroleum-based fuel. India would therefore need to buy more crude oil overseas, potentially increasing its import bill. The E20 initiative had already saved nearly 2 trillion rupees in oil-import costs since 2014, with annual savings estimated at 430 billion rupees at a 20% blend.

Ethanol producers would face a different problem. They borrowed heavily to expand capacity to about 20 billion litres a year, expecting rising demand. If blending falls to 15% to 17%, plants could be underused. Lower corn purchase prices, from 71.86 to 68.86 rupees per litre, would further squeeze distillery margins.

Motorists and automakers have already raised concerns about fuel efficiency and engine wear under E20. A lower blend might ease those concerns for some vehicles, but the government’s stated priority is food security. The trade-off is less biofuel use and potentially greater exposure to volatile global oil prices.

Petrol is made from crude oil, much of which India imports. When oil companies blend domestically produced ethanol into petrol, each litre of blend contains less petroleum-derived fuel. At a 20% blend, ethanol supplies one-fifth of the fuel volume, helping reduce crude-oil purchases and exposure to international energy prices.

The mechanism depends on agricultural supply. Sugarcane, corn, rice, or damaged grains are processed by distilleries into ethanol, which oil companies mix with petrol. India’s E20 initiative saved nearly 2 trillion rupees in oil-import costs since 2014. Annual savings were estimated at 430 billion rupees at the 20% rate.

The benefits come with costs. Using crops for ethanol can compete with food and animal feed, especially after a poor monsoon. Rice-based ethanol would also require costly government support. Lower blending protects food supplies but raises oil dependence, while higher blending supports energy security but can worsen crop shortages and fuel-vehicle concerns.