The global sugar market is entering a phase of subtle transformation in its supply and demand structure.
Any discussion of the global sugar market inevitably centers on two major producers: India and Brazil.
Currently, both nations are grappling with difficult trade-offs between sugar and biofuel production. This, combined with the threat of El Niño weather patterns, has left the global supply balance for the 2026/27 season hanging in the balance.
This analysis draws on the latest public data from multiple institutions to examine the global sugar landscape.
India's Dilemma: Sugar or Ethanol?
The core issue in India is price.
An Executive Director at Shree Renuka Sugar stated at a Mumbai sugar conference that if sugarcane ethanol prices are not increased, the industry may "abandon ethanol and produce more sugar." This is not an exaggeration but reflects a structural distortion that has persisted for years.
The root cause is the government's long-standing failure to raise ethanol procurement prices.
The Indian government has not increased the price for ethanol made from sugarcane juice or B-heavy molasses for nearly four years. Meanwhile, domestic sugar prices have continued to rise, leaving sugar mills with little incentive to divert more cane to ethanol. This price inversion is particularly pronounced in North India, where sugar prices are higher than in Maharashtra. The relative price of ethanol versus sugar would need to rise significantly from current levels to incentivize a greater shift to ethanol production in that region.
The gap between cost and procurement price has been quantified.
The Indian Sugar & Bio-energy Manufacturers Association (ISMA) points out that the mismatch between input costs and the ethanol procurement price is widening. The Fair and Remunerative Price (FRP) for sugarcane rose from 305 rupees per quintal in the 2022/23 season to 355 rupees in 2025/26, an increase of 16.5%. However, the procurement price for ethanol from cane-based feedstocks like sugarcane juice and B-heavy molasses has remained unchanged since 2022/23. The current production cost for ethanol from B-heavy molasses is approximately 66.09 rupees per liter, while the procurement price is only 60.73 rupees, a gap of nearly 5 rupees. Ethanol from sugarcane juice faces a similar cost-price deficit of about 5 rupees per liter.
A more ironic contrast exists in the imbalance between feedstocks. Ethanol from corn currently fetches 72 rupees per liter, while ethanol from sugarcane remains at 65.61 rupees, which is below production costs, creating a severe imbalance in ethanol pricing.
This lack of incentive has directly suppressed production.
For years, ethanol production from sugarcane has stagnated for five consecutive years at 3-4 billion liters, despite a capacity of 9 billion liters.
It is worth noting that the Indian government is not entirely inactive.
The government has announced the removal of all quantity restrictions on ethanol production from sugarcane juice, syrup, and various molasses for the 2025/26 supply year. This major policy shift aims to support sugar mills, boost renewable energy production, and advance biofuel blending targets. Previous limits on ethanol output were due to reduced cane supply, but two consecutive monsoon seasons with improved rainfall have expanded sugarcane planting area. The issue is that lifting quantity restrictions addresses "whether they can produce," while the price inversion determines "whether they are willing to produce." These are two different policy levers.
India has another consideration: energy security.
India is earnestly seeking to better utilize its vast ethanol production capacity to reduce dependence on energy imports. Measures include increasing the ethanol blending ratio in gasoline, introducing flex-fuel vehicles, using ethanol in cooking stoves, and exploring ethanol blending in diesel. This motive has strengthened following the rise in oil prices due to conflict in the Persian Gulf. Considering the impact of Gulf conflicts on global oil prices, India, as one of the world's largest crude importers, faces particularly acute impacts on its energy security, inflation, and economy.
However, there is a subtle reverse logic here: if the Strait of Hormuz reopens, energy costs ease, and the pressure to increase ethanol production diminishes, while sugar mills require higher ethanol prices to switch production, the government may be even less willing to raise ethanol prices when oil prices fall.
Brazil: The "Sugar-to-Ethanol" Shift Driven by Oil Prices
If India's story is one of rigid policy pricing, Brazil demonstrates how market-driven elasticity can rapidly favor fuel production when driven by oil prices. Brazilian sugar mills can flexibly allocate sugarcane between sugar and ethanol, with the core variable for this allocation being the price of crude oil.
At the start of the 2026/27 season, the economics of ethanol clearly outperformed sugar.
Brazilian ethanol prices held a significant premium over New York sugar prices. Hydrous ethanol was equivalent to 17.96 cents per pound, while anhydrous ethanol was at 19.73 cents per pound, compared to ICE raw sugar closing at 14.63 cents. The initial sugar-to-ethanol price ratio was heavily favorable for ethanol. Consultancies therefore judged that mills would focus on ethanol at least until around mid-June.
The conflict in the Middle East was the direct catalyst for this shift. With the onset of hostilities, Brent crude oil prices rose by 30%, subsequently pushing up gasoline prices. In Brazil, Petrobras, which controls over 80% of the refining market, is the price setter. The market had been watching to see if it would follow international gasoline prices and raise domestic prices, which it only did recently. There is a political-economic consideration here: this increase was feasible because the government partially subsidized the federal tax on gasoline, as fuel price hikes are unpopular in an election year.
Brazil's ethanol demand also has policy support.
Last year, the Brazilian government increased the mandatory blending ratio of anhydrous ethanol in gasoline from 27% to 30%. Authorities are also evaluating a further increase in ethanol content from 30% to 35% under the "Fuel of the Future" law.
On the production front, Brazil's sugarcane industry, represented by UNICA, along with the corn-based bio-products sector, expects ethanol production in the 2026/27 season to reach a record high, exceeding the current season by 4 billion liters. This increment is equivalent to Brazil's total gasoline imports in 2025.
However, market elasticity works both ways.
The latest developments suggest the scales may be tipping back. Market expectations for the 2026/27 season point to a sugarcane crop of 630-650 million tons, with a sugar mix estimate of 47% to 48%. The price ratio for hydrous ethanol has already begun to shift in favor of diverting cane to sugar production.
This elasticity is precisely why sugar prices are highly sensitive to oil prices: a return of WTI crude to high levels would maintain the attractiveness of ethanol returns and lock in supply constraints; conversely, any rapid decline in oil prices would immediately weaken the ethanol incentive, causing mills to shift cane back to sugar production and increase sugar market supply.
Global Balance: The Tipping Point from Surplus to Deficit
Integrating the dynamics of India and Brazil into the global picture reveals a key feature of the 2026/27 supply-demand balance: the surplus is narrowing to a point where it can barely absorb any weather shocks.
Production forecasts from various agencies differ in magnitude but align in direction.
The U.S. Department of Agriculture (USDA) predicts global sugar production will fall by 1.2 million metric tons to 184.9 million metric tons, with production declines in Brazil, the EU, the US, and Thailand outweighing increases in India.
The International Sugar Organization (ISO) presents a tighter assessment, forecasting a 1.15% year-on-year decline in global sugar production to 180 million metric tons for 2026/27, resulting in a global supply deficit of 262,000 metric tons. This is based on the potential impact of El Niño weather patterns on harvests in India and Thailand.
There is significant divergence in deficit estimates among different analytical firms, reflecting the high uncertainty of forecasts.
For 2026/27, StoneX predicted a deficit of 550,000 metric tons on May 20, while Covrig Analytics revised its surplus forecast down from a previous 380,000 metric tons to 100,000 metric tons. The most dramatic revision came from trader Czarnikow, which adjusted its global sugar balance for 2026/27 from a 1.4 million metric ton surplus to a 100,000 metric ton deficit, citing Brazilian mills producing more ethanol than sugar amid soaring crude oil prices.
It is crucial to emphasize that the distance from surplus to deficit is now extremely small.
Although the projected sugar production surplus has risen to 1.4 million metric tons for 2026/27, this scale remains too small to absorb weather-related production losses. Even a modest global production shortfall of 0-2 million metric tons would be enough to erase the expected surplus and push the market into stock drawdown.
El Niño: The Sword of Damocles Hanging Overhead
As one analyst put it, "El Niño is hanging over our heads." Weather risk is the overarching thread of uncertainty in this landscape, and its probability assessment has been consistently revised upward in recent months.
The U.S. National Oceanic and Atmospheric Administration (NOAA) now places the probability of El Niño conditions developing by July at 82%, with a 37% to 40% chance of a strong El Niño event by year-end.
Last Friday, the India Meteorological Department revised down its cumulative rainfall forecast for the June-September monsoon season from 92% of the long-period average (LPA) in April to 90% of LPA.
The impact mechanism of El Niño has a specific time lag that is often overlooked.
The key risks involve harvest disruptions in Brazil's Center-South region and weaker cane development in India and Thailand if rains disappoint. However, a greater risk may emerge in the 2027/28 season, as monsoon rains affect ratoon cane development and replanting in India and Thailand, meaning the full production impact often materializes one season later.
In other words, even if the 2026/27 season weathers the storm, the "bill" from the weather could be deferred to the following season for payment.
Historically, in years associated with El Niño, global production losses have exceeded 5 million metric tons, although wet weather in Brazil has sometimes partially offset losses in other regions.
Synthesis and Outlook
Connecting these threads, the global sugar market for the 2026/27 season can be summarized as a "fragile balance under a triple squeeze."
First, biofuel policy has become a structural constraint on sugar supply. Whether it's India's attempt to reduce crude oil import dependence through ethanol or Brazil's use of increasingly higher mandatory blending ratios to underpin ethanol demand, the sugarcane feedstock is being steadily pulled from the food plate to the fuel tank. For the global sugar market, Brazil's record ethanol prospects intensify competition for cane. Stronger mandatory demand and greater policy certainty for higher blending ratios will, at the margin, tilt the production structure towards ethanol, especially when local fuel economics are favorable.
Second, oil prices are the "master switch" of this mechanism. Brazil's market-driven elasticity means sugar prices are highly tethered to oil prices, while India's policy pricing is caught in a dilemma due to oil price volatility. Although their mechanisms differ, both are pulled by the same energy variable. Recent oil price declines have already begun to tip the scales back: WTI crude falling to a three-and-a-half-month low has weakened ethanol prices, potentially encouraging global sugar mills to shift cane crushing towards sugar rather than ethanol, thereby increasing sugar supply.
Third, El Niño is the amplifier. With the surplus already narrowed to the million-metric-ton level, El Niño does not need to cause catastrophic production losses to push the market into deficit. This also explains why sugar prices have recently been seesawing between "ample supply" and "climate risk."
Some analysts believe that if a strong El Niño simultaneously impacts India and Thailand, sugar prices could surge to 24 cents per pound, nearly double the current price.
In summary, the most critical signals to watch closely in the coming months are: whether the Indian government finally raises ethanol procurement prices (determining the direction of "sugar or ethanol" production), the actual evolution of the sugar mix in Brazil's main producing region (Center-South) during the season, and the intensity of El Niño development and monsoon performance.
An unexpected development in any one of these three factors could tip the delicate current balance between surplus and deficit in one direction. The current low-price environment for sugar appears stable but is built on a series of assumptions that have yet to be fully resolved.
As of June 18, raw sugar futures prices fell to 14.13 cents per pound, down 5.86% over the past month and 11.20% year-on-year, due to easing tensions in the Middle East and a sharp drop in oil prices weakening ethanol competitiveness.
The market continues to evolve dynamically, and all possibilities remain on the table.
Comments