India's ethanol blending target could run into trouble in the near term as corn prices have increased across key producing regions in the country due to an expected drop in production and a rise in demand from other sectors, several market participants told S&P Global Commodity Insights.

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For marketing year 2023-24 (April-March), corn production in India was pegged at 32.47 million mt, 14.7% lower on the year from 38.09 million mt.

"The prices have increased sharply due to a likely drop in output," said a trader based in Nizamabad, adding that prices could rise further if heat waves expected across central India impact corn production.

Apart from lower production, a rise in demand from the poultry sector is also likely to push prices up, market participants said.

Corn prices in key physical markets were currently around Rupees 23,000-23,500/mt ($275.71-$281.70/mt) as of April 2.

In contrast, the government plans to purchase corn at a minimum support price of Rupees 20,910/mt through its agencies and supply it to produce ethanol.

The government has rolled out plans to procure corn through the National Agricultural Cooperative Marketing Federation of India and the National Cooperative Consumers Federation of India and supply it to distillers for producing ethanol.

Under the program, the government agencies will enter into five-year agreements with farmers to buy corn and supply the feedstock for production of clean fuel, government officials added.

The primary objective of the plan is to ensure uninterrupted supplies of feedstocks to distillers to produce ethanol, a government official said.

The plan is pivotal to India achieving its target of blending 20% ethanol with gasoline by 2025. It would also boost efforts to increase ethanol blending with gasoline, which was at 12% in marketing year 2022-23 (November-October). The government wants to achieve a blending target of 15% in MY 2024-25.

Corn is a crucial feedstock for India to achieve its ethanol blending target. The country mainly sources ethanol from sugarcane and corn.

The government is making moves to increase corn as feedstock for ethanol even as markets participants are concerned over a likely drop in sugarcane output due to poor rainfall.

Government agencies have so far signed memorandums of understanding with around 40 distilleries to produce clean fuel. However, they are yet to sign the final contracts to supply corn to ethanol producers.