The Indian Economy Blog

November 17, 2007

The Sugarcane Mess

Filed under: Agriculture — Karthik @ 8:41 am

The situation with the sugar industry has gotten more bizarre, with the Allahabad HC stepping in and mandating that the mills buy sugarcane at Rs. 110 per kilo and start processing. While on first thought, it seems quite funny that the high court is getting into matters it shouldn’t get into, such as fixing of a market price, the situation on the ground is quite grim.

And the main reason for all this is heavy intervention by the state; in my opinion, heavier intervention than what we saw in the bad old days of Indira Gandhi. Back then, the state fixed a price and said “take it or leave it”. Here, even that option doesn’t exist. When the sugar mills didn’t like the state-fixed price of Rs. 125 per quintal, they decided to stop procurement and production. However, the state intervened and didn’t even allow them to do that, and now the HC has ordered them to start production, albeit after sourcing at a lower cost.

The difference between procurement in sugarcane, and that in other commodities is that in the others, the government effectively writes an option to the farmers by fixing a “minimum support price” (MSP). If no one else is willing to pay the farmers that much, the government buys it from them. However, in case of sugarcane, the government doesn’t buy anything. It is the private mills that need to procure the sugar at the stated price.

The problems don’t stop there. For example, currently, you can’t export sugar, which effectively pushes down its market price. So on one hand you have controlled prices for input, and on the other you have a suppressed price for your goods. Not a good situation to be in, unless Mulayam Singh is in power. The SP uses the sugar mills as a huge vote bank, and consequently used to set a lower price for sugar procurement in UP. So as long as it was in power, the industry was happy. Now, Mayawati depends on the votes of the sugarcane GROWERS, and her coming to power has turned things completely upside down.

Let us assume that in the absence of a state advised price, market fundamentals would determine the price of sugarcane. The reason a state advised price exists is that if things are left to the market, the mills would squeeze out the farmers, and set an extremely low price for procurement. And not having much choice (due to another bizarre set of laws, you can’t sell sugarcane grown here in another state), the farmer would have no choice but to accept this abysmal price.

Now, what is the market solution to this problem? Under normal market circumstances, more people would set up sugar mills, and thus compete with the existing producers, which would result in higher revenues for farmers. However, the uncertainty caused due to heavy state intervention takes out all incentives to invest.

So, is there a way out of the current mess? Due to the current political situation it is unlikely. Each government in UP supports one part of the sugar supply chain or the other, and hence, would like to retain control over the industry. Then at the central level, the agriculture minister Sharad Pawar is himself from the sugar industry, and represents Baramati, which is in the powerful sugar belt in Maharashtra. He too has a vested interest in the industry, so policy changes at the central level can be ruled out.

One hope might be that the movement of sugarcane across states might be liberalized, but given that the current government rolled back the NDA’s attempts to dismantle the Essential Commodities Act, one is also not very hopeful of this.

3 Comments »

  1. it is a nice article but can u assist me with more details on minimum support price and it’s effect on market and role of government
    ……….

    Comment by sirish — November 18, 2007 @ 11:10 am

  2. 1.You are right.It’s definitely amazing that HC has decided to set sugarcane prices.But it was a decision on a dispute brought to the court,which seems to be a right thing -I just hope the court considered expert advice.

    2.”For example, currently, you can’t export sugar, which effectively pushes down its market price”
    :ramifications are quite far reaching.I am of the opinion that people should sell their goods wherever there is a market for it.(It shouldn’t be restricted to national boundaries).This is one area where Indian farmers need a support system to market their produce and effectively compete against global traders in days to come.But i am not sure why such a sell(export) would pull down prices?

    3.The third debate-should farmers make a kill or buyers.Isn’t this a very difficult circumstance for any easy solution.To be fair i think prices paid to farmers must be proportional to demand for the finished product.The trial and error of prices is alright according to me except for the fact if the favor is tilted towards mill owners side,then it’s easy to put farmers at disadvantage side(even manipulated) as they are usually rendered without a voice.I feel this an opportunity for budding entrepreneurs to pitch in to bring in the competition direly needed amongst mill enterprises(&generally Indian agriculture) which will effect a balanced price for farmers and mill owners alike.(But the catch being –demand for farm products are never consistent and exposed to varies vagaries including weather,STATE policies(“heavy state intervention”) etc,etc–but lets’ assume the demand and supply is not too chaotic) This where ability to export helps–just like remote/virtual computer networks I’m curious to know your take?

    4.I feel a co-operative mill management here is a good solution(Like Amul)

    Comment by Rajiv — November 18, 2007 @ 2:51 pm

  3. Tuesday, October 30, 2008
    State should make an endeavor for start of crushing of sugarcane by the U.P.Sugar mills,
    State Government should make an endeavor for start of crushing of sugarcane by the U.P.Sugar mills, We hope that the process of reservation of sugarcane area should be finalized by end of October.
    Ravindra Singh Representative of cane societies Says,

    State should make an endeavor for start of crushing of sugarcane by the U.P.Sugar mills, We hope that the process of reservation of sugarcane area should be finalized by end of October.This year since their is shortage of sugarcane due to non payment of adequate sugarcane price(agreed-price) to the farmer’s that too in time and non development of cane area by some sugar mill’s.In this peculiar situation cane commissioner might be in difficulty in allocating the adequate quantity of sugarcane to the respective sugar mills as per estimated requirement fixed earlier.It is a well known fact that this year khandsari and kolhu’s are paying between Rs125-130/ per quintal of sugarcane to the farmers and as such the Sugar Mill’s should honor the consensus sugarcane price State Advised Price (SAP) @ 140/ per quintal of sugarcane for general variety and Rs 145/ for early variety for season 2008-09 announced by the U.P.Government on 18th,October,2008 without litigating the same,other wise they may not be able to produce required sugar.

    Comment by ravindra singh — October 30, 2008 @ 8:09 pm

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