Indian agriculture

The Economics Of Land Ownership : The Ordinary, The Pedestrian & The Unique



In common with the rest of Indian agriculture, the sugar sector has certain features that are similar to other forms of land usage, but in some aspects, the industry has unique characteristics.

Declaimer: This article was written in February 2008, and some of the data points may be outdated.
the most important of these features is the exposure to price volatility.

One of the most important of these features is the exposure to price volatility. (Agricultural) land ownership in India exposes the owner/ farmer to agricultural price volatility, mostly without access to the means to manage it. This is not as obvious a statement as it looks. If you are a tea ‘farmer’ in Assam or a coffee ‘farmer’ in Coorg, you don’t think so much about the commodity prices and (agricultural) productivity of tea/coffee, because that risk is taken over by an organization with the financial and managerial means to handle such volatility.

However, in most other agricultural products, the ownership of land imposes upon you the responsibility of anticipating commodity markets and managing your financial risk. Given our traditionally emotional relationship with land ownership, I often wonder whether we Indians ever think of these risks before deciding to own land.

Cane production offers economics of scale, i.e. the cost of extensively cultivated cane is lower than the cost of intensively cultivated cane. This cost differential is critical for survival because the crop has long ‘working capital’ cycles, where the cash-to-cash operating cycle is much longer than other food crops. A farmer driven to subsistence levels in cane, would, therefore, find it more difficult to ensure his own economic survival if he gets on the wrong side of the above-mentioned commodity and financial risks.

Conversely, the above economies of scale attract larger farmers, the ‘kulaks’ who are traditionally one of the powerful and politically active segments of the Indian population. This creates the ‘emotional interest’ of a large, vocal segment of the Indian populace, with attendant ramifications for Indian politics. Among all the sub-sectors of agriculture, sugar is comfortably the most politically sensitive sector. That makes it the most heavily regulated of agri-produce sectors, with the possibility of price-distorting signals which create huge volatility in the demand-supply balance.

In a utopian world, this alone would be enough to argue for corporate control over land usage in this sector. The corporate that faces the commodity market, has the maximum ability to forecast price trends. If the same player were to control land allocation for cane production, the forward price signals would flow back to the farmer. This need not be an issue of land OWNERSHIP, which becomes a needlessly emotive and political issue in our country. It is merely about managing the volatility in prices that comes as baggage, and about responding to the price signals that come from the market. Situations like the currently prevailing surplus situation, where the Indian surplus has depressed world market prices, would have been mitigated if the sugar industry had a say in deciding the acreage allocated to cane.

There are other reasons for building a business model that separates the ownership of land and the usage of land. Extension farming demands inputs for water management, logistics, seeds, and technology. These are better done in an integrated framework, with the corporate being able to supervise initiatives that increase the productivity of land usage.

In an informal way, this trend is already in place. Despite rural land ceiling laws in place for the last 3 decades, not much has happened by way of redistribution (of land). If long-term leases of land were to be allowed for corporates, it would increase medium-term investment in ancillary infrastructure that improves the productivity of land usage. This is beyond the capacity of the small and marginal farmer.

This issue is not limited to the sugar industry alone. Long-term leases will allow corporates to invest in social forestry programs, inter-cropping with food crops. This will not only increase the economic productivity of land but will prevent soil from falling fallow, one of the major criticisms of single-cropping land.

A new challenge for the sugar industry is the new trade-off between food and fuel

The new trade-off between food and fuel is a new challenge for the sugar industry. As part of the Renewable Energy industry, this is the kind of opportunity that can transform both the industry and its dependent farming community. The ethanol industry needs to be supported with a market structure that supports the farming community dependent on cane. Here again, the price signals coming from the oil industry do not flow through to ethanol pricing, which in turn, would show up on cane. If the requisite mandates were in place, the network infrastructure for incremental mixing of ethanol would be a part of the oil marketing infrastructure. After that, the Govt needs to ensure a method by which the price signals flow from the oil market to cane production. Along with this, some sort of crop insurance or MSP mechanism should be in place by then to ensure that the farmer is not left stranded during a crop surplus period.

Compared to such a utopian dream, the existing situation seems to be at the other extreme. With state policy at loggerheads with the Centre, there is utter confusion prevailing in the minds of potential investors in the industry. The uncertainty prevailing over both input prices and the possible prices of end products is resulting in capital flight, not just from the sugar industry but even cane farming. Panic sales of cane will create a climate of fear in the hands of farmers, which will result in a substantial shrinkage of cane acreage, further compounding the problems of the sector. I can’t see how anybody benefits from this situation.

For once, we have a situation where the interests of various stakeholders are naturally aligned in the same direction. If cane price arrears are not brought down, acreage will fall, affecting not only sugar production but also potential ethanol production. The latter saves forex, and the environment and helps the oil marketing cos to develop alternate feedstock for a scarce fossil-based resource. This big trend is bigger and more important than any narrow sectarian or private interest.

Getting it wrong has its price too. At the moment, late crushing and payment delays are going to result in a pronounced shift in cane acreage; taken together with the increase in MSP for wheat, it will accelerate a shift to food which will hurt the country. The Principle of Comparative Advantage tells us that it is better to import wheat, whose prices will not go up to the same extent as oil has. An oil substitute like ethanol is far more valuable in money terms; as one of the world’s largest importers of oil (and the fastest growing), at the margins, it is the delta oil price that India should worry about, leaving the rest of the world to respond to the price signals coming from the food market.

This economic loss is not some opportunity loss, to be calculated conceptually. It will be real and this is how: the Indian sugar surplus has been sold at depressed world prices in the 8-9 cents per pound range; these prices were depressed by the mismanaged Indian surplus. Now, commodity funds can see that India is rushing into a deficit over the next 2 years, resulting in a hardening of the Forward prices on sugar (11-12 cents per pound already). The entire Indian surplus, nay, twice the world surplus has been warehoused by these funds already, waiting for India to come back onto the world market as a buyer.

At what prices will India get back its surplus sugar? My guess is that the next sugar deficit will take prices to impossible heights; with world prices at levels unimaginable within the current paradigm. We have seen this happen in Nickel, where the Hedge Funds bought the ENTIRE production from the physical players ($11000/ ton), leaving them stranded while they took prices to unimaginable levels ($52,000).

And how do you think the Govt will handle the oncoming crisis? With administered pricing and volume controls, what else?…..



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