sugar

The Politics & Economics Of Sugar : The Ordinary, The Pedestrian & The Unique

Sanjeev

Sanjeev

In common with the rest of Indian agriculture, the sugar sector has certain features that are common with other forms of land usage, but in some aspects, the industry has unique characteristics. We can break down these various features into the common, the shared, and the unique.

Declaimer: This article was originally in August 2019, and some of the data points may be outdated

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. Suppose you are a tea ‘farmer’ in Assam or a coffee ‘farmer’ in Coorg. In that case, 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 economic survival if he gets on the wrong side of the above-mentioned commodity and financial risks.

The Indian population

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 that 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 corporation being able to supervise initiatives that increase the productivity of land usage.

Informally, 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 land leases were to be allowed for corporations, 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, and 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.

The sugar industry

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

This is part of a larger issue of farm productivity, water management and usage, land ownership, and even taxation. If you want to double farm incomes in the near term, you must double the productivity of inputs, where cost reduction programs need investment. Solar pumps, water recycling & regeneration, investment in storage/ cold chain and transportation, labor productivity, and deployment, all need decentralized investment, which simply cannot come from the (mostly) marginal farmer. It can only happen when the corporation enters the sector or extends backward in the case of cane production. Most importantly, the mindless expansion of acreage without any understanding of the cyclicality of prices, cannot stop unless some intelligence comes into the market.

If agriculture ever comes into the tax net, this (corporatization) is the only way. Farmers are the holy cow of Indian politics, a fit case where their interests are less served by the empty rhetoric that they have been fed so far, than by reforms that include the corporatization of agriculture. The entire food processing industry should be encouraged to extend backward and invest in farming infrastructure, permanent labor (which can then be skilled with better farming practices that include energy management, water recycling, and input optimization, besides the proactive management of cyclical prices, the bane of Indian agriculture). I think the inability to handle cyclical agriculture is at the root of most of the farmer’s distress and suicides. We are treating the symptoms and not the cause.

The issues may be most visible in Sugar, but they are endemic across the broader swathes of Indian agriculture. If we are serious about doing something for the 60% of Indians who live no-hope lives in the underbelly of Indian agriculture, then this is the way to go. Incentives should not be tax-based, otherwise they will attract the money launderers who can be seen elsewhere in the economy. They should be asset-based, providing access to cheaper inputs (land being the most important one of them) and infrastructure (Solar electricity, pumps, water recycling equipment, pipes, etc) that will reduce costs in agriculture. Only then will we have the genuine productivity growth that creates net economic welfare. With a drop in the overall cost of agriculture and an increase in labor welfare, we will have higher production with lower cost, keeping inflation down even as Indian agriculture switches from grains to horticulture. This will improve public health, even as we keep costs down.

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