Hello,
Recently I found an article about sugar and why its price has not increased in lockstep with inflation. I began searching for more information. The more I understood the more I was fascinated.
The search led me to Amit Verma’s podcast on Farm loan waivers and the agricultural crises in India. It was an eyeopener for me. It is a place where market dynamics are ignored in favor of politics.
One of the best examples of this is in the story of sugar.
A vicious cycle of debt driven by wrong policies.
In 1991, sectors of the Indian economy were opened to foreign participation, except agriculture. The belief being competition would sound the death knell for farmers.
30 years later, the sector employs 58% of the population and contributes to less than 15% of the GDP. Over the years the growth in agriculture has stagnated.
Under the guise of protection, perverse policies have distorted incentives. To understand these let’s look at the supply chain for sugar.
India is one of the largest sugar cane producers and the leads the world in sugar consumption.
Sugarcane farming is driven by farmers in Uttar Pradesh and Maharashtra contributing to ~60% of total production. Since the 1970’s the production of sugarcane has more than doubled. Innovation in the form of drip irrigation and quality seeds have driven the boom in production.
Why do farmers continue to farm sugar cane?
New techniques have increased yield by 60-70% as compared to other crops. Over time less farmland is needed to produce a similar yield.
Support from the government in the form of - Fair and Remunerative Price (FRP). The FRP is the benchmark price which sugar mills will pay to the farmers.
The market for agricultural produce is highly volatile, it is susceptible to oversupply shocks. By setting a FRP the farmer is certain of selling all his produce for a specific price and therefore is incentivised to produce as much as he can.
Due to a boom in production, there is excessive supply of sugarcane. But the demand for the end product- sugar is still the same.
However, the sugar mills have to buy the sugarcane at the FRP. They cannot take advantage and buy the cane at a lower price. This mismatch in demand and supply factors, starts a cycle where the mills don’t earn enough from selling the sugar to pay the farmers.
As a result of this intervention the farmers are owed Rs.16,883 cr.
FRP. Where we messed up.
Why does the FRP exist?
A high FRP ensures that farmers are paid well and are incentivised to produce the cane. A consistent supply of sugarcane ensures that there is enough raw material to produce sugar. This is important as sugar is the cheapest source of energy for the poor. By keeping the end price of sugar low, everyone can afford to eat it.
Is the FRP too high or is it too low?
According to the Indian Sugar Mill Association (ISMA),
One of the main reasons for cane price payment arrears is high FRP set by the Centre. Millers said that they are facing a tough financial situation, as there is no correlation between the revenue generated by mills and the cost incurred in the production of sugar.
The FRP is based on the cost of production of sugarcane and an element of assured profit as to cover the risk of sugarcane farmers. According to ISMA, the mark up above the cost of production of sugarcane, at an all-India average basis, is as high as 100 per cent over the cost of producing sugarcane.
As per Raju Shetti, President of Swabhimani Shetkari Sanghatana representing the farmers,
Sugar mills insist on low FRP citing low sugar prices and low demand but markets are not stagnant. No sugar mill has shared its profit with farmers when sugar prices are at the peak,
Also, he insists that
The production cost incurred by farmers is much more compared to the FRP. He added that mills dilly-dally to pay one-time FRP to farmers despite making money.
One fact is that the price paid for the cane is higher in India when compared to other countries.
Indian mills pay ₹2,890 per tonne of cane compared with ₹1,732 in Brazil, ₹1,739 in Australia and ₹1,842 in Thailand. Thanks to the high cane prices and lower economies of scale, the cost of production in India is way above the international sugar prices.
This is why India, despite its significant surplus, is not a serious player in the global sugar market.
The original intention of fixing the price for cane was to protect the farmers income in times when prices crash (bumper crop). But the FRP has become more of a crutch as political parties are afraid of the backlash if they slash prices.
Farmers are suffering due to arrears and mills are suffering from not generating enough revenue to pay the farmers.
Reading this you might be wondering, there is an easy fix out of this right? Mills should just raise the prices of sugar. If only it were that easy.
How the price of Sugar affects consumers and govt coffers.
This poem encapsulates the problem Indians face-
Marte hum bhi hain. Marte tum bhi ho.
Marte hum bhi hain, marte tum bhi ho.
Hum sasta bech ke marte hain,
Tum mahanga khareedke marte ho.
Translation,
I die, my friend, and so do you.
I die, my friend, and so do you.
I sell my produce cheap, and die.
You pay so much that you die too.
-By Sharad Joshi, founder of Shetkari Sanghatana, an organisation for farmers.
The minimum price of sugar has been set by the government. It is set at Rs.31/kg with requests being made to increase it to Rs.34.50. The price in international markets today is ~Rs.33 and this has been the highest price in 3 years. This year on an average the international prices have been around Rs.29.
Problems caused by this discrepancy-
Indians over the years have landed up over-paying, even though there was a supply glut. There is an opportunity cost attached to overpaying. The consumer could have spent it on buying essentials or saved it or reinvested it into business.
Prices of sugar alternatives such as jaggery and coconut sugar have gradually increased over the years while the price of sugar has been controlled. This is a signal to buy sugar instead of these alternatives. The diet is heavily skewed towards sugar making India the world’s biggest consumer of sugar.
Low international prices disincentivises exports of sugar, as costs are higher than selling price. Therefore, to make exports profitable the government in 2020-21, offered subsidies to the tune of Rs.3,500 cr.
Moreover, we forget to include an important cost to growing sugarcane-
Rice and sugarcane both are water-intensive crops with surplus production while India stairs at a severe water shortage. In states such as Maharashtra, in the drought-prone region, a significant share of irrigation is used only for sugarcane production. In effect, when we export sugar, we are exporting water with a subsidy.
About 4% of farmed land in Maharashtra is under sugarcane, but it consumes 71.5% of irrigated water.
Water is not factored in as a cost. And the cost is borne by society as well as farmers during a drought.
Even with a high guaranteed price for the cane the farmer is in debt. Read here for Aljazeera’s reporting on farmer suicide due to debt.
Furthermore, due to market distortion the farmer is disincentivised to plant any other crop. For example farmers in Maharashtra are moving away from grape cultivation as the price for sugarcane is higher. This sets up a vicious cycle the farmer can’t escape from.
There are secondary effects caused by distortions of the sugarcane industry-
The central government is yet to release the export subsidy due to the mills and the total due is as high as Rs 6,900 crore. Individual mills had taken loans to facilitate exports and now they have to pay interest to the banks. Unpaid interest of Rs 3,000 crore for maintaining buffer stock has also hit hard the balance sheet of mills.
This puts a strain on public sector banks finances and discourages mills to export sugar in the future. Also, there is limited amount of financing available, by investing in unproductive assets there are other sectors of the economy which don’t receive funding.
The various layers of control that the government has implemented has led to the hollowing out of the sugar industry.
Farmers have grown dependant on a high FRP but are severely in debt.
Sugar mills can’t raise prices of their product or reduce their cost of goods.
Indian consumers are forced to pay higher prices even when international prices are lower.
It is a tricky situation for the industry to solve but with the sector being in perennial crises, policies need to change.
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