Any market where the final product faces perfect competition while the input costs are fixed is set up for failure. That is why the current distress in the sugar sector was a disaster waiting to happen.
Sugar prices were decontrolled two seasons ago. But sugarcane prices remain political lollipops under the control of five state governments. The perils of this half-way freedom are clearly visible.
Six hundred factories are competing to sell unbranded sugar to highly price-sensitive consumers with a no-holds-barred race to the bottom. At the same time, factories are paying record prices for sugarcane that have no connect with business reality. The average price of one kilo sugar in India is Rs 23. The average price of one kilo sugarcane is also Rs 23. In largest producer Maharashtra, one kilo sugar is selling for Rs 19 while one kilo sugarcane is selling for Rs 26.40. The situation is equally absurd in Uttar Pradesh and Karnataka. These are the states where farmers have committed suicide.
When a business haemorrhages like this at both ends, bankruptcy, losses and loan defaults are inevitable. The top 20 private sugar companies are mired in losses ranging in hundreds of crores. But closure is not an option for them till they repay banks and clear farmer dues. The outstanding bill for farmers stands at Rs 21,000 crore.
Who can solve this mess? Farmers alone hold the key. Farmers mistakenly believe that high government-fixed prices are a bonanza. In fact, they have become a noose. The illogical prices increase competition by attracting even marginal areas to cane and producing more crop than India can comfortably sustain both in terms of consumer demand and water availability. There is a difference between a free market and free-for-all market.
Had cane prices been linked to sugar prices, only the farmers with a genuine comparative advantage would have remained. To stay competitive, these farmers would have invested in yields and better varieties. And they would have made profits commensurate with their investment. Already farmers are accepting the market price by selling part of their cane to jaggery mills for Rs 15/kilo. The same logic should be extended to the entire crop.
A good example here is of guar that is native to the dry and arid areas of Rajasthan. When guar prices hit the heady heights in 2012, farmers with irrigated lands and higher opportunity cost in as far as Andhra Pradesh joined the party. Eventually the music ended and prices dropped to their natural levels. Farmers in Andhra Pradesh wisely stopped growing guar and shifted back to paddy. Rajasthan farmers continue with guar because their low opportunity costs make it a suitable option. Luckily the government stayed away from guar and market forces were allowed to play out.
Sugarcane farmers and their leaders needs a similar reality check. It is true that mills have no choice but to pay the state government’s advised prices. But this apparent lack of risk is an optical illusion. As the current scenario shows, business doesn’t run on a politician’s word. Ultimately, it is the five crore sugarcane farmers and their families who pay the human cost of cane arrears. Farmers should stop rewarding politicians who make tall promises in the name of rural welfare.
Politicians, of course, tremble at the thought of freeing the cane market because they fear instant reprisal. But this delay merely kicks the can down the road.
Since liberalization of the cane market appears unthinkable, farmer bodies such as the All India Ganna Utpadak Sangathan and All India Chini Utpadak Sangathan are clamouring for a return to controls on sugar prices. Their demand is that all factories should be forced to sell sugar only above a certain price, which will be naturally linked to the continuously rising price of cane. They argue that people in Japan are paying Rs 200/kg for sugar and so we shouldn’t baulk at paying Rs 40. They forget the vast difference in consumer incomes. In short, farmer leaders want millions of India’s poorest families to pay through their nose merely to sustain their uncompetitive agriculture.
The Modi government has wisely stayed away from meddling with the sugar market. Instead it is trying to increase cash in the hands of mills through promoting ethanol. That may be too little too late to solve the crisis.
Ultimately, the only way to stop the farmer suicides is to let the sugarcane sector run on free market principles. And that means farmers and their leaders being forced to change. Farmers may find lies about guaranteed security far more seductive than predicting the future in a free market. But as they are now discovering, when you have a market that is disturbed by government manipulations, it’s impossible to make any predictions.