Sugar mills: Ownership, productivity and crop choice

In this era of food price inflation, developing country governments are increasingly concerned about agricultural productivity. Shaping the institutional structure of agricultural markets – that is, deciding whether agricultural processing plants should be run by the government, producer cooperatives, or private individuals – represents an important potential policy lever for improving agricultural productivity. This question assumes significant importance in developing nations like India where rural growth lags far behind urban growth. We seek to answer this question by examining the effect of sugar mill ownership structures in southern India on various economic outcomes. India is the world’s second largest producer of sugarcane, and the sugar industry employs a substantial number of the rural population. Since sugarcane must be crushed as soon as it is harvested, farmers cannot sell their cane to mills that are far away, and mills thus have local monopoly power and the opportunity to exploit farmers after their crop has grown. Farmers may anticipate these problems and undersupply cane, thereby directly affecting agricultural productivity and growth. Estimating whether these problems are more endemic to private mills poses a methodological challenge: theory predicts mill ownership structure will be correlated with other, partly unobservable, economic outcomes, making it difficult to determine whether ownership has an independent effect on productivity. n institutional quirk for South Indian sugar mills provides a way to address this challenge. Mills are subject to a zoning system wherein every farmer in a given “command area” must sell to an associated mill; these areas are historically fixed, clearly delineated and the borders can be considered to be randomly placed. Any differences in farmer outcomes will be associated with differences in ownership structure right at the border. Overlaying satellite images on maps of command areas, we determined that the sides of the borders owned by private mills are planted with a greater proportion of sugarcane than those owned by cooperative or government mills. This result is mirrored in surveys of farmers with plots that are close to the borders. We find that more of them are likely to be cultivating sugarcane if they are in private mill command areas. Further, we find that the effect is concentrated on farmers that own less land. Delving deeper into the data, we find that private mills appear to provide more loans for poorer farmers, thereby encouraging them to cultivate cane. Contrary to popular perception, it does not seem as though the monopoly power wielded by private mills hurts poor farmers, nor does it lead to under‐provision of sugarcane. Given these facts, it appears as though various state governments’ policies to run publicly owned mills and/or to massively subsidize cooperative mills are unnecessary. The main mechanism for encouraging sugarcane production appears to be loans. However, private mills seem to be just as good at making these loans as cooperate and public mills, even without access to the massive agricultural credit flows that cooperative and public mills enjoy. Given that subsidized agricultural credit tends to be politically motivated and often wasted, perhaps these policies should be abandoned as well.