In India, cane is processed into sugar by cooperatives, public enterprises, and private (for-profit) firms. The Indian government sets a unique floor price for each processor that is increasing in the firm's effectiveness in converting cane into sugar. The floor price binds for public and private firms but not for cooperatives, which rebate profits to members. We argue that this price floor policy creates a disincentive for private and public firms to be technically efficient in converting cane to sugar. In support of this hypothesis an analysis of 593 Indian sugar factories from 1992 to 2007 reveals statistically significant differences in technical efficiency, with cooperatives being the most efficient and public firms least efficient. We estimate welfare losses due to the technical inefficiency attributable to the price-floor policy and argue that it can be eliminated by enacting policy to base price floors upon quality of the cane input received by a factory.JEL classifications: O13, Q13, Q18

and rich@primal.ucdavis.edu.Private sugar processors in Andhra Pradesh, India use an unusual form of vertical coordination. They issue 'permits' to selected cane growers a few weeks before harvest. These permits specify the amount of cane to be delivered during a narrow time period. This article investigates why processors create uncertainty among farmers using ex post permits instead of ex ante production contracts. The theoretical model predicts that ex post permits are more profitable than ex ante contracts or the spot market under existing government regulations in the sugar sector, which include a binding price floor for cane and the designation of a reserve area for each processor wherein it has a legal monopsony for cane. The use of ex post permits creates competition among farmers to increase cane quality, which increases processor profits and farmer costs. Empirical analysis supports the hypothesis that farmers operating in private factory areas have higher unit production costs than do their counterparts who patronize cooperatives.Managing Quantity, Quality, and Timing in Indian Cane Sugar Production: Ex Post Marketing Permits or Ex Ante Production Contracts?Sandhyarani Patlolla, Rachael E. Goodhue, and Richard J. Sexton * JEL Codes: L14, L22, L66 Keywords: India, Andhra Pradesh, sugar, sugarcane, contracts, quality, vertical coordination Sector Board: Agriculture and Rural Development (ARD) * Sandhyarani Patlolla is a lecturer at San Francisco State University; her email address is sandhya@sfsu.edu. Rachael Goodhue (corresponding author) and Richard Sexton are professors at the University of California Davis; their email addresses, respectively, are goodhue@primal.ucdavis.edu and rich@primal.ucdavis.edu. Goodhue and Sexton are members of the Giannini Foundation of Agricultural Economics. The authors thank Travis Lybbert for his advice regarding the survey design, James Chalfant for his advice regarding the empirical analysis, the regulators and processors in the Indian sugar industry who provided valuable institutional information, Acharya N.G. Ranga Agricultural University for providing assistance with survey data collection, and the survey respondents for sharing their time and knowledge. Elisabeth Sadoulet and three anonymous referees provided useful comments. No external funding supported this research.India is the second-largest producer of sugarcane in the world (following Brazil) and accounted for approximately 19 percent of the world cane production in 2012 (FAOSTAT 2014). The sugar industry is crucial to the Indian agro economy. It serves approximately 7.5 percent of the rural population through the production, transportation and processing of sweeteners. It involves approximately 45 million cane farmers and employs a larger number of agricultural laborers (Government of India 2014). Sugar manufacturing is the second-largest agro-processing industry in India, accounting for nearly three percent of the total value of industrial production in India (FAO 2014).The Indian government has institute...

and rich@primal.ucdavis.edu.Private sugar processors in Andhra Pradesh, India use an unusual form of vertical coordination. They issue 'permits' to selected cane growers a few weeks before harvest. These permits specify the amount of cane to be delivered during a narrow time period. This article investigates why processors create uncertainty among farmers using ex post permits instead of ex ante production contracts. The theoretical model predicts that ex post permits are more profitable than ex ante contracts or the spot market under existing government regulations in the sugar sector, which include a binding price floor for cane and the designation of a reserve area for each processor wherein it has a legal monopsony for cane. The use of ex post permits creates competition among farmers to increase cane quality, which increases processor profits and farmer costs. Empirical analysis supports the hypothesis that farmers operating in private factory areas have higher unit production costs than do their counterparts who patronize cooperatives.Managing Quantity, Quality, and Timing in Indian Cane Sugar Production: Ex Post Marketing Permits or Ex Ante Production Contracts?Sandhyarani Patlolla, Rachael E. Goodhue, and Richard J. Sexton * JEL Codes: L14, L22, L66 Keywords: India, Andhra Pradesh, sugar, sugarcane, contracts, quality, vertical coordination Sector Board: Agriculture and Rural Development (ARD) * Sandhyarani Patlolla is a lecturer at San Francisco State University; her email address is sandhya@sfsu.edu. Rachael Goodhue (corresponding author) and Richard Sexton are professors at the University of California Davis; their email addresses, respectively, are goodhue@primal.ucdavis.edu and rich@primal.ucdavis.edu. Goodhue and Sexton are members of the Giannini Foundation of Agricultural Economics. The authors thank Travis Lybbert for his advice regarding the survey design, James Chalfant for his advice regarding the empirical analysis, the regulators and processors in the Indian sugar industry who provided valuable institutional information, Acharya N.G. Ranga Agricultural University for providing assistance with survey data collection, and the survey respondents for sharing their time and knowledge. Elisabeth Sadoulet and three anonymous referees provided useful comments. No external funding supported this research.India is the second-largest producer of sugarcane in the world (following Brazil) and accounted for approximately 19 percent of the world cane production in 2012 (FAOSTAT 2014). The sugar industry is crucial to the Indian agro economy. It serves approximately 7.5 percent of the rural population through the production, transportation and processing of sweeteners. It involves approximately 45 million cane farmers and employs a larger number of agricultural laborers (Government of India 2014). Sugar manufacturing is the second-largest agro-processing industry in India, accounting for nearly three percent of the total value of industrial production in India (FAO 2014).The Indian government has institute...