Price floors and technical inefficiency in India's sugar processing industry

Abstract

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

Financial structure and cooperative efficiency: A pecking‐order evidence from sugarcane farmers in Eswatini

“…Under the first strand of the literature, the studies have examined how cooperative membership affect technical efficiency of smallholder farmers (Abate, Francesconi, & Getnet, 2014; Abdul‐Rahaman & Abdulai, 2018; Ma, Renwick, Yuan, & Ratna, 2018; Zamani, Mojaverian, & Nader, 2019) while the second strand examines the general drivers of technical efficiency of agricultural cooperatives (Al Mutairi, Olson, & Al Ghanim, 2018; Arcas, García, & Guzmán, 2011; Ariyaratne, Featherstone, Langemeier, & Barton, 2000; Brandano, Detotto, & Vannini, 2018; Caputo & Lynch, 1993; Featherstone & Rahman, 1996; Guzmán, Arcas, Narciso, Rino, & Sergio, 2009; Ma et al., 2018; Maietta & Sena, 2010; Mosheim, 2002; Piesse, Doyer, Thirtle, & Vink, 2005; Porter & Scully, 1987; Sexton, Wilson, & Wann, 1989; Singh, Coelli, & Fleming, 2001; Soboh, Lansink, & Van Dijk, 2012, 2014; Sueyoshi, Hasebe, Ito, Sakai, & Ozawa, 1998; Yamamoto, Kondo, & Sasaki, 2006). Most of these studies have covered farmers engaged in the production of apple, coffee, cotton, dairy, fruits and vegetables, grains, maize, wheat and wine, with few evidence of efficiency of sugar/sugarcane FCs by Ferrantino and Ferrier (1995) Patlolla, Goodhue, and Sexton (2012) in India and Ahn, Brada, and Méndez (2012) in El Savador.…”

Managing Quantity, Quality, and Timing in Indian Cane Sugar Production: Ex Post Marketing Permits or Ex Ante Production Contracts?

“…Studies to date have addressed Maharashtran sugar cooperatives (Banerjee et al 2001;Lalvani 2008) and compared the technical efficiency of sugar processors across organizational forms, including private factories, cooperatives, and public (state-owned) factories Ferrantino, Ferrier, and Linvill 1995;Patlolla, Goodhue, and Sexton 2012). To the authors' knowledge, no studies have considered the specific cane procurement methods used by private sugar processors in India or investigated the links to product quality and government policy.…”

Decision Making under Uncertainty in Developed and Developing Countries: An Experimental Analysis of Farmers’ Risk Attitude and Investment Behavior

“…Furthermore, to the best of our knowledge, there are no experimental studies examining the ROA and the effect of policy measures, such as price floors on the investment behavior of decision makers in developing countries. A few attempts have been made to examine the impact of price support systems on investment in theoretical and empirical applications, but these studies provide conflicting results Sckokai and Moro 2009;Patlolla et al 2012). Thus, it is crucial to investigate if or under which conditions price support systems have an effect on the investment behavior.…”

“…However, there are some studies that doubt the effectiveness of a minimum price (e.g., . In some cases, it can be observed that price floors do not have a stimulating effect on investment (Patlolla et al 2012;).…”

“…They emphasized the importance of the actual level of the price floor. Patlolla et al (2012) focused on price floors in India's sugar processing industry and investigated the extent to which the government's price floor policy reduced factories' incentives to improve their sugar recovery rates. They argued that the price floor policy created a disincentive for private and public firms to be technically efficient in converting sugar cane to refined sugar and found empirical evidence.…”