Skin in the game

The scatter plot next to this column is a mess. Why? Because it is a true representation of the travails of the sugar sector. Today, the firm leading the market controls one third of the share held by the next 28 listed companies combined.

During the last full marketing year, listed companies recorded an average utilization level of 59 percent. That same year, the market leader operated at 120 percent utilization. Time and time again, financials of laggards list low availability of sugarcane as the primary cause of their underutilization, even as the industry suffers from excess supply of sugar as a whole, leading to losses to laggards as they struggle to keep up with the ever-high levels of support price.

Less of the market leader, the industry (listed firms only), recorded 45 percent idle capacity on average over the last five years. Average market share of these players is not more than 1.25 percent; with second largest player coming at less than half of the firm leading the pack.

Pack it may very well be, but this sector is no wolfpack. In an industry so bitterly fragmented, does it make sense to complain of a sugar mafia? More importantly, what is it that the top dog seems to get right that no one else seem to able to figure out?

Look closely at the financials, and one discovers the key difference. At the close of last full year, the top firm carried sugarcane crop worth Rs2.3bn on its books. Back of the envelope estimate of the crop volume brings the number close to 511,110 tons of sugarcane, based on the government indicated minimum support price of cane at Rs180 per 40kilos. This is roughly two-thirds of total sugarcane crushed by this firm during MY17. Sourcing crops from one’s own plantations allows the firm to shield itself from arbitrarily imposed floor price of sugarcane.

This column is in no way an ode to the market leader. From a perspective of competition, the top player attempts to corner the market in ways more than one. Moreover, it could be argued that vertical integration in agricultural sector is not possible for most players. Going by financials, it appears that most firms have balance sheets valued at less than the value of top player’s crops (alone)!

There is no denying that the industry is marred by several challenges, and that MSP needs to go; but most players have resorted to protests and grumbling, hoping they would be able to wish the support price away. Meanwhile, the top player has cemented its place by circumventing support prices and middlemen through growing its own plantations.

Purely from a behavioural perspective, if there is one thing that could be said about the different sets of responses exhibited by most players and the top firm, it is the latter’s ability to put skin in the game. Farming is in no way an easy business, exposed to risks of extreme weather and crop failures.

While it is true that most players could not afford to grow their own crop, some of the old players belong to big business groups that could. While these business families have diversified into other businesses over time, the highs and lows of their sugar mills continue to rely on government policies.

Yes, the government needs to rationalize its policies, but no firm or industry can thrive if it continues to count on government’s blessings. Sugar industry is no mafia, but sloth is a sin too, yes?