The sugarcane belt in Maharashtra has been tense in the last few weeks. The Swabhimani Shetkari Sanghatana (SSS) has led an agitation demanding that the advance price of sugarcane be raised to Rs 300 per quintal. The sugar factories are reported to have offered only Rs 230 per quintal as first payment. In Uttar Pradesh too, farmers’ organisations want the state advised price (SAP) to be raised to Rs 300 per quintal, against last year’s Rs 240 per quintal.

Peaceful bargaining between buyers and sellers over the price of their product is perfectly legitimate. Logically, governments should keep away from such negotiations and only monitor the implementation of decisions taken. But when the bargaining becomes violent, it indicates there is something seriously wrong in the institutional structures that deal with such issues. So it is time we revisit the pricing of cane in the country.

At the Centre, the Commission for Agricultural Costs and Prices deals with the pricing of sugarcane. Till 2008, it used to recommend to the Centre a statutory minimum price (SMP). Since then, it has been recommending a fair and remunerative price (FRP). SMP was based on the premise that the Centre should ensure a “minimum” price for cane growers; if states or individual factories wanted to raise the prices, they could. That practice broadly continues till date.

But farmers and factories both know that the real price of cane is determined by its sucrose content. Since this varies widely across regions, so does the recovery rate of sugar, and hence the price of cane. But the prices of sugar and its by-products could vary widely. So the cane price announced by the Centre assumes a minimum recovery rate of 9.5 per cent. With 0.1 per cent increase in recovery, the price of cane is raised proportionately.

The problem arises when sugar prices go well above the trend, and farmers feel they should get a fair share of this increased value, or when a state announces an unduly high price for political reasons while Central pricing remains conservative. To neutralise the possible volatility of sugar prices, Maharashtra’s sugar cooperatives first announce an advance price. Later, they distribute a part of the surplus among farmers if the realisation from sugar and its by-products is higher than the initial price of cane indicated. This was a reasonably fair system when it started, but the deductions from this surplus in the name of social development projects, and sometimes the lack of transparency in declaring the surplus, has eroded faith in it. Private entrepreneurs are gradually replacing cooperatives in the Maharashtra and Karnataka sugar belt.

In UP, farmers tried to extract a part of the value of sugar through the SAP, which involves political and economic negotiations. There are no transparent economic principles behind this, but somehow it has worked all these years, with occasional hiccups in the form of “cane arrears”.

The Rangarajan Committee report on the regulation of the sugar sector suggests that 70 per cent of the value of sugar and other by-products generated from a quintal of cane be distributed among farmers as the price of cane, given a recovery ratio of 10.3 per cent. Underlying this is a robust economic principle: the value generated in the first stage of converting sugarcane into sugar and its by-products should be distributed between the farmer and the sugar mill, in the relative ratio of the costs each has incurred.

The value of sugarcane is a function of the recovery rate and the price of sugar. So the formula given at an all-India level needs some refinement for different sugar zones. So my estimation of cane prices for UP, given an ex-factory sugar price of Rs 3,685 per quintal and assuming a minimum recovery of 9.5 per cent, would be around Rs 267 per quintal. For Maharashtra, with an ex-factory sugar price of Rs 3,245 per quintal and a recovery ratio of 11.3 per cent, it comes to about Rs 285 per quintal. Of course, the factories that have higher recovery rates can afford to give a higher price, provided sugar prices remain the same.

But what if sugar prices roll down? That is very possible, given that since July 13, when India imposed a 10 per cent import duty, domestic sugar prices have gone up by 15-20 per cent while the international prices have gone down. If import duty is reduced to zero to protect the interests of consumers, sugar prices in India will also have to roll back. That is when setting the price of cane will be difficult, without bleeding the industry or leading to a situation of massive cane arrears. Unless the negotiating parties understand this and work out a solution, the pricing of cane will be prey to crude bargaining tactics that are devoid of rational economic principles. If we want to tap the full potential of this industry, which could generate environment friendly energy in the future and create millions of jobs in rural areas, we should use the rationale for cane pricing articulated by the Rangarajan Committee.

The writer is chairman of the Commission for Agricultural Costs and Prices. Views are personal