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

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.