Where to Put a Sugar Mill: Least Cost Versus a Cooperative's Arithmetic
A farmers' cooperative in a cane belt wants a 2,500 tonnes-crushed-per-day sugar mill. Three sites are offered. Site P is 8 km from the centre of the cane area, on a village road, 42 km from the nearest broad-gauge railhead, with no assured power. Site Q is beside the railhead in a town of 1.2 lakh people, 70 km from the cane centre, with 24-hour power and a captive bagasse boiler. Site R is 30 km from the cane centre, on a state highway, next to a proposed 20 MW bagasse-based power plant and a distillery that will buy molasses. Cane is harvested from late November to March; sucrose content falls sharply within 24–36 hours of cutting, and cane weighs about six to ten times the sugar recovered from it. The cooperative has a ₹90 crore loan sanctioned and must crush next season. Members are split: some want the mill beside their fields, some beside the town.
1. Using least-cost location logic, evaluate the three sites and recommend one.
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Sugar manufacture is strongly weight-losing: at 10 per cent recovery, roughly nine-tenths of the cane's mass leaves as bagasse, molasses, press mud and water. Transport cost on the raw material side therefore dominates, and because sucrose degrades within 24–36 hours, distance is also a quality constraint, not only a cost.
P wins on cane assembly (8 km) but loses badly on power and on evacuating sugar and by-products - a mill without assured power cannot run a continuous campaign.
Q has the best transport node and power, but a 70 km haul is two to three hours; stale cane means lower recovery, and growers far from the mill may divert to a nearer competitor. Urban land is also costly.
R is the compromise that turns the logic: 30 km is a workable haul, and the proposed power plant and distillery create local users for the weight-losing by-products, so bagasse and molasses do not have to travel and effluent disposal becomes revenue. The distillery also gives off-season income.
Recommend R, conditional on a written cane supply agreement across a 25–30 km catchment and a firm power purchase agreement.
2. Why might the cooperative's choice differ from a private firm's, even with identical costs?
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Because their objective functions differ. Members are cane growers; their return is the cane price plus dividend, not only the sugar margin. A shorter haul for members is income in their pockets, and they also value local employment and a stable, on-time cane payment. A private firm discounts the future and minimises capital at risk, so it might choose Q for assured power and rail despatch, or simply wait until cane supply is proven.
The cooperative also carries constraints a firm does not: a ₹90 crore loan means fixed debt service, so a failed campaign is existential; and it must satisfy audit and member-equity rules, which makes 'assured power' more valuable than the raw transport saving.
Judgement: the cooperative should weight campaign risk heavily and refuse P unless power is guaranteed, because a mill that cannot crush on time defaults on the loan and destroys member trust - a cost no transport saving repays. This is why R, with a power tie-up, beats P even for a grower-run body.
3. Identify the main risk of your recommended site and a mitigation plan.
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The main risk is that both of R's advantages are proposals, not assets. If the 20 MW power plant and the distillery do not come up on schedule, the mill has no bagasse outlet, no local molasses buyer, and possibly no assured power - it would have paid a 30 km haul for benefits that never materialised.
Mitigations, in order:
- Obtain letters of intent or a tripartite agreement with the power plant and distillery, with dates and penalties;
- Size the captive boiler to export to the grid under a power purchase agreement, so power does not depend on the neighbour;
- Build molasses storage for six months and keep a rail despatch arrangement via the Q railhead, 30 km away;
- Phase the ₹90 crore drawdown so the crushing plant is commissioned first and by-product tie-ups second;
- Sign cane supply agreements with a 25 km catchment with a minimum-price clause, to prevent diversion.
State the test explicitly: proceed only if at least one of the two by-product agreements is signed before financial closure.