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24-01-2023 | Original Article

Before Privatization There was Its Impact: Sugar Factories in Turkey

Author: Alper Demirdogen

Published in: Review of Industrial Organization | Issue 2/2023

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Abstract

This paper estimates the effect of a sugar-factory privatization policy on sugar beet acreages in Turkey. It finds that sugar beet acreages decreased by more than 15% due to the 2018 privatization of several sugar factories. Farmers decreased their contracted acreages in the middle of 2018, after the privatization announcement but before the actual transfer of the institutions. Production continued to decrease in the following years for the farms that were in the “catchment area” of the privatized factory group. However, for the farms that were in the area of the factories in which privatization was subsequently canceled, the negative effect of the announcement vanished. The results show that privatization policies can significantly affect markets even before the transfer of the institutions to the private sector.

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In addition to the yearly average of 2.5 million tonnes of domestic sugar production in Turkey between 2015 and 2020, Turkey imports about 8% and exports about 4% of total production (Turkish Sugar, 2021).

According to the author’s conversation with a sugar factory manager, more than 80 km between the field and the factory would not be economical for the farmers in terms of transportation costs. Therefore, sugar factories are located within the same geographical regions as farmers, and each sugar factory negotiates contracts with the farmers in the surrounding villages. This type of geographic dependency can create monopsony power, which we will address below.

We received an official document from Turkish Sugar, which is the main institution that governs the state’s sugar factories and the industry’s contracting periods. In 2018, depending on the factory and production location, the contracting process began in February and lasted until May. Therefore, at the time of planting, farmers knew whether their contracting partner would be a state or private factory at the end of the year.

Farmers must fulfill 90% of the sugar beet production outlined in their contract. If less than 90% of production is met, with the exception of some extreme conditions (e.g., fire, earthquake, frost, flood), the difference between the production and the amount in the contract is recorded as a debt for the farmers.

We dropped the villages contract with more than factory in a given year (only 0.5% of the villages in total). In addition to these villages, 1.3% of the villages change the factories with which they form contracts over the years. We also dropped these villages in our dataset. We did an additional robustness check by keeping these villages, and the results were similar. These additional results are available upon request.

There were 14 state-owned factories that were listed in the privatization announcement. However, in our treatment group, we only include 13 of the 14 groups of villages that were under contract with these state-owned factories. Since the bidding on one of the factories (Kastamonu Sugar Factory) was canceled in April 2018, farmers under contract with this factory knew that their partner would continue to be a state-owned factory at the time of planting sugar beets.

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Title: Before Privatization There was Its Impact: Sugar Factories in Turkey
Author: Alper Demirdogen
Publication date: 24-01-2023
Publisher: Springer US
Published in: Review of Industrial Organization / Issue 2/2023
Print ISSN: 0889-938X
Electronic ISSN: 1573-7160
DOI: https://doi.org/10.1007/s11151-023-09894-1

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