Planting Seeds for the Next Economic Boom: Why the Agriculture Sector will never be the same
The agriculture sector in India forms the backbone of the country. It employs 54% of the country's total workforce of 481 million people. Being the means of living for the majority of our population, it is imperative that this sector flourishes if India is to cement its place as a global leader over the next decade.
Over the years, this sector has been under a cloud of perception that is primitive, backward and sluggish. Also, because of general political policy over the years, the incentive for corporate firms to enter this space has been low. However, this is changing. Through this article, I would like to highlight and compare some key facts about the agriculture and allied sectors that showcase its stellar performance over the years. This will further enable me to talk about the investment opportunities that exist in both agriculture and its allied sectors.
A Global Superpower
Due to India's varied geographic landscape, agriculture in India is multidimensional. India's ecological diversity, crop diversity and diet diversity are interconnected and form a symbiotic relationship. India has the 10th largest arable land resource in the world. It also possesses all 15 major agri-climatic as well as 46 of the 60 types of soil conditions. Thus, India possesses all the natural pre-requisites required to build a flourishing industry.
India contributes 12% of the global agricultural production worth $3,358 billion. If we compare this to the much-celebrated sectors of the Indian economy i.e Manufacturing sector and Services sector, we see that India ranks 5th and 9th respectively and contributes 3% of the global output in both sectors.
If we examine India's agricultural timeline, the first modern phase of expansion took place during the era of the Green Revolution which began in the 1970s. India's agricultural production grew at a sluggish pace from $25 billion to $101 billion in the late 1990s, an annual growth rate of 4.76%. This was due to the fact our growth was driven by mostly two products - wheat and rice.
However, between 2000 and 2018, the agricultural contribution grew at a rate of 7.90% from $101 billion to $397 billion. This surge in growth can be attributed to the emergence of high-value segments like horticulture, dairy farming, fisheries etc.
A major legislative amendment to the Essential Commodities Act, 1955, will incentivise private players to invest in setting up warehousing and storage facilities. Before the amendment, the central government conferred the power to moderate the supply and storage of essential commodities like pulses, some vegetables and fruits to the state governments. The government, more often than required, would place 'stocking limits' i.e force wholesalers/traders to sell a portion their inventory in the market to reduce their total quantity of a commodity to the prescribed limit. This was done to increase the supply of a commodity in the market, therefore, reducing the price of the commodity and keeping it stable. This disincentivizes private players from building storage facilities since one day your inventory could be full but the next day, you could be asked to part with half your inventory, leaving you with a half-empty storage facility running at full cost! The amendment dilutes the provision of stocking limits and takes care of this 55-year-old problem.
Another favourable legislative change outlined aims to reform the Agricultural Produce Market Committee (APMC). Farmers are expected to sell their produce to a local designated 'mandi'/market area which is usually within their state. The buyers aka wholesalers/traders bid for the produce. The long-standing issue in these auctions is that they are rigged. The buyers collude, work together and deflate the prices of the produce. The agents of the APMC, who are in charge of handing out licenses to these buyers, are also in on the act and do not hand out new licenses fairly thus keeping the club small where corruption is rife. Effective price realisation can occur only in a free market. A market like this where there is only one buyer is called a monopsony. This causes farmers to sell their produce at a mere 20-25% of the final price of the consumable product. The government aims to break this monopsony by allowing farmers to sell their produce in different states, giving them a plethora of choices and helping them realise the best price for their produce.
The development of warehousing facilities, cold chains and the subsequent supply chain by the government and private players will go a major way in reducing the farm waste. In 2019, 16% of the total farm produce was wasted which was worth more than Rs. 1 lakh crore. This major wastage can be reduced through a streamlined supply chain process.
With the power of the APMC being curbed by allowing farmers to find their own buyers new local as well as international players will be brought into the system, bringing liquidity in the market and fair realisation of prices. A major segment that I believe will benefit is the export market. The world agriculture market is highly export intensive. In 2019, world agriculture production stood at $3358 billion of which $1820 or 58% was exported. India exported close to 10% of its produce. Indian produce is highly price competitive but not trade competitive, this disconnect can be solved by bringing more buyers into the market.
Coming to the allied services of the agriculture sector, I made an interesting observation with companies that are in the business of manufacturing pesticides and insecticides. Most public companies import raw material i.e chemicals from China mainly. With de-globalization being the trend that will dominate the global economy over the next decade, early reports suggest that companies have started to backwards integrate themselves. This is essentially creating their own end-to-end supply chain within India. Commentary written in annual reports suggests that this CAPEX expenditure should reap benefits in the near future and will certainly help their margins.
In 2018, over 285 irrigation projects to service 18.8 million hectares of land have been earmarked by the government. This has been done to reduce the dependency on the monsoon seasons which can be erratic. Global pandemic or not, demand for agriculture produce is ever-present and with rising income for the middle class, the packaged food industry in India is on track to $65 billion by the end of 2020 - the 3rd largest market in the world.
If we examine India's agricultural timeline, the first modern phase of expansion took place during the era of the Green Revolution which began in the 1970s. India's agricultural production grew at a sluggish pace from $25 billion to $101 billion in the late 1990s, an annual growth rate of 4.76%. This was due to the fact our growth was driven by mostly two products - wheat and rice.
However, between 2000 and 2018, the agricultural contribution grew at a rate of 7.90% from $101 billion to $397 billion. This surge in growth can be attributed to the emergence of high-value segments like horticulture, dairy farming, fisheries etc.
Policy Boost
The 3rd tranche of the economic stimulus package, announced in May 2020, has outlined a host of legislative changes and approximately Rs. 1.6 lakh crore focusing on agriculture and allied services.
“I will be announcing 11 measures today, of which eight relate to strengthening infrastructure, capacities and building better logistics, while the rest three will pertain to governance and administrative reforms.” - FM Nirmala SitharamanOne of the major announcements includes the setup of a Rs.1 lakh crore agri-infrastructure fund for farm gate infrastructure. The purpose of this fund is to finance the setting up of post-harvest infrastructure like cold chains, warehouses and streamlining the supply chain.
A major legislative amendment to the Essential Commodities Act, 1955, will incentivise private players to invest in setting up warehousing and storage facilities. Before the amendment, the central government conferred the power to moderate the supply and storage of essential commodities like pulses, some vegetables and fruits to the state governments. The government, more often than required, would place 'stocking limits' i.e force wholesalers/traders to sell a portion their inventory in the market to reduce their total quantity of a commodity to the prescribed limit. This was done to increase the supply of a commodity in the market, therefore, reducing the price of the commodity and keeping it stable. This disincentivizes private players from building storage facilities since one day your inventory could be full but the next day, you could be asked to part with half your inventory, leaving you with a half-empty storage facility running at full cost! The amendment dilutes the provision of stocking limits and takes care of this 55-year-old problem.
Another favourable legislative change outlined aims to reform the Agricultural Produce Market Committee (APMC). Farmers are expected to sell their produce to a local designated 'mandi'/market area which is usually within their state. The buyers aka wholesalers/traders bid for the produce. The long-standing issue in these auctions is that they are rigged. The buyers collude, work together and deflate the prices of the produce. The agents of the APMC, who are in charge of handing out licenses to these buyers, are also in on the act and do not hand out new licenses fairly thus keeping the club small where corruption is rife. Effective price realisation can occur only in a free market. A market like this where there is only one buyer is called a monopsony. This causes farmers to sell their produce at a mere 20-25% of the final price of the consumable product. The government aims to break this monopsony by allowing farmers to sell their produce in different states, giving them a plethora of choices and helping them realise the best price for their produce.
The Opportunity
The opportunity for growth in the agricultural sector exists in not only its core operational aspect i.e better economic conditions for farmers of pulses, vegetables, fruits, marine life etc but also for its allied services which include agricultural equipment like tractors, pesticides & insecticides and small finance banks.
The development of warehousing facilities, cold chains and the subsequent supply chain by the government and private players will go a major way in reducing the farm waste. In 2019, 16% of the total farm produce was wasted which was worth more than Rs. 1 lakh crore. This major wastage can be reduced through a streamlined supply chain process.
With the power of the APMC being curbed by allowing farmers to find their own buyers new local as well as international players will be brought into the system, bringing liquidity in the market and fair realisation of prices. A major segment that I believe will benefit is the export market. The world agriculture market is highly export intensive. In 2019, world agriculture production stood at $3358 billion of which $1820 or 58% was exported. India exported close to 10% of its produce. Indian produce is highly price competitive but not trade competitive, this disconnect can be solved by bringing more buyers into the market.
Coming to the allied services of the agriculture sector, I made an interesting observation with companies that are in the business of manufacturing pesticides and insecticides. Most public companies import raw material i.e chemicals from China mainly. With de-globalization being the trend that will dominate the global economy over the next decade, early reports suggest that companies have started to backwards integrate themselves. This is essentially creating their own end-to-end supply chain within India. Commentary written in annual reports suggests that this CAPEX expenditure should reap benefits in the near future and will certainly help their margins.
In 2018, over 285 irrigation projects to service 18.8 million hectares of land have been earmarked by the government. This has been done to reduce the dependency on the monsoon seasons which can be erratic. Global pandemic or not, demand for agriculture produce is ever-present and with rising income for the middle class, the packaged food industry in India is on track to $65 billion by the end of 2020 - the 3rd largest market in the world.
Final Thoughts
I believe, the benchmark for the agricultural sector will be the 'doubling farmers' income by 2022' initiative taken on by the government. If the policy changes and infrastructure projects come through, it will make it much more cost-efficient for farmers to produce goods, selling their goods in a free, competitive market will allow for better price realisation. Wholesalers/traders will be able to build and sustain state-of-the-art cold storage and warehousing facilities without the fear of unnecessary government intervention. This will prevent wastage of precious food produce. The positive loop will extend to its allied sectors as farmer's with higher income will be able to invest in better machinery, high-quality seeds, pesticides and insecticides as well as take on loans from small finance banks to improve their infrastructure creating a positive feedback loop.
There will be challenges related to execution along the way but the foundations of exponential growth within this sector are beginning to be formed. Infrastructure developments and favourable policy changes like the ones being witnessed will be the key drivers of growth. Exciting times lie ahead!
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