India has more than 50% of its population dependent on agri and allied activities. With worldwide green revolution and famine like situation in India in 1961, the production today has increased manyfold even with declining agricultural land, this was with the use of fertilizers and crop protection products. Agri-input sector consists of Fertilizers, Crop protection products and seeds as well as farm mechanization. In this blog ” Understanding the ‘Indian Agri-Input Sector’ ” , I will try to explain the basic pointers of the sector focusing only on fertilizers and crop protection segment.
Understanding the ‘Indian Agri-Input Sector’
Indian agriculture faces a number of problems:
Fragmented land holdings – No solution to it. Need to improve efficiency & productivity
Lower irrigation
Imbalanced nutrient usage
Low mechanization
Lack of output marketing infrastructure
Weak storage & distribution and gaps in output marketing linkage
One of the most easiest way to improve productivity amidst all problem is the use of agri-inputs. Also, The pressure on resources like water and labour are giving way for efficient practices such as micro-irrigation and farm mechanization in the areas of transplanting, harvesting and spraying services.
Understanding the ‘Indian Agri-Input Sector’
India lags the world in almost all aspects of agriculture, be it the use of fertilizers, crop protection products or agri machinery compared to other countries. That gives them lot of room for growth.
The image below I have picked from Phillips Capital report on Agri-Input.
I will be talking about just Fertilizers and Agrochemicals/Crop protection products/Pesticides.
As you can see that labor is the largest cost in agriculture contributing about 65% of total cost. There is growing labor problem in agriculture in India.The Lockdown has further aggrevated this problem/ ACCELERATED THE CHANGE. In general, Labour shortages & rising wages is a common concern for entire emerging world & that gives rise to a huge demand opportunity for pesticides. India’s consumption of agro-chemicals is just 300gm/hectare compared to world average of 4kg per ha.
Fertilizers are more of a always needed kind of product and will continue to grow.
AMONG THE 3 KEY AGRI-INPUTS THAT IS SEEDS, FERTILIZER & PESTICIDES, IN FARMING FERTILIZERS ARE THE MOST CONSUMED FOLLOWED BY PESTICIDES(CROP PROTECTION) & THEN SEEDS. THAT IS QUITE VISIBLE FROM THE SIZE OF THE COMPANIES IN EACH CATEGORY.
Understanding the ‘Indian Agri-Input Sector’
Fertilizers
Having read a few annual reports on fertilizers, one point all company’s management makes is that India needs investment and not subsidy. With subsidy we will always be laggard. India’s more than 55% of population is involved in agriculture and of the total rural household 70% is dependent on agriculture and Indian farmers continues to be poorest.
Fertilizer as the name suggest is used to fertilize the soil for the right growth of the plant/crop.
Fertilizers: A fertilizer is any material of natural or synthetic origin that is applied to soil or to plant tissues to supply one or more plant nutrients essential to the growth of plants.
Now, lets talk about the nutrients. Plants require 17 essential elements for growth.
Natural Nutrients: Carbon, Hydrogen & Oxygen, they are obtained from Air & water.
The remaining 14 which are required by the soil are divided into 3 categories depending on their required usage and importance.
Primary Nutrients: Includes Nitrogen, Phosphorus & Potassium.
Nitrogen(N) is a source of protein to plants. Plants also absorb more N. Helps plants to retain nutrition even after they are harvested.
Phosphorus(P) is used by plants to use and store energy. Helps plan to grow and develop normally.
Potassium(K) strengthens plants ability to resist diseases. Increases Crop yield & overall quality.
Secondary Nutrients: Includes Calcium, Magnesium & Sulphur.
Micro Nutrients: Zinc, Iron, Boron, Chlorine, Copper, , Manganese (Mn), Molybdenum (Mo), Nickel (Ni),
Nitrogen Fertilizer: Most common Nitrogen fertilizer is Urea. It is quite simple to make. The key starting material are Natural gas/Coal(major part of raw material cost), air and water/steam. Natural Gas, which is 85% Methane(CH4) is purified and with a number of steps and then reacted with atmospheric Nitrogen to form ammonia(NH3) using Haber process.
Ammonia obtained is then reacted with Carbon dioxide to form Ammonium Carbamate(NH4COONH2) which is then evaporated at high temperature to form Hydrous Urea(NH2CONH2). Hydrous urea is poured into a chamber with steam. Steam evaporates the water content & then we get solid granular Urea. Urea has 46% of nitrogen.
Urea which is coated with neem tree seed oil is called Neem-Coated urea. The concept of coating urea with neem seed oil is that it enables gradual release of urea which goes into the plant rather than seeping into the soil and contaminating it and more importantly eliminating use of cheap subsidized urea in chemical industry. The current policy is that Government has mandated all indigenous producers of Urea to produce 100% of urea as Neem coated urea only.
Because of the high interference of the Govt in the Urea since a long time in terms of complete control, the segment has remained inefficient which has led to higher cost of production and hence India’s cost of Urea is much higher than imported Urea. Now to encourage domestic manufacturing as well as make sure the cost of urea is lesser than imported ones, GOI is compensating these manufacturer with difference between the (Cost of Production- MRP of Urea). In a way Govt is subsidizing inefficiency of production. India is the second largest consumer of urea.
Urea Subsidy policy:
1. Urea MRP is fixed by the govt
2. It provides subsidy to domestic producers, which is firm-specific on a cost plus basis, meaning that more inefficient producers get larger subsidies. 3. It provides a subsidy to importers. Imports are canalized i.e. only three agencies(Govt companies) are allowed to import urea into India
Also there is almost always long delays in receiving payment by these companies from govt.
The govt has been increasing the subsidy burden between FY01 and FY19, urea subsidy has increased from Rs 9,500 crore to Rs 45,000 crore.
One reason why Nitrogen as a nutrient gets so much attention is the ease with which it can be manufactured(easy availability of raw materials) & hence highly fragmented. Also, N being more important than the other 2(P&K) as is visible in the ratio below. Too much of Urea subsidy has created a number of problems.Difference between the prices of Subsidized Urea and Non-Urea products are 4-5x, that encourages farmer to consumer more of urea that distorts the soil quality and the causes many other crop related problems.
The ideal proportion of use of nutrients required by the Indian soil is N:P:K :: 4:2:1. While it stood at 7 : 2.7 : 1 in 2000-01, it was still askew at 6.1 : 2.5 : 1 in 2017-18, while in Punjab and Haryana, two of India’s top agrarian states, the ratio was 25.8 :5.8 :1 and 22.7 :6.1 :1, respectively.
You can read more on the sector:
Coming to the other 2 nutrient that is P and K producers and importers receive a fixed Nutrient Based Subsidy (NBS) based on a formula. Since government involvement is less, the prices of these fertilizers are deregulated market prices adjusted by fixed nutrient subsidy.
In terms of backlog clearance, govt gives first preference to Urea manufacturers, then to NPK & last one to SSP.
Phosphorus (P) Based fertilizer
Phosphoric fertilizers are made from phosphate rock. Phosphate rock is a sedimentary rock that contains high amounts of phosphate minerals. India lacks phosphate rock resources, so it is imported mainly from either China, US or Morocco. By itself, phosphate rock is not soluble and so cannot provide phosphorus in an available form for plant use.
To produce a phosphorus fertilizer, phosphate rock is treated with acid; sulfuric, phosphoric or nitric. Each method has its advantages and constraints. The sulfuric acid route produces a low phosphorus fertilizer – single super phosphate(SSP) – which is half gypsum. The use of phosphoric acid produces a higher concentration phosphorus fertilizer. SSP contains 15-16% phosphorus, hence cheaper than DAP.
The third manufacturing process is to use nitric acid to acidulate the rock phosphate. This process is a cleaner process with no waste products and produces two fertilizers Nitrophosphates which are combined with potassium to produce the complex NPK fertilizers i.e. fertilizer which contains all three primary nutrients and Calcium nitrate (from the nitric acid combining with the calcium in the rock phosphate).
DAP(diammonium phosphate) is the most common phosphate fertilizer(its a concentrated one) containing 46% phosphorus. About half of the demand in Indai of DAP is met through imports.
When raw material price increase, it is much more economical to import DAP and if the prices have increased by a good amount, farmers prefer lower P content(NPK) Fertilizer due to lower costs.
Potassium(K) based Fertilizers
Most potassium used in fertilizer production is taken from natural deposits of potassium chloride(KCl). The mined material is crushed and purified by the removal of rock particles and salt. The majority of the potassium chloride produced is used for making fertilizer, called potash, since the growth of many plants is limited by potassium availability.
The two main types of potash are muriate of potash (MOP, potassium chloride) and sulphate of potash (SOP, potassium sulphate). While SOP typically sells at a premium to MOP, the vast majority of potash fertilizer worldwide is sold as MOP(95%). Mostly imported in India. MOP consists of 50% potassium & 46% chloride.
Potassium Sulphate(K2SO4) is manufactured by reacting Potassium Chloride with Sulphuric Acid (H2SO4) in a 2 step process.
Potassium Chloride is simple refined natural deposit.
Potash is the common name for various mined and manufactured salts that contain potassium.
Potassium chloride is also imported in India.
Process showing how Potassium Chloride is obtained
Key players in fertilizer industry:
Some of the well known fertilizer companies in India are UPL Ltd,
Coromandel International ltd, Chambal fertilizers, PI Industries etc
Despite all the challenges faced, these companies have been able to source the raw materials efficiently, grow significantly in size, create a brand name as well as become export wise competitive. These companies are mainly present in Phosphorus nutrient based fertilizer. Also, to fetch better margins these companies manufacture complex grade of fertilizers i.e. combination of more number of nutrient as well as nutrients from various categories in their fertilizer.
They also face the problem of farmers preferring urea over their fertilizers. To overcome, these companies in addition to branding, they keep doing lot of soil test with farmers, conducting workshops with them as well as engaging directly & educating them on various aspects to help them grow the farm productivity.
Different crops require different combination of NPK nutrients. So, you can see that packets of fertilizers with 14:35:14 and several other combination. Some secondary & micronutrients are also added to fertilizers depending on the soil the region.
All these larger fertilizer players have a small portfolio of crop protection products as well.
How does the DBT(Direct Benefit Transfer) system of Fertilizer subsidy works?
DBT or Direct Benefit Transfer is transfer of any form of payment from govt to intended beneficiaries directly in their bank account.
DBT was launched in 2012 by the planning commission to make direct payments for student scholarships, social security payments and women and child welfare. The project was being tried on a pilot basis in 20 districts. Later on with the new govt coming in 2014, it was expanded to include NREGS( earlier MGNREGA) & several other schemes including Fertilizer subsidy (primarily Urea). The idea was to reduce leakage of subsidized urea & Limit the use of excess urea in farming.
Under DBT system in fertilizer subsidies, the farmers/beneficiaries will continue to receive Urea and P&K fertilizers at subsidized prices in the market.
The fertilizer companies which used to receive subsidy on receipt of fertilizers at the district, will now get subsidy after the fertilizers are sold to farmers/beneficiaries by the retailers ONLY through Point of Sale (PoS) machines through biometric authentication.
To use POS, farmers have to press their thumb against a POS machine. When they do this, exact details of the purchase including the quantity, Aadhaar number of the buyer and even the soil health of the plot will be recorded via the POS machine. After the sale is recorded, the subsidized amount will be settled directly with the fertilizer manufacturer.
So the burden of subsidy is to be borne ONLY by the fertilizer company till the payment is made by the govt.
Problems associated with DBT of Fertilizers
Now the root cause of the problem: The govt in order to window dress the fiscal deficit(govt revenue- govt expenditure) rolls over the payment to next fiscal. The govt rolled over 33,000 crore in dues of the allocated ₹70,000 cr in FY19.
Although the new digital system is able to restrict diversion & misuse of urea as well as paperwork associated, there are only one negative associated as compared to the previous system WHICH IS THE HIGH WORKING CAPITAL OF MANUFACTURERS.
{POS HAS MORE OR LESS STABALIZED NOW}
Usually the payment to fertilizer companies are done within 2 weeks of they filing the for the subsidy payment. But the problem arises is in case of larger delays such as that of rolling over of the payments by the Govt for the next fiscal.
Now to tackle that, govt will be doing off balance sheet lending, that is they are going make cheap loans available to these manufacturers.
Historical rate of govt subsidy in India
Understanding the ‘Indian Agri-Input Sector’
Agrochemicals/Crop protection products/Pesticides
Crop protection products consists of Insecticides, Herbicides and Fungicides. All crop protection categories come under pesticides.
One best point about Crop protection(CPC) products is that there is no pricing control by the govt on these products. As the name suggest, these products are used to protect the product, mainly used in the later stages of farming.
But CPC attracts a much higher GST of 18% compared to 5% with Fertilizers.
With around 15-25% crop loss due to pests, diseases and inadequate CPC usage, India offers a strong growth prospect to the CPC industry. India is losing agricultural production worth ₹1.48 lakh crore annually due to damage from pests, weeds and plant diseases, according to the Ministry of Agriculture.
Produce loss due to several factors:
Crop protection product can be divided into 3 categories:
1. Herbicides: Weedkillers substances used to control unwanted plants.
Herbicides are majorly used in rice and wheat crops however, due to availability of cheap labour in India those are employed to manually pull out weeds. Herbicides have seasonal demand due to the fact that weeds flourish in damp, warm weather and die in cold spells.
The current labour shortage issue has increased the usage of herbicides.
2. Fungicides: Fungus are the #1 cause of crop loss worldwide. Fungicides kills these fungus or their spores as well as inhibits their growth. Finds application in fruits, vegetables and rice. Fungicides play important role to reduce post-harvest losses in fruits and vegetables.
3. Insecticides: They are formulated to kill, repel or mitigate insects. Used mainlyaddy, cotton, sugarcane and other cereals.
Pesticides or Agro-chemicals depends on pest incidences, planting areas, rainfall, new products and prices.
Globally, herbicides account for largest value within agrochemical industry followed by insecticides and fungicides. But in India it is Insecticides that have the majority share over 50% followed by Herbicides. Over time, this is likely to shift towards herbicides.
Labour shortages / rising wages /peak season high labor cost is a common concern for entire emerging world & that gives rise to a huge demand opportunity for pesticides. The Lockdown has further aggrevated this problem. India’s consumption of agro-chemicals is just 300gm/hectare compared to world average of 4kg per ha. Herbicides will be the biggest beneficiary.
Companies such as Dhanuka Agritech, Bayer have been doing quite well on this particular theme(labor shortage) and that is also reflected in the numbers as well. Also, Astec lifesciences whose product is a key raw material for these crop protection companies(Mainly herbicides) is also doing very well.
Indian Pesticide manufacturer have created a name for themselves exporting 50% of produce
Understanding the ‘Indian Agri-Input Sector’
Key pointers
Consecutive droughts lead to lower consumption of agri-inputs. Thats leads to higher inventory in channels. Higher inventory leads to stressed cash flow.
First year of good monsoon goes into inventory liquidation. From second year of good monsoon, things start showing in terms of encouraging financial performance. Also, first year of drought is not a big problem as the high level of water in the reservoir helps to mitigate the impact of low rainfall.
Since the raw material for P& K fertilizers are imported, if the raw material cost increased, domestic production declines, import increases.
There is ongoing debate on whether organic agricultural fertilizer is better or the chemical one. Based on whatever I have read is that, organic manure is insoluble in water and hence takes lot of time to show its impact and the yield is also not comparable to those obtained using chemical fertilizers. HENCE, CROP OUTPUT IS QUITE EXPENSIVE.
However, there is a growing thought process towards sustainable/environmental friendly farming. So, companies are trying to keep eyes on that as well and over time some new technology can come that can boost productivity via organic fertilizer.
While fertilizer is controlled by or have interference by India Govt, Pesticides do not have any pricing control by the Govt. On the other hand Monsoon has limited impact on sales of fertilizers compared to monsoon playing a major role for the demand of pesticides. Also, demand for pesticides or crop protection products is a function of pest incidences.
Farmers crop earnings are dependent on mandi prices of MSP. When supply of crop increases during good harvest, prices go way below MSP. GOVT MSP SCHEME HARDLY WORKS EXCEPT IN A HANDFUL STATES.
In the past couple of months, govt has announced a number of agriculture related reforms such as participation of private players, reforming the Agriculture Produce Market Committee (APMC) and promoting contract farming. Although, they are quite big, the implementation needs to be seen.
If the subsidy rates go down, the farmers have to pay higher and hence higher MRP of fertilizers. What I understand from reading is that, given the stressed financial condition of farmers, the subsidy cant be removed completely.
ONE SIMPLE SOLUTION SUGGESTED BY COROMANDEL INTERNATIONAL’S MANAGEMENT IS THAT OF TRANSFERRING SUBSIDY DIRECTLY & TIMELY TO THE FARMER’S BANK ACCOUNT. IT WILL BE A SOLUTION TO MANY PROBLEMS SOMETHING THAT WORKS SEAMLESSLY FOR SUBSIDIZED LPG CYLINDER. IT WILL SOLVE THE WORKING CAPITAL PROBLEM OF MANUFACTURERS, FARMERS GET TO BUY THE PRODUCTS AT SUBSIDIZED RATES AND GOVT ANYWAY IS PAYING FOR THESE SUBSIDIES. I AM SURE IT WILL HAPPEN SOMEDAY.
And over time when the farmers income rises, the subsidies can be gradually removed.