Going with the grain
Greed is right, greed works...." But when the CEO of Godrej Agrovet, a Mumbaibased poultry and animal feeds company, sings a paean to rising prices, his intentions may not be as self-seeking as those of the fraudulent trader that Stone captured on the big screen. "Inflation is good because it is putting money in the hands of the farmers, and is making agriculture profitable," reckons Yadav.
Yadav's premise can be argued until the cows come home - after all, if farmers are receiving higher prices for their produce, costs of various inputs too would have spiralled - but there's little doubt agri-business is an opportunity waiting to be tapped. And that opportunity - like many others in India, including those for construction of roads and highways, airports and power generation - is founded in a scenario of shortage.
A section of experts has been screaming from the rooftops about a looming crisis of food supply being around the corner. "The challenge is unbelievable. We need to treble our growth rate in agriculture in the next 15 years," says R. Gopalakrishnan, Executive Director, Tata Sons, who leads the group's charge into the agri sector.
The projections for food items like cereals, pulses, edible oil and sugar are indeed alarming, with steep shortfalls seen by 2026 (see Opportunity in a Crisis). If the crisis is deep, so is the opportunity. Consultants and industry bodies estimate just the urban food market to be worth Rs 3,50,000 crore - and 40 per cent of India is projected to live in urban areas by 2020.
The middle class pool, which is developing the adventurism and the purchasing power to try out new products, is estimated to be 580 million by 2025 - almost double the current population of the United States. And if all these numbers aren't convincing enough, here's another one: The estimated investment in food processing is expected to touch Rs 1 lakh crore by the time the 11th Plan ends (in 2012).
At the vanguard of these opportunities are some of the biggest names in corporate India. The Tatas straddle various parts of the agri chain (although many of these initiatives are not consciously linked to each other). At a broad level, Tata Chemicals is engaged in crop nutrition, Rallis in crop protection, Voltas with its focus on refrigeration is ideally placed to plug gaps in the cold chain, and Star Bazaar, the hypermarket formats at the retail end, also has a collaboration with Tesco of the United Kingdom for building a supply chain.
Mukesh Ambani's Reliance Industries' most visible presence in food is through its not-too-successful retail stores called Reliance Fresh. But the group claims to be the country's largest procurer of fruits and vegetables (800 tonnes a day), and it is building a logistics business that includes cold storage, transportation and warehousing. Similarly, other than its joint venture, or JV, with Wal-Mart for supply chain management, the Bharti group also has FieldFresh Foods, a JV with Del Monte Pacific that sells fruits and vegetables across India as well as Europe and West Asia.
ITC's agri-business division exports and sells domestically foodgrain, oilseeds, leaf tobacco, fruits, vegetables, coffee and spices. Add to this its unique e-choupal model - it touches four million farmers - and ITC's would be the largest agri-business in the country, with revenues of just under Rs 3,900 crore last year. ITC is also the only company that spans the entire food chain - right from the farmer's doorstep, to the plate in its hotels, as well as ready-to-eat products.
Let's dig a bit into what some of these companies have on their plate. Rallis and Tata Chemicals have taken on a programme to improve dal productivity in India. Rallis has started an urad dal (white lentil) project in Pudukkottai district in Tamil Nadu with local farmers; and Tata Chemicals is doing its bit with moong dal (mung bean) in Punjab. Kapil Mehan, Executive Director, Tata Chemicals, says farmers in Punjab are being encouraged to grow the dal between rice and wheat as a quick crop that can be harvested in 50 days - when the land largely lies idle.
For Tata Chemicals, contracted procurement of agri-produce has been a revenue stream, adding Rs 550 crore (around five per cent) to its revenues in 2009-10. It procures Basmati rice, potatoes and other crops for other companies and Basmati exporters using its engagement with three million farmers as a seller of fertilisers. The company has also set up a banana ripening centre in a joint venture named Khet Se with Irish company Total Produce.
Mahindra Shubhlabh, a subsidiary of Mahindra & Mahindra (M&M), is the largest corporate exporter of grapes today; 380 containers were exported in 2009. Harrison Malayalam, the tea and rubber company from the RPG Group, has 60,000 acres under its belt. Today, the company has gone on to become the largest grower of pineapples in India. Says Managing Director Pankaj Kapoor: "We have 700 acres for pineapples within our rubber estates. We have also planted pepper vines at our tea estates, taking advantage of the replanting and rejuvenation that we are investing in."
Large companies have also marked their presence with intervention centres that talk to farmers about farming techniques and provide services like soil testing and in-formation on prices. ITC has some 6,500 of such centres, called echoupals, the Tatas have 650 Tata Kisan Sansars, M&M has 75 Samriddhi Centres and Rallis has Tata Kisan Kutumba, an outreach programme operating out of community centres and schools.
The PE Fuel for Growth
There's plenty of action among midsized and smaller companies, too, with private equity (PE) investors eager to back a number of them. Within the broad agriculture space, the cultivation sector attracted PE support of $102.46 million between December 2008 and June 2010 through eight deals, according to data from Venture Intelligence, a Chennai deal tracking firm. From January 2005 to date, estimates Noida-based VCCircle, about eight times that has come into the sector from PE sources.
One company that's being fuelled by private equity is The Global Green Company, an Avantha Group entity engaged in contract farming of gherkins. The India Agri Business Fund, a $120-million private equity fund sponsored by Rabo Equity Advisors, invested $10 million in The Global Green Co. in March this year.
"The investor has vast knowledge about both agriculture and the food sector in India. We believe Rabo's knowledge will work to our advantage in the next phase of growth," says Vineet Chhabra, Group CEO of The Global Green Co. Or consider Krishidhan Seeds, which got a $30-million investment from Summit Partners, a Londonregistered PE fund in April this year.
Says Krishidhan Managing Director Sushil Karwa: "It is important for a PE firm to come in for at least five years in agriculture. It must stay through an entire cycle that will see a lean year as well as one of bumper crops." Rajesh Srivastava, Managing Director of Rabo Equity Advisors, which launched the India Agri Business Fund in 2008, says around $55 million has been invested already.
"The fund is likely to be exhausted by the end of the year and we will raise a new fund next year," he adds. The going isn't easy - for the big as well as the small. Convincing farmers to be bound by a contracted price, lack of (cheap) labour thanks to the popularity of the government's employment guarantee scheme, and a supply chain that creaks and leaks are just some of the stumbling blocks.
Says Rakesh Bharti Mittal, Vice Chairman and Managing Director, Bharti Enterprises, who leads the group's agri business: "Agriculture requires extreme patience. I have learnt it the hard way." He explains how FieldFresh Foods started off trying to work on multiple fruits and vegetables but has since whittled down the list to five-baby corn, sweet corn, apple, pineapple and banana. The company's focused approach has worked for it and for the farmers.
FieldFresh Foods has in the last three years captured 15 per cent of all baby corn sales in the UK retail market. It supplies to retailers like Sainsbury's and will soon be shipping to Tesco. Income for farmers has gone up 20-30 per cent due to this high value crop. Dairy farmers, after harvesting the baby corn, use the rest of the plant and husk as fodder for cattle. Due to better agronomic practices, not only has milk production gone up, the quality too has improved.
"Today the business is making losses, but my conviction is that we are on the right track," says Mittal. The fields of India are lovely, but they're also dark and deep, and the multitude of players have miles to go before they strike pay dirt.
AGRI-BUSINESS HAS A LOT GOING FOR IT...
- The government's employment guarantee scheme has made farm labour expensive, compelling farmers to take a fresh look at mechanisation
- Real-time price information, commodity spot exchanges, weather insurance and irrigation technologies are helping to modernise farming
- Huge internal demand will drive agricultural growth in India in the future and profi ts need not depend on exports
...BUT THERE ARE HURDLES APLENTY
- Lack of a modernised supply chain that can reduce wastage and get farmers a reasonable price every year
- New generation turning away from farming in a bid to avoid the drudgery and uncertainty
- Fragmented nature of business means it is diffi cult to scale up; large-scale plans have longer-than-anticipated gestation periods
- Government's policies like minimum support price deter farmers from trying new crops or seeds
