Understanding the ‘Indian Agri-Input Sector’

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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:

  1. Fragmented land holdings – No solution to it. Need to improve efficiency & productivity
  2. Lower irrigation
  3. Imbalanced nutrient usage
  4. Low mechanization
  5. 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.


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. 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.

Understanding the ‘Indian Agri-Input Sector’


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.

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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, 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. 

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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 as well as 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.

Neem Coated urea was introduced in the early 2000’s, but has been popularized in the last few years.

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

Source

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. Despite this only 50% farmers receive subsidized urea and the percentage of ZERO when it comes to Bihar, WB & Orissa.

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 as is visible in the ratio below. Too much of Urea subsidy has created a number of problems.Difference between the prices of Urea and Non-Urea products are 4-5x, that encourages farmer to consumer more of urea that distorts the soil quality. 

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:

Link1

Link2

Link3

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.

Like Sugar Industry, the govt has been trying to have higher control over businesses which can never be good.


Phosphorus (P) Based fertilizer

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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 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.

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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 superphosphate(SSP) – which is half gypsum. The use of phosphoric acid produces a higher concentration phosphorus fertilizer.

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.

Source 


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.

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.

Understanding the ‘Indian Agri-Input Sector’
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 fertilizersPI Industries etc

Despite all the challenges faced, these companies have been able to source the raw materials, 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. 

All these larger fertilizer players have a small portfolio of crop protection products as well.



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 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.

Crop protection product can be divided into 3 categories:

Herbicides: Weedkillers substances used to control unwanted plants 

Fungicides: Fungus are the #1 cause of crop loss worldwide. Fungicides kills these fungus or their spores as well as inhibits their growth.

Insecticides: They are formulated to kill, repel or mitigate insects.

Pesticides or Agro-chemicals depends on pest incidences, planting areas, rainfall, new products and prices.

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Labour shortages & rising wages 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. 

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.



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 is goes in 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.


Subsidy income is recognised on the basis of the rates notified from time to time by the
Government of India in accordance with the Nutrient Based Subsidy (NBS) policy(2010) on the quantity
of fertilisers sold by the Company for the period for which notification has been issued and for
the remaining period, based on estimates.


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. There has been lot of hue and cry against use of fertilizers, pesticides etc but we should look at history. During World War II, there was shortage of food and at that time the world population was just 100 cr and today the world population is 700 cr + and we have more than sufficient. And this has been due to the use of agri-inputs.


While fertilizer is controlled by or have interference by India Govt whereas 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. 

In the past couple of months, govt has announced a number of agriculture related reforms. Although, they are quite big, the implementation needs to be seen.


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The post Understanding the ‘Indian Agri-Input Sector’ appeared first on My Investment Diary.



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Shekhar Yadav
It was only during the third semester in Engineering that Shekhar overheard a Gujarati guy in his class discussing stocks. After a few discussions with him, he realized that this was what he wanted to do in his life.
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