We recently visited the Malwa region in MP to gauge the mood of farmers and ascertain overall demand for agri-input in the Rabi season.

Soft Q3FY19 for agri-inputs

Sales in Q3FY19 dropped by 10-20% for agrochemical dealers

Major crops in this region are soyabean during the Kharif season and wheat during the Rabi season. Apart from this, garlic, onion, potatoes, peas, chilli and chana also are grown in the Rabi season. However, due to low crop prices of garlic, onion and chana, farmers have started planting wheat. As a result, wheat sowing has increased by 20% YoY

The Malwa belt is herbicides heavy, forming ~65-70% of total agrochemicals consumed in the region.

As a result, herbicides consumption has been healthy this year. Rising labor cost also has led to increased consumption.§ However, this year the pest attack to date has been low, due to favorable weather conditions; hence, the sale of insecticides has dropped.

Channel inventory of insecticides has been higher by 15-20% while herbicides lower. As a result, dealers expect lower pre-placement of insecticides at the start of the next season, but they will be looking forward to place orders for herbicides from April.

Fungicides during the Rabi season is used primarily in the opium crop

Complex fertilizer prices have increased by an average of ~INR 200-250 per bag or ~INR 4,000-5,000 per tonne. Despite this sharp increase, consumption has not seen a major drop

Many dealers say fertilizer prices have been higher than this in the past, and thus demand may not get adversely affected

Demand for urea was up sharply during the last week of December 2018 as the weather turned cooler, which became conducive for urea application. However, lack of preparedness on the government’s part has resulted in an artificial shortage and farmers have reported that urea is being currently sold on the black market. Prices today are at INR 450 per bag vs MRP of INR 275 per bag of urea

Low consumption of agrochemicals also can be attributed to a sharp increase in product prices, especially in the generics category

The sale of specialty products, which are more expensive than generic products, have not been hit to a large extent as farmers who purchase these products understand the benefits outweigh the cost

The use of farm machinery, such as harvesters, has increased as labor has become prohibitively expensive. Cost of using harvesters is ~80% lower than wages of manual labor

Cold wave, frost damage crops,

add to farmers’ woes.

During the last week of December 2018, extreme cold weather damaged the standing crops

The government has estimated ~22,000 hectares of land was damaged due to the cold wave and frost while our interactions with farmers and dealers suggest the damage could be higher.

The Indore, Dhar, Ratlam and Mandsaur districts have been the worst affected, with ~25-60% of crop damage being reported from these districts

Major losses have been reported in potatoes, peas, chana and chilli crops while garlic, onion and wheat also have been adversely affected

Crop arrivals, especially vegetables and horticulture, at the mandi (market), have reduced, which has led to an increase in prices by 50-100% there

While higher prices will help farmers recoup some losses, farmers are concerned that they will not receive compensation for the damaged crop as they did not pay premium for crop insurance under the Pradhan Mantri Fasal Bima Yojna, given they were expecting a loan waiver

Bhavantar falls short in providing farmers relief

The Bhavantar scheme of the MP government was aimed at compensating farmers in case actual crop prices were below the MSP

While the scheme was good, it failed to deliver benefits to farmers as it had promised

Traders have started to quote lower prices since farmers were expecting to recover the price differential from the government

As a result, the government’s outflow increased and resulted in delay in payments. This has created unrest among farmers

Local retail chain of agri-input

We met with the promoter of a local retailer who runs a chain of agri-input stores in MP. The company currently operates 11 stores in the state and sells agrochemicals and seeds of more than 50 companies. It does not manufacture any products and does not intend to enter in that space

It operates on a franchisee model and is based on profit-sharing with partners. All stores are currently profitable at the PAT level

Centralized inventory procurement and management result in efficient inventory management and lower dead stock

The usual store size is 500-700 sqft along with a godown (warehouse) of 1,000 sqft. The average rent per store is ~INR 8,000-10,000 per month

Due to a large number of stores, the company enjoys the benefits of scale and is able to negotiate better margin

The company plans to add two more stores in CY19. In the next three years, it plans to operate 20 stores in major districts across MP

Mandsaur

Key crops during the Rabi season are wheat, opium, isabgol (psyllium husk), chana, garlic and onion

Sales of agrochemicals are down by 15-20% YoY, given farmers are facing a cash crunch due to lower prices. Post demonetization, farmers’ cash in hand has been lower, and, hence, spending on agrochemicals is lower

Rainfall had been good so water availability is good

Labor cost has increased by 25% YoY this year, especially in wheat. So, farmers have started using harvesters as they are economical

Garlic sowing has dropped by 20% YoY as weak prices have prompted farmers to shift to wheat

Soybean prices have started to increase and are currently at INR 3,200 per quintal vs INR 2,800 per quintal over September-October

Currently, garlic and onion prices also have gone up and are being sold for INR 5 per kg and INR 8 per kg, respectively

The past year’s farmer agitation was due to weak prices in most crops. We spoke with shopkeepers who witnessed the agitation. They highlighted the peaceful agitation became violent when some miscreants joined the protesting farmers and started to burn buses and cars

Ratlam

Farmers usually sow three crops a year, which are soyabean during the Kharif season and peas & chana during the Rabi season

BASF’s Pursuit is widely used herbicide in pea cultivation; however, agriculture activists are recommending against its use as it remains in the soil for a few months even after harvesting. This makes cultivation of the third crop difficult

Crop protection companies Syngenta and Adama are other strong firms in the region and have good connect with farmers

The Ratlam market is 60% cash and 40% credit

Prices of pea had touched INR 40 per kg at the start of the season. Thus, farmers have earned a good profit. However, current prices are at INR 12 per kg, which is not remunerative

Bayer recently launched two new products, Invento an insecticide for potatoes, and Ambition, which is a plant growth regulator (PGR)

The dealer says awareness of fungicide was low, but increased sharply in the past three years. Only 10% of farmers used fungicide three years ago, which today has increased to 40% § MNC activity by Bayer, Adama and UPL has led to this increase

Adama is the most improved brand in this region. New product launches in the weedicide segment at reduced prices compared to other MNC is the key reason for higher sales of Adama

Atul has a smaller product portfolio but still a strong brand recall in some generics, such as indoxacarb, due to superior product quality

Atul’s biggest drawback is lack of management strategy towards ground-level activities to build strong brands

Ujjain

Ujjain is a INR 2.5bn market for agrochemicals and has ~500,000 hectares of land under cultivation

Competition has increased for retailers as new shops have started doing business in the past few years. This has resulted in a drop in margin by ~50% from the peak levels of 15% to 7% now

Companies are offering a cash discount of 4-5%; thus, most dealers prefer buying materials by making an upfront payment

BASF has a strong weedicide portfolio and in value terms sales of weedicide of BASF is 3x the sale of its insecticides in this region

Average channel inventory is high this year, which is due to lower sale of insecticides. Most dealer inventory could be higher by 15-20%

Sumitomo has been aggressive in the market for the past few years. It has been registering sales growth of 30-40% YoY due to increased penetration and new product launches § Dealers have reported an increase in fertilizer sales by 15-20% this year. IFFCO is the most preferred company in the fertilizer space, followed by Chambal Fertilisers and GSFC

The most widely consumed complex fertilizer is 12:32:16, which sells for INR 1,350 per bag. Sales has been higher this year as farmers using DAP have switched to this grade of fertilizer as DAP prices have increased to INR 1,400 per bag vs INR 1,000 per bag in the past year

Company-wise feedbackBayer

The company has good R&D and is known for launching innovate molecules. However, it has yet to launch any good products recently

FAME, which was a blockbuster product, has lost market share to Coragen

The company still has some good products in the horticulture segment, but not in foodgrains

In the past few years, the intensity of ground-level activity has reduced. The company has closed its sales office in MP and is now operating from Maharashtra. Dealers say the new team, which comes from Maharashtra, do not understand the MP market that well

BASF

The company remains the most preferred in MP’s weedicide market. Pursuit is one of the largest-selling molecules in soyabean today

Recently, the company launched new molecules in the fungicides and insecticides categories as well

BASF has good sales and marketing team working closely with farmers Adama

Adama is one of the most improved companies in the past three years

The company has the widest range of products and its prices also are lower than other MNC

Dealers appreciate the company has reduced dumping of inventory and is taking sales return immediately of unsold inventory

Adama’s inventory management system is also good, and there is never a shortage of products

UPL

Among India’s companies, UPL is considered to be the best

Strong farmer relationships, continuous launching of new products and an array of offerings are some strengths

The company also is expected to see good growth this year in the Malwa region due to relaunch of Iris, which had failed when it was launched two years ago

Another product, Atabron, sees healthy demand because of ban of trizophos

Dealers seem happy the company has reduced dumping of inventory

Dhanuka

*Dhanuka’s Kohinoor scheme for distributors has received positive feedback § Distributors seem happy being part of the Kohinoor scheme as it has led to reduction in working capital, better inventory management and assurance of return of unsold inventory

*Targa Super continues to see good demand in soyabean

*Cover has not been able to grow at the rate at which Coragen has been growing as Coragen enjoys brand loyalty due to the first-mover advantage.

Sumitomo

*The company has grown at a 30-40% CAGR in the past three years on new product launches, especially in the weedicide category and increased penetration

*Sumitomo’s new weedicide, SumiMax, has been received well by farmers. It finds application in soyabean, wheat, chana, pea, sugarcane and a few horticulture crops

*The company has successfully launched Danito, which is an insecticide for pink bollworm in the cotton crop

Atul

*While Atul is strong in some generics, such as 2-4D (Zuro) and chlorimuron (Cyno), it has been unable to scale up its brands business due to lack to planning from top management

*Its ground-level strategy is weak and not aggressive in field activities Rabi sowing at 93% of LPA

Rabi sowing at 93% of LPA

Pulses cover more than 105% of LPA

According to Ministry of Agriculture, total acreage for the Rabi season until 11 January 2019 was lower by 4.8% YoY, but was up by 3% on a weekly basis. Apart from drought, lower acreage can be attributed to lower price realization seen in most Kharif crops which have discouraged farmers from sowing Rabi crops. Most Kharif produce is attracting up to 30% lower minimum support price (MSP).

Wheat sowing has dropped slightly by 2% YoY despite higher acreage in MP, which increased by ~20% YoY. MP farmers have switched from onion and garlic to wheat as prices in the past year had crashed sharply, resulting in huge losses to farmers; for wheat, due to government procurement, farmers are confident of earning a good price.

Paddy sowing has seen a sharp drop of 21% YoY, as the acute water scarcity in key regions of Tamil Nadu and Andhra Pradesh due to a deficient northeast Monsoon and weak western disturbances in December. Pulses acreage is down 5.7% YoY while sowing for coarse cereals and oilseeds is lower by 15.9% YoY and 1% YoY, respectively. The drop in acreage has been seen in case of gram due to low area coverage in Maharashtra as it has been hit by drought.

Cotton production at 33.5mn bales, lowest in 8 years

Below normal rainfall in most key regions of the country has adversely affected cotton production this year. As per latest estimates by the Cotton Association of India (CAI), cotton production is expected to drop by 8% YoY to 33.5mn bales this year. CAI expects lower crop production in states of Gujarat by 0.15mn bales and Maharashtra and Telangana by 0.2mn bales each. Owing to lower water availability, the pickings also were restricted to two rounds vs four under normal circumstances. Opening inventory stood at 2.3mn bales and the country is expected to import 2.7mn, which is higher than the previous year’s imports of 1.5mn bales.

—Elara Capital