India Inc waits for dust to settle before firming up farm strategies

The final of a two-part series looks at why investment is unlikely to be forthcoming until industry sees the new ground reality

Corporate India, while generally welcoming the three Ordinances that seek to free agriculture marketing, is waiting for the dust to settle before recalibrating strategies for the changed environment.

As S Sivakumar, group head, agri and IT businesses at ITC, one of the biggest companies in the agriculture space, puts it, investment might take time to start as many issues need to settle down first but it will happen once companies start seeing value in the new environment.

“I think lot of people will wait for how things get executed on the ground before they start putting their money into various propositions, but the good thing is that all three measures of freeing inter-state trade, providing a mechanism for contract farming, and delisting some items from the Essential Commodities Act (EC Act), have happened in one go. Earlier, if items were removed from the EC Act, the APMC reforms waited,” said Sivakumar. 

He said the only challenge he sees is the price cap of 100 per cent and 50 per cent that has been kept in the amendment to the EC Act

The amendment to the EC Act, while exempting major commodities from the provisions of stock holding limits etc., said that the provisions would come into force if the prices of horticulture crops increased by 100 per cent and the prices of non-perishables such as pulses by 50 per cent.

 

This is as compared to the last 12 months or the average of the last five years, whichever is lower.

“One has to see how this is executed, because breaching the 100 per cent barrier in the case of horticulture products isn’t very difficult,” said Sivakumar. 

But, there are some who are already preparing for the new order. 

Adani Wilmar’s Deputy Chief Executive Officer Angshu Mallick, recently told this paper that the company may buy soyabean and mustard seeds directly from farmers in the near future, a call on which it will take by October, when the next crop arrives. Adani Wilmar sells its edible oil under the brand name, ‘Fortune.’

Arvind Mediratta, MD& CEO of Metro Cash & Carry India, while strongly welcoming the new laws and the amendment said that, going forward, this will attract investments from private companies as it will allow them to directly contract with thousands of farmers and ensure better control of the end product.

“Private companies will also invest in infrastructure and units near to the growing zones for processing where they are confident of assured raw materials,” Mediratta told Business Standard.

He said that from Metro Cash and Carry’s perspective, the company has been engaging in direct farming for many years now. It has five collection centres across the country that directly source from farmers without any middlemen. Meanwhile, according to a senior executive from a leading consumer goods company that procures in bulk, the recent amendments do not really affect them.

“Firstly, all procurement contracts that we do with farmers are on a long-term basis and secondly, we pay them well above the market rate. So it is unlikely that farmers will go and sell their harvest to anyone else. Finally, in the last three decades, we have been able to retain almost 90 per cent of the farmers and their operations are well integrated with us,” said a senior official from the company who did not wish to be named. 

One sector that foresees a big jump in investments because of the Ordinances is warehousing and storage.

Though India’s agriculture and horticulture output has been setting new records, warehousing and cold storage have not seen huge investments due to the long gestation period in breaking even. Investors normally eye earnings in the first year of their investment, but warehousing is a sector which takes a minimum of eight years to generate a profit, that too when the godowns are 100 per cent occupied — a fact that puts investors off. 

Ramesh Duraiswami, managing director and chief executive officer, National Bulk Handling Corporation, said that the agriculture sector reform package announced by the Centre was a good move that gave flexibility to farmers or FPOs to sell their produce to anyone and anywhere of their choice.

Of course, he added, such out-of-mandi sales would certainly have revenue implications for state governments but these could be dealt with by using alternative revenue streams such as GST and state tax to compensate for the losses incurred. 

“While the intent of the government is good, actual implementation of these reforms on the ground will be challenging as the Centre may face resistance from states as agriculture is a state subject,” said Sanjay Kaul, non-executive chairman, National Collateral Management Services. 

For Madan Sabnavis, chief economist, Care Ratings, it was clear that the arrivals of agricultural commodities would decline but they would not become totally extinct because all farmers would not be able to bring their produce directly either to large consumers or corporates. 

“But farmers’ realisation will go up by selling commodities outside the mandi yard and consumers will negotiate a better and more cost-effective deal,” said Sabnavis. 

At Bayer India, one of the largest plant protection companies, Simon Wiebusch, chief operating officer in the Crop Science Division, said that through these Ordinances, farmers will be empowered to engage with processors, aggregators, wholesalers, large retailers, online food retailers and exporters without depending on intermediaries.

“All of this will especially help smallholder farmers (who were previously less connected to the market) become an integral part of the overall farming eco-system,” said Wiebusch. 

Wiebusch said that while it is understandable that food price inflation is a concern, farmers will have to see the benefits also when crop prices rise and should not see their earnings potential capped when market opportunities emerge. To this, Ramesh Chand, NITI Aayog member, said that several commodities such as tomatoes have been out of the EC Act for ages yet there had been little big ticket investment in tomato storage and warehousing.

“The world over, governments have some instruments to control prices and I don’t see any wrong in it. Moreover, we have exempted all those processors and exporters who haven't stored more than their installed capacity from the Act. This should take care of all value chain participants,” said Chand.

With inputs from Arnab Dutta

Series ends