Plough, Plant and GrowAGRI INPUTS

Gauri Anand

December 2015

Agriculture value chain

INR Bn US$ Bn % of GDP

Seeds 120 2.0 0.1 ~ 25% is organised, rest is saved seeds of last year

Fertilisers 1300 21.7 1.4 overall ~ 55 mmt of which urea is 30 mmt

Pesticides 100 1.8 0.1 CRAMs an emerging opportunity

Irrigation equiments 60 1.0 0.1 Micro, drip/ sprinkler irrigation

Tractors,Tillers 300 5.0 0.3

India ranks among the top countries in sheer volumes; however India lags in efficiency

India yields are the lowest and well below the world average

With ~ 50% of the population involved in farming and allied activities, agri and allied activities forms only ~ 15% to overall GDP

India's Position in World Agriculture

Item India World % Share 's Rank Next to

Area (mn hectares)

Total Area 329 13442 2.4 Seventh Russian Federation, Canada, U.S.A.,

Land Area 297 13009 2.3 Seventh Russian Federation, Canada, U.S.A.,

159 1411 11.3 Second USA

Population in mn

Total Population 1181 6750 17.5 Second China

Agriculture 583 2617 22.3 Second China

Crop Production (mmt)

Total Cereals 267 2521 10.6 Third China, USA

Total Pulses 15 61 24.6 First

Fruits & Vegetables (mmt)

(A) : Vegetables & Melons 90 932 9.7 Second China

(B) : Fruits excluding Melons 67 580 11.6 Second China

Commercial Crops (mmt)

(A) : Sugarcane 348 1736 20.1 Second Brazil

(B) : Tea 0.81 3.9 20.7 Third China, Turkey

(C) : Cotton(lint) 3.77 22.85 16.5 Second China

Poor Monsoons, is it still an area of concern?

25

30

35

40

45

50

1988

-89

1990

-91

1992

-93

1994

-95

1996

-97

1998

-99

2000

-01

2002

-03

2004

-05(

p)

2006

-07(

p)

2008

-09(

p)

(%)

0

50

100

150

200

250

FY96

FY98

FY00

FY02

FY04

FY06

FY08

FY10

FY12

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

Food production (lhs) Fertilisers (lhs)Pestisides (lhs) Rainfal (rhs)l

0

20

40

60

80

100

120

140

160

180

FY96

FY98

FY00

FY02

FY04

FY06

FY08

FY10

FY12

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0AgriGDP (lhs) Rainfall (rhs)

Net irrigated area has been on the rise

Despite deviation in monsoons (compared to lpa), most factors have growing, underpinning the resilience

Declining per capita land availability (halved to 2.2 ha land per person) has

put the onus of increasing food production on existing farm land

3

4.4

6

7.54.3

3

2.21.8

0

2

4

6

8

1960 1980 2000 2020

Popu

lati

on R

s bn

0

1

2

3

4

5

Arab

le la

nd p

er p

erso

n (h

a)

Population, bn (lhs) Arable land per person, hectares (rhs)

0

20

40

60

80

100

120

Ric

e

Wh

ea

t

Pu

lse

s

Ed

ible

oil

Su

gar

(mmt) FY00 FY11 FY21

1.00

1.25

1.50

1.75

FY10 FY12 FY20 FY50

Declining per capita land availability Projected demand of food in India

India’s population by 2050 (in bn)

Dietary shifts - India needs to produce more also to feed the livestock

Consumption (mmt) FY12 CAGR 2007-12

Rice 104.32 2.2

Wheat 93.9 4.4

Cotton (mn bales) 35.2 9.2

Meat* 4.10 15.8

Egg* 0.65 6.5

Fruits* 0.08 6.2

Vegetables* 0.14 11.1

Eggs, Meat & Fish

110

130

150

170

190

210

230

250

270

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2009 2010 2011 2012

FRUITS & VEGETABLES

110

130

150

170

190

210

230

Jan

Feb

Mar Ap

r

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

2009 20102011 2012

Yields have to improve, farm inputs to aid growth

Scope for yields to improveScope for yields to improve

000 Kgs/ha India World %Paddy 3.37 4.31 -21.8Wheat 2.80 3.09 -9.2Maize 2.32 5.11 -54.5Groundnut 1.07 1.55 -31.0Sugarcane 68.88 71.51 -3.7

Yield/ha - India vs. WorldBetween 2005 and 2009, profitability of farmers improved significantly on the back of rise in MSPs and largely stagnant input costs. Major part of the costs (~85 - 90%) include labour, land (rent) and inputs such as fertiliser and agro chemicals

Post the 2005 – 2009 period, farmer profitability took a hit on account of increase in labour costs (>50% of cost of cultivation), increase in fertiliser costs (post NBS) and relatively stable MSPs

On an average, paddy farmers in AP saw net income decline from ~Rs. 2,700 / acre (2009) to a loss of Rs. 2,320 per acre in 2011

NREGA program is considered to be a key driver for increase in farm labour cost as it reduced availability of labour, increased the base cost of labour especially during the important sowing and harvesting period

MSP of Key Kharif & Rabi Crops

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

Rs/Q

tl

PaddyMaizeMoongCottonSoyabeanWheat

Rise in input costs has led to stagnating profits

All India avg daily wage rate for Agricultural Labour (Rs/day)

98114

135

163

189

0

50

100

150

200

FY08 FY09 FY10 FY11 FY12

Others 7%Insecticide

6%

Fertilisers9%

Seeds8%

Machine labour15%

Human labour55%

Cost components, agriculture is labor centric

46,427

24,31924,577

-

10,000

20,000

30,000

40,000

50,000

FY09 FY10 FY11 FY12 FY13

Estimated Cost Estimated Profit

48,748

28,23827,742

-

10,000

20,000

30,000

40,000

50,000

60,000

FY09 FY10 FY11 FY12 FY13

Estimated Cost Estimated Profit

Cotton cutlivation (high grade) in AP (Rs/ha)

Cotton cultivation (high grade) in AP (Rs/ha)Profits stagnate: Rice cultivation in AP (Rs/ha)

Small ownership, falling farm profits and rising land prices to result in consolidation

Category of Holdings __Number of Holdings (PPL in mns)__ ______Area (mn hectares) _______ ___Avg Size of Holdings (hectares)___

2000-01 2005-06 2000-01 2005-06 2000-01 2005-06

1 2 3 4 5 6 7

Marginal (< 1 hect) 75 84 30 32 0.4 0.38

(62.3) (64.8) (18.7) (20.2)

Small (1 to 2 hect) 23 24 32 33 1.42 1.38

(19.0) (18.5) (20.2) (20.9)

Semi-Medi (2 to 4 hect) 14 14 38 38 2.72 2.68

(11.8) (10.9) (24.0.) (23.9)

Medium (4 to 10 hect) 7 6 38 37 5.81 5.74

(5.5) (4.5) (24.0) (23.1)

Large (>10.0 hect) 1 1 21 19 17.12 17.08

(1.0) (0.8) (13.2) (11.8)

All Holdings 120 129 159 158 1.33 1.23

Contract manufacturing – Agri input industry could be large aggregators of farm produce for modern retail

APMC mandis are located far from farmers

Sq km

Implied radius (km)

Punjab 115 6Rajasthan 823 16Uttaranchal 940 17Himachal Pradesh 1465 22Sikkim 7096 48Average 435 12Benchmark 80 5

More than a tenth of the produce is

lost due to poor infrastructure

%

Potato 11

Onion 11

Other vegetables 13

Fruits 19

Food grains and oilseeds 10

Average 12150

155

160

165

170

175

180

185

190

195

200

205

FY07 FY08 FY09 FY10 FY11 FY120%

5%

10%

15%

20%

25%

30%

35%

40%Foodgrain Production (in mmt) LHS

Procurement by FCI (%) RHS

Although FCI has upped procurement it’s a meager 35% -

implies only 35% of the produce is sold at MSP

Farmer realizes only 68% of the

customer price

Seeds: sow for high returnsRank Country Area

(mn hectares)

Value (US$ bn)

Biotech Crops

1 69.0 12 Maize, soybean, cotton, canola, sugarbeet, alfalfa, papaya, squash2 30.3 2 Soybean, maize, cotton3 23.7 0.6 Soybean, maize, cotton4 10.6 2 Cotton5 10.4 0.55 Canola, maize, soybean, sugarbeet6 3.9 9.5 Cotton, papaya, poplaar, tomato, sweet pepper7 2.8 NA Soybean8 2.6 NA Cotton9 2.3 0.37 Maize, soybean, cotton

10 1.3 NA Soybean, maize11 0.9 NA Soybean12 0.7 0.4 Cotton, canola

0

5

10

15

20

25

30

35

40

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY120

100

200

300

400

500

600Production mmt

Yield kg/hectare (RHS)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY100

20

40

60

80

100No.of farmers (in mn)

% of acreage under BT cotton (RHS)

Rise in yield & production of cotton after application of BT cotton

Seed pie

Corn, 7Cotton, 1

Rice, 45Wheat, 32

Vegetables, 0.7

Others, 14.3Corn, 11

Cotton, 26

Rice, 18Wheat, 9

Vegetables, 12

Others, 24

Crop share in volume terms Crop share in value terms

Rice the next big hybrid opportunity

Rice yields though up 18% in the last decade, yields are stagnating over the last 5 years

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11*

2011-12**

Seed replacement rate though improved it is still very low in cereals

0

20

40

60

80

100 %

Pesticides: Low gramage to drive growthPer capita pesticides consumption Kg/ha

0

2

4

6

8

10

12

14

16

18

Taiwan China Japan USA Korea France UK India

MSP Trend

0

1000

2000

3000

4000

5000

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

Rs/

Qtl

Paddy (F) Cotton WheatMaize Tur (Arhar) Soyabean Black

MSP of rice and cotton on a rise, thus improving pesticide affordability

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Wheat Rice Maize Potatoes Soybeans Cotton

With Without

Extent of crop losses(%) with and without crop protection

34

35

36

37

38

39

40

41

42

43

1990 1995 2000 2005 2010 2015E

Total agrochemical market ($bn)

Total agrochem market $ bn

Outlook for generics continues to look good

0

10

20

30

40

50

60

2000 2005 2010

Patented Proprietary Off patent Generic

Share of generics rising

9.3

0.3

2.3

1.7

2.1

2

0.9

0

1

2

3

4

5

6

7

8

9

10

2010 2012 2014 2016 2018 2020 Total

$6 bn worth products going off-patent in 5 years

Average cost of a new product introduction is up ~ 70% in a decade

0

20

40

60

80

100

120

140

160

1995 2000 2005-08

Research Development Registration

Monsanto India

The seed business is secular barring the setbacks over the last three seasons. Subdued MSP hikes and inadequate monsoons have led to lower corn plantings; weak glyphosate prices have further pressured earnings in FY15-16. However, Monsanto’s sustainable competitive advantage is derived from its technological superiority and market reach, making it a promising long-term investment opportunity.

Maize hybrid seed industry is set to compound 20% by FY18, Monsanto (leader with 26% share) guides of superior product launches which would help better industry growth (estimate EPS to compound 28% during FY16-18E). It’s an innovation led company steered by high rate management; with attractive dividend payout ~80%, yield 2%. Any approval for GM corn would be viewed as a significant positive (final leg of data submission). At CMP, doesn’t consider any option value for GM maize (a min Rs 2000/sh opportunity).