Exercise 4 A study of input markets: fertilizers and pesticides
Fertilizers can be described as any substance, organic or inorganic, natural or artificial, that supplies one or more of the chemical elements required for plant growth. It is the most important among all the inputs purchased by the farmer. For boosting agricultural output, the use of chemical fertilizers has an important role. India’s soil, though varied and rich, is generally deficient in nitrogen, phosphorus and potassium— three plant nutrients that together with organic manure influence crop return. The use of fertilizers increases land productivity and eases the nutrient constraints on multiple cropping and land development programmes.
Fertilizers are classified into three groups based on the mix of nutrients— nitrogenous (N), phosphates (P) and potassic (K).
Straight fertilizers: The fertilizers that have a single nutrient like N or P or K are called straight fertilizers. Examples of such fertilizers are urea (that supply only nitrogen) and single super phosphate and triple super phosphate (that supply phosphate).
Compound fertilizers: The fertilizers that contain more than one nutrient are called compound and complex fertilizers. For example, di-ammonium phosphate (DAP) is a complex fertilizer that supplies both nitrogen and phosphate.
Specific-mix fertilizers: The fertilizer mixtures that supply all the three nutrients in proportions required by different crops and for different regions are referred to by this name.
In the present scenario, there are more than 57 large and 64 medium and small fertilizer production units under the Indian fertilizer industry (as of 2011-12). The 57 large-sized fertilizer plants in the country are manufacturing a wide range of nitrogenous, phosphatic and complex fertilizers. Out of these, 29 units produce urea, 20 units produce di-ammonium phosphate (DAP) and complex fertilizers, 13 plants manufacture ammonium sulphate (AS), calcium ammonium nitrate (CAN) and other low-analysis nitrogenous fertilizers. Besides this, there are about 64 medium and small-scale units in operation producing single-super phosphate (SSP). The annual potential demand for fertilizers was found growing at a rate of 4.5 per cent per annum and the demand on 2011-12 was 18 million tonnes for urea, 8 million tonnes (Phosphorous) and 3 million tonnes (Potash) and the overall fertilizer consumption as of 2011-12 was found to be at 147 kg / hectare.
Production of fertilizers
The fertilizer industry made rapid progress during the past decade. Fertilizers can be classified into two categories— chemical and bio-fertilizers. There has been considerable increase in the domestic production of fertilizers over the years but, not enough to keep pace with the growth in consumption. Hence, to meet the growing demand, the Government imports from other countries. Bio-fertilizers are bacterial cultures mixed with an appropriate inert material, referred to as carrier. Bio-fertilizers offer several advantages. First, they are based on low-cost technology. Second, they supplement the availability of nitrogen and increase the availability of native and applied phosphates. Third, they are eco-friendly being a renewable source of energy. Bio-fertilizer usage is popular to a reasonable extent in the states of Madhya Pradesh, Maharashtra and Tamil Nadu. At present, there are about 110 units producing bio-fertilizers. Installed capacity of the bio-fertilizer production is about 17,000 tonnes with an annual production of 10,000 tonnes. The annual potential demand (2011-12) was estimated to be around 40,000 tonnes.
Fertilizer demand is influenced by the following factors:
(i) Rainfall and irrigation facilities: Adequate and well-diversified rainfall gives the farmers confidence to invest in fertilizers along with well-equipped irrigation facilities.
(ii) Relative prices of fertilizers: Indian agriculture is characterized by small holdings and demand for fertilizers tends to be price-sensitive. If there is significant price differentiation between fertilizers, demand will move in favour of the cheaper fertilizers, even if it is not the most appropriate one.
(iii) Cropping pattern: This determines the need and timing of fertilizer purchases.
(iv) Government policy: Government policies and frameworks (subsidy and price controls) influence pricing, production and distribution of fertilizers.
According to the Fertilizer Control Order (FCO), fertilizers have to be marketed only by their generic name and not by any trade or brand name. Usually, companies add their company name to the generic name, for example Mangalore Chemicals and Fertilizers Ltd sells urea as Mangala Urea. Southern Petrochemical Industries Corporation Ltd calls their product SPIC Urea.
The bags should clearly indicate product mixture details. The proportions of the three nutrients say, NPK 20: 20: 20, should be given.
Price is an important factor in the purchase of fertilizers. The costs of the agricultural output is influenced by fertilizer prices and the quantity of fertilizer used. For this reason, Government intervention is considered necessary to control prices.
Presently, fertilizers except urea have been de-controlled in view of the improved supply situation and with the aim of reducing the burden of subsidy. However, de-control resulted in price hikes.
Subsidy aims at providing fertilizers to the farmers at a price lower than its economic price. Differential rate of subsidy on nitrogenous, phosphatic and potassic fertilizers have been used to correct the imbalance in the use of nutrients by the farmers.
Fertilizers are produced only at select locations and imported fertilizers arrive at seaports. The distribution system has to carry out the functions of storage, transportation and sales to the farmers spread throughout the country. The marketing costs are as follows: freight accounts for 50– 55 per cent, the distribution margin accounts for 18 per cent and handling and storage for 10 per cent.
While fertilizer production is continuous throughout the year, its use is seasonal. In India, there are two main cropping seasons: (i) kharif (April– September) and (ii) rabi (October– March). Fertilizers are stored before the onset of each season. Consumption is characterized by a peak period followed by lean spells. Therefore, storage is an important factor in fertilizer marketing and distribution. There are about 2,060 central and state warehouses with an aggregate capacity of 30.1 million tonnes. In addition, the Food Corporation of India has a storage capacity of 23.95 million tonnes. The co-operatives have about 65,970 godowns with a capacity of about 14.12 million tonnes. These godowns are used for storage of food grains, fertilizers and other commodities.
There are 0.26 million fertilizer sales points in the country, out of which 70 per cent are in the private sector and the remaining 30 per cent are operated by either co-operative societies or other public-sector institutions like State Agro-industries Corporations. The different channel types are:
Traditional channel: These include consignees, dealers, distributors, wholesalers and retailers.
Direct channel: Some companies sell directly to farmers through their company sales depots or service centres.
Co-operatives: The pattern of fertilizer distribution in the co-operative sector varies from state to state. Generally co-operative networks operate through a three-tier system. However, in some states the system works on a two-tier basis. In a number of states, the apex co-operative marketing federation functions as a wholesaler. The village-level primary agricultural co-operative societies (PACS) are the ultimate units in the co-operative structure. These societies act as the retail sales points for fertilizers. Nearly 50 per cent of the total PACS are involved in the fertilizer business. The village level societies generally receive fertilizer supplies either directly from the co-operative wholesaler, i.e. apex marketing federation or from primary district marketing societies.
Generally, two types of credit facilities are available in the fertilizer sector for fertilizer distribution and use. One type is distribution credit that a dealer uses for buying fertilizers from the manufacturer or wholesaler. The second type is production credit that a farmer uses for purchasing inputs such as fertilizers. Various agencies provide credit to the agriculture sector in different forms. These include co-operative banks, regional rural banks, commercial banks and other agencies.
Farmers require advice in the choice and application of scientific fertilizers. In view of this, promotion should be a two-pronged one: Creating awareness of the different brands and mixes of fertilizers Instructions on how to use fertilizers— timing, quantity and method of application. Promotion for awareness can use mass media (radio, cinema slides, wall paintings, hoardings, newspaper advertisements, krishi melas and exhibitions) but, promotion aiming at education requires interactive media. It is for this purpose that many private companies and government agencies have their farm extension services.
India is the fourth largest producer of agrochemicals globally, after United States, Japan and China. The agrochemicals industry is a significant industry for the Indian economy. The Indian agrochemicals market grew at a rate of 11% from USD 1.22 billion in FY08 to an estimated USD 1.36 billion in FY09. At about 2 per cent, India accounts for only a small part of the global agro-chemicals market; however, the year-on-year growth is about 10 per cent in terms of value. According to the report “India Pesticides Industry Analysis to 2018”, India Pesticide market has reached INR 229,800 million (as of 2011-12) and is projected to expand further with a compound annual growth rate (CAGR) of 14.7 % from FY’2014-FY’2018. The Indian crop protection market is expected to witness a growth in its consumption owing to factors such as growing farmer awarness, farmers prosperity, inclining demand for organic food, increased focus on R&D, expansion of the contract farming and GDP growth.
India’s agrochemicals consumption (as of 2011-12) is one of the lowest in the world with per hectare consumption of just 0.58 Kg/ha compared to US (4.5 Kg/ha) and Japan (11 Kg/ha). In India, cotton accounts for the maximum share of pesticide consumption, around 40%, followed by paddy (20%).
Pesticides industry in India has been broadly segmented into six categories including insecticides, herbicides, fungicides, biopesticides, plant growth regulators and rodenticides. Of the aforementioned, insecticides commanded the highest share of around 45% in the overall pesticides market revenue. The pesticides consumption in India has been unevenly spread across various regions. While the country’s northern region forms majority of the pesticides consumption, the eastern and north eastern region constitue the lowest share. Some of the major pesticides consuming states in India include Andhara Pradesh, UP, Maharashtra Punjab Haryana West Bengal, Gujarat, Kerala and Tamil Nadu.
The world market for agro-chemicals is primarily dominated by herbicides, which has a 46 per cent share followed by insecticides at 29 per cent and fungicides at 17 per cent. In sharp contrast, in the Indian market, insecticides have the lion’s share of 65 per cent followed by fungicides with 13 per cent. Herbicides have a share of only 10 per cent. The low consumption of herbicides in India is on account of cheap labour available for weeding operations. Favorable climatic conditions in North America and Europe drive herbicide consumption in those areas. Insecticides usage has also gone down in developed markets with increased usage of genetically modified (GM) crops.
Tropical climatic conditions and high production of paddy, cotton, sugarcane and other cereals in India drive the consumption of insecticides. Availability of cheap labor for manual weed picking also contributed to low consumption of herbicides in India. However, the trend is expected to change in future as herbicides, now, are the fastest growing segment due to increasing farm labour wages in India.
The consumption pattern is skewed in favour of certain states like Andhra Pradesh, Karnataka and Punjab where scientific farming practices are given greater attention.
Largely, pesticides are consumed by two major kharif crops in India— cotton and paddy. Since, the two crops are sown and reaped between the months of July and November, this is the peak demand period for agro-chemicals.
Cotton accounts for 40– 50 per cent of the pesticides consumption while other crops like rice, vegetables and wheat consume less.
Corporate Farm Service Centres (CFSC) such as ITC e-choupal, Tata Kisan Sansars, EID-Parry Argroline, Rallis Kisan Kendra and Mahindra Krishi Vihars have been assisting farmers in rationalizing the use of pesticides.
Exposure and literacy
The exposure to global practices through TV and the Internet as well as workshops and farmer meets organized by corporate firms have had a positive influence on the pesticide-use practice of farmers.
The domestic agro-industry has about 80 players in the organized sector and more than 6,000 in the small-scale sector. More than 60 technical grade pesticides are manufactured indigenously by 125 producers. Others are engaged in making pesticide formulations. There are large numbers of subsidiaries of MNCs such as Monsanto Chemicals, Bayer (India), Novartis (India) and Cyanmide Agro. R& D is a key factor in this business. However, many Indian firms invest less in R& D. The top 10 companies account for 80 per cent of the production. The formulators buy technical-grade material and prepare various formulations for the ultimate users in different concentrations for different crops and also for different types of pests and diseases. The formulators are free to manufacture and market any combination or concentration of pesticides or insecticides from the basic chemicals. They are also free to use any trade or brand name for their products.
Nature of business
Production in the agro-chemical industry is essentially a conversion job. Raw materials and labour are the major cost elements. Environmental considerations have resulted in high regulation for the industry. The industry is basically generic in nature with nearly 70 per cent of the molecules being off patent. In the off patent market, wide distribution network, strong brand image and superior product quality are major factors that help retain competitive advantage.
The products differ in form and use for different crops. However, there are also products that are insect specific and can be used for many crops. The products are mainly available in two forms, i.e. powdered form and liquid form. The pesticides/ insecticides in powdered form need dusters for application, while those in liquid form need sprayers for application. Most of the farmers do not possess the applicators. They either borrow from their neighbours or hire it from agro-input vendors.
Pricing As there are no government controls, prices of pesticides are determined by normal demand and supply forces. Competition and excessive capacity build up together led to a steady decline in the prices of generic products. In addition, discounts and credit facilities are offered to win customers. Nearly 80 per cent business is conducted against unsecured credit, the period for which varies from 30 to 120 days. As they are generally purchased at the middle or the end of the crop cycle when a farmer’s cash flows are lean, the incidence of bad debts can be quite high. In this respect, products that target crops that have a shorter cash-to-cash cycle such as paddy, or commercial crops, would be better placed than others.
The distribution of pesticides is similar to that of fertilizers. It is carried out through state departments, co-operatives and private dealers. There are about 79,000 outlets for pesticide distribution in the country. The margins for the distributors range between 5 and 10 per cent and for the dealers it is between 10 and 18 per cent. To promote cash sales, dealers often sacrifice a part of their margins and sell at lower prices.
The promotional measures used to promote agro-chemical products are usually the same as those used by fertilizer manufacturers/ marketers. As the product is a problem-solver, farmers may try to become aware of them on their own. However, inappropriate use of pesticides will result in further problems. As such, it is important to activate opinion leaders (peers, educated persons and sarpanch), local dealers, company farm-services agents and agricultural scientists from agricultural departments and universities to educate farmers on how and when to apply pesticides. The media generally used for awareness creation are: television, newspapers, radio, wall paintings, hoardings and cinema slides. The media for education include the following: field demonstrations, farmers’ meets, agriculture fairs (kisan melas), credit facilities and gifting applicators.
Despite the strong growth drivers, Indian agrochemicals industry faces challenges in terms of low awareness among farmers (only 25-30% of the farmers are aware of agrochemical products and their usage). With large number of end users spread across the geography, managing inventory & distribution costs is a challenge for the industry players. Apart from this, as per feedback from leading industry players, rising sale of spurious pesticides and increased use bio-pesticides pose a major threat to industry growth. Effectiveness of current supply chain management (SCM) practices in agrochemicals is another area of concern for the industry. Companies face issues due to seasonal nature of demand, unpredictability of pest attacks and high dependence on monsoons. Month end skews and high inventory across the channel is perennial problem for the industry.