To realise the full potential in investing in Indian agriculture, numerous problems along the entire value chain must be addressed. This is possible, even for smaller managers, but takes innovation and determination.
Indian agriculture is dominated by smallholders, each owning and operating less than five acres of land on average. Their limited access to quality inputs and inefficient routes to market lead to poor output and high post-harvest losses.
Significant gaps exist in availability of quality seeds and fertiliser, insurance, farming techniques, information systems, storage, transportation and post-harvest finance, and each of these offer the opportunity to solve specific problems. However, gaps along the rest of the value chain often render these discrete solutions ineffective.
The potato value chain is a good example. India is the world’s second largest potato producer, but the seed replacement rate is less than 10 percent and only 8 percent of total production is suitable for processing. This means lower profits for farmers and not enough potatoes for food processors.
At first glance, a good potato seed company should be able to address the problem, but this is not the case. Good seeds are more expensive for farmers, which heightens their risk in case of crop failure. Farmers also usually sell produce to brokers, who then sell it on for a much larger net profit after storage. Without being connected to buyers willing to pay the right price, storage infrastructure and post-harvest financing, farmer realisations remain low. Without finding solutions to the other problems like finance and insurance, scientific farming techniques, and market access and storage, an investment in a seed company is not likely to deliver the right returns.
Supply and retail
The front end of the agriculture supply chain is also extremely fragmented, and linked to inefficient farming.
Less than 10 percent of fruit and vegetables are sold through organised retail channels, the rest being sold through small shops or push carts.
Between the farmer and the retailer there are at least four or five middlemen, each earning a margin of 5 to 8 percent. They have no incentive to add any value to the product by pre-cooling, grading or packaging it, or using temperature-controlled storage and transportation. This means lower farmer incomes from which to invest in inputs, and poorer quality for consumers.
To break this vicious cycle, investment across the value chain is required. As a smaller manager with $35 million assets under management in agriculture, we have taken this approach. We have made four investments in fruit and vegetable procurement and retail companies that, collectively, could become India’s largest diversified fresh fruit and vegetable brand. We have also invested in a cold chain operator, and a pay-per-use mechanised farming services company.
There have been several government initiatives designed to incentivise infrastructure development — especially in storage. But these have largely been ineffective since the poor produce quality and inefficient distribution systems erode value, making it financially difficult to absorb the cost of better storage.
The lack of financing — for inputs and for post-harvest storage — is a key bottleneck. Farmers are forced to borrow at prohibitive interest rates from local moneylenders, and after harvest, forced to sell the produce at whatever price they get because of these rates.
Banks must provide financing for the agricultural sector or face fines, but they meet these requirements by financing large farmers and traders, not the smallholders who need these services. If smallholder farmers had been able to store the produce, they could achieve much higher prices. Investments need to come with solutions for free flow of financing through the value chain.
We are in the process of investing in a warehouse management and post-harvest finance company to complete the value chain.
Given that various parts of the ecosystem needs to be built out in parallel, looking for companies that offer solutions to these problems is a good starting point when considering whether to invest in Indian agribusiness. Our thesis is to buy-and-build across specific value chains through several companies. But any manager investing in this sector needs to show it can, in some way, tackle the entire chain from farmer to consumer.