Exercise 4 A study of input
markets: fertilizers and pesticides
Date: 14/09/2015
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.
Product
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.
Market
structure
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.
Demand determinants
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.
Brand names
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.
Labeling
The bags should clearly indicate
product mixture details. The proportions of the three nutrients say, NPK 20:
20: 20, should be given.
Price
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.
Price controls
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
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.
Distribution system
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.
Storage
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.
Sales
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.
Credit facility
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.
Promotion
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.
Pesticides
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.
Global differences
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.
Regional differences
The consumption pattern is skewed in
favour of certain states like Andhra Pradesh, Karnataka and Punjab where
scientific farming practices are given greater attention.
Seasonal differences
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.
Crop differences
Cotton accounts for 40– 50 per cent of the pesticides
consumption while other crops like rice, vegetables and wheat consume less.
Extension services
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.
Market structure
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.
Product
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
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.
Distribution
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.
Promotion
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.
Industry challenges
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.
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