Rains can hold a mammoth economy at ransom.
Agriculture is still a crucial part of the Indian economy accounting for approximately 18%[i] of overall GDP. The impact of last two weak[ii] monsoons was both severe and widespread across industries such as automotive, consumer durables, packaged consumer goods etc. The key driver for such adverse effects was – rural purchasing power. Majority of rural households still depend on agriculture as a source of income and any changes in agricultural output impacts rural purchasing power. Thus, weak rainfall and adverse climate changes has a very tangible and immediate impact on the economy overall.
Why should we care?
India accounts for 8%[iii] of the overall agricultural output of the world, second only to China. Major disruptions in the Indian output will impact prices and availability of agricultural commodities across the globe. India is the largest producer of cotton in the world, producing 27%[iv] of the worlds output, it is also the second largest producer of wheat, onions, potatoes and tomatoes. It’s size and open trade policies will translate any domestic disruptions to the broader global economy.
Kaveri Seeds – strengthening Indian agriculture.
Kaveri Seeds[v], is an Indian seed manufacturer that dominates the cotton segment and has a strong presence across other crops such[vi] as Maize, Paddy, Millet and Sunflower. Kaveri led the charge in improving agriculture yield in India in early 21st century, by improving the quality of seeds (hybrid and genetically modified seeds) and in the process has created some iconic brand names in the seeds market. These brands, no doubt have led to great financial success for Kaveri, which has a market capitalization of over $400mn and has generated immense value for shareholders over the years.
However, in 2016 due to an abnormally poor monsoon, sales declined by 23%. The first quarter of 2017 has been similar with sales declining by another 20%[vii]. The company is struggling in the current environment. The recent results have left the shareholders and management grappling for a sustainable solution and conclusively showcased that Kaveri’s financial success is intimately intertwined with the success of its customers – the Indian farmers.
Strong foundation for change.
Over the course of time Kaveri has successfully built strong relationships with its customers. It interacts directly with 90,000 seed growers with access to production acreage of over 60,000 acres[viii]. Kaveri’s flagship brand “Jadoo” is a household name in the rural parts of western India and commands immense respect from the farming community. Strong brands and consistent marketing efforts that aimed at educating the farmers in India has allowed “Kaveri” to become a trusted brand with the farmers. Kaveri has indicated plans to leverage this trust and relationship to move into other agricultural input products. These factors coupled with their extensive distribution system which spans the country with a network of over 25,000 distributors gives Kaveri a unique opportunity to once again influence Indian agriculture. Kaveri is well placed to help the Indian farming community adapt to the effects of climate change, such as the recent deficit in rainfall.
Sowing the seeds of success.
Climate change has caused major changes in the rainfall pattern over the last two years[ix]. Irrigated agriculture land accounts only for 40%[x] of the total land under agriculture use in India. Dependence on rain-fed agriculture further accentuates the challenges of climate change. Kaveri can leverage its brand and grassroot relationships to improve water management in agriculture, just as it led the hybrid and genetically modified seeds revolution.
A combination of rainwater harvesting and superior irrigation systems such as drip irrigation can improve production even in such adverse times. Rainwater harvesting has been implemented successfully in India, albeit in small independent silos. Recently, efforts have been consolidated by government machinery to improve adoption[xi]. Kaveri is uniquely placed to create a sustainable business by combining established rainwater harvesting techniques with those of drip irrigation and service farmers who are still relying solely on rain-fed farming. Kaveri can create strategic partnerships with companies such as Jain Irrigation[xii] and implement complete water management solutions for farmers. Capital expenditures (both for rainwater harvesting and drip irrigation) are currently supported with subsidies from different state governments and the central government[xiii]. Sharing the capital costs between Kaveri, partner companies, government bodies and farmers will allow farmers to afford the upfront expenditure of such a solution. Kaveri can play the role of a successful mediator by creating a system that will educate farmers, attain subsidies from the government entities, procure equipment and drip irrigation systems from partners and implement the complete solution.
Kaveri’s effort to develop and grow such a business venture will successfully leverage its brand equity and distribution strength while it helps its core seed business reduce some of the demand volatility seen in 2015 and early 2016.
[iii] http://www.business-standard.com/article/b2b-connect/india-an-agricultural-powerhouse-of-the-world-1160518 00253_1.html
[vi] Kaveri Investor Presentation for Q4 FY16 (financial year: April – March)
[vii] Kaveri Investor Presentation for Q1 FY17
[viii] Corporate presentation – “http://www.kaveriseeds.in/images/investor-presentation.pdf”
[xiii] Drip irrigation subsidy in Pradan Mantri Krishi Sinchayee Yojana (PMKSY) – “http://www.thehindu.com/news/national/tamil-nadu/subsidy-for-drip-irrigation/article9081497.ece”
Rain water harvesting scheme details – “http://agritech.tnau.ac.in/agricultural_engineering/agriengg_govt_schemes.html#scheme6”