MONSOON AND STOCKS. Crop protection players bank on rains

Conventional wisdom suggests that Indian agriculture’s prospects, particularly that of agri inputs, are determined by monsoon. But the relationship between monsoon and agri input sales is not straight forward, suggests data. In the last two decades, south-west monsoon rainfall was significantly below normal in five years — 2002, 2004, 2009, 2014 and 2015.

How did the sales of seeds, fertilisers and pesticides fare during these periods? Sample this. According to data compiled by the World Bank, the consumption of fertilisers and distribution of seeds grew in 2009 — even as the country was experiencing its worst-ever drought in three decades. The certified seed distribution stood at 257.1 lakh quintals in 2009, 19 per cent higher than in 2008. Similarly, fertiliser consumption that year was about 168 kg per hectare of arable land, 9 per cent higher than in the previous year. The principal reason for this is that, a good amount of seed and fertiliser purchase happens ahead of the start of the season. But the sales of agrochemicals are closely correlated with the monsoon. Seed being the first agri input, its sale typically happens ahead of the sowing. And sowing happens around the time of monsoon onset. In the past, the revenues and profits of seed companies, such as Monsanto India and Kaveri Seed Company, have not been impacted by the vagaries of monsoon.

That said, the stocks of these two leading seed companies have been under pressure over the past year. This was thanks to the sharp reduction in Bt cotton seed price by the Maharashtra government last year. Over the last few years, the price of Bt cotton seed has been fixed by the respective State governments.

In March 2016, the Centre announced a cap on the sale price of Bt cotton seed at ₹800 per 450 gram packet, lower than the erstwhile range of ₹830-1,000. Also, the royalty payable to seed technology company Monsanto Mahyco Biotech (MMB), which licenses its patented Bt technology, has been slashed. Seed price regulation has had a negative rub-off on the performance of seed companies. However, a good monsoon will have a positive impact on the sentiment of seed sales.

Coming to the second agri input, fertiliser, sales of urea, which is the principal fertiliser, have always been resilient on two counts. One, its demand outstrips supply and the country imports substantial quantity of urea. Second, it is the cheapest fertiliser, thanks to the massive subsidy by the government — it reimburses almost two-thirds of urea’s sale price as subsidy directly to manufacturers.

However, the story with phosphatic fertilisers is a little different. Post-price decontrol in 2010, the sale prices of these fertilisers have gone up significantly and this has led to a moderation in the volumes of phosphatic fertilisers. The correlation between monsoon, farm incomes and offtake of phosphatic fertilisers has become stronger now.

While seeds and fertiliser sales have largely been insulated from the monsoon, the prospects of agrochemical makers are closely linked to a good monsoon.

Crop protection chemicals can be divided into three broad categories — insecticides, fungicides and herbicides.

While herbicide application happens ahead of sowing as a preventive measure, fungicides and insecticides are applied only post sowing. In India, insecticides account for over half of agrochemical sales. Hence, a weak monsoon impacts insecticide consumption.

As a result, the prospects of crop protection players, such as Insecticides India, PI Industries, Rallis India and Excel Crop Care, are dependent on the monsoon.

In 2015-16, while PI Industries managed a modest growth, Rallis India and Excel Crop Care saw their revenue dip. Bayer Crop Science, Rallis India and Insecticides India saw their operating margin moderate last year. Besides a weak monsoon, competition from Chinese players and price wars also ate into the profitability of agrochemical makers.