Agribusiness - Reaping Harvests In Chaos

Agribusiness – Reaping Harvests within Chaos Dr Rahul Mirchandani, Executive Director, Aries Agro Limited

Paradox seems inescapable when we speak of Indian Agriculture. It begins when we say we have the largest cultivable landmass on the planet with one of the lowest productivity. It magnifies when we say in a nation of a billion plus people, agricultural labour is one of the scarcest and most expensive resources and farmers cannot afford mechanization. But what is perhaps the most alarming of all the plethora of paradoxes is that agriculture is the largest component of India’s ‘people’ economy (56% of the workforce, 273 million people) with a contribution of just 18% to the country’s GDP (Rs 764,000 crores). While reams have been written on the paradoxes that plague agribusiness in India, several times more has been written on the global financial crisis. Unlike in earlier times of turbulence, most notably during the Asian meltdown, when India was largely insulated as we were inward looking with ‘limited stakes’ overseas, this time around a globalized India is caught in the chaos. However the scale, scope and speed of the impact on the various sectors have differed significantly. Agribusiness has been affected in a rather limited manner as the crisis affected the money economy before it affected people. The 18% share of agriculture to GDP ensured that the extent of the damage this crisis could do was correspondingly reduced. There have infact been certain positive impacts of this emerging chaos as well. Rising Global Food Prices Inflation caused due to a global shortage of food and consequent increase in food prices was a precursor to the current financial crisis. However, it has been lost in the debris of the Wall Street bubble burst. The inability of several consuming economies like the US to adequately feed its people spawned global demand for food items. The ripple effect of rising food prices was felt in India and we all pay much more for our food today than what we paid a year ago. Though this pinched urban consumer budgets, it has increased farm gate realizations for all agricultural output. There was even a sharp hike in certain minimum support prices for essential cereals like wheat, by the Government. Overall, farmers today are getting much more for their produce than they did in the past. Cost of agricultural inputs like seeds, fertilizers, pesticides, labour, etc. have also risen. However the increase in the output prices has been higher than the rise in the cost of inputs, leaving a net gain to the producers. Inflationary Expectations Inflation is almost always fuelled by inflationary expectations. People think prices will rise further and hence buy more today. This adds to short term demand significantly while supply takes times to adjust and hence further increases prices. The producing farmers also look at inflationary trends in certain crops and make decisions on cropping patterns. This inevitably leads to a herd mentality of majority farmers shifting to a crop that appears to be having the highest incremental return, causing oversupply in the following season. Farmers need to tread with caution while making such decisions and be driven by medium term demand patterns rather than purely by inflationary expectations.

Lack of credit flow Indian farmers have always had a cash flow problem. The financial crisis has made banks unwilling to lend due to the experience of bad loans, defaults causing a liquidity crunch and rising cost of money. The high risk, rain dependent, highly seasonal nature of agriculture has never been one of the darlings of the banking system. The massive loan waiver announced by the government added to the woes of banks that took the plunge and funded farmers. Starting with the loan waiver aftermath, the availability of adequate institutional credit flow to agriculture has radically dried up. Even public sector banks are unwilling to lend unless farmers have taken steps to ‘de-risk’ themselves. Farmers are now left with no alternative but to use traditional high cost sources of funds again. This being the macro context facing agribusiness companies, working in this environment has required developing unique solutions to the emerging problems. Aries Agro is India’s largest manufacturer and marketer of Specialty plant nutrition solutions offering the widest portfolio of 41 brands and 107 crop specific formulations of plant nutrients to 7 million farmers across 22 states of India. Aries continues to grow with a CAGR of 25% despite the turbulent environment. Some of the key elements of the company’s strategy have been – Continued focus on Innovation Aries has always been a niche, highly specialized player in the plant nutrition sector. Innovations in product design, process re-engineering and continuous revamp of crop specific formulations have been the cornerstones of our product strategy. Investing further in R&D despite the ongoing crisis have helped us launch 6 new products even this year when most of the competition is scaling back. The new products have been cost savers to farmers, but continue to earn money for the company. Crunching time-to-market to the minimum is however critical to overcome the shortfall in offtake of certain products which became unaffordable as a result of a huge increase in raw material costs. Farmers in India have been moving to less rain dependent cash crops, growing genetically modified seeds that are drought and disease resistant and also using micro-irrigation to reduce their need for water. These are ways in which progressive farmers are de-risking themselves from the vagaries and cycles of agriculture and making themselves for acceptable to lenders. Aries product line is configured to meet the growing needs of these next-gen farmers, with customized formulations for horticulture, spices, oilseeds and plantation crops. We also have designed products ideally compatible with modern agricultural techniques like fertigation, hydroponics, green house cultivation, etc. Convert fixed costs to variable costs Aries has set up 4 new manufacturing units during 2008, in addition to the existing 4 units in India and 2 overseas. Several new projects needed fixed investments in real estate. With real estate prices falling, Aries decided to begin operations at some of these new locations on leased premises currently and will exercise its option to move to owned premises once real estate rates bottom out. This has converted fixed costs to variable costs in the short term, with no compromise on roll out time deadlines of new projects. No new projects have been kept on hold. However cash has been conserved by not investing at present on fixed assets.

Revisions of emoluments to the staff have been made with additions to variable pay. Aries, rated amongst one of the top 100 Best employers of India in a BT-Hewitt survey, has always had a merit pay system across all levels and job functions and hikes in variable pay have further institutionalized meritocracy in the corporate culture while minimizing load on fixed cash outflows. Certain curbs have also been placed on recruitments and revision of emoluments. However fast growth does require more people and gaps are often filled using temporary field staff for 6 to 8 months of the season rather than year long employment. Moreover, all the 4700 distributors and 69000 dealers of the company have been provided with a scheme to employ persons to work for Aries range of products with reimbursement taking place on a ‘percentage to sales’ basis. For eg. A dealer can employ a field staff and if his annual sales are Rs 5 lakhs, Aries will reimburse 5% of sales to reimburse the employee cost. If he sells higher, he gets a higher percentage, and vice versa. This increases the field force with no fixed cost addition to Aries and dealers ensure sales upto a minimum threshold so as to earn enough under this scheme to compensate for the employee’s cost. Conserve Cash In the current environment, cash is king. Cost control has been institutionalized across the board. Most physical meetings have been made virtual, with extensive usage of web conferencing and tele-conferencing. This is not common in agribusiness companies but has been very effectively used during the last six months to reduce executive travel for routine meetings. More importantly with over 500 sales persons spread across the country, not only has this drastically cut costs, but it has now became possible to be ‘present’ at three meetings a day rather than just one, increasing productive time and reducing unproductive travel time. Email communication is mandatory for all employees above officer grade. Penalties and demerit points are imposed on staff and branches not recycling, using both sides of each sheet of paper, saving energy costs, etc. Manage Inventories With input costs on the rise, a strong procurement team with forward contracts, assured delivery schedules and buffer stocks become essential. Aries also imports more than two thirds of its raw materials and the rupee depreciation has added further challenges. Unexpected increases in customs duties were additional pressures. Moreover, as detailed initially, higher output prices meant more demand for nutrition products by farmers. Hence, stock levels were increased in the first half of the year to very high levels with purchases made when the dollar was lower and before raw material prices peaked. This added to working capital requirements temporarily but these stocks were procured with an eye on liquidating them in the second winter season which is not rain dependent and more certain than the summer/monsoon season. Forecasting the year’s demand was an essential part of this inventory planning exercise and micro-level estimates were made down to product-wise, pack-wise, month-wise, dealer-wise targets. Variance analysis was conducted fortnightly to adjust procurement decisions and delivery schedules. Invest on Technology to Integrate Operations With 8 manufacturing locations, 41 brands, over 800 SKUs, decentralized manufacturing, movement control regulation across states, global procurement and highly seasonal demand, Aries has used the past few months to revamp operations while scaling them up. A company-wide change management program is underway that is putting in place a real-time information and data management gateway using a completely integrated, customized ERP solution. We have chosen

to use follow a ‘software-as-a-service’ model as against purchasing high cost, non user friendly, ready-made ERP packages. The operations of the company from purchase to inventory to accounting to HR will be totally integrated with Aries paying a monthly service fee to the service provider, after the ‘go-live’ date. The monthly fee will include the software usage, data storage, data transfer, software updates and hardware requirements at all the company’s nationwide locations, with no heavy fixed costs at sign up or for the development of the customized IT solution. The integration will also reduce duplication of data entry, eliminate delay and time lags in data capture, reduce additional manpower requirements and optimize data transmission costs. Scale up Customer Communications using low cost means Aries has made a conscious effort to stay visible in the eyes of its customers. With zero advertising in mass media, the company still manages to build strong brands in rural India. During the past year, we have scaled up brand building efforts using low cost means like smsbased marketing. Demonstration and field trials and farm meetings continue to be highly effective, low cost methods to create awareness. Aries has also made it compulsory for every staff member to give 2 guest sessions in 2 rural schools each month providing latest agricultural techniques information to students in their science classes. This cost the company a minimal amount but the message delivered builds future customers. Advertising in newspapers has been substituted with branded ribbons used to roll the newspapers before delivery by local paper vendors. To read the newspaper, the person has to be exposed to the ribbon and the exposure is guaranteed at a fraction of the cost. Some brand building efforts have been converted into revenue streams, like crop advisories, weather reports, output price information, soil testing, etc. Aries provides all these services to build its brands but now charges farmers a small amount for each of these services. This makes the service ‘valued’ and increases trust in the company’s efforts as the service is not provided free. In the process, the running costs of the company to provide access to these services to the farmers is recovered. These are by no means ‘normal times’. Extraordinary circumstances have necessitated lateral thinking. Aries has succeeded in converting certain threats into opportunities using innovation and inventing ‘next practices’. Staying top-of-the-mind amongst target customers is essential in these times as many competitors may be driven out of business or scaling back. Conserving cash has kept the company’s resources strong to ride the storm. But using innovation in creating products that are suited to the changed needs and priorities of customers have been critical to our success. The ‘rules of the game’ have changed. To succeed now, ‘Be the game changer’.

Dr Rahul Mirchandani is Executive Director, Aries Agro Limited and ational Vice Chairman – Confederation of Indian Industry’s Young Indians. He has a decade of experience in the specialty plant nutrition sector and handles the marketing efforts of Aries in India. In addition to a CFA and an MBA from Australia, Rahul has a Ph.D. in Rural Marketing from MIMS University, Mumbai. He teaches Marketing, Consumer Behaviour, Rural Marketing, Marketing Research & Integrated Marketing Communication at MIMS University and is Visiting Faculty for Rural Marketing at IIM-Ahmedabad. Rahul can be reached at [email protected]