Thanks to the below-normal rainfall during the southwest monsoon last year, foodgrains production is expected to remain flat in 2014-15. Amidst expectations of a normal monsoon this year, the Indian Meteorological Department’s (IMD) preliminary prediction of a below-normal southwest monsoon has come in as a dampener.
In its first forecast for the season, issued in April 2015, the IMD said that it anticipates rainfall during the southwest monsoon to be just 93 per cent of the long period average (LPA), with a model error of about 5 per cent. The LPA is the average rainfall received during the 1951-2000 period. Should the IMD’s prediction turn out to be true, 2015 will be the second consecutive year of below normal monsoon rainfall.
Farming and food security
A weak monsoon is not good news for India for two reasons. First, about half of the country’s population is dependent on agriculture for its livelihood. This is despite the share of agriculture in the country’s GDP falling steadily over the past decade -- thanks to the boom in the manufacturing and services industry led by the IT sector.
The share of agriculture has slipped from about 25 per cent in 1999 to below 18 per cent in 2013. Yet the significance of agriculture cannot be underestimated, given its importance in feeding the country’s growing population.
And the monsoon plays a critical role in the country’s agricultural prospects as over two thirds of the country’s agricultural land is rain fed. A below normal rainfall can lead to a fall in foodgrains production and put at risk the nation’s food security.
While a weak monsoon is negative for the country’s economy and food security, will it impact sales of agri inputs such as seeds, fertilisers and pesticides? Not quite.
Consumption trends
Historical trends in consumption of key agri inputs -- fertilisers, seeds and pesticides indicate that they don’t directly respond to the southwest monsoon rainfall pattern. This goes against the conventional belief that monsoons have a direct impact on the demand for agri-inputs.
Over the last two decades, the southwest monsoon rainfall has been significantly lower than the LPA on three occasions. But interestingly, the sales of agri inputs -- seeds, fertilisers and pesticides have remained resilient during these periods.
Why is it that agri-inputs are unaffected by the vagaries of monsoon? The principal reason is that, farmers purchase the bulk of the agri-inputs much before the onset of the monsoon.
Seed purchase
Take the case of seed, which is the first agri input. Farmers purchase seeds well ahead of the start of the monsoon season, even though the actual planting may commence closer to the onset. Seed sales have thus been immune to the inconsistencies in the monsoon rainfall. According to a data compiled by the World Bank, distribution of certified seeds in India has remained healthy even during the drought years -- 2002, 2004 and 2009.
For instance, in 2009, when the country faced the worst drought since 1972, with monsoon rainfall being 21 per cent below normal, the distribution of certified seeds increased by about 8 per cent to almost 28 lakh metric tonnes. Thus, revenues of Kaveri Seeds, a leading player in cotton hybrid seeds, grew by about 32 per cent in 2009-10. The company’s operating profit jumped about 23 per cent that year.
Similarly in 2002 and 2004, when monsoon rains were 19.2 per cent and 13.8 per cent below LPA respectively, the number of seeds distributed rose by 7 and 11 per cent respectively.
Fertiliser consumption
Likewise, the consumption of fertilisers has risen steadily even during the drought years. For instance in 2009, fertiliser sales rose 6 per cent; so also, in 2002 and 2004, the consumption of fertilisers has risen by about 1 per cent and 7 per cent respectively. Also, the massive price subsidy provided by the Government on fertilisers has also made fertiliser sales resilient. For instance, in India, farmers pay barely a fourth of urea’s sale price, while the balance is compensated by the Government. In the case of complex fertilisers, farmers bear three-fourth of the cost and the balance is reimbursed by the Government.
Thus, fertiliser makers such as Chambal Fertilisers and Tata Chemicals have managed to sustain healthy revenue and profit growth during the drought years -- 2002-03, 2004-05 and 2009-10.
Pesticide sales
Likewise below-normal monsoon has had little effect on pesticide sales too. For instance, pesticide consumption in India during the 2002 and 2004 draught years remained healthy. However, pesticide consumption declined 5 per cent in 2009; and this was largely on account of supply side issues due to closure of several active ingredient manufacturing facilities in China. However, pesticide makers have managed to sustain healthy growth even during challenging times. Bayer Crop Science for instance, saw its revenue surge by 51 per cent and profit more than double in 2002-03. Likewise in 2009-10 too, the company managed to grow its revenue and profit by 17 per cent and 35 per cent respectively.
So should the monsoon play truant this year too, investors in stocks of seed, fertiliser and pesticide makers have little reason to worry.