Indian Agrochemical Market: 5 Lessons from the Global Pandemic

Amid the historic disruptions of COVID-19, there is a growing sense of urgency for supply chains to become more diversified. Can India fill the void? Here are insights into this question from market experts, including five lessons learned from the Indian agrochemical industry during the pandemic.

1. Resiliency

Resiliency and diversification have always been important fundamentals in supply chain management for not only the agrochemical industry.

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“Then we kind of forgot it,” Yuri Castano, manager at the global management consulting firm Kearney and co-author of the annual Kearney Reshoring Index said.

Companies have taken advantage of the low cost of production of the very mature ecosystems of second and third-tier suppliers in China. “We have, in some cases, been forgetting ‘supply chain 101’ lessons about building redundancy into the system and diversifying and managing risk.

“I think the trade war was kind of an early wakeup call. Then COVID was an acceleration of that wakeup call on steroids,” Castano told AgriBusiness Global™.

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Long before the pandemic hit, India’s strategic backward integration in agrochemicals lifted its industry to become a more tenacious competitor with China for sourcing active ingredients, especially as China struggled with its environmental crackdown that shuttered thousands of plants throughout the country and led to widespread raw material and intermediates shortages over the past few years.

“I think India is always a natural place to look (for investment),” Castano said. “The Indian government is trying to capitalize on the disruption of the trade war and COVID to dislodge certain supply chains from China and get them to reinvest in India, and agrochemicals may very well be on their strategic priority list.”

Yet, if India is to capture and keep a growing share of the sector, it will need to make a concerted drive to improve the ease of doing business, and make sure that the ecosystem of suppliers to agrochemical companies is being built out in the country, Castano stressed.

Throughout the coronavirus pandemic, several global companies with which we spoke earlier this year expressed satisfaction with China, which recovered quickly after some early delays, versus India, where flawed logistics and supply chain issues were laid bare.

Further, while India saw dramatic growth in 2017 in its share of agrochemical imports to the U.S., it lost share in each of the last two years. “India hasn’t been consistent in their capture of their share of production destined for U.S. consumption,” Castano said. “There needs to be a concerted effort — a government strategy that’s sustained over time — to capture that share for a sustained period.

“I think we’re going to see people making decisions that are not necessarily giving them the best cost from a footprint perspective for their supply chain,” Castano added, “but they are creating more balance for their networks so they can better mitigate shocks by having some redundant capacity and being able to strategic stockpile.

“While diversification and resiliency are not new topics or themes, they are going to be much more important than before as people lick their wounds from the last two years and learn lessons from the time we’re living right now,” he said.

However, as CS Liew, Managing Director at Pacific Agriscience in Singapore pointed out, building redundancy into the system needs to account for competitive forces.

“Establishing resiliency is like buying insurance and insurance requires a premium to be paid,” he said. “In times of calm, such premiums and costs will make those companies that have these in their systems and operations non-competitive, vis-a-vis the ones buying and sourcing from the cheapest and the most efficient. Trade wars and pandemics come and go, but built-in inefficiencies stay and hurt competitiveness. So, we can’t have the best of both worlds.”

2. Cash Is (Still) King

Payment terms from clients both domestic and for their export partners are being stretched, and requests for changes to contract terms are common amidst the pandemic. Credit terms that were once 90 days to 120 days are now going to 30 to 60 days.

“Cash is going to be king in the months to come,” due to widespread virus-related payment disruptions, said Samir Jayant Deosthali of Spectrum back in the spring, and it remains the case. “Cash will definitely play a very, very important role and the credit terms are going to be extreme. We have started observing in the key raw materials where credit terms are (declining) … Companies that are not cash-based will find some difficulty in procurement.”

“If there is no financing, there is going to be a problem in getting the next crop into ground. A lot of farmers lost opportunities and are dependent on what they can get from this season in order to plant the next crop. There’s a huge issue,” Liew said on a call with AgriBusiness Global editors.

The silver lining could be the coronavirus relief package announced by Narendra Modi in May. Worth Rs 20 trillion ($260 billion), the package amounts to nearly 10% of India’s gross domestic product and is about the same size as the UK’s. Some of the steps include agricultural market reforms and investment in facilities like cold storage warehouses to improve earnings for farmers.

As part of the measures, Finance Minister Nirmala Sitharaman said the government will enact a law to remove restrictions on the flow of agricultural products across the country so that farmers can receive higher prices. Prices in states vary because of different tax levels.

“The farmers will have a choice with barrier-free interstate trade. There will also be a framework for e-trading of agricultural produce,” Sitharaman said in a press briefing, adding that the government will provide 1 trillion rupees ($13 billion) to cooperatives, start-ups, and others to create cold storage facilities and post-harvest storage centers.

As the Atlantic Council think tank stated, “What will matter in the end is not (the size of the relief package), but its impact on lives and livelihoods. China and South Korea have much smaller packages and are already on their way upwards, as they have much better control over the virus. That in the end may matter more than the size of the stimulus packages.”

3. Labor Pains

India’s unemployment rate has improved to pre-lockdown levels of around 8.2% (7.6% in rural India) as of Aug. 20, thanks to a doubling of demand for work under the Mahatma Gandhi National Employment Guarantee Act (MGNREGA) and Kharif sowing, the Center for Monitoring Indian Economy (CMIE) reported.

The country’s sweeping lockdowns that began in March created a nightmare for some 150 million to 200 million poor unemployed migrant workers who were left stranded trying to get home to their villages.

Some crops were not harvested as migrant laborers went home or were lockdown; hence these farmers lost their income and were thrust into cash-tight situations for buying inputs for the next crop.

In addition, technicals that arrived at the ports in March and April were not customs-cleared in a timely manner due to the lockdown, which again impacted labor and manpower availability. When technicals finally did get to the formulation plants, the plants faced labor shortages to get formulations and packaging done in a timely manner. Some formulation plants redirected efforts and limited labor resources to making sanitizers, which had better margins and demand compared with agrochemicals.

No doubt the ideal Monsoon provided welcome relief after the spring. A survey in late March by the Federation of Indian Chambers of Commerce and Industry (FICCI) showed that 80% of Indian businesses were showing a decline in cash flows and a CMIE survey estimated 121.5 million jobs were lost in April.

4. Second-Half Challenges

Given the challenges that businesses and people are facing, the Indian economy is most likely to experience lower growth during the latter part of fiscal 2020 than in the first half of the year. According to FICCI, if the spread of coronavirus continues, growth may remain subdued in the first quarter of FY 20-21 as well.

Most multilateral agencies and credit rating agencies have revised their 2020 and 2021 growth projections for India keeping in view the negative impact of coronavirus-induced travel restrictions, supply chain disruptions, subdued consumption, and investment levels on the growth of both global and the Indian economy.

For example, OECD revised down India’s growth forecast by 110 basis points to 5.1% for 2020-21 and by 80 bps to 5.6% for 2021-22. OECD has also warned that global growth in 2020 could come down by 50 bps as compared to what was projected in November last year.

“In the long run, the supply gap may build up to an alarming extent. Therefore, we will probably see some deficit in the supply position of agrochemicals,” Subhra Jyoti Roy, Vice President, International Business at Rallis India Ltd. said. On logistics issues, he added, “We continue to remain challenged on account of inbound and outbound transport challenges. For imported product, we don’t have enough customs officials and proper loader/unloader workers and delegating in the system.”

According to the United Nations Conference on Trade and Development, India is among the top 15 countries that have been most affected as a result of a manufacturing slowdown in China that is disrupting world trade.

5. Zero Relief in Regulatory Pressure

India’s government in May moved to ban the manufacture of 27 pesticides, including key products like mancozeb, 2,4-D, and chlorpyrifos, prompting swift backlash from the country’s crop protection industry.

Manufacturers had through the first week of August to respond to the draft order from the Ministry of Agriculture and Farmers Welfare, which concluded the products are “likely to involve risk to human beings and animals.”

While exports will still be permitted, the challenge, according to Subhra Roy, is that some countries will not allow imports of a product that is not registered in the country of origin. So, if those products are banned in India, they are automatically unable to supply those countries.

Pradip Dave, President of the Pesticides Manufacturers & Formulators Association of India (PMFAI), expressed shock at the order.

“These generic products, which have been banned have a market size of Rs 40-50 billion and have been used for the last three to four decades by Indian farmers without any complaints, unless misused,” Dave told AgriBusiness Global.

Indian manufacturers had been supplying Rs 35 billion worth of the products to the domestic market, with the balance being exported. Most local manufacturers that may now not be able to sell in the domestic market, already have or can yet obtain export registrations, and can continue exporting.

“Prices of replacement products are almost three to six times higher than existing prices of Indian products. This will be an added burden on Indian farmers,” Dave added, explaining that many organophosphorus compounds can cost Rs 500/liter, which would need to be replaced with far more expensive imports.

“The bans are not going to result in any incremental investment by (multinational corporations) in India. Even for products that are currently not being manufactured by the Indian companies, were the MNCs to get product registration for the same, the government will have to issue such registrations to the Indians too, and they will be far more cost-competitive versus their counterparts,” Dave said.

Meanwhile, glyphosate is also under attack.

On 8 July, the Ministry of Agriculture and Farmers Welfare published a draft notification that, “No person shall use glyphosate except through Pest Control Operators.”

The agchem industry has called the move impractical as there are few PCOs in the farm sector, and as such it may impact sales of glyphosate and its formulations.

“It all looks very absurd because there are no licensed pest control operators in rural India,” Samir Dave, Executive Director, AIMCO Pesticides said in an interview with AgriBusiness Global. “It’s like taking away farmers’ rights to use pesticides. It’s like saying, ‘you can use glyphosate, but not you.’ I don’t know how it will go.”

The Ministry gave 30 days for industry to respond, and as of this writing, has yet to issue its final decision.

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