I'm Looking for Companies Not Influenced by Farm Loan Waivers and Minimum Support Prices - Vivek Kaul's Diary
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I'm Looking for Companies Not Influenced by Farm Loan Waivers and Minimum Support Prices

Nov 16, 2018

Radhika Pandit

Agriculture in India is still dependent on the monsoons.

The monsoon season over the last couple of years has not been too bad.

However, the distribution of rainfall has been quite uneven. Some states have faced dry conditions or even drought, while others have received excess rainfall and in severe cases, floods.

Not surprisingly, this has hurt crop production and prices. For many crops, the market prices have been below the Minimum Support Price (MSP). This has hurt the incomes of farmers.

Now, when farmers are in distress, the government has usually resorted to quick fix measures without necessarily understanding the core problem.

Farm loan waivers, in particular, have been the perennial favourite, and whenever there has been state elections, announcing such waivers is a given.

The other announcement that the government made recently was to increase the MSP of 14 kharif crops.

Both these solutions do not really address the problems at the heart of India's agricultural productivity.

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Vivek has time and again pointed this out in his Diary.

  • In fact, data from the 70th round National Sample Survey Office tells us that only 13.5% of the paddy farmers sold paddy to any procurement agency (Food Corporation of India and other state procurement agencies). The other crop for which the government has a reasonably good procurement mechanism in place is wheat. The National Sample Survey Office estimates that around 16.2% of farmers sold to any procurement agency.

    On the whole, wheat and rice farmers account for 6% of farmers in the country. Hence, the benefits of the MSP system are rather limited. It cannot make up for the lack of well-functioning private markets. Furthermore, much of this procurement seems to be happening from the larger farmers in a few selected states, like Punjab, Haryana, Andhra Pradesh, Madhya Pradesh and Chhattisgarh.

    Of course, this, like most things that are done in the interest of farmers in this country, from bank loan waivers to no tax on agricultural income, will benefit the larger farmers. And they are organised enough to make these demands.

Basically, the government needs to focus on having proper and effective procurement systems in place and well-functioning private markets.

But as Vivek has pointed out, given that most agricultural markets are managed by local level politicians, this is easier said than done.

Meanwhile, What About Stocks in This Space?

There are quite a few agrochemical companies that provide products to farmers at various stages of harvest - seeds, fertilizers and crop nutrients, and crop protection products (insecticides, fungicides, herbicides and the like).

Not surprisingly, their financial performance is influenced by how agricultural productivity pans out.

That said, good companies in this space have reported a consistent performance over the years despite the vagaries of monsoon, even if growth has not necessarily been very exciting.

They have been able to do this because of their superior product quality, and by building a strong network of farmers and offering them comprehensive solutions that go further than only providing products. And these companies also boast of strong balance sheets.

I have been scouting for robust companies in this space, and will keep you updated as soon as I zero in on a good one.

Stay tuned!

Regards,

Radhika Pandit
Radhika Pandit (Research Analyst)
Editor, The India Letter

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Radhika Pandit (Research Analyst), is the Editor of The India Letter and is one of our senior analysts with more than a decade-long stint in the field of equity research. She has helped build our pharmaceutical sector research from scratch and has a firm grasp of the Indian automobile industry. Being an ardent follower of Warren Buffett's value investing philosophy, she believes in investing in solid businesses for the long haul.

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