Corporates are trying to tap business opportunities across the agri value chain
Business World — February 11, 2002

Last week, we zoomed in on how India Inc. had trained its sights on its newest frontier-agriculture. Companies like ITC, Rallis, Tata Chemicals and Mahindra & Mahindra have quietly spawned innovative business models to tap this big business opportunity. In this concluding part or our two-part series, we offer you a close-up of three such distinct corporate agribusiness initiatives.

Tata Kisan Kendra
Balwant Singh is getting used to a new way of shopping for fertilisers for his four-acre farm near Ujhani, Uttar Pradesh, a small town 200 km north-east of Delhi. All he has to do now is go to the Tata Kisan Kendra (TKK), a one-stop-shop for agri-inputs set up by urea manufacturer Tata Chemicals, and mention his name. The rest is done by a computer. It generates an image of his filed, shows him the fertility level and recommends how much fertiliser to use.

Welcome to the new world of mass customisation, where farmers like Balwant are being offered not only agri-products but also agri-solutions., His village is among the 72 for which TKK has acquired digitised filed maps that profile the farmer and his farm. TKK has created a GIS (geographical information system) based data system to provide farmer-specific advice.

A GIS- based data management system uses satellite images and filed maps to keep track of key parameters relevant to farmers – weather, ground water and soil-almost on a real-time basis. Using soil surveys, TataChem has created a fertility grid of these villages that shows where the deficiencies are. It has superimposed satellite images on these maps. This allows for better forecasting of trends and pest attacks, and provides the exact status of a crop.

TataChem vice-president (sales and marketing) Kapil Mehan says: "If you know there’s a pest attack, you can go there and proactively advise the farmers before they come to you and say, "My crop is being eaten away by pests."

It all started when TataChem found that its product looked no different from the urea produced by other companies. "We wanted to differentiate our urea by packaging it with value-added services and create a sustainable differentiator (for the product)," Mehan says. Hence, TataChem decided to help the farmer improve his productivity and profitability, and the ability to manage his crop.

To that end it decided to provide farmers with a host of agri-services that they would identify with the company. This differentiator was certainly sustainable. "The idea was to reach out to the farmers so that when the subsidies on urea go, it (TataChem) would have a captive base," explains Zarin Daruwala, deputy general manager, Agri Business Group, ICICI.

TataChem realised that differentiation would assume importance in a free market. "They want to build a long-term relationship with the farmer so that he sees value in the services they provide, rather than just looking at buying the inputs," says Brahmand Hegde, chief manager, Agri Business Group, ICICI. TKK has its own team to advise farmers on the right dose of inputs for a crop. It may even advise the farmer to use less fertiliser and pesticide. Although it means lower sales in the short term, it would build trust that would help in the long run. But not all benefits are indirect or long-term. The TKKs allow Tata Chem to cut out some links from the urea distribution chain. The company can bypass large distributors (C&F agents)and wholesalers, and reach the retailer directly. That helps in improving margins. Also, in areas where TKKs operate, TataChem has a marketshare of 25-30% against an average marketshare of less than 10% for the whole of Uttar Pradesh.

The firm plans to have 800 TKK franchisees in small mandis in UP, Haryana and Punjab – its natural markets. These would be supported by 40 mother centres (with soil-testing laboratories, training facilities and warehouses for inputs). TataChem says it has already put 25% of its planned network (215 franchisees and 15 mother centres) in place.

Since there was no precedent, TataChem had to learn the hard way, by making mistakes. It invested heavily in land and buildings for each of its Rs. 2-2.5 crore mother centres. Of course, the revenue from these centres is equivalent to what would otherwise have gone to the wholesalers. And if TataChem can increase its market share from 8% to 25% in UP, it can save on transportation costs as it will sell a higher proportion of its produce closer to its plant in Babrala, UP. But the TKKs don’t charge for the advice, which is something it needs to look at.

The franchisees are better off as they need to invest about Rs.3 lakh only. They largely make money by retailing agri-inputs, though TataChem is trying to develop other revenue streams like hiring out agri-implements. Mehan says the franchisees now earn a return of 30% on their investment. For instance, compared with 200-250 tonnes of urea a year or 4,000-5,000 bags a normal outlet sells, TKK franchisees sell at least 1,000 tonnes or 20,000 bags a year.

At a margin of Rs.5-6 a bag, a franchisee earns enough to sustain his business. Plus, he makes money on other inputs. While retail business is less capital-intensive than wholesale by its very nature, the retail margins in urea (Rs.100-150 a tonne) are higher than wholesale margins (Rs.50-80/tonne). Also, the dealer gets to work with a large company, and can buildup a strong relation-ship with the farmer. As for TKK, in order to improve the viability, especially of the mother centres, it needs to add more revenue streams and bridge the gaps in its model by bringing in credit and providing market access.

Rallis Kisan Kendra
Like his peers in the rest of India, G.T. Swamy of Challikere village in Karnataka’s Chitradurga district, would sell his entire pomegranate produce at the nearest mandi-Bangalore. Not only was he tired of coping with price swings on his own, but swamy also had to give cuts from his earnings to a host of middlemen-the village consolidator, the commission agent and the wholesaler in Bangalore. This changed in December 2001, when agrochemicals major Rallis began to buy his produce and supply to retailers like FoodWorld and Hopcoms in Bangalore.

Although Rallis buys only a small portion of what Swamy’s farms produce, he realises the benefits and the potential of working with Rallis. The entire transaction is transparent. Swamy knows how much FoodWorld pays Rallis, which, in turn, deducts packing and transportation charges and its commission before passing on the money to him. He is also assured of correct weights, a major concern of farmers selling at the mandis. Then again, the transport costs that rallis charges him are lower as he sends his produce with those of other farmers. And, that’s not all.

Rallis not only gives Swamy efficient market access through FoodWorld and Hopcoms, but also offers credit form ICICI. And it is this kind of collaborative approach that makes the Rallis model interesting. Moreover, the Rallis Kisan Kendra (RKK) at Chitradurga also provides Swamy all agri-imputs under one roof, a soil-testing facility to determine the nutrient mix, training sessions, advice from eminent scientists, and on-site farm advice by specially-trained agricultural graduates.

Rallis has a presence in seeds, agrochemicals and fertilisers. But now it feels it needs to address the farmers’ other concerns and provide market linkages, access to credit, quality inputs and knowledge. To that end, Rallis kicked off a pilot on wheat at Pipariya in Madhya Pradesh by roping in partners like ICICI for credit and HLL for market access. What do the partners gain? ICICI, which is keen on extending rural credit, would like to sell its other products here and HLL gets quality wheat devoid of the mixing that happens at mandis.

Rallis paid the farmers mandi prices for their produce after deducting the loans. While the farmers benefitted, the key challenge was to see how many farmers repaid the loans. Defaults "put a black mark – that I have not been able to build up their loyalty," says J.S. Oberoi, vice-president (agribusiness), Rallis. There were none. That encouraged Rallis to up the coverage from 1,200 acres to 6,000 acres the following season. To validate its results, Rallis wanted to experiment with different crops in different regions: basmati at Panipat (with the same partners), vegetables at Nashik (with Foodland), and fruits at Chitradurga.

The marketing end is crucial as Rallis thinks the farmer does not understand the market. When tomato prices fell to Rs.050 a kg. Farmers in Maharashtra chose to run their tractor over the crop than harvest it. So it would be useful if the farmer was told when and what to grow, and how to stagger the crop.

Rallis likes to first establish a centre as proof of its sincerity. "Today, credibility is an issue with corporates as farmers have seen many ‘suited-booted’ gentlemen coming to villages before. The centre provides a physical evidence of our sincerity," adds Oberoi.

RKK’s revenues will come from enrolling farmers (Rs.200 per acre per year), retailing agri-inputs, charging an administration fee for channeling loans from banks and FIs and commission on sale of produce (1-2%). Rallis is yet to figure out the contribution of different streams. But, as it scales up, volumes from the sale of produce will bring in the maximum revenues.

But is the model scalable? "We have to make it attractive for all the partners," says Oberoi. RKK cannot expect HLL or FoodWorld to pay higher margins. Rallis hopes to fix its scaling-up plans in 2-3 months. It can grow the business organically. Else, it can acquire knowledge in a few crops like pomegranates which are grown in few other areas like Bijapur and Bhagalkhot. Based on an ICICI study, Karnataka has identified regions to promote specific crops; Rallis could tailor itself to that plan.

Rallis , unlike others, has kept the initial costs down. It has spent just Rs.25-30 lakh per centre with the soil-testing labs worth Rs.20 lakh a piece. The rest has been spent on training personnel and paying visiting experts. The RKKs at Nashik and Chitradurga have benefitted from the learnings of the Tata Kisan Kendras. So the RKKs are accommodated in rented premises.

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