Agriculture inputs: Bruised sentiments

The biggest headwind agriculture inputs providers will have to contend with in 2015 is the demand environment. Not that demand played any lesser a role in earlier years, but this time around companies are starting the New Year with several handicaps.

A drop in farm productivity, a fall in agriculture produce prices and a continuous rise in input costs mean profitability of farmers is under pressure. An Elara Securities (India) Pvt. Ltd survey of farmers at a large agriculture show in Maharashtra found poor farm economics to be adversely affecting sentiment on the ground. The findings corroborate a B&K Securities India Pvt. Ltd survey conducted in more states, which also points to pressure on profitability.

The trends do not bode well for the demand for agriculture inputs. A squeeze in profitability will reduce spending and the investment capability of farmers, which can weigh on sales. This impact will be felt by agrochemical firms as early as the December quarter. Fertilizer firms are somewhat better off as inventories have more or less normalized. Companies were able to cut discounts and the receivables situation, too, is improving.

For seeds firms, the test will come in June. Assuming current price trends, it has to be seen how farmers will react to a drop in agriculture produce prices, especially to those of cotton, paddy and vegetables. These crops are major business segments for seed firms. If cotton prices remain low, farmers may reduce cotton acreage and shift to other crops such as soybean and pulses.

“Even though the market prices for these crops are also lower in the current scenario...a cost-benefit analysis favours soybean/pulses or some other crops,” B&K Securities said in a note.

June is also the month when the monsoon reaches India. If rains play spoilsport, the headwinds for the agriculture sector can get aggravated. Farmers will then show even lower interest in investing in costly agriculture inputs-complex fertilizers and expensive sprays.

The concerns are weighing on share prices. Most companies in this sector have been trailing the broader markets since the first week of November. A recovery in prices or a sharp fall in the cost of cultivation is a must to change this scenario. Alternatively, government action—faster clearances, introduction of urea reforms, and encouragement of new technologies or capacity additions—can revive investor interest in the sector.

With government response still uncertain, trends on the ground point to a difficult 2015.