Agricultural Equipment Business

Manufacturing, export and distribution opportunities in post-harvest equipment beckon entrepreneurs even as other farm products also hold great promise In the last decade, Buhler, a global manufacturer of grain milling, sorting and handling products, has been witnessing a geographical shift in demand for its products. While the US and Europe remained the mainstay for long, it is China and India that are now the demand hubs for its products. The company, which launched its India operations in 1992, has since expanded its facility in India and ramped up the workforce.

Another equipment firm, Satake, a Japanese major, has been witnessing similar trend. But the presence of big firms such as Satake and Buhler has not had much effect on local manufacturing. Many small and medium enterprises operate at full capacity across the country. Take for instance, S P Khandelwal of S S Milling and Engineering. He sells grain cleaning and sorting equipment to flour mills, energy foods producers and snacks companies. He boasts of clients such as Bikanerwala, Priya Gold and Modi Flour Mill.

It is the price factor that helps entrepreneurs such as Khandelwal survive the onslaught of the global majors. “Products sold by organized players are expensive while my products are low-cost,” he says. Farm equipment companies, both big and small, are fighting tooth and nail to grab the larger share of the lucrative India market, despite the fact that the agriculture sector’s share in the GDP has fallen over the years. This notwithstanding, the farm equipment sector, that is a key support for agriculture, has been growing at a brisk pace and is projected to touch $7.

9 billion by 2012, according to The Freedonia Group, a US-based market research firm. [pic] Growth Drivers A couple of factors are driving the growth of this sector. These are mechanization of agriculture, increase in contract farming, easy availability of farm loans at low interest rates, and migration of laborers from villages to cities. Mechanization of Indian agricultural has been a major booster. The continuous increase in the consumption of power for farm sector and the corresponding reduction in the use of animal and human power is a clear indication that more and more machines are being deployed.

A study by KPMG, done for India Brand Equity Foundation (IBEF) throws up some interesting observations. It says the share of animals as the source of power for the agriculture sector declined sharply from 45% in 1971-72 to less than 10% in 2005-06. Similarly, the share of human beings as the source of power for the farm sector reduced to a little over 5% in 2005-06 from 15% in 1971-72. |Quick Points | |- Global demand for agricultural equipment to rise 3. 8% per year through 2012 to $112 billion | |- Demand for agricultural equipment in India is projected to increase 6. 3% per year through 2012 to $7.

9 billion | |- Fast pace mechanization of agriculture in China and India to drive demand | |- Easy availability of farm loans, low interest rates, and contract farming also helping the sector grow in India | |- High manufacturing costs abroad makes India a low-cost production base | |- Lucrative export markets beckons India manufacturers | |- Distribution of established products also makes good business sense | |- Challenges include poor monsoon, rising steel prices and competition from China and low-cost manufacturers | Alternatively, the share of tractors as the source of power grew from less than 10% in 1971-72 to over 45% in 2005-06.

Electricity consumption by the farm sector has grown from 0. 30 KW/hectare in 1971-72 to 1. 50 KW/hectare in 2005-06, the KPMG-IBEF study says. “The demand for farm equipment is growing because more and more Indian farmers are opening up to mechanized agricultural practices in place of traditional farming methods,” says Bharat Dharia of Agricon Industries. “Also, the government is encouraging farmers by offering loans for procuring latest equipment at very low rate,” he adds. Agricon manufactures agricultural implements such on hoes, shovels and pickaxes.

The company is into 100% exports, and has seen the demand for its products grow in the last couple of years. “Besides benefitting from rising incomes, farmers in developing regions will continue to strive to increase productivity through further automation and replacement of older equipment and of draft animals used during various stages of the farming process,” says The Freedonia Group. “In addition, rising wages in many of these countries as well as large scale migration to urban areas will necessitate the replacement of human capital with fixed capital,” it adds.

|The demand for farm equipment is | |growing because more and more Indian| |farmers are opening up to mechanized| |agricultural practices in place of | |traditional farming methods | |Bharat Dharia | |Agricon Industries | TheOpportunity With a long value chain that spans across the agricultural cycle, Indian entrepreneurs have a host of opportunities to explore. These include equipment involved in land development, tillage, seedbed preparation, sowing and planting, plant protection, harvesting and post harvest activities.

Besides manufacturing, distribution and retail opportunities in post-harvest equipment are a plenty, and entrepreneurs could explore this area. As the cost of post harvest equipment is very high, a good margin exists for distributors of such products. There is plenty of scope of India becoming a low-cost manufacturing destination for foreign players. Some companies such as Agricon are already harping on it. “We are shortly commencing production of forged shovels which are mainly for European market.

Also due to high cost of production in other countries, they are discounting producing such tools and are outsourcing from India or China. So in time to come we are quite optimistic that constant demand should persist,” says Dharia. The Market Although dependent heavily on monsoon, the demand for farm equipment has only risen over the years. “India comprised a $5. 8 billion market for agricultural equipment in 2007, third largest in the world behind the US and China,” says The Freedonia Group. “India is the world’s second largest four wheel tractor producer behind China on a unit basis (output of around 305,000 units in 2007).

The production cost for one tractor in India is less than half the level found in developed countries, which has enabled India to become a significant net exporter of lower horsepower tractors,” it adds. [pic] The market penetration of tractors and other farm equipment is still very low. This clearly implies enough scope for growth. The KPMG-IBEF study draws a parallel with the consumer durables and auto sectors saying that when there is a low market penetration, coupled with availability of high quality, high technology products and ease of financing, the market booms.

“With shipments of $5. 9 billion in 2007, India also maintains a significant agricultural equipment industry and is a modest net exporter of farm machinery. However, most output is sold domestically,” The Freedonia Group says. Challenges “My business depends a lot on three factors — monsoon, farm loans to our customers and the cost of raw material,” says D N Patil, who runs a farm equipment manufacturing company, Amkita Agro, in the Aurangabad district of Maharashtra.

Thus, he was concerned when the State Bank of India, the country’s largest public-sector bank, announced last month an embargo on its farm loans. However, the bank was quick to do a volt-face after coming under attack from several quarters. Indian farmers are heavily dependent on loans from private and public-sector banks and agri-cooperatives to buy farm equipment and implements that are needed across the agriculture cycle. “Ever since major public-sector and private sector banks started giving loans to buy farm equipment, our business has grown,” says Patil.

“Easy finance will help drive the growth of the farm equipment sector. When loan proposals stop, the total market for farm equipment goes for a toss,” he adds. The cost of iron and steel, the major raw materials for these equipment has gone up sharply in the last one year. This has pushed up the manufacturing cost of equipment, bruising margins of both big and small manufacturers. “The raw material (steel) cost has shot up dramatically by about 40% but because of competition, we cannot increase prices, thus our margins have suffered,”says Khandelwal.

However, Patil had to increase the price tag of his products in view of the rising input costs. “The plough that we used to sell for Rs 20,000 is now being sold for Rs 60,000. This is because of the rise in steel prices,” he says. Many of the farm equipment manufacturers DARE spoke to talked of increase in local competition over the last few years. They claimed that many a times buyers ignore quality in favor of low-price of a product. Thus low-cost manufacturers could spoil the party.