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| Now, agri commodity firms diversify sourcing, eye assets abroad |
| Rajesh Bhayani / Mumbai Mar 08, 2010, 01:16 IST |
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The trend seen in metal and core industries to acquire resources from all over for ensuring stable supply of raw material seems to be expanding to agriculture commodity companies, too.
While Shree Renuka Sugar had acquired a controlling stake in Equipav, one of the largest sugar/ethanol companies in Brazil, two more sugar companies are said to be looking at such assets in Brazil. Some Indian companies have acquired oil palm plantations in Indonesia and Malaysia. Ethiopia is a destination to develop commodity farms.
Equipav of Brazil is well diversified, having sugar/ethanol mills with integrated co-generation facilities, and cane supply from the cultivation of about 115,000 hectares, two-thirds farmed directly by it. Shree Renuka is also, as are other sugar companies such as Balrampur Chini, setting up refineries near ports. Many are implementing de-risking strategies, given the industry’s cyclical nature and high political intervention.
At present, only 10-15 per cent of refining capacities in the industry are with the corporate sector. Now, the governments in two major sugar-producing states, Maharashtra and UP, are selling cooperatives. Jigar Shah, head of research with the Indian arm of Singapore-based institutional investor, KIM ENG Securities, said: “As part of de-risking strategy, the industry will cover regions which are not on the sugar map yet, for cane cultivation and refining”.
There is a need to de-risk because, he said, the “single-most variable cost for the sugar industry is procuring sugarcane, which is 67 per cent (of the total) and stable supply is something they are looking for”.
Sanjesh Thakur, associate director, retail and consumer product practice, Ernst & Young, said: "Due to cane shortages, there is an increasing focus on the management of the supply side. The industry is witnessing a new trend, wherein companies are now setting up greenfield (new) refinery projects closer to ports to process raw sugar and, in a way, hedge their dependence on farmers for cane supply. The port-based refinery will enable companies to process raw sugar, cater to deficit markets and reduce overall transportation costs.”
The quest for raw material sources is not confined to sugar companies. In many commodities, companies are planning to diversify procurement. Sanjesh of E&Y says, “Apart from sugar, with the phenomenal growth in the FMCG sector, even edible oil and dairy companies are working on plans to streamline supplies or hedge supply risk by strengthening supply source or through backward integration.”
For example, Ruchi Soya and K S Oil procured oil palm plantations in Indonesia and Malaysia and more companies are looking for such opportunities. Karuturi Global, the country’s leading rose exporter, acquired 840,000 acres in Ethiopia to develop agricultural land, in which the company would grow cereal crops (maize, wheat and rice), fresh vegetables and palm oil and then, at a later stage, get into sugarcane. Dairies generally procure milk from cooperatives but to reduce dependence on these, a north-based dairy is talking to village panchayats to procure milk directly from cattle owners.
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