Development in Indian Warehousing Industry with Focus on Pulses

-  Article Published in HANDBOOK OF PULSES 2016 -  Page (54 - 59) 

Warehousing plays a very vital role in promoting agriculture marketing, rural banking and financing and ensuring Food Security in the county. It enables the markets to ease the pressure during harvest season and to maintain uninterrupted supply of agricultural commodities during off season. Hence, it solves the problems of glut and scarcity, which are the usual problems in agricultural marketing. Though warehousing is an independent economic activity, yet is closely linked with production, consumption and trade. Warehousing is now seen as an integral part of the supply chain where goods are not only stored for safekeeping, but also where other value processes are implemented, thereby minimizing wastage and costs.

Agricultural warehousing accounts for fifteen percent of the warehousing market in India and is estimated to be worth Rupees 8,500 crore. However, it is perceived to be inadequate and unorganised. More than 40 per cent of the agricultural warehouses are run by state enterprises such as FCI, CWC and SWCs. About 30 per cent of the warehousing capacity is held by unorganised small godown players. These unorganised warehouses lack scale and quality. On the other hand, there are a few large national-level players in the warehousing market which own professionally run warehouses and also provide ancillary services around warehousing. Although there is no exact data on the number of warehouses present, some of the substantial capacities available in public, cooperative and private sectors are depicted in the adjacent table.

Given the fact that a huge quantity of government procured food grains are kept in open storage (CAP) for months together, the risk of quality deterioration needs no emphasis. In this context, the finding of an expert Committee, point to a total warehousing gap 35 million MT during the 12^th plan period, reflecting the excess of demand for warehousing capacity less supply or availability of the same. In the other words, warehousing capacity of 35 million MT need to be created in the country during the 12^th plan period to ensure that the demand for storage of agri commodities is adequately take care of. Of this gap, as indicated above, capacity of 12.11 million MT has already been created. The gap insofar as the private sector is concerned is likely to be about 10 million MT as the bulk of the storage gap is in the public sector.

About 80 per cent handling and warehousing facilities are not mechanized and traditional manual methods for loading, unloading and handling of foodgrains and other commodities are used. However, the warehouses which are mechanized have just forklifts or hydraulic hand pallet trucks. These numbers clearly indicate that there is an acute shortage of organized and good quality warehousing and storage infrastructure in the country, for both, agricultural and non-agricultural commodities. In spite of the fact that government has incentivized agri-warehousing capacity building, there had been lack of sustained investment in the warehousing sector. The private sector initiatives were small and sporadic in this sector. Besides, most of the private sector warehousing capacities available in the country were of poor quality, small, fragmented and do not meet the requisite infrastructure standards.

The warehousing capacity built over past 10 years, especially those sanctioned by NABARD have an average storage capacity per warehouse of 1,261 MT and around 75 per cent of numbers of godowns have capacity of less than 1,000 MT. The development of small and medium godowns indicates that most of them have been built by farmers or a community of farmers thus ensuring that distress sale is reduced and better prices are paid to farmer for their produce. Apart from this there are few large national level players which have emerged over the last decade owing to the available capital subsidy. These include National Bulk Handling Corporation Ltd., National Collateral Management Services Ltd., Adani Agri Logistics, Star Agriwarehousing & Collateral Management Ltd., Shree Shubham Logistics Ltd., Ruchi Infrastructure Ltd., Guru Warehousing Corporation, Paras Warehousing and LTC Commercial. Irrespective of the concerted efforts from the government as well as private and corporate players in the warehousing sector, the industry is gripped with regional imbalance.

Only 22 per cent of total storage capacity is available in the major consumption states. Even some of the states have got storage capacities of less than one month of their requirement. While obvious factors like proximity to the major mandis in the state, differences in the quantities of food grain and pulses produced within the state, etc. are the major causes behind the regional imbalances, other key factors like the extent of interest and initiative shown by bank officials in promoting the concept of rural godowns to local entrepreneurs, publicity and awareness created about the scheme at the local level, etc. also played a major role behind these regional imbalances. In short, dominant producers of food grain and related agricultural products comprise the majority of godowns and storage capacity.

The warehousing industry in India gained tremendous impetus after the introduction of the Warehousing Development and Regulatory Authority (WDRA) which came into existence on 26th October 2010 as per the provisions made in the Warehousing (Development and Regulation) Act, 2007. WDRA has been instrumental in the implementation of negotiable warehouse receipt (NWR) w.e.f. 26^th April 2011. As per the Warehousing (Development and Regulation) Act, 2007, negotiable warehouse receipts (NWRs) can be in both paper and electronic forms. The format of the NWR has been finalized in consultation with various stakeholders and Indian Banks’ Association (IBA), and paper NWRs are now being issued by the registered warehouses across the country. The advantages of electronic warehouse receipts (EWR) over the paper warehouse receipts include: reduction in manual paper handling, elimination of transportation of paper warehouse receipts, reduction in chances of forgery, and quick access of information. The WDRA play a vital role in developing an orderly, robust and reliable warehousing system in the country not only for foodgrains and other dry commodities but also for perishable commodities like fruits and vegetables wherein post-harvest losses are reported to be about 30 per cent. The introduction of NWR system in the country would not only help farmers to avail better credit facilities and avoid distress sale but would also safeguard financial institutions by mitigating risks inherent in credit extension to farmers. The pledging /collateralization of agricultural produce with a legal backing in the form of NWR would lead to increase in flow of credit to the rural areas, reduce the cost of credit (due to certainty of recovering credit by the bank) and would spur other related activities, like standardization, grading, packaging and insurance services in the agricultural sector. With the increased requirement of quality storage, warehousing industry would also get a boost in rural areas. This would also fill gaps in the logistic chain of agri-business in the rural sector.

With the emergence of the collateral management companies, warehouse receipt finance has gained acceptance in the banking sector, with all big and small banks now participating in this space. As a result, finance against commodities is likely to experience a participating in this space. As a result, finance against commodities is likely to experience a phenomenal growth. While currently the size of the market is estimated at about Rs. 30,000 crore, as per a recent study by NABCONS, the potential for finance against collateral of major agri commodities and fertilizers is Rs. 166234 crore, details in this regard are given in adjacent table.

Over the years warehousing business has been transformed to a great extent from merely a storage infrastructure to a one stop shop for supply chain management through the entry of private sector. Nowadays the goods are stored as per the scientific methodology to protect them against the quantitative as well as qualitative losses occurring due to unavoidable circumstances such as floods, pest attacks, etc. Hence, ‘warehouse performance indicators’ should be introduced to check the efficiency of the warehouses which now should include quality parameters like ability to control wastage, pest control measures, provide wide range of testing, grading and certification services which can help in ascertaining the value of the commodity deposited and bring transparency among all interested entities.

In India Pulses are grown in around 24-26 million hectares of area producing 17-19 million MT of pulses annually. India accounts for over one third of the total world area and over 20 per cent of total world production. India primarily produces Bengal gram (chickpeas), red gram (tur), lentil (masoor), green gram (mung) and black gram (urad). For majority of vegetarian population in India, pulses are the major source of protein. Pulses and pulse crop residues are also major sources of high quality livestock feed in India. In India pulses are cultivated on marginal lands under rain fed conditions.  Only 15 per cent of the area under pulses has assured irrigation. Because of the high level of fluctuations in pulse production (due to biotic and abiotic stress) and prices (in the absence of an effective government price support mechanism) farmers are not very keen on taking up pulse cultivation despite high wholesale pulse prices in recent years.  India having the largest shares about 25 per cent production, about 33 per cent acreage and about 27 per cent consuming of total pulses of the world. The acreage ranged from 23.46 (2003-04) to 23.82 million hectares (2015-16) and production varied from 14.91 million MT (2003-04) to 17.33 million MT (2015-16). The productivity has increased from 636 kg/ hectares (2003-04) to 728 kg/ hectares (2015-16). The major pulses producing states are Madhya Pradesh (24.12 per cent), Maharashtra (16.46 per cent), Rajasthan (12.94 per cent), Utter Pradesh (8.82 per cent), Andhra Pradesh (8.06 per cent) and other states together (21.29 per cent) during 2015-16.

As per the figures given in table 2, the Pulses accounts for a share of about 4.49 per cent of the total Warehouse Receipt Finance happening in the country. Of the total food grains produced in the country, the total pulses contribute to 6.85 per cent and the cereals comprises of about 93.15 per cent (as per production statistics of 2015-16). Thus we can see that the pulses at present command a very low profile status in terms of utilizing the warehousing capacity of the country. In order to improve the situation of the pulses situation in the country the government has proposed  proposal to create a buffer stock of 3.5 lakh MT of pulses during the current 2015-16 crop year through domestic purchase or imports to prevent a further price spikes. Out of the proposed 3.5 lakh MT, about 1.5 lakh MT of tur and urad will be procured in the ongoing kharif marketing season and the rest 2 lakh MT of chana and masoor will be bought in the rabi marketing season. With huge buildup of inventories and limited storage space with the government there is ample scope of expansion of private warehousing in the pulse sector.

Though the storage capacity has increased at a CAGR of about 8 per cent during the last decade till March 2016, the irony remains that around 20-30 per cent of the total food grain harvest is wasted due to lack of availability of storage capacity, regional imbalance in warehouses, lack of adequate scientific storage and inefficient logistic management in the country.

Stagnation in Demand Keeps the Investors Sentiments in Doldrums

Copper prices follow the natural flow of industrial demand, responding to long-term growth and contraction cycles, as well as fluctuations in mining production. World financial markets understand its power to predict economic turning points. Copper affects nearly every aspect of industrial production as an integral component in building construction, power generation and transmission, electronic products, industrial machinery and transportation. The supply continues to be robust and on the positive side since it entered on the surplus side mid of 2015.

Rapid growth in BRIC nations in the last decade underpinned copper prices, with China leading the way, building new cities in the middle of agricultural land while engaging in massive renovation projects throughout older cities. The country’s annual GDP growth rate hit a peak at 14 per cent in 2007, dropped to 9.2 per cent in 2009 and rose to 10.4 per cent in 2010. By the end of 2010, analysts were convinced that China and BRIC nations’ rapid growth would continue for another decade. However, that year marked a cyclical peak, with growth falling at a steady pace into the second half of 2015 when it hit 6.9 per cent. Copper took notice of this sea change early, printing the 2011 high and turning sharply lower in a new downtrend that’s still in progress. It crossed the last support level above the 2008 bear market low in the fourth quarter of 2015, setting up a major test.

Rising copper prices reflect increasing economic growth, with countries building infrastructure at a rapid pace to meet the demand for new factories, commercial facilities, and residences. Falling copper prices signal slowing economic growth or recessionary conditions, with commercial and industrial occupancy levels falling because supply exceeds demand. Since China utilizes over 45 per cent of the total copper production, the state of its economy is the guiding force for the copper. Over the last one and half year, the slowdown in the Chinese GDP growth, weakness in its PMI Data and weak demand for copper has led to the massive fall in prices (breaking the lower levels of 8 -9 years in different regions). This has also severely affected the economies of the copper mining countries and led to significant production cuts by major mines. Since the start of 2016 the prices have shown some stability on presumption of global economic stability.   

In the current scenario, China’s growth is expected to stabilize in 2016 at the same time the United States continues its slow but steady economic expansion. The introduction of Federal Reserve rate hikes could jeopardize U.S. growth, but prior history suggests it will be several years before the economy turns into the next recessionary cycle. Europe becomes the wild card in this scenario, with dovish central bank policies attempting to jumpstart Eurozone economies. Their efforts may be working, with growth hitting a four-year high in the fourth quarter of 2015. China has accumulated most of the world’s copper stocks, with miners and investors trying to figure out what that means for future demand. China, which consumes more than 40 per cent of global copper, now accounts for almost 80 per cent of stockpiles after booming imports late last year sucked up stocks held elsewhere. The bears are currently having a tighter grip on the copper market and opine that the stockpile reflects the demand weakness as China transitions to a consumer-driven economy. The others are of the opinion that the stockpile is not necessarily a bad thing, and shows the Chinese state is buying and holding copper for strategic reasons.

Copper lost a quarter of its value last year as slowing demand in the Asian nation exacerbated a glut after years of over-investment by miners. While copper has rebounded from January’s six-year low, it’s more than 50 percent lower than at the height of the commodities boom in February 2011. Demand in China needs a marked pickup in the next few months to support prices. While copper held in warehouses monitored by the Shanghai Futures Exchange fell in the past two weeks, it has more than doubled this year to a record high last month. Metal held in China’s bonded warehouses, which isn’t monitored and is custom-free, has expanded to a seven-month high amid oversupply, according data compiled by Bloomberg Intelligence.

Apart for the recent economic development the supply dynamics needs to be studied in details. As per the study, World mine production is estimated to have increased by around 2 per cent (30,000 MT) in January 2016 compared with production in January 2015. Concentrate production increased by 2.5 per cent while solvent extraction-electrowinning (SX-EW) remained essentially unchanged. The increase in world mine production was mainly due to a recovery in production levels in Indonesia and in Peru while the latter also benefited from new production at mines that started last year. Production declined by 11 per cent in Chile, the world biggest copper mine producer. World refined production is estimated to have increased by around 7 per cent (130,000 MT) in January 2016 compared with refined production in the same month of 2015: primary production was up by 7 per cent and secondary production (from scrap) was up by 6 per cent. The main contributor to growth was China (+14 per cent), followed by the United States where production increased by 30 per cent. Output in Chile, the second leading refined copper producer, increased by 4.5 per cent. On a regional basis, refined output in January is estimated to have increased in the Americas (10 per cent), Asia (10 per cent) and Oceania (20 per cent) while declining in Africa (-12 per cent) and remaining unchanged in Europe. The average world refinery capacity utilization rate for January 2016 increased to 85 per cent from 81 per cent in January 2015.

The refined copper market balance for January 2016 showed an apparent production surplus of 56,000 MT. When making seasonal adjustments for world refined production and usage, January showed a production surplus of 50,000 MT. This compares with a production surplus of 15,000 MT (a seasonally adjusted surplus of 9,000 MT) in January 2015.

One point needed to be highlighted that the Chinese has been benefiting from the slump in the global copper prices. The country is the largest copper importer. So, lower copper prices bode well for China. However, lower copper prices would also mean that China mines less copper domestically and relies more on imports—both refined and concentrates. China lacks secondary copper reserves. It would make sense for the country to import more copper instead of producing it domestically when copper prices are trading at multiyear lows. This would mean that Chinese copper imports might not fall much despite the demand slowdown in the country. Another issue that could hit copper prices in the medium term is the copper stacked in financing deals. A lot of metal is tied in these deals. It could return to the physical market if we see rate hikes by the Fed. The successive rate cuts by the Chinese Central Bank already reduced the arbitrage opportunities in these transactions.

Thus, all is not so negative with the investment sentiments in the copper industry. Slight stability in the global economy would bring back the prices on track. New investors in the copper industry should now be keenly watching the movement in the FED Interest Rates and the Chinese industrial growth index for further direction and for those who have already invested should stay invested and have patience as the low phase of the industry is supposed to be over. 

Final Rabi Crop Estimates for 2015-16

Unseasonal rain and hailstorms have once again hit the crops across North and West India but the intensity has been on the lower side. Report of marginal damage is received from localised pockets in cereals, oilseeds and pulses. The main states affected by the rains & hailstorms are Punjab, Rajasthan, Haryana, Uttar Pradesh, Maharashtra, Gujarat and Madhya Pradesh. As per the recent assessments by various agencies wheat crop has been affected in Punjab, Haryana, Uttar Pradesh and Madhya Pradesh. Apart from wheat, slight losses have also been seen in RM Seed in the states of Rajasthan, Punjab and Haryana. Reports of loss in Chana is reported from Madhya Pradesh and Rajasthan.

In my first estimate (First Rabi Crop Estimates for 2015-16 – Dated: 19^th December 2015) had already lowered the crop size for major crops over 2015-16, Owing to deficient monsoon (14 per cent on National level) and delayed sowing of Rabi crops as the kharif harvest was delayed. The situation of increased moisture stress in wheat fields in Punjab, Haryana and Uttar Pradesh got relief after light showers in 1^st and 2^nd Week of March and the crop situation has improved. Accessing the new improved scenario, I have positively revised my wheat estimate by 8.40 per cent to 83.34 million MT which, still below the last year’s estimate by 3.57 per cent. Rabi Maize total production is set to decline further by 13.92 per cent over last estimate to 4.92 million MT. The barley production in Rajasthan and other parts of the country is set to decline by 25.00 per cent over last estimate to 1.29 million MT. Overall, the total Rabi Coarse Cereals production is likely to decline by 9.47 per cent over last year to 9.99 million MT.

In the pulses sector, the Chana (Chickpea) is expected to be most affected by the lack of residual soil moisture in major growing areas and the recent hailstorms in several pockets of Rajasthan. I expect the production of Chana to decline by 23.24 per cent to 6.24 million MT over last estimate. Overall, the total Rabi Pulses production is likely to decline by 14.55 per cent over last year to 9.89 million MT.

The oil seed sector is likely to see an improvement in production by 3.72 per cent to 8.66 million MT keeping the total rabi oil seed supply at the same levels as last year.

Based on the above reports and feedback from the Industry / Traders I have revised my Rabi crop estimates for upcoming season as: