The New Business Opportunity in India’s Agriculture and Food Industry

India’s food & agriculture industry has come a long way since Independence and today it stands as one of the world's largest food exporters. The next growth wave in this sector will be driven by capital-hungry technical innovation; a need that bridges the gap between large MNCs and nimble startups.

“Stay Hungry, Stay Foolish”

When the late, great Steve Jobs said these words in his Stanford Commencement speech in 2005, he purposely used these (usually) negative adjectives in a positive way. He meant that one should never be satisfied, always pushing forward and willing to try things that people said could not be done.

However, when taken literally, this phrase has an ominous truth in the context of India’s exponential population growth and India’s ability to sustain its citizens in the most literal way – generating enough food to support our population.

Back in 1947, at the stroke of the midnight hour, when the world slept, India awoke to a new life and independence, but also the responsibility of shepherding over 300 million citizens into a new era. Today, that number stands at over 1.2 billion and we’re on pace to reach a staggering 1.4 billion by 2040.

Food Security & India: A Long and Fraught Relationship

Food security for its citizens was one of India’s foundational concerns. Upon independence in 1987, 82% of India’s population was rural and the agricultural sector was by far the largest employer. However, this industry was largely underdeveloped and much of the agriculture was dedicated to subsistence rather than generating an economic surplus.

In addition, Colonial mis-governance had led to catastrophic events like the 1943 Bengal Famine, which resulted in the deaths of 2-3 million people. All told, it is safe to say that the fledgling Indian government had a challenge on its hands just putting food in people’s bellies.

The concept of food security is multi-layered, and it’s worth diving into these nuances at this point. Broadly speaking, ensuring food security means not only having enough quantities of food but also ensuring that the public always has access to this food and that the food is appropriate and nutritional. Refer to Figure 1 for more on these layers of food security.

By any of these measures, India was a food-insecure nation well into the second decade of its existence. It was not until the government fostered the Green Revolution, starting in the 1960s with a mission-oriented approach, that this started to change.

The Green revolution came in the form of new high-yield varieties of seeds, improved irrigation methods and fertilizers, and adoption of modern technology like tractors. The resulting explosion in wheat and rice crop yields helped stabilize India’s food supply situation and eliminated the always-looming threat of famine.

From Calories to Nutrients: Moving Up the Value Chain

Even with the resounding success of the Green Revolution, India had only addressed the most basic subsistence need of its citizens. Earlier, the overriding concern had been finding a way to provide sufficient calorific intake for people. Therefore, the Green Revolution largely focused on increasing the output of wheat and rice.

However, as India grew richer and its food supply circumstances improved, the objective then moved on to providing not just enough calories, but also protein and other micronutrients like vitamins and minerals for a well-rounded diet. This would entail the expanding provision of soya, pulses, vegetables, and animal-based protein by similar orders of magnitude as with rice and wheat.

Unfortunately, this is where the pace of the Green Revolution has slowed down. Failure to provide a sufficiently nutritional diet has created the paradoxical situation where the population suffers from both obesity (due to over-provision of calories) and malnutrition (due to under-provision of micronutrients). This malnutrition is often described as ‘hidden hunger,’ because it may manifest without visible signs and not appear in data that only tracks people’s calorific intake.

The Need for Capital Investment in Agriculture

"The best time to plant a tree was 20 years ago. The second-best time is now."

This reasoning also holds true when applied to India’s food problem. With the right conditions and incentives, India’s farmers can produce even more on existing farmland to satisfy the food needs of the future. However, as things stand the farmers are burdened by structural problems that plague the agricultural sector, denying them access to resources that could unlock the potential growth in this sector.

Indian agriculture is still overly reliant on the notoriously unpredictable annual monsoon rainfall to fuel its output. Even in good monsoon years, Indian farmers struggle to get their crops to market due to a lack of transportation and warehousing infrastructure. They face chronic power shortages and are often denied access to financial resources to help them through lean times. It’s little wonder that the current generation of farmers are less inclined than ever to continue in their ancestral trade.

All these concerns can be mitigated or alleviated with targeted investment in infrastructure, power supply, irrigation methods, financial support and education. The government has developed several schemes to address these concerns, but they have often been unreliable and inefficient.

There is a strong argument that only coordinated investment from the private sector can truly address these problems in the long-run. The government’s priorities can often stray away from the focused economic needs of the agricultural sector and, as always in India, politics can get in the way. However, given the large-scale economic opportunities on offer, the incentives are aligned for private ventures to step in with the required capital investment with a view to long-term growth in the sector.

After all, there is no reason for an agriculturally productive nation like India to rely on staple food imports like edible oil and wheat from far-flung places like Australia and Ukraine.

Driving Innovation and Growth in Agriculture

It is essential that any long-term solution and new innovations be tailored India’s specific food and nutritional requirements. For example, India has more vegetarians than the rest of the world put together, with the UN Food and Agriculture Organization (FAO) reporting that Indians had the lowest rate of meat consumption in the world.

Given this reality, India must adapt to food supply solutions that work within local constraints and promote the benefits of specific local staples over others (Did You Know: Green toor dal has 40% more protein than black dal). Sadly, India’s lack of a quality supply chain and warehousing system results in us losing out on protein and eating a nutritionally ‘watered-down’ option. This issue is compounded by the general lack of awareness on this issue among the public.

With a growing population and an agri-food infrastructure that is still underdeveloped, this is not a time for evolution. It is time for a renewed Green Revolution, and there is an opportunity in every facet of the industries that drives innovation and growth in the Agri-Food sector. There are so many areas that play a part in driving this innovation – some of these may surprise you!

• Science – Genetics, bio-tech, alternative protein, lab-grown meat, bio-energy
• Technique – Greenhouses, hydroponics, indoor farming, aquaculture, packaging
• Tech & Automation – Software, data analytics, AI, IoT, ERPs, sensors, automation
• Business Models – eCommerce, aggregation & supply chains, leasing, industry consolidation
• Consumer Preferences – Calories to micronutrients, packaged goods, organic, non-GMO, year-round availability, ready-to-eat
• Talent/Skilling – Development of women, Education
• Funding – Investors include development, social, VCs and more
• Government – Pro-innovation, pro-agriculture policies, strategic partnerships
• Testing & Compliance – Transparency, sustainability, traceability, molecular analysis, allergen detection
• Cost & Efficiency – Productivity yields, just-in-time inventory management

This list is hardly exhaustive, but it illustrates that there are a whole lot of industries that will influence the next stage of agricultural development in India. Any successful development program will be the aggregate result of the contributions made by each of these sectors. This offers a massive opportunity for companies and investors that operate at the margins where cutting-edge ideas meet practical opportunities.

The Agri-Business Dilemma: R&D or M&A?

In established industries with large players operating at scale, innovation usually comes from Research and Development (R&D) investments by the companies. Unfortunately, the data paints a concerning picture for advocates of R&D-led innovation in the food industry.

In 2017, worldwide R&D spending by the world’s 1000 largest corporate R&D spenders increased by 3.2% to $702 billion. However, the global food industry only contributed 3% of this amount, lagging far behind industries like computing, electronics, automobiles and healthcare.

Instead, legacy players in the food and agriculture space are increasingly looking towards Mergers and Acquisitions (M&A) as the avenue for innovation-minded investments. Large conglomerates like Cargill and Unilever have made significant bets on startups and SMEs with a view to participating in the next stage in the industry’s evolution.

There is a structural shift is likely to yield better results. Innovation outside corporates takes the form of partnerships, M&A and consolidation – the combined value of which will outstrip that of R&D alone.

This makes a lot of sense when you consider the diverse industries that are expected to be driving agricultural innovation. Many of these industries are far removed from the traditional agriculture and food business, spanning fields as diverse as finance, logistics, genetics and digital technology.

Traditional agri-food companies recognize that they do not have any direct expertise in these sectors and M&A investments are a more efficient way of acquiring this expertise rather than in-house R&D. Large conglomerates like Cargill and Unilever have floated their own venture capital arms to make strategic investments in start-ups, either directly or by participating as investors in VC and PE funds.

Unilever Ventures has been particularly active in India, picking up stakes in the staple food delivery service Milkbasket and social ecommerce firm Shop 101. But the real reason mergers have such a large impact is because they generate their primary value through economies of scale and reducing costs across the board.

No Magic Bullets, but Opportunities Abound

At UAP Advisors, we believe that the structural inadequacies of the Indian agri-food sector indicate great potential for disruption by innovative companies. We also believe that this disruption is more likely to come from smaller companies with risk-taking appetite and entrepreneurial spirit.

Meanwhile, legacy players in this space are updating their own business models and increasingly looking to venture capital in order to benefit from the synergies with younger counterparts. The start-ups get much needed capital and access to unbeatable production and distribution setups, while the large companies get access to cutting-edge fields that they may not currently operate in.

Investment is attractive in this sector because stocks are reliable and relatively secure (earning the designation ‘defensive stocks’), while also being an extremely attractive investment opportunity in a ‘recession-proof’ sector (i.e. much like education and healthcare) where companies don’t die easily, and the market size never dwindles.

The unpredictability of doing business in India means there will be no sure bets or magic bullets. Succeeding in this space will require bold projections, strategic thinking and a whole lot of capital. Given the micro and macro trends at play, there is an unrivaled opportunity for driven companies looking to solve longstanding problems in the Indian agri-food industry, and along the way, unlock the growth potential in this sleeping giant of a sector.