FEED Business Worldwide March, 2012

 

The promise and challenge of Indian agribusiness 

 

by Eric J. BROOKS

 

 

East Asia and China took centre stage in the 1990s and 2000s but the last decade has seen India's economy take off. When incomes are rising rapidly, so does meat consumption and with it, India's feed and livestock sector. At least two decades of 6% to 10% annual expansion are ahead for India's broiler, layer and dairy sectors.

 

 

 

The reason for this pent up potential is its small, but rapidly expanding starting base. As of 2011, India's per capita spending on food was 17% of China's and only 7% percent of America's. With per capita incomes growing rapidly and some 150 million Indians ascending to middle class status over the next ten years, we can expect this figure to rise at rapid rate.

 

Consequently, despite its vegetarian traditions, with a population of over one billion, India's red meat and poultry production are already ranked fifth in the world - and rising at a faster rate than in China or Brazil. Superficially, that may sound impressive, in truth, there remains considerable room for market expansion.

 

For example, with per capita meat consumption of less than 5kg, India's one billion people are outranked by Mexico's 115 million people in poultry production or Germany's 80 million in overall meat output. While this demonstrates Indian agribusiness's immaturity relative to its one billion population, it also demonstrates the latent potential of a mega-market destined to triple or quadruple its per capita meat consumption over the next two decades. - But this growth comes with daunting challenges.

 

The fact India must sustain itself with an arable land endowment comparable to that of Argentina but with 27 times more people only is one component of South Asia's agribusiness immaturity - and scope for growth. Everyone from the USDA to Ernst & Young has noted that India's traditionally strong vegetarian tradition is giving way to higher propensity for meat consumption, especially among the young, educated and new members of its emerging middle class. This ongoing transformation of India's meat demand preferences implies that it will undergo much stronger agribusiness growth than China did at a comparable stage of development.

 

 

 

Indeed, in its own way, the country already leads in one sector: India has the largest livestock population of any country and is the leading dairy producer, accounting for 20% of world milk output.

 

According to the USDA, domestic milk output increased from 80.6 million tonnes in 2001 to 102.8 million tonnes in 2008 and 121.5 million tonnes in 2011. This year, production is expected to increase another 4.6% to 127 million tonnes. As is the case with other protein consumption statistics, India's per capita milk consumption lags that of its BRIC rivals who consume an average of 199kg of milk a year. India's per capita consumption however, is rising far more rapidly, from 106kg in 2000 to an estimated 120kg this year. 

 

Going forward, while dairy is not the fastest growing protein line, India's milk sector is beset by challenges which are in themselves investment opportunities. Chief among these is the following: The Indian government's National Dairy Plan foresees milk production rising to 180 million tonnes by 2020. To achieve this, supply has to grow by nearly 6% annually but has only been increasing at a 4.5% rate.

 

According to the USDA, "Indian consumption of nonfat dry milk is forecast to surpass Indian production in 2012, reflecting a small but growing deficit in dairy production and the need for increased supplies.  2012 fluid milk consumption is set to match 2012 fluid milk production. Butter consumption exceeded domestic production in 2010 and is forecast to do so again in 2011 and 2012.  

 

With demand for highly processed dairy products rising by 15% annually over the next five years, this small but rapidly growing niche is causing overall demand to outrace supply. The National Dairy Development Board sees consumption across all dairy classes growing by up to 8% annually through to 2020 –all sustained by milk production that has grown at little over half this pace.

 

With consumption overtaking capacity, India's government prohibited the export of skim milk powder, whole milk powder, dairy whitener and dairy-based infant formula, casein and casein products. Over the longer term however, the only solution is to raise the inventory, capacity and productivity of India's dairy herds. The importance of raising cattle productivity cannot be understated: With an average dairy herd containing a mere five cows, it takes up to three Indian cows to match the milk output of one Russian cow, five to match an American cow's productivity. It would just take the narrowing of this productivity gap to ensure the country's self-sufficiency in milk.

 

The need for Indian dairy's reinvention can be seen in the following: One kilogram of forage yields 2.9 litres of milk in an American dairy cow but only 1.5 litres in its Indian counterpart. All this implies five to ten years of intense capital investment and a strong, investment-opportunity-driven movement towards consolidated, capital-intensive milk production.

 

 

 

Dairy's opportunities and challenges aside, no protein line so defines India's current prosperity as poultry, which increased in number from one million in 1966 to over two billion in 2010. Moreover, poultry not only grew in absolute numbers but as a percentage of national protein intake. From a 15% share of meat consumption in 1990, poultry's share had risen to 36% in 2010.

 

Moreover, after appearing to tail off, poultry's growth turns out to be faster than anticipated. From growth rates of up to 15% from the 70s to the mid 90s, output kept growing by 10% annually into the mid 2000s, when it appeared to taper off. However, just when many analysts thought we should content ourselves with 4% to 6% expansion, growth took off after the 2008 recession. In its latest reports, the USDA expects broiler meat output to keep increasing at a 10% rate over the next several years.

 

A similar but somewhat slower story is unfolding in the layer sector, where per capita consumption has risen from 51 eggs per year in 2009 to a USDA-estimated 57 eggs in 2012. At 6% per annum, layers represent an intermediate sector, growing faster than dairy or ruminants but slower than that of broiler meat.