Trend in private food in agriculture sector and global food chain.new

Trend in Private Food in Agriculture
Sector and Global Food Chain

Prepared By

Dewasish Ghoshal
PGDM (Agriculture)

NAARM, Hyderabad

National Academy of Agricultural Research Management, Hyderabad

Current state of Indian agricultural industry

In India, 52% of total land is cultivable as against 11% in the world. All 15 major
climates of the world, snow bound Himalayas to hot humid southern peninsula;
Thar Desert to heavy rain areas all exist in India. There are 20 agro-climatic regions
and nearly 46 out of 60 soil types in the country. Sunshine hours and day length
are ideally suited for round the year cultivation of crops. India is the centre for
biodiversity in plants, animals, insects, micro-organism and accounts for 17%
animal, 12% plants and 10% fish genetic resources of the globe. In the live stock
sector, India has 16% of cattle, 57% of buffalo, 17% of goats and 5 % of sheep
population of the world. Agriculture contributes 24.2% to GDP, 15.2% of total
exports and provides employment to 58.4% of country’s work force.

As mentioned in the FICCI report of October 2004 India is the
 Second highest fruit and vegetable producer in the world (134.5 million tons)
with cold storage facilities available only for 10% of the produce.
 Second highest producer of milk with a cold storage capacity of 70,000 tons.
 Fifth largest producer of eggs. Investments in cold chain required to store
20% of
 surplus of meat and poultry products during 10th plan requires Rs 500 Crore
(US$ 100M)
 Sixth largest producer of fish with harvesting volumes of 5.2 million tones.
Investment required is estimated to be Rs 350 Crore (US$ 70M)

In spite of the vast natural resources and abundant agricultural produce India ranks
below 10th in the export of food products. Conservative estimates put processing
levels in the fruits and vegetables sector at 2%, meat and poultry at 2%, milk by
way of modern dairies at 14%, fish at 4%, bulk meat de-boning is to the tune of
21%. Currently, the food processing sector, though in the nascent stage,
constitutes 14% of manufacturing GDP amounting to products value of Rs.2,
80,000 Crores. It employs 130 lakh persons and is supposed to increase at an
annual rate of 7%.


Average Spending Pattern of Indian Household


Global Processed Food Industry

The shape of the global food industry is constantly changing and evolving thereby
reinforcing the key themes of health, convenience and value. The global processed
food industry is estimated to be valued around EUR 2.5 trillion and accounts for
three-fourth of the global food sales. Despite the large size of the industry, only 6
percent of processed foods are traded across borders compared to 16 percent of
major bulk agricultural commodities. The U.S., EU and Japan together account for
over 60 percent of total retail processed food sales in the world.

Trade liberalization policies through multi-lateral and regional trade agreements
have led to a rapid growth in this field. In the Asian region Japan is the largest food
processing market, but India as well as China are likely to grow at a faster rate.
The processed food industry is strong in Japan and South Korea, as they are the
leading meat importing countries in the world and consumption of meat is high in
these countries. The Australian processed food industry is one of the most
technically advanced in the world as it produces products of international standards
at comparatively lower prices. The U.S. continues to live up to its reputation as the
“breadbasket to the world”. More than one-third of U.S. Food and Beverage (F&B)
manufacturers look to foreign expansion to capture additional revenues. Countries
in the Sub-Sahara African region, Latin America and parts of Asia continue to be on
the lower-end of technology prowess in food items are inclined to their staple diets,
whereas, those in Europe, North America, and Japan are on the higher-end of
technology, with a sharper shift towards convenience and diet foods.

The growth in global F&B categories was recorded at 4 percent. Many of the large


global players primarily from developed countries are now targeting developing
countries in quest for new opportunities. Developing countries across the globe are
now set to account for most of the growth in future food demand. At the same
time, newer, emerging markets are showing signs of building infrastructure to
modernize their food distribution channels.

Changes in income patterns, demographics, and lifestyles have led to changing
eating habits, where consumers have begun purchasing fewer staples and more
high valued food items.

According to the AC Nielson “What's Hot Around the Globe in F&B 2006” Survey, 12
product categories showed growth rates of or above the overall average for Food &
Beverages, including baby food as the fastest growing product area and non-
alcoholic beverages as the one contributing the largest value growth amount.


The survey also revealed the following growth trends in various categories

These trends have created immense opportunities for both manufacturers and
retailers. There is a definitive need to acknowledge and address the consumer's
requirement for healthy and convenient products. Since consumers are willing to


purchase both private labels and branded products, global food markets have
become all the more competitive and are looking at expansion beyond their own
local boundaries.

Indian Processed Food Industry

India's agricultural sector, especially food processing and allied activities is going
through a major transformation driven by improving policy environment,
increasing public private participation and an increasing thrust on the improvement
of rural infrastructure. The government is targeting Four percent growth for the
agri-sector from 2005-20.
The revival of the agriculture sector is expected to open up a plethora of
opportunities for players having strong linkages in the agri value chain. The FPI is
expected to be one of the biggest beneficiaries of this whole process. Significant
investment opportunities are yet to be tapped in the areas of supply chain
management, cold storages, financing, retailing and exports. Historically, the
Agriculture and FPI have been plagued by factors such as low public investment,
poor infrastructure, inadequate credit availability and high levels of fragmentation.
However, in the last couple of years there have been significant improvements in
almost all the fronts.

The regulatory environment is changing for the better. Though the agri sector in


India is one of the highly regulated sectors, the government has been taking
selective steps to liberalize and create an encouraging investment climate. The
Agricultural Produce Marketing Committee (APMC) act that deals with the
functioning of agri-marketing activities within each state is being amended by
various states in order to allow greater private participation and help end users to
source raw materials or farm produce directly from the farmers. This will not only
infuse more efficiency in the system but will also allow increased participation from
corporates for contract farming and direct sourcing.


In order to achieve 4 percent plus growth in the agri-sector, the government has
been increasing investments in the areas of irrigation, storage and post-harvest
infrastructure and connectivity. Private participation is increasing across the various
segments of the agri-value chain. Corporates are increasingly focusing on areas of
contract farming, raw material sourcing and creating agri-linkages. Companies like
HLL, ITC, and Pepsi have taken a lead in terms of contract farming initiatives.
Contract farming by corporates would not only yield better prices to farmers but
also help them access superior farming techniques, better management and risk
mitigation methods.

Food Processing

According to industry estimates, the processed food market accounts for 32 percent
(EUR 21.8 billion) of the total food market which is valued at EUR 67.9 billion. India
is the world's second largest producer of food next to China, but accounts for only
1.6 percent of international food trade. The Government aims at increasing this
share to 3 percent in the next 8 years. This indicates vast potential for both
investors and exporters.

Though the Food Processing Industry (FPI)has been growing at an average rate of
7 percent, it has the potential to achieve double digit growth. F&V processing,
which is currently around 2 percent of total production is likely to increase to 10
percent by 2010 and further to 25 percent by 2025. Value-addition in food
products is expected to increase from the current 8 percent to 35 percent by the
end of 2025. Total exports of the FPI have jumped from EUR 4.7 billion in 2002-
03, to EUR 13.8 billion in 2006-07. The industry ranks fifth in size in the country,
representing over six percent of GDP. It accounts for around 13 percent of the
country's exports, 6 percent of total industrial investment, and approximately 12-
15 percent of manufacturing GDP.

With only 2.2 percent of processing levels for Fruit and Vegetable (F&V), 35
percent for milk, 21 percent for meat, 6 percent for poultry products and 38
percent for agri-produce, India's levels are significantly low compared to
international levels. Processing of agriculture produce is around 40 percent in
China, 30 percent in Thailand, 70 percent in Brazil, 78 percent in the Philippines
and 80 percent in Malaysia. India's consumption of processed food products is also
low, considering a population of 1.1 bn and a strong 350 million urban middle
class. However, this is expected to change significantly on account of increasing
urbanization, changing lifestyles and increasing income levels and the growth of
the organized retailing. Increasing Public-Private-Partnerships (PPP) and enabling
measures taken by the government will also boost the growth of this sector.


Though India's agricultural production base is reasonably strong, wastage of
agricultural produce is estimated at around EUR 9 bn. Value-addition to the
agricultural produce in India is just 20 percent, which could be increased by
leveraging on the country's huge raw material base and propelling exports.
Organized players remain at fringes of this market accounting for only a third of
the country's total agri-processed products.

The organized sector is relatively small, in comparison to the unorganized sector,
with around 516 flour mills, 568 fish processing units, 5,293 fruit and vegetable


processing units, 171 meat processing units and numerous dairy processing units
at the state and district levels. The share of the organized and unorganized sectors
varies across different segments of the industry.

Sector-wise Overview

The main product lines within the food processing sector include fruit and vegetable
processing, dairy processing, meat, poultry, marine processing, edible oil, alcoholic
beverages & non alcoholic beverages, grain processing and Ready-to-Eat (RTE),
and health and convenience foods. We have tried to high light India’s attractiveness
for business and the emerging business opportunities in the following sectors.

Dairy

India ranks first in the world in terms of milk production. At present, the dairy
sector has an estimated consumer demand for milk and milk products at EUR 26
billion, growing at about 8 percent per annum.
About 35 percent of milk produced in India is processed. The organized sector
(large scale dairy plants) processes about 13 million tons annually, while the
unorganized sector processes about 22 million tons per annum.

Chief products manufactured are infant milk food, malted food, condensed milk and
cheese. The southern and western regions collectively contribute for 80 percent of
the milk produced in India.

The rapid growth of the dairy-processing industry is likely to lead to a greater
demand for value-added, milk-based products, such as processed cheese, table


butter, sour milk, yoghurt and ice cream. A higher demand for branded and
probiotic milk has also led to a rise in investment for milk processing.
As per Dairy India 2007, by 2011 private dairies are slated to outpace the co-
operative sector and become the largest producers of milk in the industry. Private
dairies are likely to contribute double the quantity of milk that would be
contributed by co-operatives in 2011.

Sensing the big business opportunities in the dairy sector, with rising demand for
processed milk and milk products, many corporate are planning a foray into the
dairy business. For Example Indian and foreign companies like Reliance and Wal-
Mart have already made an entry into this business by signing deals with farmers
to procure seven lakh liters and 15 lakh liters of milk per day. Cola manufacturing
companies, PepsiCo and Coke are also, reportedly, planning to launch milk-based
health drinks. Yakult Danone plans to launch health drinks and yoghurts based on
probiotics bacteria. Amul has also forayed into the flavored yoghurt segment.

Growth Prospects for Dairy Processing:

 Industry profitability has been good and there is good potential for
introduction of new value added products and their exports

 Market for yoghurt in India is growing at 18 percent and that for sour milk
at 33 percent

 The manufacture of casein and lactose has good scope in the country; at
present these are generally imported

Meat, Poultry and Marine

The existing levels of processing for Meat, Poultry & Fish are low with majority of
the processed production dedicated to exports. The country has 3,600 slaughter
houses, nine modern abattoirs and 171 meat processing units licensed under the
Meat products order. A few modern pork processing plants are also coming up in
the country.

Meat

Indian buffalo meat is witnessing strong demand in international markets, due to
its lean character and near organic nature. India is the fifth largest exporter of
bovine meat in the world. Indian buffalo meat exports have the potential to grow
significantly and hence present an opportunity for exporters in the food processing
segment.


Poultry

Poultry meat is the fastest growing source of animal protein in India (Compounded
Annual Growth Rate (CAGR) 11 percent). India ranks among the top six egg
producing countries and ranks among the top five chicken countries. There are
limited numbers of integrated poultry processing plants in the organized sector,
though the small poultry processing units are in plenty. There are also a few egg
processing units engaged in exporting egg products.

The Government plans to set up a National Meat Board with the objective of
promoting the meat processing industry and overseeing aspects such as
Research and Development (R&D), quality assurance and hygiene. The


Government also plans to set-up about 100 slaughter houses through PPP.

As per CMIE's CapEx survey, for the quarter ended June 2007, the total
outstanding investment in the poultry and meat segment stood at EUR 177
million spanning across 12 projects. Poultry projects account for the majority (96
percent) of the investments taking place in the industry. The highest investment
of EUR 106.6 mn was in the egg market by Toubro InfoTech and Industries.

Marine

With its long coast line of over 8000 km, 50600 sq. km of continental shelf area
and 2.2 million sq. km. of exclusive economic zones, India is endowed with rich
fishery resources. It is the largest producer of fish and the second largest producer
of inland fish.

The Government plans to increase its share of marine exports by focusing on non-
traditional export markets such as Japan and China. The Marine Products Export
Development Authority has envisioned that the share of value-added products such
as frozen fins and squid and cuttlefish in the export portfolio be augmented from 5
percent to 75 percent over the next five years. Total marine exports have been
targeted at EUR 2.82 bn in the next five years.


As per the CMIE Capex survey for the quarter ended June 2007, the total
outstanding investment in marine products industry stood at EUR 76.13 mn
spread over twelve projects.


Growth Prospects for Meat, Poultry and Marine Processing

 Large potential for setting up modern slaughter facilities and development of
cold chains in the meat and poultry processing sector

 Buffalo meat is surplus in the country and has good export potential

 Poultry production and egg processing industries have come up in the
country in a big way and are exporting egg powder, frozen egg yolk,
albumin powder to Europe, Japan and other countries

 As per market estimates, poultry meat is likely to grow at a CAGR of 11
percent

 Key export products are: shrimp, lobster, cattle fish, clams and fish fillets

 The Government plans to reduce dependence on frozen shrimps and focus on
higher exports on value added marine products (Currently, frozen shrimps
account for 55 percent of total marine exports)

Fruits and Vegetables

India is the second largest producer of Fruits & Vegetables (F&V) in the world10 (82
mn tons- 10.9 percent of global production and 47 mn tons - 8.4 percent of global
production respectively).

The prominent processed items are fruit pulps and juices, fruit based ready-to-
serve beverages, canned F&V, jams, squashes, pickles, chutneys and dehydrated
vegetables. The fruit and vegetable processing industry in India is highly
decentralized. A large number of units are in the cottage/home scale and small
scale sector, having small capacities up to 250 tons/annum. But big Indian and
multinational companies in the sector have large capacities in the range of 30 tons
per hour or more.


 Fresh F&V exports have demonstrated a CAGR of 13 percent in value
terms over the last four years11

 Large organized players like ITC, Bharti Field Fresh, Mahindra Shubhlabh
have entered into this segment recently, spotting the high potential

 Total volumes of “frozen” F&V ~ 8,000 MT

Growth Prospects in Fruit and Vegetable Processing

 Abundant investment opportunities in expanding domestic market and
exports

 Changes in export-import policies and exchange rate adjustments to help in


improving export potential

 Considerable international demand for certain fresh fruits as well as
processed fruit products such as: mango, grapes, bananas, litchis and
exotic fruits like sapotas, pomegranates, custard apples and other tropical
fruits

 Among vegetables, the items having good export potential are: onion,
potato, okra, bitter gourd, green chilli and other seasonal vegetables.
Many non-traditional vegetables mainly processed mushrooms and
gherkins, and others like: asparagus, celery, bell pepper, sweet corn,
green and lima beans and organically grown vegetables are also
increasingly being exported

The sauces/ketchups segment is expected to record 17 percent growth in 2007-08

Bakery Products

India is ranked among the top ten producers of all major grains. It is one of the
major producers of paddy, wheat, maize, barley and millets (great millet, pearl
millet and finger millet).

The Bakery industry consists of products ranging from biscuits, bread, cakes, rusk,
buns, breakfast cereals and other edible items with key raw materials such as
wheat flour or other grains, sugar, edible oils etc. The two major segments viz.,
bread and biscuit account for about 82 percent of the total bakery products. The
organized sector has a market share of 45 percent and the balance 55 percent is
with the unorganized sector. With rising demand and entry of big companies like


ITC, competition has heated up in this segment. The bakery industry has been
reporting brisk growth and is likely to continue the trend in the future with growing
demand for low-fat products like healthy snacks, low-sugar biscuits, fat-free cakes
etc.

Increasing health consciousness and changing consumer preferences in favour of
packaged bakery products is growing. These trends are expected to continue in the
future. A case in point, Atta which was traditionally milled at local mills, now is a
branded product which is available at affordable prices. Also, the demand for
products like Maida (one of the milled grain products) has found its new value
added use in noodles, vermicelli, macaroni and pasta.

The Breakfast cereals segment is estimated to grow at a CAGR of seven percent
with projected sales expected to reach EUR 35 million in 2010. The immense
growth potential for breakfast cereals stems from the vast untapped demand and
high scope of penetration for these offerings in the affluent urban areas. In addition
to this, there is a potential to upgrade existing consumers from basic product types
such as flakes to more value-added offerings such as muesli, hot cereals, and other
Ready-to-Eat (RTE) cereals. The expected foray of new local and international
players, tied with the on-going retail boom, is also expected to spur higher sales of
breakfast cereals.
For the quarter ended June 2007, investments in the bakery and milling sector
rose by 30.4 percent year-on year to EUR 196.3 mn spread over 39 projects.


Growth Prospects in Bakery

 The bakery segment is expected to record robust growth between 10-20
percent in 2007-0814

 In 2007-08, branded flour (Atta) is likely to grow at 16 percent, bakery
items like bread, cakes at 11 percent, and biscuits at 16 percent
respectively14

 With rising popularity of branded rice and flour among urban population,
the investment scope in this field has increased

 Surge in exports of Indian basmati and non- basmati rice backed by rising
international demand

Confectionery

The Indian confectionery industry can be segmented into sugar-boiled
confectionery, chocolates, mints and chewing gums. The confectionery market is
highly fragmented with players having a strong regional presence. The annual per
capita consumption of branded confectionery in India is estimated to be under 100
gms. The chocolate market in India is dominated by two major players, Cadbury
India Ltd and Nestle India Ltd, which together account for about 90 percent of the
total chocolate market.15

The total market for sugar boiled confectionery (comprising plain/hard boiled
candies, toffees, eclairs and gums) is estimated at EUR 1.15 bn of which the


organised sector is around EUR 460 mn.

Growth Prospects in Confectionery

 Market is estimated to grow at a CAGR of five percent with projected sales
expected to reach EUR 691 million in 2010

 The western concept of pick 'n' mix sugar confectionery is expected to gain
ground in India over the forecast period, and may bring other Western
confectionery specialists in their wake

 Sugar-free confectionery will dominate adult confectionery sales in the
future

Fruit Juices (Non-carbonated)

Convenience and natural taste together with health-consciousness has played an
important role in the growth of packaged fruit juices. The fruit drink market has
grown at 20 - 25 percent, of this, the exotic fruit juices segment has grown at 40
percent this year. Fruit-based milk drinks and fruit-based soya milk is another
emerging segment is valued at around EUR 2.7 - EUR 3.5 million and expected to
grow rapidly.

Cola sales have fallen dramatically after health concerns and this seems to have
benefitted the fruit beverage industry. Tetra Packs have offered a solution to
provide fruit juice practically fresh and preservative free. These factors have
resulted in an increased consumption of juices. Industry estimates state a 25
percent compounded annual growth in the juices segment between 2007-2010.


Tea

Tea is indigenous to India and is an area where the country can take a lot of
pride being the largest producer in the world. In all aspects of tea production,
consumption and export, India has emerged to be among the world leaders,
mainly because it accounts for 31 percent of global production. Indian tea
production has grown at 1.2 percent CAGR over the last ten years. Tea is an
essential item of domestic consumption and is a major beverage in India.
Domestic demand for tea has grown at over 4 percent in the last three decades.
The tea Industry provides gainful direct employment to more than a million
workers mainly drawn from the backward and socially weaker section of the
society. It is also a substantial foreign exchange earner.
Due to the highly competitive nature of the market, brand differentiation emerges
as the most important factor. Value addition strategies include: introduction of new
variants in the form of special blends (ice tea, flavored tea, diet tea, herbal tea,
organic tea, ready-to-drink tea in liquid and granulated form) and new packaging
techniques that help preserve freshness, aroma and increase convenience. The U.K.
and the U.S. have shown an increasing preference for instant ice tea and
companies such as Tata Tea and HLL have been able to access this market.

Tea is primarily produced in four states in India Assam, West Bengal, Tamil Nadu
and Kerala. Tea is either sold in loose or packaged form in the domestic and export
markets. India is the fourth largest tea exporter in the world. Key destinations for
exports include the Russian Federation, the UAE, Iraq, the U.K., and Kazakhstan.
India mainly exports bulk and packaged tea comprising instant tea, packet tea and
tea bags.

India's packaged tea market has around 300 brands, with some brands having a


regional presence, and others enjoying national presence.

Coffee

India is the sixth largest producer and exporter of coffee in the world. About 72
percent of coffee production is exported. (4 percent of total global coffee exports),
leaving the balance for domestic consumption. Italy is the largest export destination
for Indian coffee, accounting for 25 percent of total exports. Germany is the
second-largest destination, followed by the Russian Federation, Belgium and Spain.
India is one of the few countries that produce both the Arabica and Robusta
varieties of coffee.21

The industry can be segmented into filter coffee and instant coffee. Among all the
beverages consumed in India, coffee ranks third, after tea and plain milk.

In India, HLL manufactures only mixed instant coffee. Nestle is the market leader in
instant coffee, with a 59.3 percent share in the instant coffee market, followed by
HLL which accounts for nearly 40.7 percent. In the filter coffee segment, HLL is the
market leader accounting for 60 percent of the market share with its Deluxe Green
Label Brand. Tata Coffee Ltd (TCL) is the second largest with a share of 12 percent.
The share of regional players in the coffee segment is very low.

Growth Prospects in Non-alcoholic Beverages

 Flavoured tea, diet drinks and fresh natural juices are likely to dominate the
future of the beverage industry

 Fruit juices, pulp and concentrates are likely to register 18 percent growth
in 2007-08

 Potential to export innovative flavors of tea

Ready-to-eat

The Ready-to-eat industry is estimated to be around EUR 92.5 mn, growing at 30
percent. This can be attributed largely to the demand from global Indians, Non
Resident Indians (NRIs) and others looking for convenient food, (almost) authentic
dishes and entrée on the go. The industry is estimated to cross EUR 277.5 mn by
2010. This demand for ready-to-eat meals has captured a large amount of the food
retail market in India and around the world. Another reason for this boom is the


use of new technology and ensured sterilization which has helped reduce prices
and increase shelf life without the need for refrigeration.

Organic Food

In large parts of the world today, consumers are averse to Genetically Modified
(GM) foods and chemical additives, and are gravitating towards organic/bio-foods.
Organic foods are a EUR 25 bn market growing at 8-10 percent annually, this is an
exciting opportunity for India across key segments.

Organic Foods include almost everything that is used in the kitchen from fruits,
vegetables, pulses, cereals, bread, and sweeteners such as honey, brown sugar
and raw sugar to all cereals, pulses, flours and spices, bakery and dairy products,
typically sourced from farmers practicing organic farming, free from conventional
chemical systems of farming using artificial fertilizers and pesticides.

By default, a majority of the farming in India is organic with minimal use of agri-
chemicals and GM seeds. India's export of organic produce is quite low;
however, the entry of larger and more organized companies is likely to give a
boost to the industry.

Diet Snacks

Diet snacks are another segment which is gaining vast popularity with improving
standards of living and increasing health-consciousness. While the market for low-
calorie foods is small in developing countries, India already ranks among the top 10
consumers of diet foods. The market size is expected to nearly double in the next
five years. Total sales in this category are estimated to have grown by 3.8 percent
in value in 2006. The current market size of the sweetener category, is close to
EUR 12.4 million, and is growing at about 15 percent per annum. In recent times,
the positioning of these products has also changed, with the target

Audience no longer being diabetics, but healthy people for whom sweeteners are
preventive products

Growth Prospects in Packaged Goods

 The convenience foods segment offers the greatest potential

 The ready-to-eat segment is estimated to record 22 percent growth in
2007-08


 Exports of soya based products like: soya meal, deoiled cake and other
value added products are increasing at a rapid pace

 Technological revolution in processing and packing of food products, coupled
with fast growing inland and export markets presents an excellent potential
for further investment in this sector


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