The Culture of Pump and Dump has to to stop | Interview with Jagadeesh Sunkad

Ever since I started writing about Agribusiness Matters, my blogs have opened doors to many insightful private conversations with veteran Agribusiness leaders across the globe. Over the past few weeks, I've begun my efforts to make my conversations public, with the fervent hope that we raise the bar of our discourse and facilitate honest and deeper conversation about agriculture and agribusiness matters to collaborate and transform the lives of farmers across the globe.

In my last article about Traceability and the Dharmasankata of Channel Management, I introduced the Indian concept of Dharmasankata - a decision making double-bind - faced by Agribusiness Leaders. I wrote:

"The dharmasankata - a decision making double-bind - an Agribusiness Leader investing on agri-input supply-chain "Traceability systems" faces is this:

"I am damned if I incorporate the data from Traceability systems in my business processes with the sole aim of protecting the Channel partner's best interests"

"I am damned if I incorporate the data from Traceability systems in my business processes with the sole aim of protecting the farmer's best interests"

What is the origin of this dharmasankata?

What is it about the nature of agri-inputs industry which brings this dharmasankata in having to choose between creating value for the farmer on one end, and creating value for the channel partner on the other end?

To explore these questions in greater depth, I have Jagadeesh Sunkad today, a veteran agribusiness leader with two decades of experience in Agriculture, and prior to that, a decade of experience in the market research industry.

"I studied electronics. I got into agriculture purely out of passion. Like many urbanites who say that , "I will retire and do agriculture", a day came when, two decades ago, I said, "if I truly believe in it, I shall begin today."

Jagadeesh's long and illustrious journey into agriculture began when he founded School of Agricultural Training and Research in Belgaum, where he worked a lot with farmers. To make the school sustainable, he facilitated contract farming, bringing corporates to work with farmers. He pioneered export of cut frozen vegetables from Belgaum and facilitated contract farming for vegetables, wheat, barley, red chillies, potatoes, breeder seed multiplication.

As he sums up his work,

"There is a disconnect in the communication between the industry and academia. Technical developments don't reach farmer. Bulk of the work I do is in connecting investors with scientists in agricultural space.

Jagadeesh brings a wealth of experience from the agri-input industry, with his efforts in commercialization of PUSA Hydrogel - semi-synthetic super absorbent polymer, developed by the Indian Agriculture Research Institute (IARI). Jagadeesh led this project at Carborundum Universal, when IARI licensed the technology to six Indian companies, including Murugappa Group’s Carborundum Universal India.

As he reflects back on that experience, he shares an insightful framework to make sense of the complexity in agri-input channel.

"I've had deep exposure to the agri-input industry, by virtue of trying to develop the market for an agricultural innovation. Through that, we learned very deep things about how the channel behaves.

Channel in their interaction with farmers, have an unsaid, but broad classification of agri-input products.

• Products that are Must Have
• Products that are Good to Have

Hybrid Seeds and Chemical Fertilizers such as Urea, Diammonium Phosphate (DAP) fall under Must Have category. Pesticides, Herbicides, Fungicides, Plant Growth Regulators belong to Good to Have category.

One small exception is the category of Weedicides, which is the single fastest growing category currently, because of the labour problems for weeds. I would put it under Must Have category

Farmers and Traders have a typical behaviour about Must Have products. From selling at thin margins to giving credit to promoting products in the market. Thanks to the way the industry is structured, Channel does not make too much money on Must Have products. As a thumb rule, I would state that 30% of dealers' business comes from Must have products; the rest from Good to Have products.

In the case of Must Have products like Chemical fertilizers, they do black marketing, where they indicate the premium as cost of credit. If a bag of Urea costs ? 500, and sold at ? 700/800, it should be technically called as Black Marketing. However, dealers are very clear that if the products are taken on credit, then farmers would have to bear the cost of credit. "

In a nutshell, as per this framework, farmer pays a higher cost of credit for Must Have products as compared to Good to Have products. Jagadeesh further elaborates on how farmers respond to this, based on this framework.

"I've seen this in Chilli and cash crops. How the farmer hedges this is simple: If the market price of the end produce is going to raise, he will buy more inputs and indulge in Good to Have products. If the market prices of the end produce are not likely to go up, like, in the case of tomato, then, he will stop short of the additional input that he needs to give on the farm.

This distinction becomes clearer in the case of micro-nutrients and organic fertilizers, which return carbon to the soil. Although one could technically classify them as Must Have, it is considered functionally as Good to Have by the farmers.

"He knows that the crop is stressed for some nutrient. He'll let the plant survive on water and whatever is there in the soil. That is his way of hedging his losses. "

If you contrast this response of the farmer with the dealer, it is where things get really interesting.

"A dealer is trying to push Good to Have products to the farmers, because his business thrives on that category. For Good to have products, the Channel insists that agri-input manufacturers provide fat margins, because he tells them, "I have a captive base of so many farmers, to which your product I know works and I can push it. But I am going to charge you for it."

What range of margins are we talking about?

"It varies depending on the company and the credibility of the product in the market. Typically, the dealer would not like to touch a product below 15% margin. They begin by asking for 40% and above"

I find this WHY about "Push" interesting. It concurs with what I wrote in my earlier article on "Channel and Truth About Agri-Input Marketing:

What influences the buying behaviour of Indian farmers, when it comes to agri-inputs? Is it the power of the channel or the power of the last-mile activity led field marketing?

Sure, the trade channel and the field marketing play a synchronous role in ensuring that the demand created by the marketing in the ground is fulfilled by the channel.But, if one were to pit one against the other, the answer is obvious.

Channel wins hands down.

But, what are the consequences of this practice?

"When a product is quite effective, provides significant margins, bad habits in the market creeps in. Very soon, a small network of dealers bring in spurious and fake products.

Sure, it gives a good margin. But, how does it affect their relationship with farmers?

The dealers are keen to have Good to Have products, because these products give them not only the cream of margin, but also a distinctive identity among the farmers' community.

In the engagement between the farmer and the dealer, they know that seed and chemical fertilizers are a must. There is not much of service to be offered by the trader and nothing much the farmer can also do about it.

If the farmer is given a tonic or a pesticide or pest management technique - it could be anywhere from a pheromone trap to any kind of bio-pesticide which has a benefit to my crop and my earning - the farmer starts showing more loyalty to the dealer.

How does this channel dynamic add up to the big picture?

Let us say, the product's MRP written on the bottle is ?. 500. The dealer indicates a discount of ?. 50 - 100, and tells the farmer "You are a good farmer and I am giving to you at this discount". But, he has actually got it at ?. 300. To the agri-input manufacturer, the product is worth ? 100, but through the dealer,distributor channel, it has been priced at the retail counter at ?. 300, and given to the farmer at ?. 450, saying that he got a ? 50 discount.

Frankly, a product worth ?. 100 ended up reaching to the farmer at ?. 450, which is actually a joke, really. No agri-input manufacturer who is in the Good to Have category is actually happy about the distribution channel.

Why is the Agri-Input manufacturer unhappy about the distribution channel?

Frankly, for all the Good to have products, the cost of the credit is held by the agri-input manufacturer. Invariably, they have given a fat margin and a long credit cycle to the channel.

I suppose we are talking of credit greater than 180 days?

Yes, and the channel rarely pays on time.

In that case, the commonly held notion, often evident in sector briefs about the agrochemical sector, that the credit period and the cost of credit is shared between the agrochemical companies and the distributor is not always true.

Yes, indeed, for the Good to have products. In the case of Must Have products, dealers have to pay money upfront in advance to book their allotment. They have borne the cost of credit, in that case.

In the case of Good to have products, the other credit which they claim, and do have merit in saying so, is the one that they have given out to farmers. Frankly, if you ask me, the kind of premium they charge for that, they should not be claiming that they have borne the risk of it.

This point about agri-input manufacturer bearing the cost of the credit is very interesting, because it helps us empathize with the trade-offs faced by agribusiness leaders while investing in traceability systems.

As I had written in my Traceability and Dharmasankata of Channel Management blog earlier,

Even though Traceability systems provide visibility, a good agribusiness leader will know the art of balancing the pulls of "Control" of Dealer/Distributor, based on the credit-terms offered to build relationship and maximize product visibility, with the pushes of "Visibility", to manage account receivables for working capital requirements.

Yes. This has to be resolved at a level where the culture of, what Pran said earlier, of "Pump and Dump " has to stop.

You see, so long as the culture and leadership in the agri-input companies says, "I am going to be rewarded for the market share I get or how successful I make the product", then the easiest tool to resort to is pump and dump."

What are the broad consequences of this practice for the industry? Our Coffee, Conversation and Agribusiness E:1 with Jagadeesh Sunkad continues....Stay tuned.

In other news, I will be talking about the Dharmasankata of Traceability Software Systems and showcase our neoInt platform and our work with agri-input firms at CII's Conference on Digital Agriculture in Chennai on 20th December 2018. I will be speaking in the session titled: "Digital Technologies for Pre-Harvest Management"

Do let me know if you would like to attend the event. I can put you in touch with CII folks

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