IGI Logo

Farm profitability to be marginally higher for Kharif 2024-25

We interacted with various Farmer Produce Organizations (FPOs) and farmers across India to gauge the on-ground situation regarding crop conditions, yields, and farm profitability during the Kharif season in CY24. The key takeaways are: 

* The northern belt of India witnessed higher crop yields YoY as higher rainfall supported the production of paddy. The southern belt and Gujarat were key laggards as the heavy downpours resulted in floods and significant crop losses.

* Overall, the production is expected to improve, led by higher sowing (up 1.9% YoY and 1.1% above the normal average area) and above-normal monsoon season (~8% above normal levels).

* According to the First Advanced Estimate of the Ministry of Agriculture & Farmers' Welfare, overall production of food grains/oilseed (cumulatively accounted for ~84% of the total acreage in CY24) is expected to increase 6%/7% YoY, while that for other key crops, such as sugarcane/cotton, is expected to decline 3%/8% YoY.

* However, the declining crop prices (prices of key food grains and oil seeds have declined 3.2% YoY) have partially offset the benefits from higher production during the year. Nonetheless, the cost of cultivation has marginally declined ~1.3% during the Kharif season due to controlled inflation and a high base effect.

* Accordingly, we expect overall farm profitability to be marginally higher on pan India basis for the Kharif season 2024-25. Further, the higher reservoir levels (filled at ~86% of their total capacity v/s 70% in the previous year and the average of ~73% in the last 10 years) and higher sowing of Rabi crops (up 2% YoY as per the latest available data) promise a brighter outlook for the Rabi season.

Farm profitability to be better in North India; Southern belt and Gujarat adversely impacted by heavy rains

* The overall farm profitability is expected to be marginally better across the northern belt of India (major states include Bihar, Punjab, Madhya Pradesh, Uttar Pradesh, Haryana, and Rajasthan), led by a healthy monsoon season and relatively lower crop damages. However, extreme heavy showers in the latter part of the season affected yields in states such as Rajasthan (rainfall of ~140%/83% above the normal level in Aug/Sep’24) and Haryana (~29%/36% above the normal level).

* The southern belt of India is likely to witness a muted Kharif season as yields are expected to decline due to a heavy downpour and flooding in several regions. This, coupled with lower prices of key crops, is likely to result in muted to marginally lower farm profitability.

* Farm profitability in the western and eastern regions of India is expected to be a mixed bag, with Maharashtra and West Bengal witnessing a decent Kharif season. Farm profitability in Gujarat was hampered by abnormally high rainfall, which impacted crop yields in the state. Meanwhile, erratic rainfall and the effects of cyclone also reduced crop yields in Odisha.

* The overall farm profitability is expected to be marginally higher at the pan India level, with the northern belt performing relatively better than the southern belt, while the eastern and western belts were a mixed bag.

Higher sowing and above-normal monsoon (on pan India level) to lead to better output

* The total area sown in the CY24 Kharif season was slightly higher (up 1.9% YoY and 1.1% above the normal average area) at 110.9m hectares. Among the major crops, the area sown under arhar/groundnut witnessed the highest increase of 14%/9% YoY, while cotton witnessed the highest decline of 9%.

* According to IMD, rainfall during the CY24 monsoon season (from 1st Jun’24 to 30th Sep’24) stood at 935mm, 8% above normal rainfall levels of 869mm. However, it continues to be erratic (11% deficient in Jun’24 followed by 9%/15%/12% excess in Jul/Aug/Sep’24).

* At the sub-divisional level, 21 sub-divisions (covering 54% of the total area of India) experienced normal rainfall during the CY24 monsoon season, while 2/10/3 sub-divisions (covering 9%/26%/11% of the total area of India) experienced large excess/excess/deficient rainfall.

* According to the First Advance Estimate of Crop Production released by the Ministry of Agriculture & Farmers' Welfare for FY25, the production of Kharif food grains/oilseeds (cumulatively accounted for ~84% of the total acreage in CY24) is expected to increase 6%/7% YoY to ~165/26MMT.

* The increase in the production of food grains is supported by higher production of rice (up 6% YoY to ~120MMT) on account of the higher-than-normal rainfall during the current monsoon season.

* The sugarcane output is expected to decline 3% to ~440MMT in the current year, while cotton output is expected to decline 8% YoY to ~29.9m bales.

Lower crop prices partially offset higher production; lower cost of cultivation leads to marginally higher profitability

* Overall input cost is estimated to have marginally declined by ~1.3% YoY (refer to Exhibit 14) in the CY24 Kharif season (Jun-Sep’24) due to controlled inflation and a high base effect.

* Human labor costs account for ~51% of the total cost of cultivation (on average for key Kharif season crops). The same declined 1% YoY in the CY24 Kharif season. Apart from the cost of seeds and fodder (up ~4% YoY), other costs (including high-speed diesel, irrigation (electricity) charges, and insecticides) were largely flattish or down on a YoY basis.

* Prices (as of Dec’24) of key Kharif food grains and oilseeds such as rice, arhar, bajra, maize, soybean, and groundnut declined ~3.2% (refer to Exhibit 17) as compared to average harvest season prices of the previous year (Oct’23 to Jan’24, calculated on a weighted average basis of its estimated production). The Fair and Remunerative Price (FRP) of sugarcane rose 7.9% YoY to INR340 per quintal, while cotton prices grew ~3%.

* The production for Kharif season is expected to be higher on a YoY basis, driven by marginally better sowing and higher yields.

* Accordingly, lower crop prices will partially offset the benefits of higher production and lower cost of cultivation. We expect the farm profitability for key Kharif crops to be marginally higher

Higher reservoir levels reflect brighter Rabi outlook

* Across our interactions with FPOs, the common commentary across the country was about the positive outlook on the upcoming Rabi season.

* The optimism was driven by higher groundwater levels coupled with healthy reservoir levels across India on account of higher-than-normal rainfall during the current monsoon season.

* Reservoir levels as of mid Nov’24 stood at 153 Billion Cubic Meters (BCM). This is significantly higher than 124 BCM recorded at the same time previous year and its last 10-year average of 130 BCM.

* In CY24, reservoirs are filled to 86% of their total capacity (v/s 70% in CY23 and 73% in the last 10 years).

* Further, the sowing of Rabi crops is progressing healthily (up 2% YoY till the first week of Dec’24, as per the latest data available)

* Accordingly, although we believe that the Kharif season was a mixed bag, with varying conditions across the country, the upcoming Rabi season is likely to yield good production. Farm profitability is likely to depend on changes in crop prices and inflation in the cost of cultivation.

View

* The prices of key Kharif crops have declined, impacting overall farm profitability for the Kharif season. However, this was offset by better production and lower cultivation costs, resulting in largely muted farm profitability across India for the Kharif season.

* The outlook for the upcoming Rabi season remains encouraging, as rainfall at the pan India level was over 8% of normal levels in CY24 southwest monsoon season (v/s 6% below normal levels in CY23), leading to higher reservoir levels (up 8% YoY) as of mid Nov’24.

* In the Fertilizer space, we have a BUY rating on CRIN. In the Agrochemicals space, we have a BUY rating on PI and GOAGRO and a Neutral rating on UPLL.The outlook for the upcoming Rabi season remains encouraging, as rainfall at the pan India level was over 8% of normal levels in CY24 southwest monsoon season (v/s 6% below normal levels in CY23), leading to higher reservoir levels (up 8% YoY) as of mid Nov’24.

* In the Fertilizer space, we have a BUY rating on CRIN. In the Agrochemicals space, we have a BUY rating on PI and GOAGRO and a Neutral rating on UPLL.

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412