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India gaining infuence in rice market

A view inside Dunar Food’s hygienic plant in Haryana state just north of New Delhi.

After China, India is the number two rice-producing and consuming nation. Record crops the last two years means total annual supply of 108 million rice equivalent is much in excess of domestic demand. Government planners are less concerned now with how to maintain an adequate emergency reserve in case of consecutive failures of the annual monsoon rains than with how to store and dispose of the burgeoning surplus.

Dunar Foods large mill near Karnal, Haryana state, India — one of three in different states — sits among wheat fields that will be replanted with rice during the summer monsoon season. Photos courtesy of David McKee.

One belated response has been the removal in September 2011 of the export ban on non-basmati rice. According to an IGC report, currently India is on track to increase overall exports 6.1 million tonnes this marketing year, up 50% from 4.1 tonnes last year.

If the trend continues, which seems likely given the high level of stocks and continued production increases, India could soon become the world's leading supplier of rice to world markets, overtaking second-ranked Vietnam and usurping Thailand from the number one position that it has held for decades. Rice millers and exporters in all corners of India have been gearing up production to take advantage of the new external market openings. Vijay Setia, president of the All-India Rice Exporters Association, estimates that there are 1,000 rice millers producing for export. The majority of mills may sell through traders and brokers. But the largest exporters are the biggest rice millers. Those that receive major foreign orders often subcontract production to numerous small neighboring mills.

Suresh Sundaresan, executive director of the same association, estimates that as much as 16% of the current crop could be available for export even while ensuring buffer stock norms of 33% of annual use. But the government must be flexible in reducing its minimum export price to speed the outward flow, he says.

A view inside Dunar Food’s hygienic plant in Haryana state just north of New Delhi.

A view inside Dunar Food’s hygienic plant in Haryana state just north of New Delhi.

India's rice exports cover the entire spectrum of varieties, processing and quality grades, from high-priced, store-branded basmati varieties, both parboiled and raw, for wealthy markets like the Gulf countries of the Middle East, North America and Europe, to certain grades of broken rice for West African countries, to common varieties of raw rice for government food organizations like Bulog in Indonesia.

Rice Mosaic

This  diversity  is  a  reflection of the variegated picture of rice production and milling in India. The major differences are between north and south. The biggest surpluses are produced in Punjab and Haryana in the shadow of the Himalayas, where the superb irrigation infrastructure, sophisticated commercial farmers, and high government prices combine to make rice a mono-culture during the Kharif season from April to autumn when it alternates with the other mono-culture, wheat, in the dry Rabi season.

Haryana and Punjab produce an annual crop of around 15 million tonnes. Nearly all of it is marketable surplus as the people of the region traditionally consume just a few meals of rice per week. The Food Corporation (FCI), a federal agency that operates the central grain pool, takes the bulk of the surplus.

FCI pays the Minimum Support Price to farmers for common varieties purchased by a number of state level organizations from the mandi system of agricultural markets. The paddy is delivered to rice mills, about 700 in Haryana and 3,300 in Punjab, on a quota system during the harvest in September.

The mills are expected to complete milling of the rice by March 31 for delivery to government warehouses and eventual shipment  to  rice deficit states, mainly in the south.

Nine out of 10 rice mills in both states are doing only custom milling for the government and have an average capacity of less than 2 tonnes per hour. Only 300 of Punjab's rice millers buy their own paddy to produce for the open market in addition to government business. Just a handful of the largest millers completely forgo custom milling for the government.

One state where rice milling has become relatively consolidated is Andhra Pradesh in the south, where just 600 mills produce over 14 million tonnes, the second most of any Indian state after 15 million tonnes in West Bengal. The government's share of the market is less important there, so fewer small mills are surviving only through custom milling for the state. To suit local tastes almost all rice is parboiled, a more capital intensive process. Both of these factors may help to explain why clusters of bigger milling enterprises have developed in major production zones.

Basmati Rice

A new sector of large modern automated rice mills has emerged in the north that have based their growth on the surging demand for higher-value, attractively packaged, specialty varieties both in export markets and domestically.

Dinesh Chhatra, general manager who heads up Adani Wilmar's recent entry into branded rice sales, estimates that half the rice milling in the two northern states occurs in relatively large-scale enterprises processing 24 tonnes of paddy (rough) rice per hour and more. In the southern states, where rice is the most important staple, he says just 10% of all rice is milled in larger mills.

Some rice milling plants in Haryana and Punjab now count among the largest in the world with hourly processing capacity of 100 to 200 tonnes. They have sophisticated milling technology and other processes to extract maximum value by producing an array of high-value byproducts such as rice germ and rice bran oil.

LT Foods, KRBL, REI Agri, Kohinoor Foods and Lakshmi Food and Energy all rank among the largest rice processors and exporters. The key to growth of most of these is exportation of several varieties of tne long-grained, aromatic basmati rice to dozens of countries in all regions of the world.

Dunar Basmati rice packaging

Sophisticated packaging is one aspect of marketing strategies for Middle Eastern countries that take a big share of India’s high value basmati exports.

Sundaresen said that in a rare show of cooperation, last year India and Pakistan settled their long-standing dispute over the use of the name "basmati," agreeing to a common geographical index for certain varieties grown in a contiguous region of the Indian subcontinent.

India has traditionally exported nearly all of the basmati it produces, simply because it commands such high prices on international markets. Few Indian consumers were willing pay for basmati multiple times the cost of the common varieties they were accustomed to since childhood. But now basmati rice and branded rice in general have seen a tremendous surge in domestic consumption thanks to higher incomes accompanying economic growth.

KRBL Ltd. is one major rice miller that has exploited this trend. Anil Mittal, chairman and managing director of the company, reports that 85% to 90% of production at his 130-tonne-per-hour plant is basmati rice, but that his sales are split evenly between the international and domestic markets where KRBL has built one of the country's leading rice brands, India Gate, which Mittal says may be extended to rice bran oil and even whole wheat flour for chapattis.

"In 1998, only 10 percent of rice sales in India were branded, and 90 percent were unbranded," Mittal stated in a recent interview. "Now 65 to 70 percent are branded, and  in five years  rice will be 90 percent branded."

Government  Rice

This branding trend applies mainly to the 4 million tonnes of basmati rice and additional 10 million tonnes of specialty varieties that were produced last year, according to Mittal, and excludes the 30 to 32 million tonnes of rice that is purchased annually by FCI for the central pool as well as rice self-consumed by farmers.

Without government procurement, it is clear that many of India's rice milling enterprises, whose number Mittal puts at 45,000, would go out of business.

The Government of India announces an MSP every year to be paid to farmers. The price is sufficient to bolster farmers' incomes guaranteeing that enough rice is grown to ensure food security. The central pool also furnishes the bulk of the heavily subsidized common varieties that are provided as either raw rice or parboiled rice to the 25% of families in most Indian states that hold ration cards under the Public Distribution System.

The FCI procures rice at 18 rupees ($0.38) per kg but sells it to the state governments for just six rupees per kg. The states, at their own discretion, may increase the subsidy from their own budgets. Often this happens prior to elections. In the southern state of Tamil Nadu, every ration card-holding family is now entitled monthly to 35 kg of rice for free versus a previous price of one rupee per kg.

Government subsidized rice is invariably poor quality and so a high percentage of beneficiaries, many of whom are no longer truly poor, do not bother to go to Fair Price Shops to get their rice. This opens the door to leakages from the official channels. One academic study published last year by Reetika Khera of the Indian Institute of Technology in Delhi concluded that over 40% of food grains, including rice, is illegally diverted from state run public distribution systems to open market sales. But the study also determined  this figure  is actually down about 10% from several years before.

Given the low cost and the increasing quantities being pushed through the system to reduce stockpiles, it is not surprising that there is much anecdotal evidence about old, poor quality government rice being fed to chickens by rural ration card holders or by commercial poultry farms that have purchased it on the black market.

Food security

There is little doubt that India has abundant non-basmati rice for itself and others. The challenge is for the soon-to-be top rice exporting nation to live up to its responsibility for global food security by not repeatedly closing the door on exports each time international prices suddenly spike.

At the same time, the government could do more to increase world rice stocks simply by building more and better storage, a process that is well under way.

Finally, a reduction of the state's role in the sector would allow extra room for well-run rice milling companies to create greater value in Indian agribusiness.

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Lifting the screen on Indian milling

Industry expanding despite government controls and challenging business environment

The owners of roller flour mills in India like to describe their country’s wheat industry in sweeping terms:
• an annual harvest that has reached a record level of 88 million tonnes;
• about one-third of the crop each used by farmers, bought by traders or by the government;
• more than 1,200 roller milling companies grinding from 15 to 18 million tonnes of wheat per year into refined flour
called “maida” and other products;
• several million tonnes of branded packaged stone ground whole wheat flour or “atta”; and
• most importantly, 40 to 45 million tonnes of atta still ground on a job-work basis in villages, towns and even in large cities by small electric or diesel driven stone mills, known as chakkis.

The 100-tonne-per-day flour mill of Gillco Agro Pvt. Ltd. stands among irrigated wheat fields near Ludhiana, Punjab. Photos courtesy of David McKee.

Such broad brush strokes, however, conceal the enormous complexity of India’s grain value chain. Wheat production and consumption vary tremendously from region to region. Differing tax regimes on wheat purchasing and wheat product sales give artificial advantages to millers in some states and put those in others at a huge disadvantage. Government procurement of wheat for the “central pool” in surplus states and movement to deficit states for heavily subsidized distribution to the poor under an array of state level welfare schemes results in massive distortion of markets and creates incentives for illegal behavior at all levels of the supply chain, as does a highly regulated agricultural marketing system for wheat that protects unneeded intermediaries, reduces the efficiency of supply, raises costs through extra fees and taxes and prevents millers from procuring directly from nearby farmers.

The central government periodically reduces excess stocks through release for export or forcing poor quality wheat on to the domestic market while preventing importation of high quality wheat by millers. When the monsoons fail, the government may import wheat itself.

Expansion

Despite the heavy-handed role of the government and challenging business environment, the roller milling industry, which is entirely privately owned, has been steadily expanding during the last two decades of economic liberalization and rapid GDP growth in India. Millers estimate that refined flour consumption has been increasing at the rate of 7% to 8% per year against an average population increase of 2%. Leading equipment suppliers estimate there are 20 to 30 new roller mill plants being built every year.

The total number of roller mill stands installed may be as many as 15,000 to 20,000, estimates Manesh Lokin, a milling industry consultant, meaning average mill capacity of 100 to 150 tonnes per day. Many of the new milling plants being built or on order are as large as 300 tonnes per day, placing them among the biggest in the country.

This expansion notwithstanding, the roller milling industry remains fragmented with national milling groups having failed to emerge. Only a handful of companies have multiple milling plants and usually they are clustered in one region of a state.

On the other hand, by some estimates up to three quarters of India’s roller milling companies’ owners may have close or distant family ties. They are mostly members of the same Mawaris community of wealthy merchants, one branch of whom made their profession the construction and operation of industrial flour mills throughout the country. Brothers, cousins, nephews and uncles often cooperate to found mills in the same state or even district, or move onto new states where they perceive market opportunities. But their companies remain separate entities.

Indian roller millers traditionally produce a different product range than their counterparts in other countries. Only 55% of refined flour may be extracted for bread and biscuits. Millers also separate out fractions of fine semolina called “sooji” and used for pasta, and coarse semolina called “rawa” for traditional sweet foods like halwa, in addition to 10% atta, and finally 20% bran.

Chakki atta

For the last 10 years, roller mill owners have been increasingly targeting the market for packaged branded atta. Traditionally, Indian families store wheat at home and take 10 to 15 kilograms (kg) at a time to chakkis for custom milling. In large cities, this practice has been slowly dying out as busy lifestyles and dual income families cause many to opt for packaged atta from shops and supermarkets. In the largest cities, only 10% to 30% of families still take wheat to chakkis. Often they are the more well-off ones, with domestic help available to perform this task.

Depending on the state, a quarter to three quarters of roller milling companies have also installed lines of mostly Indian-style horizontal stone mills in order to produce their own brands of atta in all package sizes. The mills make use of the cleaning sections and bagging lines of their roller mills.

Indian consumers prefer chakki atta over roller mill atta for its taste and texture. It is commonly thought that stone grinding breaks the starch sufficiently to release extra sweetness while burning it slightly to give added flavor to chapatis (flat bread cooked on a griddle) and nan (flat oven bread).

Some of the most successful roller milling companies are contracted copackers of chakki atta for the handful of national brands. By far, the leader in this segment is the domestic consumer goods giant ITC, whose Aashirvaad brand sells 100,000 tonnes per month.

Multinationals General Mills and Hindustan Unilever have also targeted this segment for over a decade with their Pillsbury and Annapurna brands, respectively. Besieged by local lowprice competitors unburdened by either the high overhead costs or heavy advertising budgets, both companies have retrenched. None of these market leaders own their own chakki mills, relying instead on the larger flour milling companies who invest in lines of large diameter horizontal stone mills to supply them. According to C.S. Saboo, managing director of Sunstone Engineering Industries, a major manufacturer of stone mills, there are over 50 roller milling companies that also dispose of production lines of 15 to 25 stone mills.

The historic Century Flour Mills Ltd., established in 1955 in Chennai in the southern Indian state of Tamil Nadu, still operates at a capacity of nearly 150 tonnes per day roller milling and another 100 tonnes per day stone milling.

Overall growth in the commercial whole wheat atta segment has been driven by the entry of hundreds of new players. As most urban and many rural consumers switch to ready-made atta, new local commercial stone milling enterprises have sprung up, particularly in the areas of heavy wheat production and consumption, resulting in fierce price competition.

Barriers to entry are minimal. Just a handful of stone mills are sufficient to start up a commercial atta mill, preferably with a cleaning section and bagging and packaging lines. Wheat can be purchased by the truckload from traders at mandis or at a discount if it is illegally diverted from government distribution channels. A brand with colorful 5-kg, 10-kg or 25-kg packaging can be created easily. These small local companies produce a fresh product tailored to local preferences. Their packaged atta can be marketed directly to wholesalers and brokers who supply retail shops.

Just in the 200-km corridor between Mumbai and Pune, Saboo estimates there have been 50 new commercial chakki millers started up in recent years to supply the two largest cities in Maharashtra state.

Fortified atta

A phenomenon that has also stimulated commercial atta production has been policy changes in several states to distribute subsidized vitamin- and mineral-fortified atta to ration card holders under their Public Distribution Systems, instead of bagged wheat which beneficiaries would normally take to local chakkis for custom milling but which is often illegally “leaked out” of distribution channels.

Both roller milling companies with or without chakki production and the new chakki atta companies have been able to qualify for production quotas under these fortified atta schemes, whereby they receive wheat for fee-based milling into fortified atta.

For example, in Rajasthan, where daily per capita wheat consumption of close to  300 grams is the highest of any state, the largest program for fortified atta now operates. Some 120 mills, including 70 roller milling companies, are officially grinding about 95,000 tonnes of atta monthly for distribution in 10-kg packages to most of 14.4 million ration card-holding families in all categories through a network of 25,000 Fair Price Shops. Production for government welfare schemes is the only business being done by up to onethird of the enterprises involved.

Wheat purchasing

Further complicating the life of roller mill owners is the heavy involvement of both the central and state governments in wheat purchasing. Thanks to a highly developed irrigation infrastructure fed reliably by the Himalaya snowpack, the wealthy and highly mechanized farmers of Punjab and Haryana states in the north produce a combined annual wheat surplus of about 18 million tonnes, nearly all of which Food Corporation of India purchases at the central government Minimum Support Price (MSP) through a comprehensive network of agricultural trading centers (mandis). A farmer rarely has more than 10-km distance to go to sell his crop.

From its location in the heart of the city, Century Flour Mills still delivers much of its refined flour in jute bags according to the preferences of Chennai’s baking industry.

However, millers in the two states, who must pay MSP for wheat, face low price competition from neighboring Uttar Pradesh, where traders and small farmers sell wheat at well below the MSP, since the government wheat purchasing system is underdeveloped, with mandis often 50-km apart and farmers lacking means of transporting their grain.

The result is that millers in the Punjab and Haryana may run at a fraction of their capacity even as wheat flour arrives from Uttar Pradesh and huge amounts of wheat are poorly stored for up to four years by FCI all around them.

Haryana millers have also lost the New Delhi market due to state taxes on their wheat purchases and wheat flour production not faced by Uttar Pradesh millers.

Uttar Pradesh, which occupies most of the Ganges Plain, has the largest number of roller mills of any Indian state at around 200 enterprises, according the Roller Flour Mills Federation of India. New mills are being built every year. Wheat production is increasing as the state has experienced a delayed Green Revolution.

Despite the state’s population of 200 million, millers are able to export more and more surplus flour to other states, thanks in part to lower wheat prices due to the inability of the government to enforce the MSP.

Neighboring Bihar, India’s poorest state, is also experiencing a boom in its wheat industry, with yields rising and new mill construction doubling the number over the last five years, stimulated by a state government subsidy of 30% of the investment cost. Conversely, to the south, the state of Jharkand has seen a halving in the number of mills since it separated from Bihar in 2000. This is mainly due to a tax on wheat and wheat products, which is not collected in Bihar.

Millers in the states of southern India, where wheat is not grown, have traditionally relied on FCI for much of their wheat supply, since that agency’s mandate is to move wheat from surplus to deficit states. In Tamil Nadu, however, supply from FCI in recent years has become less reliable.

Consequently, many of the mills have shut down because they lacked the financial resources to buy whole trainloads of wheat from the north or import wheat from Australia and elsewhere when it is allowed.

The number of operating millers has fallen from 54 to 33 in just four years, according to the Tamil Nadu Roller Flour Mills Association.

As India’s wheat production increases and wheat processing enterprises grow in number and size, one wonders how much more rapidly the industry might evolve in efficiency and scale if the invisible hand of the market had freer play in both the supply chain and distribution channels.

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