Only faster break-even will trigger India’s
warehousing revolution
(http://articles.economictimes.indiatimes.com/2012-04-26/news/31410337_1_warehouse-tonnes-service-providers) (07.10.2013)
When June rains hit northern India,
they will soak 2.5 million tonnes of wheat in burlap sacks lying in the open
with a tarpaulin for cover. Enough grain to feed all ration card-holders for
two months will start to rot. Owner Food Corporation of India
(FCI) says it has no place to store this wheat. But when the government is
willing to shovel several hundred crore in subsidy to build food bins, why is
no one queuing up? That’s because government itself beats them away. ET helps
you join the dots.
Though storage appears like a
gigantic problem, the solution is well within reach. India can already store
110 million tonnes of farm produce. Since 130 million tonnes comes for sale to
Indian markets, there is a gap of 20 million tonnes. By 2018, this gap will
widen to 35 million tonnes, says the Planning Commission.
That means building 3,500 warehouses – each enough to hold 10,000 tonnes – over
next five years. No impossible task for a country the size of India.
Even the land needed is not much. A
warehouse for 10,000 tonnes can easily fit in a football field, with room to
spare. Only 250 new silos are needed to store this year’s wheat left in the
open. The hitch lies elsewhere. Look at warehousing from an infrastructure
company’s or even a large commodity trading company’s perspective. Building one
warehouse on 3 acres in the north, for instance, means an average investment of
7 crore at current cost of land and construction.
To get a return on investment of 20%
in five years, the warehouse needs a monthly income of 14 lakh, or a rent of
140 per tonne per sq ft. Current rents are around 60-70 per tonne per sq ft.
Even if you add the tax breaks and subsidies given under various government
schemes, a new warehouse won’t break even for 10 years. Appreciation in land
value is rarely a valid argument for investment. Given high interest rates, no
company can afford to wait 10 years. Since the opportunity cost is steep, no
company wants to touch commercial warehousing.
The upshot of this corporate
disinterest is that only individuals with a handy plot or piles of unaccounted
cash are in a position to build warehouses. Their main expenditure is on
construction, which allows them to survive on current rentals. The advantage is
that this keeps storage costs low for customers. The downside is that
warehousing remains trapped in the unorganised sector.
The only companies in the field are
management service providers who keep an eye on stored produce. Their business
model is risk-free. They lease a warehouse and charge customers for storage
services. Their income is the arbitrage between warehouse lease cost and fee
from services.
Since customers in the commodity
business want low overheads, Indian warehouse management services are fairly
basic too. Service providers usually lease old godowns that come cheaper than
new constructions. Once the lease ends or customer flow dries, service
providers shift to another location. So, most service providers maintain the
same number of warehouses but keep changing locations to stay profitable.
Building warehouses is not on their agenda.
What is the solution? Clearly, the
business needs higher rentals and lease plans that make it profitable within
five years. This can only happen if FCI, which buys 50% of India’s wheat and
rice and leases maximum capacity of storage, starts paying higher rentals.
Instead of generous subsidy, if government offers generous hire terms, it would
trigger a construction frenzy by infrastructure companies. Other users can’t
afford to pay more than the FCI because FCI’s economic cost sets the floor price for wheat
and rice. Once FCI leads, others will follow.
In the next stage, state-run
companies, including FCI, that together own 60% of the warehouses, should hire
service providers to manage them. These service providers will eventually nudge
the market from flat rental per square foot to charging on the basis of value
of the crop stored so that they have incentive to offer performance guarantees.
We know intuitively that we can’t pay the same rent for storing gold and wheat
because the same percentage of physical loss in gold would hurt us more. It is
the same logic.