Investing in Hydroponic Agriculture
Investing in Hydroponic Agriculture
What does Hydroponic Agriculture mean?
Hydroponic agriculture is a method of growing plants without soil. Instead, it relies on a nutrient-rich water solution to provide essential minerals and elements directly to the plants' roots. The roots are usually supported by a substrate like coconut coir, perlite, or rock wool.
This method offers several advantages:
Water Efficiency: Hydroponic systems use significantly less water compared to traditional soil-based farming.
Higher Yield Per Acre: It's possible to grow crops vertically, allowing for higher yields in a smaller space.
Precise Nutrient Control: You can tailor the nutrient solution to meet the specific needs of different crops.
Year-Round Production: Hydroponics allows for year-round cultivation, reducing dependence on weather conditions. Higher sale price in for non seasonal produce
Pest and Disease Control: Soil-based pests and diseases are minimized, reducing the need for pesticides.
What are the regulations involved in Hydroponic Agriculture?
The investment is divided into 2 parts
- Full Asset Hydroponic Investment
- Fractional Investment in Hydroponic Agriculture
Full hydroponic agriculture is treated as a business investment, where the asset manager gets into a contract with you to service the asset and give you returns. Since there are no equities involved, does not come under purview of SEBI regulation
The fractional hydroponic is done through a LLP based ownership mode and is currently regulated by listing of your share on ROC, but SEBI regulations have not been made for these financial models. Will come under SEBI purview in the future
What are the risks with Hydroponic Agriculture?
While hydroponic agriculture has many benefits, it's not without its risks.There are two categories of risk associated with hydroponic agriculture listed below, we will subsequently deep dive into each of the categories
- Crop Failure Risk
- The Business & Infra Based Risk
Crop Failure Risk
Even though the chances are relatively small as compared to traditional farming, this also has risk of failure in case of natural calamities or diseases attack which could not be prevented on time
Business & Infra Based Risk
Since this is a business being run using an infrastructure, this creates the two levels of risk for any investor. We will try to answer this with questions our investors have asked
- What if your Infra gets damaged: The Infrastructure collapses or is damaged, in this scenario your investment is secured through insurance where the infra is secured at market rates. If investment is not there then you will lose the whole capital
- What if you can’t sell the produce: This is a very real risk where the produce can’t be sold owing to no demand/ no logistics to manage sale. It is important to keep these factors in mind for evaluating any hydroponic investment. Usually Mandis, Distributors, Exports and Large revenue contracts are the main channels to sell. Understand the split for any AMC. Over this the understanding of crop to demand should be kept in mind.
- What if you can’t get enough price for its produce: There can be a risk of the average price of sale going lower than average or no demand in case of exotic foods, leading to wastage and loss of capital deployed
Your returns are protected at three levels, gross profit stays at 50-60% and can cover for loss in average price. Second is revenue contract discussions in place to have binding agreements for future sale. Third is since there are more than one crop cycles, non seasonal produce prices will prevent average sale value going down substantially
- What if the asset management company is going bankrupt: In a case the AMC is going bust, will put the operations at risk and hence your returns. Its important to have iron clad agreements where the existing AMC will transfer AMC rights to a new asset manager and you keep owning the asset. Option to sale as well can be discussed in case such a scenario arises.
What are the things you need to keep in mind while evaluating the investment
Cost
Setting up a hydroponic system can be cost-intensive. You'll need to invest in infrastructure, lighting, pumps, and nutrient solutions. It is important to benchmark the costs being offered in the project with the market rates
Technical Expertise
Lack of experience is another key factor as this is a specialized technique in farming and requires technical know-how with constant improvement is key in managing a profitable project. It is important to evaluate the technical capability of the asset manager which will run the project
Crops being grown
Most common mistakes which lead to closures of farms are growing exotice produce for higher sale price. The low market size leads to wastage losses and are not covered by higher sale prices. The right fit between demand and supply for a particular crop should be asked.
Subsidies
Some State governments have subsidies for Hydroponic Farming, check with your investment partners to avail the subsidy and lowering initial investment
Location
The choice of location is critical. You need access to a stable power supply and a water source. Additionally, proximity to potential markets can reduce transportation costs and improve the freshness of your produce.
Financial Analysis
Analyze the potential return on investment (ROI) and the costs associated with your hydroponic venture. While the initial setup costs can be high, consider the long-term financial benefits, such as reduced water and land use, and higher crop yields.
Conclusion
Hydroponic agriculture in India is an exciting and innovative approach to address the challenges of traditional farming. While it offers numerous advantages, it's essential to be aware of the risks and conduct thorough due diligence. With the right knowledge, planning, and resources, hydroponic agriculture can be a sustainable and profitable investment in the Indian agricultural landscape.
Before diving into hydroponic agriculture, conduct a thorough due diligence process. Ensure you are compliant with all local agricultural regulations and permits. If you're considering getting involved in this field, make sure you're well-prepared and committed to the learning curve that comes with this innovative farming technique. Hydroponics has the potential to transform the way we produce food in India, and those who embrace it with diligence and innovation may find themselves at the forefront of a burgeoning industry.
Happy farming!