Gurugram-based agritech startup Origo Commodities which manages end-to-end agri commodity supply chain, has now ventured into introducing securised agri commodities to India’s capital markets
With this, institutional investors can invest in agriculture commodities in a manner similar to other financial instruments, but with the added security of being backed by physical commodities at the warehouse
Backed by Oikocredit, Triodos Investment Management, Caspian, responsAbility and IndusInd Bank, the company has managed to raise about INR 1.3 Bn in funding, a mix of both equity and debt financing
Even though India is one of the largest producers of agri commodities in the world, including rice, wheat, maize and cereals among others, the market is still struggling to address the severity of food insecurity caused due to the weak supply chain with multiple stakeholders handling the produce, resulting in huge losses, wastage and food shortage.
In a bid to eliminate these inefficiencies in the agri commodity supply chain, several large corporations such as Cargill, Reliance, Olam and ITC are building their capabilities, but it is the startups that are innovating faster and releasing new solutions to tackle the issues. A major area of development is warehousing management and making use of storage capacity to improve the financial efficiency in the supply chain.
For instance, Gurugram-based agritech startup Origo Commodities, which is into managing end-to-end agri commodity supply chain from procuring to warehouse management, quality analysis and trade financing, has now entered securitised agri commodities products, launching the investment instrument in India’s capital markets for institutional investors.
Leveraging blockchain technology, Origo is working on creating a seamless experience for its investors and clients to track transactions via TradeFi platform. Clients and investors can see the inventory, while vendors can check the positioning of the commodities, performance of monthly payments and transactions made with the banks and the clients on the blockchain platform in real-time.
With agri commodities stored in Origo warehouses being listed with the Securities and Exchanges Board of India (SEBI) and regulated by Warehousing Development and Regulatory Authority (WDRA), the startup is looking to allow investors to secure their investments via pass-through-certificates (PTC), rated A1 as per credit rating agency ICRA, which falls under the bracket of low risk asset class.
As on October 22, 2020, the WDRA has registered close to 1815 warehouses, and Origo has about 500 warehouses registered in the country. In March 2020, the authority also came up with a digital receipt called the e-Negotiable Warehouse Receipts (e-NWR) to ensure the authenticity of the warehouse owners. This, inevitably, paved a path for dematerialising the commodities, and the emergence of startups like Origo to foray into listing agri commodities into capital markets.
With this offering, institutional investors can now invest in agriculture commodities in a manner similar to other financial instruments like bonds, certificates, mutual funds etc, but with the added security of being backed by physical commodities, at Origo-managed warehouses, explained cofounder Sunoor Kaul.
At present, besides Origo, other companies involved in trade financing and warehouse management include National Bulk Holding Corporation and National Collateral Management Ltd. (NCML) and others
“There are many companies mushrooming in the space, but it will not succeed because buyers/sellers do not trust the quality of the commodities, plus the fact that the transactions are happening between unknown entities,” added Kaul.
How Agri Commodity Trading Works?
Explaining the use-case for Origo, Kaul gave the example of an FMCG company buying INR 100 Cr worth of rice for production in December 2021 i.e one year from now. Using the pass-through-certificates (PTC), with 20% of upfront security amount, it can not only secure commodities for future use at the current market price, but can also pledge these certificates at the bank or institutional investors for financing.
So far, Origo Commodities has managed to raise a mix of both equity and debt from domestic and international investors and NBFCs to run its operations. Its impact investors include Dutch-based financial institutions like Oikocredit, Triodos Investment Management and Hyderabad-based fund Caspian, alongside responsAbility and NBFCs like IndusInd Bank among others.
Founded in 2010, Origo Commodities was started by Kaul and Mayank Dhanuka, the company has managed to securitize six agri commodities, including wheat, paddy, maise, soybean, cotton and mustard backed by its physical backend capabilities of handling end-to-end supply chain for these commodities. “These six commodities, we are really good in terms of supplier and buyer network so that we can buy really quickly and we have off-takers identified very quickly,” added Kaul.
In case of default in the contract, Origo clarified that it can match commodities with buyers in its network. As an agri-supply chain company, Origio has assets under management worth INR 85 Bn ($1.4 Bn), with a storage capacity of more than 3.5 Mn metric tonnes managed by over 1150 employees at its various warehouses.
Dawn Of Agri Fintech?
While the agri commodity trading looks plausible, most of the transactions even till this day happen on paper, and Origo’s efforts are primarily to digitise the entire process and bring transparency and measurability to extract the financial value of warehousing.
In terms of outcomes, in 2019, the company claimed to have earned INR 160 Cr though just trade finance and INR 130 Cr from its warehousing business: total revenue of INR 295 Cr, which is done completely offline. With this technology in place, the company believes that there will be 2.5x growth, thereby earning revenue of about INR 400 Cr. In the next three-four years, the company estimates to reach a cumulative revenue of INR 5000 Cr.
“Today, digital agri commodity trading is in the nascent stage. With the security and transparency that our system offers, a lot of buyers and sellers are eagerly waiting to join the ecosystem to be able to participate,” said Kaul, adding that the blockchain platform will be the next focus area for Origo Commodities.
The Impact Of Agri Reforms On Origo
With the recent agri reforms in place, it has eased the hurdles for a lot of agritech startups in the country, and for Origo Commodities, this could not have got any better. For instance, the reform which emphasises on the deregulation of mandis, helped Origo to use its warehouses as the collection point. “The 1.5-2% of the mandi taxes which we used to pay to state mandis, for zero contribution whatsoever, has now been relaxed,” added Kaul. However, it has to be noted that the buyer has to pay the mandi tax, if procuring from local mandis.
At the same time, the revoking of Essential Commodities Act has brought more relief to Origo Commodities, increasing its potential warehouse capacity. Also, the elimination of middlemen from the equation has given more power to the company in terms of procuring directly from farmers, thereby minimising the channels in the agri-supply chain, as middlemen’s trade license have been cancelled.
To this, the founder said that this will take time as some of the middlemen will continue to operate informally, but in the long run, it would slowly diminish. Origo Commodities, without revealing much details, said that it is also working on a market linkage platform that helps them procure from farmers directly. Agri reform has definitely created new opportunities for both existing and new agritech startups.
As far as the size of the commodities handled by Origo Commodities in trade finance, last year, it was able to manage close to 80K metric tons of specialized commodities, and this year, it claimed to be doing about 1.5 Lakh metric tons of volume, which it anticipates to increase up to 20 Lakh tones in the next four years, the founder added. “We will also be adding more and more commodities and services, thereby increasing the penetration and reach in terms of suppliers and buyers on our platform so that it determines the liquidity, which will further help us in setting the price of commodities.”