The curious case of how high vegetable prices are creating investment avenues

Why did chicken cross the road? To avoid onion, potato, and tomato; especially their prices.Being a vegetarian is a healthy lifestyle choice, but you must be able to digest the price volatility. While consumers may be hurting, there is a selection of stocks that can help investors profit, and even hedge, against this phenomenon. We’ll come to that selection in just a bit.But first, what exactly is going on?“[Vegetable] price fluctuations are increasing. Almost 40%-50% of vegetable yields get destroyed due to extreme weather and later due to inefficient supply chain,” says Achintya Anand, founder of Krishi Cress. Anand’s company operates farms in Chhatarpur in New Delhi, Faridabad in Haryana, Himachal Pradesh, and some other locations across north India. While his startup supplies mostly to hotels, restaurants and canteens, Krishi Cress also caters to modern retail stores like Nature’s Basket and Le Marche. It takes about 24 hours for vegetables to reach from farm to customers, he says. And it's not just vegetables, the prices of pulses are rising too.Meanwhile, it's consumers who are feeling the pain. Dipika Mehta (59) has been running her household for more than 40 years now. She stays in the suburban Mumbai neighbourhood of Kandivali and like many other here, her family consumes pure vegetarian food. Every day when she steps out for a walk in the morning or sometimes in the evening, she shops for vegetables.“Vegetables have become expensive and more so in the past 2 months,” she says, adding that prices of onion, potato, tomato, beans, and even things like green coriander and ginger have increased, and in some cases, doubled.Till a few years ago, her monthly spend on buying vegetables from her local vender would come to around Rs 3,000. That has increased to Rs 5,000 per month now.In absolute contrast, while the rising prices of vegetables are a worry, the steady or slightly lower price of broiler chicken and mutton is a relief for the Shelke household, living in Thane.“Leaving aside the price of fish, which fluctuates a lot depending on supply throughout the year, prices of mutton chicken, do not fluctuate on a weekly or even monthly basis,” says Smita Shelke who manages a household of four people, just like Mehta. Seasonality does affect prices, but say if chicken becomes expensive in winter, it becomes cheaper during summer. So overall prices balance out.Crisil Ratings in a recent report said that the price of a non-vegetarian thali in April has fallen 4% year-on-year, while that of vegetarian thali has risen 8% from year ago. Analysing the data further, it is visible that not only are prices of the veg thali rising faster, but the price fluctuation is higher. From April 2023 to April 2024, prices of vegetables showed volatility of over 10% while for non-veg thali it was 5%. medium nocaption111172733So, is there a way an investor can take advantage of this change in consumption pattern and industry structure difference between the two categories? Consider the following example.How can investors benefitShares of Tata Consumer Products, which sells pulses under its Sampan brand, have outperformed the Nifty 50 in the past one year, while shares of one of India’s largest poultry company, Venky’s India, have underperformed the broader markets. medium nocaption111172745One of the prime reasons is that the profitability of the business is under pressure as the company cannot completely pass on the rising price of its raw material to its customers. And again, the raw materials responsible for price rise are agri-products, mainly maize and soyabean.While there are no listed companies that directly trade in vegetables or pulses alone, one of the ways to play the theme of food inflation could be via proxies.One of the strong proxies to play this theme is Kaveri Seeds. LKP Securities in its report says that hybrid rice, maize and vegetables are going to drive the company’s growth for the next 10 years. The company expects to get 60% of revenues and profits from these three segments. Shares of Kaveri Seeds are up 86% in the last one year.Another good proxy is Godrej Agrovet, whose crop protection business is performing well, and it has led to brokerage Motilal Oswal raising its Ebitda estimates for FY25 and FY26 by 7% and 10%, respectively. However, investors should consider that Godrej Agrovet also has an animal feed business and poultry business. Avenue supermarkets, which owns DMart store chain, is also a decent proxy bet. The company got 57% of sales from the foods segment in FY24. medium nocaption111172831Vegetable inflation has continued to hover above 27% YoY for the sixth straight month in May. Sequentially too, the prices are rising. Tomato, onion, and potato prices are leading the price charts. The latest consumer price index (CPI) data shows this clearly.Lentils, a key part of a vegetarian meal, have also been on the rise from July to May and are widely expected to continue their ascension for the next month or so.“For the past nine months, price of pulses has been on fire due to a shortage of roughly 4 million tonne in FY24. This further added to the demand of vegetable as people replace pulses on their plate with vegetable gravy,” says Shrikant Kuwalekar, commodity market expert. He added that if everything goes well on the monsoon front, prices of pulses will reduce after 2 to 3 months.“The poultry supply chain is fully integrated — meaning there is proper data available which details the estimated consumption, supply and inventory of chicken and eggs required throughout the country in a year,” says agri-commodity analyst Deepak Chavan. He says there are about six companies that account for majority of poultry production.This industry gets affected only when extreme events happen like heatwave or a virus outbreak. It is largely stable as the cycle is just about eight weeks long and there is always some inventory available to cushion sudden dips in supply. With multiple companies competing for supply, prices also remain competitive. This adds to the woes of companies like Venky’s India, which according to Care Edge Ratings report has “limited control over the selling prices of broiler birds”, in other words they do not have much pricing power.Vegetable inflationVegetables are prone to disruptions every now and then. In the last one year, Himachal Pradesh, which is one of the biggest suppliers of vegetables and fruits to Delhi NCR, suffered two extreme weather events. Last July, large swathes of the region suffered flooding due to extreme rainfall. Since last month the extreme weather situation has reversed and crops in Himachal are now wasting under heatwave.This is why organised retail chains that have good sourcing arrangements and can eke out profits, are good buys. This is because now vegetable supply disruptions are taking place across the country. “Unlike poultry, 90% of the vegetable market is unorganised and the unorganised sector doesn't have a very good system in terms of number of handlings and number of storage places, which leads to wastage,” says Vikram Gupta, founder and managing partner of IvyCap Ventures. The Rs 5,000 crore venture-capital fund has invested in farm-to-consumer, Bengaluru-based startup Deep Rooted Co and cold-chain marketplace startup Celsius.But given the vast spread of the unorganised market, Gupta concedes that government support is crucial to develop the cold-chain logistics and warehousing infrastructure for vegetables.While the Crisil report limits itself to reporting inflation in home-cooked meals, restaurant owners too are feeling the heat of the rising prices of vegetables.“Salad leaves are best in winter but people like eating salads in summer leading to higher demand. This year it has been so hot in Delhi, that production from hydroponic vegetable farms and even greenhouses has been affected. Even after harvest, a 3-hour journey from farm to the restaurant kitchen in extreme heat can cause salad leaves to wilt,” says Kainaz Contractor, co-founder of Divided Attention Hospitality, which operates restaurants such as Bhawan, Cafe Dori and Rustom’s Parsi Bhonu. To tackle this recurring problem, she changes her restaurant menu every season to adjust to the availability of local and seasonal ingredients.While discussing the issue of price rise of vegetable one crop needs special mention. Last July, the retail prices of tomato touched Rs 200 per kg from about Rs 40 in June as heavy rainfall impacted the crops in southern states. The sky-high prices of tomato last year led to multiple incidents of tomato thefts from vendors and farms, with one tomato seller also employing bodyguards to keep his stock safe. After a brief period of cooling, prices of tomato have started rising again this June, this time it is due to heatwaves destroying crops in north India. Tomato is currently selling for a retail price of around Rs 70 per kilo in some parts of the country.“Tomato prices are a pain point every year. Last year when prices shot up, we started to make open market purchases as our B2B vendors were unable to supply the high-quality tomatoes at the yearly lock-in price,” says Nainjyot Dham, promoter of Te Amo Bistro and Bar chain. On the other hand, prices of chicken remain rangebound in most years, he adds.To sum it upIndia’s vegetable market is mostly unorganised and the efforts to organise it have not been very successful given the huge capital investment required to integrate it.To make matters worse, adverse weather conditions are occurring more frequently. Neither India’s farms nor its rickety logistical or warehousing infrastructure are designed to handle the demand-supply pressure, let alone the impact of climate change.“There is big gap right at the farming level and it shows in the low yields of Indian farms,” says Ajay Kakra, managing partner at JU Agri Innovation, a fund investing in solutions to enhance farm productivity. Commercialisation of drought-resistant and heat-tolerant strains of crop could provide relief to both farmers and customers.But until these issues are resolved, homemakers like Mehta and restaurant owners like Contractor will have to keep adapting to these situations by dropping the expensive items off their thalis and menu. Investors, however, by taking the right bets to play food inflation theme can continue to reap rewards and afford to eat almost anything (health permitting).