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Guru Nanak Institute Of Management Studies, Matunga

A Project Report On, International Business

PGDM (Sem. III)

Products & Markets Biodiesel For Indias Market Organic Food For US Market

Group Members

Name M. Alam Parag Bhole Swapnil Bhosle Divya Teja Pradeep Gupta

Roll # 01 03 04 10 13

Under the guidance of, Prof. Sameer Charnia

Biodiesel What is Biodiesel? Biodiesel is the name of a clean burning alternative fuel, produced from domestic, renewable resources. Biodiesel contains no petroleum, but it can be blended at any level with petroleum diesel to create a biodiesel blend. It can be used in compression-ignition (diesel) engines with little or no modifications. Biodiesel is simple to use, biodegradable, nontoxic, and essentially free of sulfur and aromatics. Is Biodiesel the same thing as raw vegetable oil ? Biodiesel is produced from any fat or oil such as soybean oil, through a refinery process called transesterification. This process is a reaction of the oil with an alcohol to remove the glycerin, which is a by-product of biodiesel production. Fuel-grade biodiesel must be produced to strict industry specifications in order to insure proper performance. Biodiesel is the only alternative fuel to have fully completed the health effects testing requirements of the 1990 Clean Air Act Amendments. Biodiesel that meets standards and is legally registered with the Environmental Protection Agency is a legal motor fuel for sale and distribution. Raw vegetable oil cannot meet biodiesel fuel specifications, it is not registered with the EPA, and it is not a legal motor fuel. For entities seeking to adopt a definition of biodiesel for purposes such as federal or state statute, state or national divisions of weights and measures, or for any other purpose, the official definition consistent with other federal and state laws and Original Equipment Manufacturer (OEM) guidelines is as follows: What is the Renewable Fuels Standard and why is it important for biodiesel? The RFS program was created under the Energy Policy Act (EP Act) of 2005, and established the first renewable fuel volume mandate in the United States. Biodiesel qualifies for both the biomass-based diesel category and the advanced biofuel category by achieving a life-cycle Green House Gas (GHG) emissionsreduction of at least 50 percent compared to baseline petroleum.

What makes biodiesel Advanced biofuel? Biodiesel is the first fuel commercially produced nationwide that meets the U.S. EPAs definition of an Advanced Biofuel. Advanced biofuel is defined as a renewable fuel other than ethanol derived from cornstarch. The advanced biofuel category can apply to a variety of fuels, including biomass-based diesel, biogas, butanol or other alcohols and fuels derived from cellulosic biomass. Both advanced biofuel and biomass-based diesel must meet a life-cycle Green House Gas (GHG) emission-reduction threshold of 50 percent, and must be manufactured from feedstock meeting the definition of renewable biomass. A fuel's life-cycle GHG emissions are defined as the aggregate emissions attributed to all components of fuel production and use, including feedstock production and distribution, fuel production, delivery, use and significant indirect emissions from land use change. The full life-cycle emissions level of a particular fuel is measured against a baseline fossil fuel in order to determine its GHG emissions reduction threshold. Is biodiesel used as a pure fuel or is it blended with petroleum diesel? Biodiesel can be used as a pure fuel or blended with petroleum in any percentage. B20 (a blend of 20 percent by volume biodiesel with 80 percent by volume petroleum diesel) has demonstrated significant environmental benefits with a minimum increase in cost for fleet operations and other consumers. How do biodiesel emissions compare to petroleum diesel? Biodiesel is the only alternative fuel to have fully completed the health effects testing requirements. The use of biodiesel in a conventional diesel engine results in substantial reduction of unburned hydrocarbons, carbon monoxide, and particulate matter compared to emissions from diesel fuel. In addition, the exhaust emissions of sulfur oxides and sulfates (major components of acid rain) from biodiesel are essentially eliminated compared to diesel. Of the major exhaust pollutants, both unburned hydrocarbons and nitrogen oxides are ozone or smog forming precursors. The use of biodiesel results in a substantial reduction of unburned hydrocarbons. Emissions of nitrogen oxides are either slightly reduced or slightly increased depending on the duty cycle of the engine and testing methods used. Based on engine testing, using the most stringent emissions testing protocols required by EPA for certification of fuels or fuel additives, the overall ozone forming potential of the speciated hydrocarbon emissions from biodiesel was nearly 50 percent less than that measured for diesel fuel.

Do special storage facilities needed? In general, the standard storage and handling procedures used for petroleum diesel can be used for biodiesel. The fuel should be stored in a clean, dry, dark environment. Acceptable storage tank materials include aluminum, steel, fluorinated polyethylene, fluorinated polypropylene and teflon. Copper, brass, lead, tin, and zinc should be avoided. Does biodiesel cost more than other alternative fuels? When reviewing the high costs associated with other alternative fuel systems, many fleet managers have determined biodiesel is their least-cost-strategy to comply with state and legal regulations. Use of biodiesel does not require major engine modifications. That means operators keep their fleets, their spare parts inventories, their refueling stations and their skilled mechanics. The only thing that changes is air quality. Can biodiesel used in existing diesel engine? Biodiesel can be operated in any diesel engine with little or no modification to the engine or the fuel system. Biodiesel has a solvent effect that may release deposits accumulated on tank walls and pipes from previous diesel fuel storage. The release of deposits may clog filters initially and precautions should be taken. Ensure that only fuel meets the biodiesel specification is used.

Market Segments
From 4-door sedans to bulldozers, from street sweepers to school buses, from snow plows to semi-trucks, and even in boats and home heating systems, the use of biodiesel is as diverse as the diesel engine itself! Thousands of fleets and motorists throughout the country will use biodiesel to fuel their vehicles in all kinds of weather and conditions. Here are just a few examples

Introduction to Indias Petroleum Industry: Economic development and energy are deeply inter-related. Affordable energy is critical for sustaining economic growth and for improved living standards of its population, which in turn is driven by increasing energy consumption. Hence, it is recognized that energy security in a fast developing economy like India is of strategic importance and energy needs of the country, esp. hydrocarbons, are likely to increase in the coming decades. Against this background, the Ministry of Petroleum and Natural Gas is mandated to take measures for Exploration and exploitation of petroleum resources, including Natural gas and Coal Bed Methane (CBM), and also Distribution, Marketing and Pricing of petroleum products to ensure adequate and timely availability of the products. There has been effort to increase exploration and production of crude oil and natural gas with the New Exploration Licensing Policy (NELP) in 1999 and also schemes for improved oil recoveries from existing fields. The crude oil production was 37.712 MMT in 2010-11 i.e. an increase of 11.94 % over 33.690 MMT in the year 2009-10. The natural gas production has shown an increase of 9.95% as it increased from 47.496 BCM in 2009-10 to 52.222 BCM in 2010-11. In order to facilitate oil & gas security, there has been considerable increase in refining capacity over the years. Refinery production (crude throughput) during 2010-11 was 206.154 MMT, i.e. an increase of 6.94% over production of 192.768 MMT in 2009-10. In any economy the energy sector plays an important role, the growth of the economy largely depends on the energy sector. In India, the history indicates that this sector was largely regulated by the government only. To a great extent this can be determined to be the cause of Indias poor share in the worlds oil and gas production and petroleum product consumption. Some of the biggest problems associated with the sector include excessive dependence on import of energy products and very little participation of private players in the sector. Realising these issues, the government has taken steps to improve the status of the country in this field. Policies like Administered Price Mechanism have been dismantled 1 . Moreover, the government has facilitated the entry of private players in the industry, in both upstream and downstream activities. Thus, deregulation of energy sector was supposedly a step forward to improve the Indian Petroleum Industry. To go into brief history of the Indian Petroleum Industry, it is significant to note that until independence of the country, the petroleum industry was largely dominated by private entities. It was only after independence that the government took control of the sector. Moreover in 1970s when oil crisis hit the country, nationalization of international oil majors took place in the country. It was, after this that the Administered Price Mechanism was suggested by the Oil Coordination Committee. This mechanism was aimed to assure stabilization of petroleum prices across the country.

Moreover, through APM producers, refiners and marketers were compensated for operating costs and also procured a fair return on their assets. What the researcher aims at discussing through this report is not merely the APM and its dismantling, but the role that the government is playing thereafter. The dismantling of APM brought with it the freedom of private players to market the transportation of High Speed Diesel (HSD). Thus, private players assuming that they could fix the prices of HSD made large scale investments. However, the government intervention in the area continues as the government is still regulating the HSD price and is issuing oil bonds to the Public Sector Undertakings. Therefore, the aim of the project of is to examine the current policy of the government regulating Indian Petroleum Industry on the touchstone of Competition Laws and suggest changes in the policy, if required. The administered price mechanism and its deficiencies. The concept of Administered Price Mechanism (APM) came into existence in the year 1977 after the recommendations of the Oil Pricing Committee (OPC). The APM was a success in that era owing to the fact that all foreign oil companies were acquired by the government of India. The recommendation of the committee was that the domestic cost of production should be the determining factor for pricing of petroleum products. Moreover, the prices of raw materials as well as finished products were to be pre-determined on a continuous basis. After its initial success, the APM had to depart2 due to the growing international market and the slow growth of Indian economy. The oil industry is said to be the wheel of an economy and its strategic linkage with almost all other sectors cannot be overlooked. The APM was scrapped off due to the changing oil policies of the gulf countries. On all occasions when the oil prices escalated, the world economy went into a zoom. In the deregulated system, the price rate is the one that floats with changes in global crude rates with producers and retailers margins added on and the government taxes added over it. Thus, administering oil prices on continuous basis was totally unviable.

Post APM petroleum industry: interference by the government The need for dismantling of APM was a necessity owing to the changing world economy. However, the Government of India in a way or the other is still manipulating the prices through changes in duties and taxes. The state government also has the authority to scale up the sales tax whenever retail prices come down. For instance, the state policies of the Government of Maharashtra, the state government increased the sales tax in Mumbai to a whopping 40 percent which is the highest levy in the country. Another very important aspect that needs a mention here is the policy of government to cut down on the subsidy provided on petroleum products like LPG and Kerosene. The government of India is not ready yet to scrap off the subsidy provided on these products completely. Even the Ministry has admitted4 that direct transfer of price burden on household sector by scrapping off the subsidy is unjust and unreasonable. Moreover, the general implication of this policy would be that the market prices shall be controlled by the government itself, despite the dismantling of APM and the oil pool account of these products will continue to be maintained as a part of the general budget. Also, due to the absence of any proper regulatory authority5, the price disparity in various states will be huge, thus leading to stress on the consumers and affecting competition in the sector. In a nutshell, it would not be incorrect to state that the role of government is still existent in the pricing of petroleum products. Despite, dismantling of APM in the country, there is still control of government over the activities in the sector. To what extent are these policies affecting competition in the country is matter of deliberation and debate, which shall be further discussed. Lack of proper regulations affecting competition in the market. The legislative delays in India are not something new or alien. Legislative ambiguities also have great impact on the competition in an economy. A survey conducted by The Energy and Resources Institution reveals that investors need satisfaction that their investment will at least make neutral returns before they look at opportunities. To this end, they must be assured of the continuity of existing policy regime, or the gradual move to a more favourable policy regime in the future. Given the lacunae in the government policies relating the determination of prices of petroleum products, the private investors who made huge investments in the sector have suffered huge losses and this has adversely affected competition. Pricing is one of the most critical elements of energy regulation. This is because cost-reflective tariffs enable the utilities/operators to maintain, modernize and expand their facilities and services.

Therefore, to create a competitive environment and reduce impediments to financial viability of energy provision, the regulatory framework should allow utilities to charge tariffs that cover underlying costs. In the Indian context, while there has been some reduction in cross subsidy levels/tariff rationalization in the electricity sector, there exist imperfections and administrative control in pricing of oil & gas and coal. It is worth noting that controls on pricing of fuel inputs have a direct bearing on competition in the electricity sector. In recent years, there has been an increased recognition on the need for introducing cost reflective pricing across the energy sector. Production and Consumption of Petroleum Products There was an increase of 5.78% in production of petroleum products, including fractioners, during 2010-11 compared to the year 2009-10. The indigenous consumption of petroleum products increased by 2.88% during 2010-11 compared to the previous year. During the year 2010-11, net consumption of petroleum products was 141.785 MMT against total production of 192.532 MMT. It may be mentioned that the consumption data does not includes data in respect of RIL SEZ Refinery as it is presumed that all products have been exported and not consumed domestically. Year-wise production and consumption of petroleum products during 2003-04 to 2011-12 are depicted in table below. It is evident from table that production and consumption of petroleum products are substantially higher than 2003-04.

Percentage Growth in Production & Consumption of Petroleum Products

Imports & Exports of Petroleum Products: It may be seen that despite considerable variations in International prices of crude oil, imports have followed a steady growth primarily to meet domestic demand of a burgeoning economy, apart from re-exports of petroleum products. With substantial increase in refining capacity in India, as seen earlier, exports of petroleum products have picked since 2002-03 although declined shortly in 2008-09 due to slowdown in global economy. Exports of petroleum products during 2010-11, in terms of quantity was 59.133MMT valued at Rs.1,96,112 crore, which marked an increase of 16.01% inquantity terms (w.r.t. 50.974 MMT during the year 2009-10), and an increase of 36.15% (w.r.t Rs1,44,037 crore) in value terms in Indian rupees over the year of 200910.In terms of US$, the extent of increase of exports in value was 41.12%.The exports of petroleum products, it may be seen, has steeply increased by 475 % upto 2010-11. Imports of petroleum products are relatively Iimited with greater focus on imported crude oil to utilize domestic capacity as may be seen below:

Percentage growth in Import & Export of Petroleum Products

SWOT Analysis of Indian Petroleum Industry Let us now do a SWOT analysis on the industry so as to have a better understanding of the prospects for the industry, going forward: Strengths:

Consolidation: The Indian petrochemicals industry has witnessed consolidation over the last few years and nearly 85% of the polymer capacity in the domestic market is with the top three participants (Reliance, IPCL and Haldia Petrochemicals (HPL)). Of the three companies mentioned, IPCL forms a part of the Reliance stable while GAIL is set to pick up stake in HPL. Such high concentration is likely to benefit these players, as this would help reduce duplication of production. Synergies: Most of the petrochemical players have integrated facilities, thereby reducing external dependence to a large extent. To put things in perspective, Reliance Industries uses naphtha from its own Jamnagar refinery as a feedstock for the petrochemicals production. IPCL uses Reliance's vast and widespread marketing network to reach out to global consumers. On the other hand, GAIL utilizes natural gas for its petrochemicals capacity. Rich natural gas is evacuated into the pipelines and after separation of the hydrocarbons such as ethane, propane and butane, the lean gas is transmitted to consumers such as power and fertilizer industry. Further, petrochemicals business being a high value add, would add further to the profitability of these integrated companies.

Weaknesses:

Low bargaining power vis-a-vis the suppliers: Input costs form nearly 50% to 60% of the raw material costs. Further, gas prices are regulated but in short supply, while naphtha is an expensive source of feedstock. Refineries realize the import parity prices on naphtha produced and in case of high feedstock prices, petrochemical players have little bargaining power against the suppliers. These players are therefore vulnerable to raw material prices.

Low Bargaining power vis-a-vis customers: In case of increase in input costs, the companies might not be able to pass on the rise to the consumers as the prices of products is highly influenced by factors such as international prices and supply.

Opportunities:

Low per capita consumption: Currently, domestic per capita polymer consumption is nearly 4 kgs while the global average is nearly 20 kgs. This underlines the fact that there is immense scope of capacity expansion in the country as the market to be tapped is huge. Further, spending on R&D activities is around 2% of sales as compared to an international average of 18%. This leaves enough room for product development. Also, currently, India has a chemicals trade deficit of about US$ 1.5 bn a year, which leaves enough investment opportunities in the industry. Increased economic activity: The government has set aside nearly Rs 400 bn for infrastructure projects such as roadways, airports and convention centers and also towards rural housing augur well for the petrochemicals industry as this is likely to increase demand for various products (high density polyethylene, low density polyethylene among others) for the purpose of road development, packaging, cables and wiring. Also sustained growth in the auto sector is likely to keep the demand for petrochemical products high. As per our estimates, the auto sector is likely to grow at nearly 12% over the next few years.

Threats:

Customs duties: Historically, the domestic industry has been protected from overseas competition by high import duties imposed by the government. However, of late, Import duty on polymers has been steadily reduced and is currently at 20%. As part of its commitment to various multilateral and bilateral trade agreements, the government is likely to reduce duties going forward and this is likely to reduce the cushion enjoyed by the domestic players as against the landed cost of imported products.

Growing competition: The domestic industry is likely to witness immense competition going forward with IOC all set to enter the segment with its Rs 64 bn project in FY06. Further, ONGC is also venturing into petrochemicals business. With commitments to reduce and eliminate tariff and non-tariff barriers, India, with huge market potential, might witness entry of global majors such as ExxonMobil, Dow Chemicals and Shell into the business. These global majors with deep pockets can actually lead into a pricing war, which could result in squeezing margins.

The above analysis is just to provide a view of the sector and by no way advocates any opportunities to invest in the petrochemicals sector. Taking a cue from their global counterparts, Indian majors such as IOC and ONGC are entering into this value add business in a huge way and this is likely to change the entire business dynamics of the companies, not only in India but Asia as Asia is fast becoming the largest petrochemicals manufacturing hub. Going forward, investors need to be aware of this reality and make informed investment decisions in the energy sector.

PETROLEUM INDUSTRY STRATEGIC ANALYSIS - PESTEL Analysis The first framework from the strategic analysis is at the macro level and is going to help us assess the external environment of the company, how it can impact the development of the industry and how its ultimately influencing the value of companies operating within it. The PESTEL analysis consists of six aspects; Political: The Political aspects have rather significant influence on the petroleum industry. Countries around the world have a great impact on the industrys players, since primarily they are the owners of hydrocarbon (i.e. oil and gas) resources. Controlling hydrocarbon reserves allows governments to sell concessions to different companies, which grant an exclusive right for exploration and production of oil within a specified geographical area at a given time horizon. This also allows governments to favour national oil companies and exclude foreign ones from the process, which can terminate operations of these companies (EIA, 2008). In addition to individual countries, a very influential inter-governmental organization in the world petroleum scene is OPEC (the Organization of the Petroleum Exporting Countries). OPEC controls 75.5% of the worlds oil resources (and that is one of the cheapest-to-produce oil on the planet). Its geopolitical influence is only likely to enhance, as oil is depleting elsewhere on the globe (BP Statistical Review, 2008). More on OPEC will be discussed further in this paper. Internal political and broader geopolitical risks may hold back upstream investment in many countries in spite of favourable policies and strong economic incentives. Instability, changes in the regulatory environment, expropriation or nationalization of property, terrorism, civil conflicts, strikes and acts of war, can all cause discouragement and disruption of investments and operations. These are indeed very common among oil-rich countries around the world. For instance, no major oil company has yet decided to invest in Iraq; geopolitical tensions in the Middle East has since always discouraged foreign investments; political resistance in Mexico that would give private companies a bigger role in exploration and development is also the reason for diverting investors (IEA, 2008). All of these political aspects eventually negatively affect the value creation of oil companies. Political decisions among world leaders to stimulate other cleaner sources of energy due to climate changes are also going to greatly impact the petroleum industry.

Economical: There is no other industry so much interdependent with the world Economy as the oil industry. Not only is the global economy dependent on continual supply of oil at reasonable prices, but also, the progress of the international economy is crucial for the oil industrys development. This is understandable as the demand for energy is largely driven by economic growth, prosperity and rising population. Whenever there is a downturn in the economy, the demand for energy, and especially the one for crude oil decreases. This is due to the fact that most industries and transportation run on oil. The current financial and economic crisis, which is the worst and deepest since the great depression, has had a remarkable effect on oil markets. Global demand in general is currently on a downhill. This is largely driven by plummeting demand in developed OECD countries, whose economies entered recession. The outlook is not positive for the rest of the year, as it doesnt only mean lower oil demand, but also plunging prices (prices have fallen from $147 at the peak in 2008, to around $50/barrel in 2009) (Abosedra, 2009). Demand has been however increasing and is expected to increase in the coming decades in developing countries, especially in countries experiencing rather high growth in GDP, such as China and India. A good feature of oil demand is the fact its inelastic. Namely, it takes long time for businesses and consumers to respond to oil price changes, which is a positive aspect for oil companies. In addition to GDP and the market demand, another important economic aspect affecting petroleum and the industry is the value of the dollar, the currency in which oil is traded internationally. When the oil price was soaring in 2008, for example, the value of the dollar was down substantially. This occurs due to exchange rates. Oil producers (which sell oil in dollars) are regularly exposed to changes in the exchange rate between their national currencies and the dollar. Thus, when the US dollar weakens, for instance, crude oil market participants push the price of oil higher as oil producers are entitled to at least the same price of oil as before in their own currencies, after exchanging USD into their currencies. This is why a good management of the US economy (and the dollar) should provide greater stability for oil prices and profitability of oil companies (Bailey, 2008). Socio-cultural: Socio-cultural forces determine the values, beliefs and lifestyles of societies (and the world in general) where oil companies operate. These forces have been also shaping the preferences of societies for different energy types. Even though the world demand for energy has been increasing, especially the one for oil, the share of oil in the total energy consumption has been decreasing in the last decades (its share stood at around 45% in the early 80s and its at 35% today). This trend is expected to continue, where greener sources of energy are likely to increase their share (EIA, 2008, pg.1). After fears of global warming proved to

be founded, social considerations and responsibility of societies and governments resulted in increased focus on alternative energies (wind, solar energy, biofuels, hydro, etc.). People in general started putting greater value to healthy living surroundings and are showing more concern about the environment. As new and more environment-friendly fuels are developed and the cost of their production is reduced, the picture is going to get less favourable for oil producers. Companies social responsibility is yet another factor affecting companies operations in this industry, mainly through their image. Therefore, many big oil corporations claim in their annual statements that they are actively playing a dedicated role in supporting sustainable human development in societies they operate. Petrobras for instance, invests in different social, cultural and environmental activities and admits that it depletes natural resources that are part of everyones heritage, hence its duty to render accounts to society. Similar to Petrobras, BP too, states that it also contributes to local communities development either through investments in education (which creates skilled labour), or through training and financing programs that stimulate local suppliers (BP Annual Report, 2008). Technology: The oil and gas industry is extremely Technology-driven, as research and technology play a critical role in addressing the worlds energy needs and challenges. Technology is the key element from fundamental exploration all the way to refinement of oil. Innovations and improvements of technologies in the upstream processes have made it possible to extract bigger volumes or improve the recovery of oil and gas, and to extract maintaining reserves in some fields which were previously considered exhausted. This has allowed for increasing profitability and gains from existing oilfields (BP Annual Report, 2008). Technological advances, however, have made breakthroughs especially in the exploration and extraction of ultra-deep-water reservoirs. These are indeed the hardest to reach, for some of which technology is still being developed9. As an example of such oil fields are the recently discovered ones off the Brazilian shore, Tupi being the most important. Petrobras has been dedicated in developing appropriate technologies during the last year and managed to lift the first oil from the Tupi reservoir on 1st May, 200910. By deploying advanced technologies in locating fields and exploration, companies can secure competitive advantage. Technology is also an important development-driver in the midstream and downstream sectors. In the midstream, for e.g. for underwater oil-transporting pipelines at significant depths and pressure; in the downstream, for optimizing refining processes of petroleum of varying quality, which can ultimately improve companies margins (BP Annual Report, 2008). The general impression is that technology will have a profound impact on the future development of the oil industry, and especially on its long-term sustainability. This comes as a logical reasoning, as hydrocarbon reserves are

increasingly depleting and new discoveries are showing at extreme depths, which so far, had not been profitably or technologically feasible to exploit.

Environment: Environmental issues are increasingly affecting oil companies and their returns. Namely, the oil industry is believed to be one of the dirtiest and most polluting industries in the world. It is nothing new that petroleum is responsible for a number of incidents including oil spills occurring at sea or considerable pollution from oil platforms. Almost every oil company has been involved in these types of environmental catastrophes. It is therefore practice that polluters cover environmental damages they are responsible for. And not only this; whenever negotiations for concession rights are made, details and aspects of how to clean affected areas are also clarified. Moreover, companies are required to spend shares of their profits in environmental restoration and remediation, when cleanups of inactive sites are made. Inactive sites can include refineries, chemical plants, natural gas processing plants, oil and natural gas fields, service stations, terminals and waste disposal sites. All of this, of course, represents burden for companies profitability (BP Annual Report, 2008). Stronger environmental restrictions will also entail heavy investments in advanced technology to reduce pollution to minimum levels. However, safety and quality of products, and all modes of transportation of hydrocarbons, which contain inherent risks, are essential to be taken special care of. This is not only going to prevent harming the environment and people, but its also going to secure greater reputation and sustainability of the industry, through satisfied customers and stakeholders, leading eventually to a sustainable value creation for shareholders (BP Annual Report, 2008). Legal: Finally, Legal elements of the macro-environment play an important role in shaping the industry. The oil industry is subject to strict legal regulations, which range from the imposition of specific drilling obligations, environmentalhealth-and-safety protection controls, controls over the development and decommissioning of fields, etc. The hydrocarbon products are also traded in regulated commodity markets. Additionally, companies are burdened with large upfront concession fees and special royalties and taxes on petroleum, which compared to those payable for other commercial activities, are rather high. There is also a degree of uncertainty relating to the interpretation or changes to different laws and regulations, as a result of which companies could be required to curtail or cease operations, or they could simply incur additional costs (BP Annual Report, 2007). However, the major legal concerns affecting

companies come from compliance with laws, regulations and obligations relating to environment and climate change. There are extensive international, national, state and local regulations regarding products, operations and activities. Current and proposed fuel specifications, emission controls and climate change programs under a number of environmental laws will have a significant effect on the production, sale and profitability of many companies. Environmental laws also require that companies remediate the environmental impacts of prior disposal or releases of chemicals or petroleum substances. the most important characteristics of the general macro environment can be found summarized in the graph below;

ORGANIC FOOD (EXPORTS) Introduction: The global demand for organic food is growing at a very rapid rate. Ever since the environmentalists raised their concern regarding harmful effect of increasing use of chemicals in farming, the consumers are getting conscious and selective about edible foods. The increasing awareness has caused shifts in consumers tastes and preferences which have led to the domestic as well as global rise in demand for organic foods. The organic food industry is estimated to grow by 20% from US $ 35 billion with growth concentrated mainly in U.S.A, U.K. and Japan. The share of India in organic trade in the world market is less than a percent due to various challenges like standardization of foods according to consumers tastes and preferences, certification, consumer education, branding and promotion. There are large growing opportunities in this sector. The major export destinations for organic food products are Australia, Canada, USA, China, Japan, South Africa, European Union etc. This study is mainly based on exploring the scope of organic foods in US markets.

Organic food: Organic Foods are grown under a system of agriculture without the use of chemical fertilizers and pesticides with an environmentally and socially responsible approach. Under Organic Food, the use of conventional nonorganic pesticides, insecticides and herbicides is greatly restricted and saved as a last resort. In case of livestock, they must be reared without the routine use of antibiotics. Since the early1990s the growth rate of organic food foods is 20% ahead of the rest of the food industry in the whole world.

Market opportunities in US market: With retail sales of organic food amounting to about $8 billion in 2000 (expected to reach about $9 billion in 2001), the United States is the worlds largest market for this product group. One of the main reasons behind these very positive growth expectations is a strong and increasing consumer awareness of health and environmental issues, including a growing resistance

amongst consumers towards food products made with genetically modified organisms (GMOs) and genetically modified farming.

Another important factor behind this is the aggressive and targeted marketing and promotion schemes by the retail sector. Consequently the countrys major food producers are moving in organic production. The standards introduced on organic production and handling have a great impact on the development of the organic industry as there is increased focus on organic products. In the United States markets following product categories are expected to be most important: Products, mostly tropical, that are not produced in the United States or in very small quantities. Examples include coffee, tea, various spices and herbs, dried fruits and nuts. Off season products, Such as fresh fruits and vegetables that are not produced in the United States. In season products, For which there is a temporary or more permanent shortage because of increasing demand Novelty or specialty products, Like high quality organic wines, retail packed food products. Import demand in the near future is likely to be more for fruits and vegetables in comparison to other organic products.

Why to enter the United States market? A considerable amount of work is necessary to build up an organic export trade both on production and marketing side. At country level a good agricultural supply base should be built supported by appropriate standards and certifications, it is equally important to offer a wide variety of high quality organic food products that fulfill the market demand. The producer should make sure that the organic certification is recognized and accepted within the U.S. National Organic Program (NOP) and that export products meet all legal and market requirements of the United States. A careful selection of market segments and distribution channel is very important for an exporter along with a strong and reliable relationship with an importer or distributor for building up a profitable business. Exporters must keep them aware of market developments through information sharing, following trade journals and the Internet, etc. India should look at the

United States not only as a potential future market for organic products but also consider it as a possible partner in various forms of co-operation within farming, processing, certification and marketing of organic products.

What is Organic in U.S. Market? The new National Organic Program (NOP) of the USDA determines four product categories: 100 percent organic: Products containing only organically produced ingredients. Organic products containing 95 percent organically produced ingredients by weight. Made with organic ingredients: A product containing more than 70 percent organic ingredients. Processed products containing less than 70 percent organically produced ingredients: Cannot use the term organic in the principal display panel.

MARKET CHARACTERSTICS OF THE U.S. ORGANIC SECTOR The U.S. Organic Food industry crossed a threshold in 2000: for the first time, more organic food was purchased in conventional supermarkets than in another venue and continues. Organic products are now available in nearly 20,000 natural food stores and are sold in 73 percent of all conventional grocery stores. Acreage of certified organic farmland has increased to meet growing consumer demand. According to USDA estimates, U.S. certified organic cropland was 4.8 million acres in 2008. From the consumer side new products were introduced rapidly For example, over 800 organic products were introduced within which desserts made up the majority. Organic food is sold to the consumers through three main outlets in the United States natural foods stores, conventional grocery stores, and direct-to-

consumer markets. Fresh produce is the top selling organic category followed by non-dairy beverages, breads and grains, packaged foods, and dairy products.

Organic producers market their food directly to consumers much more frequently than conventional farmers do. Producers capture a much higher share of the consumer food dollar when they market their produce directly to the consumers. Community supported agriculture (CSA) is an innovative direct marketing arrangement that organic farmers have pioneered in the United States for about a decade. Over 800 CSAs are currently listed in the US database maintained by USDA.

Import requirements from US: Although the United States is a very important producer of organic producer and also produces quite a broad range of organic food and beverages, the country is far from self-sufficient in this area and needs to import significant quantities from all over the world to meet the requirements of a rapidly growing market. With certain exemptions, import demand in the foreseeable future is likely to be mainly for fresh produce and bulk-packed organic raw material or ingredients for further Processing and packaging or re-packing, although other organic products may also find market. The specific product groups discussed below include those most likely to be of interest of India: Fresh fruits and vegetables: This product group is the most important in terms of retail sales of organic foods and is also amongst the biggest import products. It includes tropical fruit and vegetables all year round, e.g. banana, pineapple, papaya and mango etc. Top vegetable prospects: Beans, broccoli, cabbage, carrots, cauliflower, cucumbers, garlic, mustard, onions, peas, peppers, potatoes, radishes, tomatoes. Top fruit and berry prospects:

Apples, bananas, grapes, mangoes, melons, peaches, pears, pineapples, strawberries.

Dried fruits and nuts, edible seeds and kernels: Although there is a considerable domestic production of these products, there is also a significant import demand; in particular products that are not grown in the United States, but also for other items may be in short supply. This category consists of: Dried fruits: Apples, dates, raisins and tropical fruit, like banana, mango, papaya and pineapple. Nuts: Cashew nuts, chestnuts, peanuts, pistachio nuts, walnuts. Edible seeds: Sesame, sunflower, pumpkin. Processed fruits and vegetables: This product group consists of a broad range of various fruits and vegetables, processed in different forms, including: Dehydrated fruit and vegetables, including freeze-dried items. Fruit and vegetable juices, concentrates and pulp/puree. Canned fruit and vegetables. Frozen fruit and vegetables. Most of these products are used as ingredients or raw materials by various manufacturers in the U.S. particularly in the case of manufacturing juices, concentrates andpulp. There is some import demand for certain canned organic fruits and vegetables (like hearts of palm), while frozen fruits and

vegetables are imported in bulk quantities and reprocessed and repacked by US manufacturers. Herbs, spices and essential oils: A full range of organic herbs and spices and also several essential oils are also imported in US. Imports include, for example, basil, rosemary, coriander, cardamom, cinnamon, cloves, black pepper, chilies, nutmeg etc. Though spices are imported but the major requirement is in the essential oils section. Coffee, tea and cocoa: The sale of organic coffee, tea and cocoa are on a move ahead in the food stores. According to sources more than 93 million pounds of coffee was imported in the United States in 2009. Most of the organic coffee is imported from Latin America, particularly Mexico, Bolivia, Costa Rica, Peru etc. Other suppliers include Indonesia, East Timor and Uganda. The importers are interested in tapping other sources as well. In the same way organic tea and herbal tea market is also growing in the US. Grains and flours: Though the United States is a large producer of organic grains, e.g. wheat, rice, millet etc. it is also an important of rice and of non-tradition cereals. Dried legumes (pulses): The United States is a major producer of legumes including beans, but it imports significant quantities of various pulses, including lentils, garbanzo beans, black beans, pintos and chickpeas. Oil crops, vegetable oils and fats: India produces various organic oil crops like Coconut, Sesame Seed, and Sunflower Seed. Special mention should be made of soybean, which is an important oil crop used for the production of food items that replace meat and dairy products which is produced in large quantities in India. A large volume of vegetable oils and fats are produced in India. India should take an initiative in this field as United States is an importer of many of the oil crops.

TRENDS IN ORGANIC FOOD SALES While a small percentage of all food sales, organic sales are growing faster than the rate of growth for conventional food products. The 15.8 percent increase in organic food sales since 2007 propelled the organic share of total food sales to nearly 3.5percent in 2008. The level of penetration has doubled in the past five years. The fruit and vegetable category accounts for the largest portion of the organic food sales. This one category represented 37 percent of the total organic food sales in2008. The second largest categories were beverages and dairy products representing14 percent contribution each. The strongest growth was seen in the categories of breads and grains (35 percent over 2007) and beverages (32 percent).The sales for non-food organic products are growing at a faster rate than sales of organic food. The non-food organic sales reached to 1.6 billion in 2008. New products categories and new products are introduced in the U.S. market. The sale of non-food products increased from $ 1,182 million to $ 1,648 million at a growth rate of 39.4 %.

EMERGING ISSUES IN THE US ORGANIC SECTOR Since the late 1990s, U.S. Organic Production has more than doubled but the consumer demand has grown at a faster pace. This change in the consumer demand has brought a massive change in the market and supply chain. Since the demand is raising so is the competition. Conventional supermarkets are introducing private label store brand lines of organic food which is forcing the organic food suppliers to import huge quantities of organic food from developing nations which meet the USDA standards. The certified U.S. acreage has also increased and the organic production has spread to every state and every product category. Even though the acreage has increased but the adoption level of organic farming is still low as conventional farmers associate varieties of financial and other risks with organic production. Limited organic supply has become a bigger issue over the last decade. By the late 1990s organic handlers faced problems in procuring large quantities of organic produce from farmers to distribute it to the retailers. More recently, the long term suppliers have reported the lack of reliable supplies of organic raw material as a major constraint for the growth of organic business.

Keeping in view all the above mentioned issues the U.S. National Organic Program (NOP) streamlined with the certification for international as well as domestic production. This gave a path to various exporters to export various organic produce to USA provided they met the NOP standards. Imports increased as growth in the organic demand exceeded the domestic supply. Another reason for the increase in imports was the cost of production of organic food. Organic farming is often labor intensive and developing countries with lower labor costs may have a comparative advantage for some organic products.

SWOT Analysis of US Organic Food Market Strength:

Today the domestic market for organic products is about US$15 billion US provide a huge market for organic product industry. It is encouraged and developed because of wide benefits. U.S. sales of organic food and beverages have grown from $1 billion in 1990 to $26.7 billion in 2010. Leading were organic fruits and vegetables, now representing over 11 percent of all U.S. fruit and vegetable sales. Natural retailers were next, selling 39% of total organic food sales. 2nd highest growth market. Creates half a million jobs. The 2002 Farm Bill directed USDA to issue regulations exempting any person who produces and markets solely 100% organic products from paying assessments under a commodity promotion law.

Exports of agricultural products from India are expected to cross around US$ 22 billion mark by 2014 and account for 5 per cent of the worlds agriculture exports,

Weakness: Govt regulations, As promised by USDA, the regulations:


Prohibit the use of irradiation, sewage sludge, or genetically modified organisms in organic production; reflect NOSB recommendations concerning items on the national list of allowed synthetic and prohibited natural substances; prohibit antibiotics in organic meat and poultry; and Require 100% organic feed for organic livestock.

High level of standards need to be followed.ISO 65 and 69. Must be labeled organic. That is they have to undergo food inspection. Artificial preservatives and flavours should not be used. The product does not contain any artificial flavor or flavoring, coloring ingredient, or chemical preservative (as defined in 21 CFR 101.22), or any other artificial or synthetic ingredient; and The product and its ingredients are not more than minimally processed. Minimal processing may include: (a) Those traditional processes used to make food edible or to preserve it or to make it safe for human consumption, e.g., smoking, roasting, freezing, drying, and fermenting, or (b) Those physical processes which do not fundamentally alter the raw product and/or which only separate a whole, intact food into component parts, e.g., grinding meat, separating eggs into albumen and yolk, and pressing fruits to produce juices.

Opportunities: The growing market and the government regulations provide a great opportunity to the exporters.

As the tax of a sole organic food maker is exempted. The production is made ease. "TransFair USAs mission is to build a more equitable and sustainable model of international trade that benefits producers, consumers, industry and the earth. Exports of agricultural products from India are expected to cross around US$ 22 billion mark by 2014 and account for 5 per cent of the worlds agriculture exports,

Threat: Among the $24 billion market of organic products. $15 billion is of domestic organic market, only $9 billion of imports. Huge competition from global players like walmart have to be faced in imports category. Competition from other countrys exporter. Non-tariff barriers may be imposed by developed nations. The amendments made in the organic product industry may have a great impact on a new business entrepreneur. INDIAN MARKETS: Rationale for Organic Farming in India In India, environmental concerns have led many NGOs and governments to promote organic farming. High cost modern farming and its un-sustainability due to overcapitalization and rising input costs has made organic farming a necessity in many Increased but the adoption level of organic farming is still low as conventional farmers associate varieties of financial and other risks with organic production. Limited organic supply has become a bigger issue over the last decade. By the late 1990s organic handlers faced problems in procuring large quantities of organic produce from farmers to distribute it to the retailers. More recently, the long term suppliers have reported the lack of reliable supplies of organic raw material as a major constraint for the growth of organic business. Keeping in view all the above mentioned issues the U.S. National Organic Program (NOP) streamlined with the certification for international as well as domestic production. This gave a path to various exporters to export various organic

produce toucans provided they met the NOP standards. Imports increased as growth in the organic demand exceeded the domestic supply. Another reason for the increase in imports was the cost of production of organic food. Organic farming is often labor intensive and developing countries with lower labor costs may have a comparative advantage for some organic products. Agriculturally grown regions. Organic farming is not only financially less draining for the small farmer and good for environment, it also helps the government to reduce its subsidy bill meant for modern inputs. Indian organic products Major organic produces from India include plantation Crops; Spices; Cereals; Pulses; Oilseeds; Fruits and Vegetables, besides honey, cotton and sugarcane. Organic production of meat items like poultry, livestock and fisheries is yet to figure in India.

Product with comparative advantage A new trend is developing in India to produce some of the crops organically not only on account of the love for protection of nature but also because of the need for having safe products for consumption. Some of the agricultural products that enjoy comparative advantage for domestic as well as international market can be grown organically in major producing zone. They are given below: Organic food exports from India Organic food exports from India are increasing with more farmers shifting to organic farming. With domestic consumption being low, the prime market for Indian organic food lies in the US and Europe. India is now becoming a leading supplier of organic herbs, spices, organic basmati rice etc. In 2005 exports amounted to 53 percent of the organic food produced in India. In 2003 only 6-7 percent of organic produce was exported. Exports are driving organic food

production in India. The increasing demand for organic food products in the developed countries and the extensive support by the Indian government coupled with its focus on agriculture exports are driving the Indian Organic Food Industry ahead. The Indian government is committed towards encouraging organic food production. It allocated $ 22.2 million during the Tenth Five Year Plan for promoting sustainable agriculture in India. Organic products exported from India include rice, wheat, tea, spices, coffee, pulses, fruits and vegetables, cashew nuts, and medicinal herbs