5
ABREVIATIONS AND ACRONYMS
ADG Average Daily Gain
BEE Black Economic Empowerment
BU Business Units
CLS Cattle Loan Scheme
EG&D Economic Growth and Development
FCR Feed Conversion Ratio
FFS Fast Food Shops
FMCG Fast Moving Consumer Goods
FMD Frozen Meat Depot
GAP Good Agricultural Practices
HACCP Hazard Analysis Critical Control Point
ISO International Standards Organisation
KISS Keep it Safe and Simple
KSF Key Success Factors
LP Limpopo Province
LPDA Limpopo Dept. of Agriculture
LU Livestock Unit
MIS Management Information Systems
NDA National Development Agency
ROM Rough Order of Magnitude
SCA Sustained Competitive Advantage
SMME Small Medium Micro Enterprises
TA Tribal Authority
UFF Up Front Fee
IBP Integrated Broiler Project
NFI Net Farm Income
PDI’s Previously Disadvantaged Individuals
MEAT PRODUCTION, PROCESSING & DISTRIBUTION – AN INTEGRATED STRATEGY
EXECUTIVE SUMMARY
BACKGROUND
A country’s economic resources consist of Natural Resources (Land, climate, minerals, water, fauna & flora), Human Resources (entrepreneurs, skilled and unskilled people) and Financial Resources (development and working capital). For a country to achieve Economic Growth and Development, scarce economic resources should not be allowed to be lie idle and must be optimally managed to meet the “Triple Bottom Line” of being Financially, Socially and Environment Sustainable. These resources should be protected to prevent them being degraded (erosion, encroachment etc.) and/or lost (overseas emigration of skills or overseas capital investment). The Limpopo Province has an abundant amount of economic resources that can be deployed to achieve significant socio-economic benefits for its generally very poor people. Sustainable primary and secondary agricultural enterprises have a significant role to play in the Economic Growth and Development of regions, provinces and countries. The national and provincial government are in the process of privatising or restructuring many of their unsustainable projects to allow them to focus on the government’s core functions and competencies and to somehow make these projects sustainable. The LPDA have a large number of redundant agri-projects that could be productive if well managed and coordinated into integrated operations. However, the LPDA have already spent many millions on these projects and wish to relieve themselves of the financial and managerial burden of these projects in an equitable and sustainable manner. The problem arises as to how this can be done in a financial, social and environment sustainable way, that is acceptable to all stakeholders.
INTRODUCTION
This report is intended to provide an equitable and tenable strategy for the rejuvenation and sustainable functioning of currently redundant LPDA owned and managed projects. Bearing in mind that agricultural enterprises are cyclical, under the current marketing environment and trading conditions, many of the LPDA projects or enterprises were found to unsustainable as “Stand Alone” enterprises if operated on their own – they need to be integrated to be sustainable. A process known as inter-firm cooperation or “Integration” can achieve this. This integration can be complete, where more than one enterprise are combined as one legal entity, or partial by independent ownership with cross shareholding or contractual agreements between enterprises. The proposed strategy is the “Vertical Integration” of a number of usually distinct enterprises into integrated “Business Units” that benefit financially from the integration process and thus previously unsustainable projects can become sustainable.
NATURE AND DEFINITION OF THE PROJECT
Problem Hypothesis - Typically the primary agricultural production operations such as cattle farms and chicken farms require the highest capital investment yet make the lowest profit margin % (0-5%) and thus the lowest Return on Investment (ROI). For example, the current unfavorable trading conditions in the broiler chicken industry, as a result of very high feed prices, has seen a number of small and larger producers closing. The next functional level of processing and adding value functions, e.g. feed Mills and abattoirs, usually make a higher % profit margin (5 – 20%) and ROI and the distribution functions of wholesale and retail shops, makes an even higher profit margin % (40% +) and ROI. Viability studies have shown that Business Units (BU’s), within the same product supply chain (e.g. Beef cattle farms & beef abattoirs) and that are closely linked, vary significantly in their ability to make a profit and thus to remain financially sustainable. This fact poses a serious problem for agricultural development in the province, as many primary producing enterprises are not viable as “stand alone” enterprise.
Solution - The proposed strategy provides a solution to the above problem by creating a demand for primary agricultural products from frozen meat depots and shops. The Strategy then integrates closely related Business Units, within the same operations (e.g. cattle farms, feedlots and abattoirs), thus allowing the primary production enterprises to share the profit of the more profitable processing and distribution enterprises. The Frozen meat depots and shops create the market demand which sustains the primary (Production) and secondary (Processing) enterprises – the demand pull effect. The integration strategy allows the less profitable enterprises to share the profits of the more profitable enterprises and it thus makes primary production viable.
Institutional Structures – The projects and their infrastructure are state assets that need to be held in trust for the citizens of S.A. Grouping the firms to be integrated under the umbrella of a Section 21 company can best do this. Each firm or sole proprietor then leases the asset from the Sec. 21 Company for a long-term period. This structure protects state assets while allowing the private sector to manage independently of the state. The “Sole Proprietorship” or Community Public Private Partnership (CPPP) Model structured within the framework of an equity sharing Pty Ltd Company is the most tenable structure and the LPDA are in the process of implementing this model. This integration strategy is secured by shareholders agreements or legally binding supply and purchase agreements that specify price, quality, quantity and timing. The key to success of the integration strategy is to create, manage and maintain a “Value Chain” that links certain Business Units from primary production through to retail selling.
Managerial Structures – Business Units will be independently managed according to industry norms while enjoying continual support from the LPDA and a coordinating entity. An efficient “Coordinating Entity” consisting of Project Managers/Consultants with managerial, marketing, technical, financial and legal capacity and experience is essential to the process. This entity will not provide day-to-day management but “Strategic Management” and guide and steer the implementation of the integrated strategy and Business Units over time and changing business conditions. This entity will implement the strategy and manage the entire process.
The Proposed Strategy
1) The proposed strategy is a forward and backward “Integration Strategy” that will integrate a number of redundant; LPDA owned agriculture related projects and a number of still to be established agricultural related and food distribution enterprises.
2) The aim of the strategy is to provide participating enterprises or Business Units with benefits from low cost products with standardised quality and quantity of supply, access to capital and markets, and managerial, financial, marketing and technical support. i.e. each Business Unit will create a demand for the products of the next Business Unit and thus justifies its establishment.
3) The integration strategy encompasses two main products, beef and chicken in their respective production, processing and distribution functions.
4) The integration process will create a demand for beef and chicken and a sustainable “Value Chain” which will link each Business Unit with on-going quality products, at the desired quantity of supply, at a market related cost.
Main Operations And Product Lines
The final product of the proposed integration strategy is “Frozen Meat”. The 3 main frozen meats consumed in the province are Chicken, Beef and Fish.
Chicken - Chicken products will be procured from the soon to be rejuvenated LPDA “Integrated Broiler Project” (Cost R19M) consisting of Breeder farmers, a Hatchery, Broiler farmers and an Abattoir. Production is planned for 40,000 birds per week and will commence early in 2002.
Beef – Beef products will be procured from still to established beef breeder farms, a 20 head per day beef feedlot and a beef abattoir and processing facility.
Fish - Fresh water fish production is not competitive at this point in time and the depots and shops will make use of sea fish purchased in bulk.
Livestock Feed – Feed makes up approximately 67% of the cost of production of Beef feedlots, broiler breeders and broiler farmers. They require scientifically formulated and mixed feed rations. Farmers on state owned irrigation and dryland crop farms will produce raw materials for a feed mill that will mill, mix and pellet feed for the feedlot and chicken Business Units.
IMPLEMENTATION HORIZON
Assuming full support and capital, once commissioned this strategy could be implemented within 2 and be fully operational in 3 years. The development of the proposed integration strategy over time, in distinct phases and sub-phases, will take it vertically deeper and deeper backwards with occasional horizontal spin-off enterprises. (Transport, piggery, tannery, leather processing, broiler farm services and contract ploughing). The Depots and Shops are the basis for the demand of the primary products produced and they must be in place to absorb these products as they are produced. The Integrated Strategy will be implemented over a number of phases. Related enterprises will be grouped and linked or integrated according to their product line and ability to be sustainable. The following are the logical integrated business units.
1) Crop production – At present current market prices for maize and other feed ingredients are high and crop farmers with economies of scale are sustainable on their own subject to good rainfall. A Feed Mill can be loosely integrated with crop farmers as contract growers. Emerging crop farmers will have a captive market in the feed mill.
2) Feed Mill, Broilers and Breeders – current feed prices have made breeders and broiler farmers less profitable as prices have not responded to increased feed costs. The feed millers work on a “mark-up on cost” basis and are not affected in the same way by higher feed prices. The broilers and breeders need to own a feed mill to shift the miller’s margin to their operations to make then sustainable. The breeders have a captive market in the hatchery and the broilers have a captive market in the chicken abattoir.
3) Cattle farms, feedlots and abattoirs – Cattle farms need to be large with high capital investment in land and livestock and thus provide a relatively low return on investment. Feedlots have also been adversely affected by feed prices. Beef abattoirs, however, are not expensive to build and operate, they turn their money over quickly and are currently making good returns. This is due to the high price for the 5th quarter. The cattle farms will own the feedlot and abattoir and benefit from their high profits. The cattle farms have a captive market in the feedlot and the feedlot has a captive market in the beef abattoir.
4) Hatchery – the hatchery business is a mark–up on cost type of business that passes all increases on the purchaser. As the broiler industry is under pressure at present sales are down at present but it does have a captive market of 40,000 chicks per week (~60% of average production) in the broiler farms. The hatchery and broiler farms will be loosely integrated by a supply contract.
5) Chicken abattoir, Frozen meat depots and shops – Chicken abattoirs are capital intensive and trading conditions are tough at present although stocks and thus prices are starting to move. The abattoir needs to piggyback on the profits generated by a number of frozen meat depots and satellite franchised retail frozen meat shops. Both depots and shops are mark-up type businesses with relatively low risk and potentially high profits.
Phases of implementation;
1) Integrated Broiler Project (IBP)
· Eight Mashashane broiler breeder farmers – 3 already started
· Mashashane Hatchery – in the process of refurbishment
· Sixteen Lebowa Broiler Farmers – About to start refurbishment, open date 03/03
· Qlity Chicks Abattoir – About to start refurbishment, open date 04/03
2) Integrated Beef Production
· Beef Abattoir – 2003
· Beef Feedlot – 2003
· Beef Cattle Farms – 2003
3) Feed Production
· Feed Mill – 2003
· Crop Farms – 2003
4) Integrated Distribution
· Frozen Meat Depots 03/03
· Frozen Meat Shops 03/03
MARKETS AND MARKETING
Although the Limpopo Province is not agriculturally rich, it has abundant resources and the potential to produce a significant proportion of its own feed and food products. However, at present most of the feed and food products are imported into the province. There is a significant market and opportunity in the province for locally produced feeds and food and thus for branded Frozen Meat Depot’s and Frozen Meat Shop’s that target lower income consumers. The establishment of 8 new platinum mines will significantly increase the spending power of consumers in the region and create a multiplier effect in the region. Chicken and beef meat are products purchased by the state (hospitals, prisons, defense forces and schools) and the proposed BU’s will benefit from the “Captive Market” created by the government preferential tender procedure for Black Economic Empowerment firms. The integration process itself creates contractual captive markets for Business Units that are part of the “Value Chain”. The mark-up on bulk and retail fast food meat is generally high and there is scope for integrated firms, that share profit at different sites, to successfully compete with value, quality, service and price.
FINANCIAL REQUIREMENTS AND PERFORMANCE
INVESTMENT REQUIRED
Table 1 below shows the estimated level of investment for each functional operation and each Business Unit within each operation. It has been assumed that existing state owned projects, some with developed infrastructure, will be used and thus capital requirements are low. The cattle farms will be stocked from the proposed state development herd and farmers will not have to buy in breeding stock. From table 1 it can be seen that the ratio of development capital : Net Farm Income is very favourable at 1:1.24. Table 2 shows how the integration process shifts profits to the less profitable enterprises to make them viable.