How can we make the chicken industry fly? Discussion paper on the economics of the Mozambican chicken industry, related analysis, and recommendations Compiled for TechnoServe, Mozambique and the Poultry Industry Development Group by John Foong For inquiries, please contact [email protected] June 2005 ---- Published 2006

1

Table of contents Executive Summary................................................................................................................3 Introduction.............................................................................................................................4 Understanding the economics of the poultry industry........................................................6 [ introduction to the economics ] ................................................................................................ 6 [ drivers of cost ] .............................................................................................................................. 7 [ other notable economic drivers ] ............................................................................................ 11 The agricultural value chain in Mozambique......................................................................12 [ value chain overview ]................................................................................................................ 12 [ the farming sector ]..................................................................................................................... 13 [ the oil pressing sector ] ............................................................................................................. 14 [ the livestock (non-poultry) and abattoir sectors ] .............................................................. 16 World Trends in Poultry .......................................................................................................18 [ a brief history of poultry ].......................................................................................................... 18 [ factors affecting the world market ]........................................................................................ 18 [ where does the poultry come from? ] .................................................................................... 19 Overview of the Mozambican Poultry Industry ..................................................................21 [ northern mozambique ].............................................................................................................. 22 [ central mozambique ] ................................................................................................................. 23 [ southern mozambique ] ............................................................................................................. 25 [ eggs? ] ............................................................................................................................................ 26 A model for how NGOs should engage with Industry .......................................................27 [ introductory thoughts ] .............................................................................................................. 27 [ dealing with constrained markets ] ........................................................................................ 28 Recommended solution framework ....................................................................................30 [ solution 1: create an industry development group ].......................................................... 30 [ solution 2: provide assistance to implement overseas best practice ] ........................ 32 [ solution 3: lower the cost of soya cake and ultimate stimulate local production ]... 36 Appendix: Chicken for dummies – a pictorial overview of how it works.........................38 Appendix: final caveats........................................................................................................40 Other attachments (See rest of CD): • Excel model – Broiler cost breakdown with facts/assumptions and changeable model • Discussion paper on the introduction of higher and enforceable standards, especially in relation to imported chicken – includes recommendations (which were omitted from this document) • Presentations to USAID/Emprenda o 22nd April 2005: Overview of the Mozambican agricultural value chain o 7th May 2005: Financial analysis of the cost of a chicken and price comparisons o 24th May 2005: Final findings, regional analysis and recommendations • USDA proposal as at 30 June 2005 (later slightly modified) o 2 page PowerPoint summary o Word document

2

Executive Summary 1. The goal is to increase the number of chickens produced in Mozambique 2. Poultry – like other produce “down” the value chain – has a strong indirect effect on employment. For every extra million broilers produced commercially, 9,000 jobs are stimulated – many of these “upstream” in the farming sector 3. Achieving the goal can only happen in one of five ways – by becoming cheaper than imports (including transport), having higher actual quality than imports, having higher perceived quality than imports, penetrating new markets, or increasing chickens consumed per person 4. Of these, the most potent lever is to reduce costs. 74% of costs is chicken feed – and half of the feed cost is soya cake 5. Whilst broilers can be produced more cheaply overseas, once costs can be reduced below 38,000-40,000 mzm, it will become uneconomical for traders to buy overseas chickens; increasing demand for domestically-produced ones 6. The oilseed and livestock industries in Mozambique are struggling, with lower global prices making recovery difficult 7. Brazil is the world’s agricultural powerhouse – and have recently become the largest exporter of poultry, with some 70% of imports into Mozambique originating from there (as at 2005, typically shipped via the Middle East). However, sub-Saharan Africa holds great potential as a “forgotten” market … 8. As at mid-2005, the Mozambican poultry industry is struggling – particularly the Maputo producers, who are most exposed to import shocks and interruptions in production. Only Abilio Antunes is generally being competitive, though others are trying 9. Eggs – whilst not examined in this paper – may provide better returns than broilers – if the 6 month cash flow lag can be absorbed 10. The role of organizations of Emprenda is to be an “enabler” – taking a constrained market (like poultry), working with other stakeholders 11. The first solution is to form a Poultry Industry Development Group – providing a forum to work closely with government on policy issues, and potentially joint marketing 12. The second solution proposed is to implement key learnings from Brazil – matching the right tasks for the right economies of scale. In particular, using families as the chicken growers – working in partnership with large processors – is highly economical 13. The third solution is to promote the growth of soya bean (and cake) in Mozambique; in the meantime collaborating to start bulk purchasing of cake to save costs 3

Introduction The fundamental message of this report is as follows: poultry is an extremely important commodity and whilst Mozambique has a number of barriers to success, victory may be possible.

If we can increase the amount of local production, it will have a flowon effect across five industries … Maize

Feed

Cake

Oil Mill

Soya Groundnut Sunflower

Fish meal & Vitamins

MORE CHICKENS FROM LOCAL SOURCES

Chicken industry Hatcheries industry Farming industry Oilseed processing industry

Feed Hatchery

EGGS

Feed mills

CHICKEN

Hatchery

EGGS

Source: value chain analysis

The above chart demonstrates just how much direct and indirect impact poultry can have – successful local poultry industries create booming local markets for numerous commodities, as well as employment for many (notwithstanding the smallholder outsourcing strategy outlined later in this document). In fact, to produce a million broilers in 1 year, some 1,500 hectares are required; requiring throughput of over 4,000 tons of feed with 4 chick incubators and 30 growing sheds (an investment of $2.2 million), requiring ongoing employment of 9,000 people: thus, replacing imports with local chickens would result in the creation of approximately 9,000 (jobs per million broilers created) x 14 (million imports that could be replaced) = 126,000 permanent jobs that would be created – without even considering the egg industry’s potential! The remainder of the document is all about the second part – how to achieve victory. This is the complicated part. Mozambique – like most of sub-Saharan Africa – is laden with numerous difficulties to make any businesses work; particularly volatile ones such as agriculture.

4

Hopefully by reading this document, you will: •

•

• •

gain an understanding of how to think about the Mozambican poultry industry – this framework will be important for any future poultry work, and will allow you to analyse the effect of any external or internal change on Mozambican poultry success discover what we feel are the key levers that will drive victory or failure, and our solutions for addressing this (all of which have been implemented by the time of publishing this document) understand the Mozambican agricultural (and value chain) context at a high level understand the poultry context in Mozambique (2005) and the world (up to now).

For those of you who would like to see that in a single diagram (as at 2005): The The vision: vision: to to be be the the high high quality, quality, low low cost cost poultry poultry producing producing country country in in subsubSaharan Saharan Africa Africa Poultry Poultry is is important important to to Mozambique Mozambique

Poultry Poultry is is an an attractive attractive industry industry for for Mozambique Mozambique SITUATION

• Causes significant flow-on effects in five sectors. Poultry directly impacts the processing, hatchery and feed mill sectors, and has substantial affect on the oilseed processing and farming sectors • Profitably employs many. For every additional million broilers sold, approx. 9,000 people are employed across the chain. There are more than 14 million imports being brought in presently which result in no local employment • Small-scale production possibilities. Due to its rapid cash flow and ease to monitor, poultry has been proven to work profitably for small scalers in many other countries (eg Brazil, Zimbabwe)

• Already good progress in industry. There are already 5 commercial producers in Mozambique, with more parts of the poultry chain (particularly feed mills) developing • Chicken consumption increases with incomes. The market for chicken meat directly correlates with income levels – which should continue to increase in Mozambique. Furthermore, Mozambicans favour chickens over other meats due to their heritage • Fair profit margins in broiler and egg sectors. Eggs can be very profitable (30-50% gross margin) and some broiler producers are already making a small profit in Mozambique

Mozambique Mozambique has has aa potential potential subsubSaharan Saharan African African market market of of millions millions

But But the the domestic domestic industry industry is is under under major major threat threat from from imports imports COMPLICATION

1. The world market is demanding • Brazil, even after shipping, is far more cost-competitive. more chickens. Increased global Brazil’s cost of production is consumption under half of the current Mozambican costs; even after 2. The world market is willing to shipping and importer profit pay more. Prices are highly taking, their prices are the variable, but with a strong upward same or lower trajectory – particularly for exported chicken parts • Maputo’s producers – large and small – have substantial 3. Sub-Saharan Africa is not willing to pay. Africans generally issues. Each of the 3 major producers in Maputo are prefer whole chickens (less revenue per chicken) and cannot having difficulty selling all production; small scale match the prices the Middle East will pay for it producers are also unprofitable and exiting the 4. South Africa is not supplying market much of the rest of Africa. South Africa, despite its chicken • The rest of Mozambique is not fully serviced due to producers, is a net importer lack of competition. Whilst the central and northern 5. With sub-Saharan Africa is being left behind, the Mozambique markets are import-competitive, they have opportunity remains for one not yet penetrated the smaller country to rise. With no one – locally or globally – focusing on cities with commercial chicken this market of 600 million people, a low cost, high quality producer could capture it

To To win, win, we we must must focus focus on on lower lower costs costs and and higher higher quality quality RESOLUTION 1. There are three main stages to this industry strategy.
Now: 2/3 of the commercial market is from imports
Next: Reduce level of imports to