Many African countries have “boards” to regulate and promote the production of various commodities (such as cotton, mentioned earlier). Sometimes these boards actually help. Frequently, they just distort the free market and offer opportunities for corruption and political manipulation. Usually, these boards are heavily lobbied by farmers to institute minimum commodity prices and to limit imports. Purchasers and processors of the farmers’ produce usually lobby the boards to let the free market reign, which typically drives down their costs. Schemers on both sides often lobby the boards to institute particular regulations so that they can manipulate the market to their advantage. I hadn’t seen this type of behavior in my limited exposure to the Cotton Board, and I was curious as to what I would see when I went to the Dairy Board, the analogous organization for the dairy industry.
As part of the Dairy Board’s efforts to grow the industry in Swaziland, the meeting with farmers was intended to get them all (large and small) to form a united front for the anticipated meeting between the dairy farmers and the production/marketing companies. The hope of the Dairy Board was that they could get local dairy farmers to provide a reliable and continuous supply of milk to the formal market. On the other side of the equation, the Dairy Board wanted to get the production/marketing companies to buy the local milk at a price that would allow the dairy farmers to make a profit. It was a huge challenge, but the Dairy Board had resources beyond the normal market mechanisms to make things happen. For example, the local milk production companies had been importing powdered milk from South America at a very low price and reconstituting it to sell as whole milk in Swaziland. The Dairy Board put an import tariff on powdered milk. This hurt the profits of the milk production companies and got their attention. They became more willing to explore options for using local milk, and so the meetings began.
This first meeting in the planned series indicated that the process would be long and difficult. We only stayed for the first three hours, but the general tone was pretty acrimonious. The dairy industry in Swaziland, a very small country, was very fragmented. There were a few moderately large dairy farms, but even those had only a few hundred cows each, much smaller than the successful dairy farms in South Africa. On the other end of the scale, many small dairy farmers had only a few cows. Some of these small farmers were organized into associations or cooperatives, but none of these organizations spoke to each other. The only things that the collected participants could seem to agree on were that the selling price of raw milk was too low and that the government (including the Dairy Board) was not doing very much for the dairy farmers. As an independent party with no vested interest in the industry and a personal orientation to free trade and comparative advantage, most of the comments sounded to me like self-serving statements from a very parochial point of view. On the other hand, isn’t this what happens with every industry in every country with the outcome based more on politics than economics? Just look at the history of sugar, cotton, corn (including ethanol), steel, dairy, and computer memory chips in the United States. We preach free markets to the developing world but manipulate as much as possible with subsidies, import tariffs, etc., for the benefit of narrow interests (with political influence) at home.
At the break in the meeting after the first three hours, we took our opportunity to meet with the director of the Dairy Board. I had not met the director before. I was anticipating a political hack with unreasonable goals and no plans for accomplishing them. I was totally wrong. The director was an intelligent, articulate youngish man with a degree in veterinary medicine and an MBA from Leeds University in England. He listened intently as we presented our view that the commodity milk industry was not viable in Swaziland because of the high cost of production compared to the much larger farms in South Africa. We went on further to say that we thought the only opportunity for success was to develop a branded specialty dairy industry by integrating forward and promoting the desirable qualities of the Jersey milk produced by the local farmers.
After we had finished our presentation, the director thanked us, and then went on to explain, very thoughtfully, why the Dairy Board was not going to follow our approach. He explained the political issues, mentioned the huge level of unemployment, discussed treaties on trade, discussions with the South African government, actions taken by Namibia to close their border to dairy products, etc. In the end, it all came down to the imperative of developing a broad Swazi dairy industry. Politically, he had no choice, and he intended to aggressively pursue the mandate he had been given. He knew that he had a lot of work to do on all sides of the equation. He knew that he had to convince the local processors/marketers to take the local milk at a reasonable price. He knew that this would be difficult, but he thought that he had enough regulatory and financial clout to get their participation. He also felt that the larger challenge would be to organize the local dairy farmers to provide a reliable, continuous supply of milk that the producers could access. He wanted to get the small farmers to organize into associations or cooperatives with centralized milk collection centers to reduce costs and allow the producers to economically collect their milk. It was an incredibly ambitious, but logical, plan with many political and economic hurdles to overcome. TechnoServe had helped smallholder farmers with a similar approach in Kenya, and it had been very successful. However, Kenya didn’t have the huge dairy farms of South Africa sitting just across the border, and the price that Kenyan dairy farmers received for their milk was approximately equal to the Swazi farmers’ cost of production. We wished the director well and offered our help in setting up the cooperatives once his concepts had been accepted and the dairy farmers were ready.
At the end of the day, Mkhululi got a call from the director of the Dairy Board. While we were having our private meeting, the larger meeting had restarted and the participants had hijacked the agenda. When we left the meeting, the dairy farmers were being facilitated through a SWOT (strengths, weaknesses, opportunities, and threats) analysis of the dairy industry in Swaziland. While the director was out of the room, the dairy farmers had revolted against continuing the SWOT and had said that their only purpose for the meeting was to agree on a price to demand from the milk processors. They agreed that they should demand E4.5 per liter, roughly double what the processors were paying for milk. All of this was completed by the time the director got back into the meeting room. He definitely had his work cut out for him!
One of the fascinating things about international development and particularly the TechnoServe approach is that you learn the details of topics that you could never have imagined that you would understand. My background in consulting was useful because for every consulting project, I had to quickly learn at least the essentials of the client’s business. Most of my consulting was in computer hardware, so I was pretty knowledgeable about computer marketing, manufacturing, product development, and customer service. I understood the details of manufacturing disk drives in China and how to configure personal computers in Ireland to ship to different countries in Europe. I had even branched out into understanding semiconductor manufacturing and software development. But I knew nothing about agriculture. In Africa, I had gotten introduced to the specifics of cotton and dairy production, and I got really familiar with pigs. Coming from an educational background in electrical engineering and business plus my career in the high technology industry, I could never have imagined that I would become so knowledgeable about the pork industry. Mkhululi was the business advisor for all of the feed and livestock industry and had concluded that not only could the pork industry be very viable in Swaziland, it could also provide income to a large number of poor rural farmers. His analysis caught my attention and interest because it suggested so much potential. In addition, I was enthralled with the unique terminology used in the industry. My favorite word was weaner. This, as might be suspected, is a little pig that has just been weaned from its mother. What made it funny to me was that these weaners would be fattened up and then sold to a butcher who would turn them into wieners. I know it’s silly, but every time I hear the word weaner, I still envision a little sausage with a head running around on four tiny legs.
Only slightly more serious, when pigs are born, they are suckers, who soon become weaners. They are then fed to be fattened up and grow into porkers. Most of the male porkers get sold to be slaughtered and turned into pork. Among the females, most of the culls (not chosen to become reproducing sows) also meet this fate. Some of both the male and female porkers get fattened up further to be sold as baconers. However, the best females are raised to be gilts (analogous to a heifer) ultimately to become breeding sows. When they have achieved a sufficient age, the gilts are serviced by either a boar or artificial insemination. Four months later, as sows, they give birth to approximately ten suckers. This cycle continues twice a year for about three years. By this time, the sows have become tired sows (no wonder), and they don’t produce as many suckers. So it’s off to the abattoir for the tired sows that get replaced by new gilts.
Although the terminology is amusing, the pork industry is a very serious business. Large piggeries can have thousands of animals at one time in all of the above stages. They plan and closely monitor all of the critical steps in the breeding and growing processes and the associated financials. They know how much feed an animal should eat at each stage and how much it should cost. They can tell you how many kilograms in weight a pig gains for each kilogram of feed it eats at each stage of a pig’s life. They know that a sow produces 9.8 piglets per litter and has 2.2 litters per year. It was fascinating, and I could work with the numbers.
On the other hand, the pig business stinks, literally not figuratively. I mean anywhere near a pig farm, it really smells bad. And you don’t get accustomed to the smell as you do with other odors. At least not during the several hours I spent on a pig farm.
More specifically, I had been helping Mkhululi with his modeling of a pork industry in Swaziland. Mkhululi had envisioned a pork industry with three tiers. At the top would be a “multiplier.” The primary objective of the multiplier would be to produce gilts (future sows). These gilts could then be sold to small farmers who would own one to a few sows. These breeding sows would produce piglets that would be sold at the weaner stage to larger growing farms that would fatten up the weaners and sell them to be slaughtered. Mkhululi thought that the business of owning sows and producing weaners could be a simple, profitable business not requiring much capital. For these reasons, it could be operated by relatively poor farmers, even starting with one sow. It sounded like just the kind of business that TechnoServe liked to develop.
However, Mkhululi had been having some trouble with the numbers. As he had conceived and modeled it, the multiplier wasn’t profitable. He knew that something must be wrong because there are people in the business, and they do make money. We had checked all of his assumptions on costs, birth rates, etc.; and still things weren’t coming out right. He needed experienced help, much more than I could give him. I suggested that he meet with one of the experts he had previously contacted to go over his numbers in detail and figure out the problem. He thought that was a good idea and that I should go along. I agreed. So we set out on a two-and-a-half-hour drive into South Africa to visit a gigantic pig farm and the manager who had graciously offered to help us.
Mkhululi had been to the pig farm before and thought he remembered how to get there. He didn’t ask for directions and didn’t need a map. As an interesting sidelight, most Swazis I met didn’t use maps. I later observed the same phenomenon in other African countries, but it was more pronounced in Swaziland. It might be that maps have historically not been available, but many Swazis will freely admit that they are not good at reading maps. However, they are very good at directions. When they go to a place, they just memorize how they got there and the landmarks that they passed. I had experienced this many times, so I wasn’t worried about Mkhululi. We should have gotten directions. He remembered perfectly how to get to the piggery except for one detail, the highway exit where we needed to turn. So we got off the highway at a number of exits to let Mkhululi look around and see if the terrain looked familiar. Finally, we got off at an exit and were able to stop a truck driver who told us that we needed to take the very next exit. Once we got off at the right exit, Mkhululi knew exactly how to get to the farm and how to maneuver down the farm’s many dirt roads to get to the piggery office.
The manager of the piggery was a very pleasant and helpful person. He voluntarily gave us his whole afternoon to go over our projections and explain how they related to the actual production figures from his operations. He had worked on this pig farm for over twenty years, I think since he graduated from college, so he had many figures readily available in his head. For those he didn’t, he accessed files in his office and gave us very detailed information. As we went through the model, our heads were spinning with all the numbers. However, we found at least part of our problem. In Mkhululi’s model, he had assumed that the multiplier would sell most of its piglets at weaner stage and only keep a few who would grow into the gilts. It was hard to sell weaners at the right price to make money. The money got made in fattening up the pigs for market. Mkhululi needed to restructure his model.
Besides the numbers, our meeting with the piggery manager had some other interesting aspects. As we were listening intently to some other dimensions of pig farm management, we heard a little noise from the bookcase behind the manager. I looked up at the device that had made the noise but couldn’t figure out what it was. Shortly, however, the smell of pipe tobacco began to fill the room, but no one was smoking. As I mentioned previously, the stench of the pig farm was pervasive, and it definitely penetrated the manager’s office. I deduced that the little noise must have been from an air freshener that was dispensing the fragrance of pipe tobacco. I don’t know if eau de pipe tobacco was chosen because it’s a manly smell or because it may be the only fragrance that could cover up pig stench. In any case, it worked for a while, but it didn’t take long for the pig smell to dominate again.
Another interesting dimension to the conversation emerged when the manager made a comment about farm management and employees. The huge farm had been divided into smaller units to allow each of these units to be more tightly managed, which had been a successful transition. The manager further explained that this simplification allowed the “black chappies” that they employed to control their operations without a lot of supervision.
I’m sure it was meant as a simple statement of fact with no ill intent. However, to my politically sensitive American ears, it set off alarm bells. When I talked to him later, Mkhululi said I visibly straightened in my chair as I heard the words come out. There is still a lot of racism in the United States, so I must admit it hadn’t been that long ago since I had heard an intentional racist comment made in informal conversation. However, it had been many years since I had heard this type of inadvertent racism in a work situation, especially from someone in a responsible position, who otherwise seemed like a nice, intelligent individual. It would have been fine if he had talked about hiring the locals with limited education, but there was that implicit assumption of the tie between race and the lack of capability. And he said it right to Mkhululi, who of course is black.
I discussed this with Mkhululi on our drive back to Swaziland. I explained that this type of phrasing had been considered professionally unacceptable and racist for many years in the United States. I wondered what the standard was here. Mkhululi explained that in Swaziland, this type of phrasing was definitely unacceptable. He suspected that in sophisticated society around Johannesburg and other South African cities, it would also be unacceptable. It was probably just in the more isolated rural areas where this manner of speaking still existed.
Race and racism are interesting, if usually unpleasant, topics. It is fascinating to me how people can devise complex schemes to discriminate against their neighbors and fellow citizens. It’s also fascinating, and of course sad, to contrast the differences in the way the United States and South Africa practiced discrimination. Mkhululi pointed out that the former king of Swaziland, Sobhuza II, had been very wise in this regard. When Swaziland had gained its independence from Great Britain, Sobhuza had not expelled the whites from Swaziland or even quickly replaced them in their important jobs as had been done in most other African countries. Sobhuza had believed that the different races could live peaceably together and that the Swazis should benefit from the accumulated knowledge of the whites who were in the country. The transition in Swaziland was peaceful and successful, and Mkhululi insisted that Nelson Mandela had used Sobhuza II as his role model for the transition in South Africa. Most Swazis are very proud of their heritage but have a slight tendency to embellish their history.
Several weeks later, Mkhululi and I visited another smaller pig farm and an abattoir. We got more information, and I learned a new word. A cutter is a pig between the size of a porker and a baconer. They get cut from the group if they eat too much food and don’t gain enough weight.
We also confirmed our financial analysis that said the best economic return for a pig farmer would come from selling all of his pigs at the baconer stage. However, we learned the market would not accept all of its pork in cuts that large. There was a sizable demand for porker or cutter size cuts of pork in the markets. Consequently, most farmers couldn’t realistically sell everything as baconers. Who knew? Mkhululi and I were becoming so informed!
Tasty Meals Business Plan and the Bank
For a number of weeks, I had spent many hours developing the Tasty Meals business plan. Tasty Meals needed financing to restart their operation. We had to go back to their bank and demonstrate how they could be successful with additional financing. Without a really solid business plan, there would be no hope, and Tasty Meals would become just another one of the hundreds of businesses around the world that fail every day. The business plan would show that they could be successful, and it would show how. There would be two crucial pieces, one describing how Tasty Meals would assure a year-round supply of mealies and the other describing how they knew that they could sell enough mealie bread to be reliably profitable. But in addition to these two crucial pieces, there would be a lot of other required sections. When financing a business, the investor has to know how all parts of the business will work. He has to know that all the pieces will be integrated without weak links to endanger the business. I had to convey this information in two forms, text and pro forma financial statements. The text described the market, the consumers, and the competition. It then explained how the business would satisfy customers, overcome competition, and garner enough market share to be successful. The pro forma financial statements showed how everything in the text got converted into financial numbers, which was, of course, the bottom line. Developing each of these required a lot of work.
A good business plan must describe very clearly how the business will operate to show that the entrepreneur has thought very deeply about the business and the many alternatives for running it. It shows that the entrepreneur has selected consistent approaches for all aspects of the business to support the overall strategy. Both the text and the financial statements must all be internally consistent. That leads to one of the challenges in developing the business plan. Everything is linked together, and a small change in one area ripples through with implications for everything else. For example, a decision to do more advertising in the early stages of the business naturally increases expenses on the income statement. However, it also generates the need for additional financing, which changes the cash flow statement. But the additional cash required means that the loan payments and interest charges must be recalculated to again update the income statement and the cash flow statement. The increase in expenses means that the breakeven production volume has to be recalculated as does the loan payments coverage. Fortunately, another TechnoServe colleague had developed a package of ten linked spreadsheets that allowed for a lot of the financial statements to be updated automatically, but the numbers had to be checked, and the related textual comments had to be updated manually and individually.
As I continued to make adjustments and refinements, I waited for our controller to produce up-to-date Tasty Meals financial statements so we would have a starting point for our projections. When they were finished, it was great to have real numbers, but the numbers were very depressing. Tasty Meals had gone through (i.e., lost) $70,000 in the seven months they had been in business. This included a $50,000 bank loan plus a $20,000 line of credit. Now we were going back to the bank to ask for $40,000 more! On the other hand, the business plan looked solid. If the bank wouldn’t grant the new loan, they would have to foreclose on the property that Phiwa put up as collateral. Originally, I had been thinking that this would be a difficult decision for the bank, but I was just being too hopeful for my client. When supporting hopeful entrepreneurs, it was very easy to get sentimental and let hopes and dreams for their success get in the way of cold, hard, realistic thinking. I thought Leslie and Mkhululi were letting their emotions cloud their thinking on dairy, and I was doing it myself on Tasty Meals. If we had been dealing with an equity investor, he could have seen a potential upside from a successful business. Realistically, I knew the bank would just see more risk, and I knew that banks hate risk. In my experience, when banks lend money, they want to have at least two ways of getting their money back. First they want to see pro forma financial statements from a successful business plan that shows the company generating more than enough cash to pay back their loan. But this is never enough. Banks also want to see how they will get paid back when things don’t go well for the business. Typically this means collateral. The banks want access to the customer’s assets that the bank can sell to pay off the loan if things don’t go well. I thought we had a great business plan, but Phiwa had no more collateral to pledge against a new loan. I resolved to remain hopeful, but the feeling in the pit of stomach told me what was going to happen. I knew times would be tough for everyone involved but especially for Phiwa.
Finally, Leslie and I accompanied Phiwa to the bank to request the additional loan for Tasty Meals. The meeting went about as well as could be expected. We had given the bankers the Tasty Meals business plan the day before, but they had not had time to read it. So they hadn’t had a chance to be impressed by our wonderful prose or elegant pro forma financial statements. Actually, the current balance sheet didn’t show in our favor, and I don’t think bankers ever get impressed by nice prose. In any case, after Phiwa’s overview of the loan request, the lead banker asked the predictable questions. I can actually say they were predictable because I had coached Phiwa on them ahead of time. The banker wanted to know what arrangements had been made to secure the green mealies. She asked why he had lost so much money in such a short period and how it would be different with a new loan. She asked about competition. She especially asked about additional collateral that certainly would be required and Phiwa didn’t have. Finally she suggested that Phiwa get a partner who could provide management help as well as additional capital. She said that they would read the business plan, do their own analysis, and then get back to Phiwa.
Phiwa remained upbeat throughout the meeting, and we assured him that he had responded well to the questions. It was just that from the basic situation, it was nearly impossible for the bank to justify a new loan. He said he would look for a partner.
Wrapping Up in Swaziland
December came quickly, and it was time to wrap up our work in Swaziland, not because we had accomplished all that we had hoped for, but because our planned stay was nearly finished. But before we left, we had one last adventure. Our good friend Carolyn had come for a visit, and we got to do some touring with her. On her last day in Swaziland, I played chauffer for a shopping day, taking Carolyn and Wendy to many different locations that sold various Swazi craft items. Our last stop was Ngwena Glass near the border with South Africa. After sizable purchases by both Wendy and Carolyn, we were ready to leave and noticed that the weather was becoming threatening. Large black clouds were moving in our direction from the west. After driving for a while, the rain started and then began falling hard. I told Carolyn not to be surprised if it began to hail since we had experienced hail several times over the past months. Within thirty seconds, we began to hear the pitter-patter of hail as it bounced off the car.
I don’t know precisely why it is, but I think the mountainous terrain of Swaziland combined with its geographical location generates extreme weather patterns. Although the terrible windstorm we experienced when we first arrived was unusual, Swaziland frequently has very strong winds at certain times during the winter. Also hail was not uncommon. For the nonmeteorologists, hail is generated by turbulent weather that causes raindrops to be swept up into the upper atmosphere where they freeze before falling to the ground. Very turbulent weather can carry small hailstones, which accumulate more water on their downward journey, back into the upper atmosphere to refreeze into larger hailstones. This process can continue until the turbulence can no longer lift the large hailstones, and they fall to the ground.
This is relevant because, as we drove along, we were about to experience very turbulent weather and very large hailstones. The best way to describe the experience is to recreate the dialogue in the car as closely as I can remember it.
“It’s hailing, just like you said.”
A small amount of time passes.
“Wow, those are hitting really hard.”
“Those hailstones are getting bigger.”
“Wow. Those are really big. They could be dangerous.”
“Oh my god! If one of those hit the windshield, it could break.”
“Oh my god! That broke the windshield.”
“There’s another break in the windshield, and that one dented the hood.”
We continued to drive through the bombardment. I felt like an unwelcome American in a foreign country where people were pelting the car with large rocks. Some of the hailstones were the size of softballs but irregular in shape. Fortunately, the car was protecting us, and although the windshield was being cracked into a mass of overlapping spider webs, it held intact.
