By Dave Ramaswamy, for Africa Agribusiness Magazine
Suguna Foods Limited, a division of Suguna Holdings, is India’s largest poultry company. Started with a seed capital of about $500, it has grown to $1 billion annual revenue (Rupees 6000 Crore) Suguna operates an innovative contract farming model—with a network of 20,000 farmers—that it now wants to adapt in African countries with suitable local partners.
Dave: How many farmers are there in Suguna’s farming network, and what is your pitch to them? What does Suguna offer to them?
Soundararajan: We work based on a contract farming model. A contract farming model, whether in India, Africa or any other region of the globe, works in a similar way [and is] based on inputs and outputs. Investments in fixed assets, such as land and buildings, have to be made by the farmer. The management practices have to be implemented by the farmer.
Suguna will provide all the working capital requirements to the farmer. This starts with the poultry chicks, feed, medicines, vaccines, advisory on best management practices and supervision techniques. Suguna will also make all the working capital investments. The farmer will then become an “outgrower” for the company. A farmer will then go on to raise fully grown chicks in about 40 to 45 days. Suguna will take back the live birds on payment of growing charges, based on weight gained by the bird.
Dave: So are you guaranteeing buyback?
Soundararajan: Yes. Suguna’s role is producing the chicks, producing the feed, supplying these to the farmer, educating the farmer, supervising the growth of the chicken to ensure health, and then marketing of the chicken to distributors. In India we have about 20,000 farmers in our network.
Dave: What does marketing involve? You mean the grown, live birds?
Soundararajan: Yes. In India, 95 percent of the chicken is sold as live birds. In Africa, too, it would be a similar proportion. Frozen or processed chicken is the remaining 5 percent share of the market. Wherever processing is needed we have our own processing plants. With proper packaging and branding, we take this product to the consumers directly.
Dave: Through your own branded Suguna retail outlets?
Soundararajan: Yes. We have our own branded shops, about 170 to 180 of them now. Through those we are doing retailing of the processed chicken. For marketing live birds, there is a two-tier structure below us. We sell to distributors in each Indian city, who then turn around and sell to retailers. The distributors take delivery of chickens at farm gate, and then distribute to retailers.
Dave: What is a typical investment required by a farmer on land and buildings? Do they approach Suguna, or do you approach them?
Soundararajan: At this point in our history—we have been operating for 30 years, and with our good reputation—the farmers approach us. For investments, it is tough to say because there is no fixed amount. We have contract farmers who have poultry sheds ranging from 2000 birds to 20,000 birds. The per bird investment required would range from 120 Rupees to 150 Rupees, as you know what return you will get, and then figure out what working capital you will need. (Note: $2 to $2.50 at prevailing exchange rates)
Dave: What is the typical return delivered to the farmer?
Soundararajan: The annual returns for farmers ranges from 16 or 17 percent to 20 percent. They usually recover their investments in four to five years. Also, once farmers join our network, we succeed in at least doubling their incomes.
Dave: Now I want to talk about the genesis of the company. How did you get the contract farming idea, and what were the challenges in the first few years of growth?
Soundararajan: My brother and I started Suguna in 1984, with seed capital of 5000 Rupees, (about $500 at that time), as a trading company dealing with poultry feed and medicines. In 1990 there was a situation in India where farmers were producing surplus chicken and unable to sell at the right time and at the right price. Due to this, farmers lost a lot of money and many went bankrupt.
We then saw an opportunity to implement the contract farming model. The farmers are good at growing chicken but not good at marketing it. They also cannot standardize things on the input side. At that time on the input side, there were many middlemen, up to 14 in some cases, between the supplier and the farmer. Money was going to the middlemen or the retailer, but not to the farmer, who did the most work.
To protect the interests of the farmer, we decided to implement a contract farming model. We had a chance to eliminate many middlemen on the input side. As I said, the role of up to 14 middlemen was taken over by Suguna.
First we became a supplier of inputs, then we standardized the product offering—poultry feed, medicines etc. We also standardized the quality of the inputs. By buying in bulk, we were able to control the prices for farmers, as well as increase negotiating power with our suppliers, in obtaining bulk discounts. We were able to deliver a complete “packaged offering” to the farmer with the right quality/price combination.
This way we allowed a farmer who joined our network to be focused purely on production, without having to run around to banks, suppliers or customers. The sales and marketing part of the chicken was also taken over by Suguna. Through our work, we also came to know about market supply and demand and the variation in pricing across seasons. We could take steps so that the farmers would not be adversely impacted. There was no way the farmer “would lose out” at any time with this contract farming model in place. Suguna would manage all the risks on their behalf. The company would handle any pricing fluctuations and make sure that the farmers were protected. Over the course of the 1990s, many farmers started becoming a part of our network as word of our pioneering model spread.
Now in India, 100,000 farmers are involved in the contract farming model for poultry, and we have about 20,000 farmers. We have become India’s largest poultry company, with over a one billion dollars in revenue.
Dave: In the 1990s and 2000s, there were periodic avian flu outbreaks. How did that impact your business?
Soundararajan: It did not impact our business too much. Wherever you have backyard poultry, there are multiple bird species, not just chicken. Other species got affected, not broiler or layer birds. Of course, in the early days, once the outbreak hit, consumers were fearful of eating chicken. So demand dipped initially during this period, but soon recovered. Nowadays, we feel consumers are more confident about the industry’s ability to handle such outbreaks, and they buy and eat chicken from different brands. The Suguna brand offers consumers peace of mind. There have been a few other outbreaks in the last two or three years in India, especially in the eastern part of the country. But this has not affected the rest of the country.
Now demand is stable in India and there is no drop in consumption, but instead we see a steady year-on-year increase. While the Indian poultry sector is growing at 10 percent annually, Suguna is expected to post 20 percent annual growth, and we see a growth of about 30 percent a year in our ready-to-eat and ready-to-cook chicken products.
Dave: Now in the US and Europe, there is a push to treat birds humanely. There is marketing of cage-free eggs. Do you see consumer demand for this in your Middle Eastern export markets?
Soundararajan: We see this trend mostly in Europe. It is still early days in the US. Such a product demand is only 5 percent of the total need. Only a small percentage of consumers request such products. We are ready to cater to this demand as and when required. The markets where we operate now—in India, Sri Lanka, Bangladesh and the Middle East—are quite price-sensitive, and we don’t hear of such requests now from our customers. In the next five years, we don’t see any change in this demand scenario. In Africa, it would also be a similar situation where consumers are price-sensitive.
European producers are losing their competitive edge to Brazilian suppliers. In Europe, there are bans in place for growing and marketing GMO food products. But Brazilian chicken sold in Europe is raised on GMO feed. In contrast, all of Suguna’s chicken is raised on non-GMO feed. The chicken we sell at our retail outlets has no added hormones.
Dave: Could you speak about your growth trajectory? How long did it take you to have 1000 farmers, 5000 farmers etc. in your network?
Soundararajan: In 1990 we had three farmers. In 1997 we had 40 farmers. In the year 2000 we had 1000 farmers. Now we are in excess of 20,000 farmers.
Dave: If you’re starting the company now in a new African geographic location with a local partner, what would you do differently? It took you about 25 years to reach 20,000 farmers? How long would it take you to reach 20,000 farmers knowing what you now?
Soundararajan: If there are no financing constraints and not much emphasis on margins, we can reach that number in about 10 years.
In India, markets are quite competitive now. We cannot expect the same level of growth we had before. We are producing 7.5 million chickens per week. If Suguna produces an additional million chickens per week, we would be oversupplying the market, and our margins will take a hit.
Dave: You talked to me earlier about your interests of entering African markets because of similarities with India, especially with comparable purchasing power levels. Also some African markets now are where India was 20 years ago, and so you could utilize your experience to serve those markets in a high-quality yet cost-effective way. What markets are you interested in entering?
Soundararajan: We have made exploratory visits to Kenya, Tanzania and Rwanda. There we found the contract farming model in poultry has yet to be started. And just like in India, the majority of the demand there now is in live birds. Those markets are not as developed as in India, so we could increase incomes of local farmers there while lowering prices for customers based on our 30 years of experience and knowledge.
In Kenya, they do about 600,000 to 1 million birds per week. Margins are much better than in India. Farm gate prices are much higher. There is a problem with procuring feed. Soya meal is imported. White corn/maize and not yellow corn/maize is grown.
The challenge will be getting the feed. Lot of good agricultural areas, but yellow corn is not allowed to be produced. They are worried about cross-pollination of white and yellow varieties. So we would have to compete with food grain. That is one problem. The other problem is getting soybean meal.
We don’t want to rely on imports for our feed. It would not be efficient and we cannot be assured of stable supplies and prices. We would be subject to political forces beyond our control, putting our operations at risk.
In any market we enter in Africa, we would like to lower the production cost for chicken to benefit local customers and help correct nutritional deficits, especially in proteins. For this, streamlining the regulatory system is most critical. For example, COMESA exists on paper, but there are still lot of regulatory barriers for free trade across these member countries.
Dave: If you enter an African country, would you go it alone or work with a local partner?
Soundararajan: We would definitely want a local partner. We would like and need the support of the local community. Also, a local partner can help us manage political risks and local complexities with their on-the-ground presence. We cannot do that sitting in South India.
Dave: Who would be a good candidate for a local partner?
Soundararajan: Based in India, we cannot assume an operational role in Africa. So we want someone there who knows the poultry business well. If we don’t have someone like that, we have to send people from India, both senior and operational people, to manage the business. This is not viable. Plus, this is not our philosophy. We want to train and develop local African manpower. We can give inputs, expertise and management guidance. That is easy for us. But the operations need to be fully handled by local people in Africa.
So we want an African partner who knows poultry, understands poultry and can be hands-on in running the business. Someone who we can trust and shares our values in promoting inclusive economic growth, raising farmer incomes and encouraging social development.
Dave: What would be the investment required by an African partner? How many birds per week?
Soundararajan: We would look at doing/reaching 100,000 birds per week. We could reach this level in three to four years. If you consider individual East African countries, they typically do half a million birds per week now. So we could help our local partner there to capture 20 percent of the market. In India, 50 million birds per week is the overall market. In each East African market, it varies from 400,000 to 600,000 birds per week now. That is, each country averaging about half a million birds per week. We cannot expect big volumes there.
In five to seven years, we can help an African country partner reach 20 percent to 25 percent of the market share doing 150,000 to 200,000 birds per week. You cannot reach 80 percent market share in any country; 15 to 20 percent market share is a viable target and is doable. To do 100,000 birds per week, about $4 million would be the total required investment. We can discuss with the potential African local partner how this investment commitment would be split, whether it would be 50-50 or some other ratio.
Dave: Does this investment amount include the feed business and input supply business like poultry medicines and enzymes?
Soundararajan: In African countries, that might be our ideal entry point. That would be to enter or start with the poultry breeding business and feed-milling business with a local partner. This would allow us to understand the market and then, after a few years, launch a contract farming business. You travel a lot in Africa and/or meet a lot of agribusiness people from there based in the United States. If you come across some good people in the poultry business, please put us in touch. They need to have poultry domain expertise. We would be happy to explore joint venture options with them.
For a market size of 500,000 birds per week, we can think of setting up a feed mill plant; 8000 to 10,000 tons per month would be the total required feed capacity, so we could try target 25 percent of that. So that would require a 2500 tons per month or 100 tons per day feed mill plant. This plant would require about $1.5 million dollars in investment.
I earlier talked about a $4 million dollar investment. Out of that two-thirds would go toward setting up breeding and feed milling operations.
Dave: What about the market for poultry medicines and enzymes?
Soundararajan: We have to handle that differently, through the distributor model. We have a company headquartered in Delhi, Bovian Healthcare Pvt. Ltd., which manufactures those. They are selling poultry medicine, vitamins and therapeutics all over India.
Dave: What about poultry equipment? Do you manufacture and export them?
Soundararajan: Yes, we do manufacture poultry equipment and sell within India. We currently export only to Bangladesh, and not to African markets. We could consider those on a case-by-case basis.
Dave: What about European and American manufacturers of poultry equipment?
Soundararajan: Their equipment is too big for most African markets. The investments required to purchase them would be ten times as much as Suguna’s equipment. So for most individual buyers in Africa, European/American equipment would be way over capacity, at least for the next 20 years.
Dave: In Africa, there is talk now of how to get youth interested in agriculture? How would you address this?
Soundararajan: The agribusiness sector has to give confidence to youth graduating from high school or college. Only then they will step in to this sector. Currently, many aspects of this sector are not integrated and/or there is lack of proper infrastructure.
Let us talk about agriculture in India, [where conditions are similar to much of sub-Saharan Africa]. Here even the older smallholder farmers are fed up. That is why they tell their children not to enter the farming business. They encourage their children to leave the village and go to the city for higher education. They advise their children to study engineering, medicine or information technology, and not return back to the farm.
In India, we see that after 10 or 15 years in the big crowded city, these children are stressed out and yearn to return back to their rural agricultural roots. In the IT sector, most people cannot work more than 10 years without feeling burnt out. In the manufacturing sectors, 70 percent to 80 percent of the product cost is the cost of the underlying input commodities or materials. In the IT sector, 70 percent to 80 percent of the software delivery cost are the people. So in the IT sector, they will cut costs by asking a given number of people to work more—to the point of burnout. So many of these IT professionals after seven to 10 years want to do something different. If they are from an agricultural background, many would think of returning to their rural roots. But when they come back home to their small town or village, the rural infrastructure is still weak, with no comforts and conveniences of the big city, like power, water, hospitals, restaurants etc. So, if you talk to ten smallholder farmers in India, all ten farmers will say, “Farming is not a future I want for my children.”
I think we could consider the kibbutz—group or collective farming—model to revitalize India and African agriculture. Israel was forced to adapt to this model in the wake of World War II. Now we can consider collective farming in a very structured way to meet looming food security challenges. Achieving farmers’ unity is a big problem with individual land holdings of two to three acres. In India, individual land holdings are much smaller than that. So we need to consider a farming unit of at least 1000 acres. On this plot size, five to ten young people can handle all farm functions if machinery rental and farming services are made available by third parties. Other young entrepreneurs could come together and provide these support services. Currently on one acre, you have two or three people working to achieve meager returns. This is not a lucrative opportunity for young ambitious people.
We have started the Suguna Institute of Poultry Management (SIPM) to train youths who want to enter this sector. Our aim is to help unemployed and underemployed youths to get self-employment opportunities across rural and urban India. SIPM imparts education and training on scientific poultry production, poultry farming, poultry breeder management, hatchery and incubation techniques, feed manufacturing and disease control measures. Our desire is to give hands-on training in various operations at different poultry farms and in its allied sectors, such as feed mills, processing plants, and disease quality control laboratories.
We welcome African officials and businessmen to visit our facilities so there can be an exchange of ideas.
Dave: There are a lot of donors who want to encourage smallholder farming in Africa, while you are saying even smallholders, at least in India, don’t want their children to follow in their footsteps.
Soundararajan: Farming on one acre is simply not economically viable or attractive. Your income is capped at a few hundred dollars a year after backbreaking work. No young person will choose this kind of life. Even their parents do not want this for them.
When you’re doing farming, out of total expenditure or total input costs, one of the topmost is that of labor. The second is fertilizers. Third may be pesticides and agrochemicals.
To gain confidence of youngsters, collective farming needs to be implemented at adequate unit sizes of at least 1000 acres. Then necessary support structures need to be put in place—like having access to farm equipment rentals, adequate water facilities for irrigation, uninterrupted power supply. All these things are needed. If these things are in place, a young person in India or Africa might be attracted to agriculture.
Dave: If I can summarize what you said, it is that “the network is the farm,” and we need adequate infrastructure and support systems to protect against downside risk from weather etc. Standalone farming with no irrigation on one-acre plots of land is just too risky.
Soundararajan: That is correct. In India, there are subsidies to buy new tractors—50 percent of the tractor cost is borne by the government. Where available, power to pump groundwater is free. Fertilizers and agricultural inputs for farmers are subsidized. Banks lend to farmers at 6 percent to 7 percent, well below lending rates to other sectors. Yet few young people want to enter agriculture because individual landholdings are capped at 15 acres. So governments need to get all the pieces of the agriculture support ecosystem right to encourage youth participation in agriculture.
Dave: Sir, thank you for your comments and time.
Soundararajan: You are welcome.