I invested in a dairy farm recently. The opportunity looked great on paper. I was supposed to get a decent ROI, and a predictable growth path.
Funnel your profits back into the business, and flourish into perpetuity. The popular narrative about dairy farming in Pakistan is that it is highly profitable. The popular narrative worldwide is that the future is in agro. What better place to invest, I thought. I had the opportunity to do something for the country, be part of an industry that on paper looks solid, and of course, make money – all in one swoop. This is what happened:
Animals. Animals. Animals.
The first rule of dairy farming is that you need to start with the right animals. It is much better to pay a premium to get the right animals, than trying your luck at the life-stock market (mandi). In our case, my working partner took a team comprising a vet, a former dairy farmer, and a milker – and still 20% of the resulting herd was seriously under performing and had to be replaced.
I think people are generally good (I guess I have been living away for too long), hence it is difficult for me to say this. But here goes: The livestock traders in Pakistan are terribly dishonest. The sellers employ all kinds of clever tactics to temporarily elevate the animal’s milk production – and sometimes even the experts cannot tell the difference.
There are some operators, however, who charge a significant premium but provide the right animals. Pay the premium.
Don’t trust the assumptions
My partner met with a number of dairy farmers to identify key parameters: consumption, production and sales price. I applied a 20% uplift on costs, and discount on production volume and sales price to estimate feasibility. The actual numbers were off by an order of magnitude.
Most smallish dairy farmers do not manage quantitatively, and have poor visibility into costs and revenues per animal. The larger players are (understandably) quite cagey about sharing financial data. Even if they share the data, their scale may be very different from yours making the numbers less relevant.
Also, I hate to break this to you, but animals are not machines. The yield per animal in the first 2 months was 1/3rd of the forecasted average. And here’s the rub, the average buffalo’s milking period is 10 months. So you have effectively lost 20% of its productive life-time in what can euphemistically be called, ramp-up period.
Its all about the mix.
Buffalo milk is easy to sell in Pakistan because it contains a higher percentage of solids (e.g. fat). It also fetches a better price than cow milk. The problem though is that the feed conversion ratio of buffaloes is typically egregious compared to cows. Translation: Cows produce much more milk per unit of feed consumed. This is a real big deal.
In fact one sophisticated farmer I spoke with said that running a sustainably profitable dairy farm based on buffalo milk production is very difficult. Pay more, and go for high yielding cows.
In our case, the feasibility we had developed was based on cows, but we succumbed to a false sense of urgency and started a buffalo based farm instead. The problem was that only industrial buyers (and certain sweetshop owners – halwais) purchase cow milk, and these contracts are usually signed once or twice a year. Rather than waiting, or finding direct references to establish these contracts, we went out and started a buffalo farm.
Don’t rush into it.
This brings me to the key point. When starting a business that you know nothing about, start (really) small. Test the assumptions and then put in more money. Starting with 10 animals is much better than starting with 50. Investing that time up front to practically understand how the business works is crucial. If the assumptions do not add up, then you can always make adjustments, or dispose the business without going into a financial tailspin.
Karachi is a f**ked up place.
Pardon my french, but there is no other way to say it. If you are based in Karachi, and want to actively manage the farm, then your only option is to set it up in the outskirts. Unless you have significant political clout, this is a terrible idea. Three months after setting up the farm, just as we were figuring out what to do, just as the operation was becoming marginally profitable, my partner got the parchi. Pay up or die.