Many years ago, in a land far, far away into the countryside, the chief and his clansmen realised that the forested hills a few kilometres away caused a lot of water to flow down to the grasslands during the rainy seasons which was then getting wasted away in the lowlands and onward to the sea. They noted that the water sped away untapped, and yet the families in the countryside went on for many days without drinking water during the dry spell. The village elders came together and agreed to seek out funds and pipe the water to the home yards using plastic pipes for domestic uses, watering animals and irrigation.
The land became so productive that in three consecutive seasons they had paid up the borrowed funds and the village had become the source of grain, fruits and vegetables, for the neighbourhoods and later the entire nation. The cess accounts of the village grew a hundred-fold as the buyers approached the villages in droves carrying out truckloads of raw and semi processed commodities.
During the regular village elders meeting, one key priority was to upgrade the pipes from plastic to metallic; to reduce the risk of bursting under the pressure of the flowing water, when this was done, a similar session six months later resolved to change the pipes from metallic to a Golden finish to reflect the image of a progressive village. It was an expensive affair but it made the pipe network appear exquisite and out of this world.
To the amazement of all, three years later, the rains subsided and the amounts of water flowing down the village reduced quite significantly. The golden pipes dried up and began to slowly rust away. The quality of life for the village began to deteriorate, and the local government was deeply concerned. A delegation of technicians was sent to the highlands brought a shocking report, that up there in the catchments; all the trees and the grasslands that had previously covered the hills and brought the rains, had now been cut and the hills were now looking dry, rock-strewn and rugged!
Many years later, this became known as the most historical Tragedy of the Golden Pipes
Looking at a production process from a value chain perspective helps us to appreciate a single stage in a process not only in its own light, but also in the light of another. It presents a final product or service as a derivative of many other processes or activities where those other subsequent activities that worked together in a certain series to deliver that product are just as important as the final product or service itself.
The analogy above brings out a common mistake in especially the production and marketing of agriculture commodities where emphasis is put on a particular stage at the expense of other stages for many reasons. It could be that the stage being emphasised was where the initial intervention was pitched and the pay-off was great and therefore the actor is stuck there anticipating the same pay-offs. It could also be that the management team at the time have a particular expertise in that one stage and therefore technically, they are drawn to that stage more than any other.
Another reason could be that, the particular stage being emphasized is the problem stage or the most sensitive stage in that process, and in the course of ‘handling it with care’ the actor loses sight of other stages in the same process, seemingly, the catchments have to run dry for the actor to realise that the process does not start and end with this one stage.
A case in point is the dairy sector. Perhaps due to the growth trends in this industry, there is now renewed hope that even where the popular cash crops like coffee and tea did not thrive, communities in such rural areas could still be able to make their own incomes from the sale of milk. This is a great advantage to the economy because it reduces the net consuming population which would otherwise rely on the producing population for their survival.
The industry experienced serious challenges in the nineties when KCC was mismanaged and eventually collapsed in 1997. It was this time when many dairy farmers were not paid for the milk that they had delivered. These negative effects were mainly felt in the Rift Valley and Mt Kenya regions and to a lesser extent in Kisii and Western Kenya.
With the collapse of the formal sector, the informal sector was the remaining hope for the many farmers who had been trading milk. Since there were no deliberate efforts by government to grow its market share or to formalize it to some extent, it remained only a market of the last resort and not a necessarily a preferred market for the farmer. With the revival of KCC in 2002, and the general recovery of the industry, the market share for the formal sector has grown.
One major response of the supply side (the farmers) has been the coming together of small holder farmers to bulk and market their produce collectively. At this point of economic recovery, the main issue was marketing, cooperatives were revived and the demand side (emerging processors) began to identify and possibly zone-off their key sourcing areas. Competition was rising and apart from the seasonal glut, there was a market for milk again.
Perhaps the hardship of markets that the farmers experienced in the past could be the real cause of the emerging tendency in the dairy cooperatives where they put most of their effort in marketing of their milk from the hands of the farmers to the hands of the processor; the bonus that comes with volumes does not help it either. It is not unusual to find a management team that discusses mainly the transactional issues between them and the processor, mostly the date of payments, the rate of payment per litre and the bonuses or commissions payable at the expense of other equally weighty matters of the cooperative.
While it is well to discuss the marketing issues, considering that collective marketing constitutes the value proposition for the cooperative, it becomes an undesirable when marketing takes the centre stage and the production issues are forgotten. The key stages that characterize the dairy value chain are production at the very upstream, collection, bulking, cooling and marketing of the raw milk which is normally carried out by the dairy cooperative and then the transportation, processing packaging and the marketing of the various final products which is mainly carried out by the processor right at the downstream of the value chain.
Looking at the entire process from this stage to stage perspective, it then means that any competent management would be keen to ensure that they have their eyes on every stage, with a view of making the value chain fully functional at least for upstream and the midstream stages for which they are fully responsible. The ability of the cooperative to grow revenues is not determined by one factor alone, but by a combination of interrelated factors.
For example, the revenue levels are determined by the amount of milk delivered to the cooperative, but this also determined by the number of cows producing this milk and this is determined by the productivity per cow, and this is determined by how the cow was fed, bred and so on. The fact that these factors are so interrelated is an indication that laying emphasis on one is setting up the enterprise for failure. It would be a zero-sum game to build the capacity of the milk handling technicians at the cooperative on one end when on the other end the cows which produce the very milk that they will be handling, are starving to death. This is not to say that the two interventions should be carried out simultaneously, but it is important that each of the two among others is done in full awareness that the other one is equally important and must not be left unattended.
Picture this, how would the cooperative appear with a group of highly competent milk handling technicians without milk to demonstrate their skills on? The danger with this form of sub-optimization is that it blinds the management from a looming failure and keeps them entertained with the golden pipes paraded in front of them. For them the front looks so rosy that they have no business looking back at what could be going wrong.
In reality, business, whether big or small, is carried out primarily for profit. Communities experience positive impact when they engage in economic activities that increase their disposable incomes, because then their purchasing power is substantive, the demand for goods and services is higher and a nation naturally grows from a lower economic level to a higher one.
From an accountant’s eye, an enterprise may increase its net earnings either by increasing its revenues or by reducing its operating costs. In the case of farmers, both reducing the costs of production, and increasing revenue by increasing the goods available for sale, is much more in the farmers’ control than increasing the cost per unit of good. The cost per unit of good is determined at another level and it highly depends on the enterprise that is buying their product and its cost dynamics. No matter what farmers do in as much as there is a place for negotiations, there is little progress that could possibly be achieved by trying to push the cost per unit of good, and yet there so much room to grow their earnings by producing more units, or being more efficient on the production process and spending less.
Either way, it results in to a marginal increase in net earnings. The fact that the management team in the cooperative puts their eyes on transacting with the milk that comes, instead of actually being the ones best placed to determine how much milk they want to receive, then their role is inadequately executed as they fail to turn around and support the very producer who keeps them in business. The way to keep the hills green, keep the rain coming, and keep the pipes and taps running in this context, is to turn around and put up lasting systems that support their own farmers to, first and foremost, increase productivity e.g. by feeding their cows well.
This is not choice to pick one and leave out the other, but rather a call to view the value chain stages as parts of one process and not a conflicting array of many isolated activities.
By David Maina, Dairy Expert, Perfometer
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