Determination of piggery business profitability in Balaka District in Malawi

R E Phiri

ronaldphiri8@gmail.com
University of Malawi, Bunda College of Agriculture, Lilongwe, Department of Agribusiness Management, Lilongwe, Malawi

Abstract

Households living in rural areas of the developing world, including Malawi undertake a series of income generating activities to complement their farm incomes. One such activity is pig production. This paper examines profitability of piggery business groups in Balaka district in Malawi. Thirty six piggery groups were sampled in Balaka district out of a population of forty six using stratified random sampling. Data was collected through a semi-structured questionnaire, business records assessments and focus group discussions. The objective of the study was to assess the profitability of piggeries using cost and return structure tool or enterprise budget analysis. 

The study found that piggeries were profitable. However, low profit levels were achieved due to lack of access to capital and inadequate capacity in pig farming. It is recommended that groups should form cooperatives to enjoy economies of scale, increase number of sows, obtain credit from financial institutions and obtain training in pig farming to improve productivity and profitability. 

Key words: budget analysis, gross margin, income, wealth creation

Introduction

The mission of Malawi Government is to create wealth through various efforts including agricultural productivity. Agribusiness such as piggery is one of the priorities in the Malawi Growth and Development Strategy which is an overarching policy for poverty reduction and sustainable economic growth in Malawi. 2008 livestock survey reported an increase in national pig production trend from 481,108 in 1997 to 1,229,468 making pigs the third largest livestock population in Malawi after chicken (44,049,155) and goats (3,106, 271). In the same year, pigs became the second largest meat supplier in Malawi. It is believed that piggeries are an entry point to wealth creation in Malawi. Promotion of piggery in Malawi is now characterized by many projects and group approaches for capital diversity considering that pigs are capital and labour intensive as they are monogastric animals which need better animal housing, good food and frequent vaccination. One such project was Skills Development Income Generation which operated from 2004 to 2009 in Balaka district in Malawi. Unfortunately there was no study to assess the cost return structure of piggeries due to premature closure of the project in 2009. This study was commissioned to address the information gap.

Materials and methods

The study was conducted in Balaka district in the Southern Region of Malawi. The district headquarters is approximately 240 km from Lilongwe City, the Capital of Malawi, and about 130 km from Blantyre City, the main commercial centre in the country. The district had a population of 46 piggery groups whose composition by gender was such that women groups were 75%, mixed groups were 20% and men groups were 5%. Each group had an average of ten members. A representative sample of thirty six piggery business groups was drawn using stratified random sampling which represented 75% women groups, 19% mixed groups and 6% men groups. Data was collected through group business records analysis, focus group discussions, and examination and appraisal of SDIG Project documents to obtain useful information about the operations of group piggery businesses in Balaka. Data was analyzed using SPSS 11, Stata 10 and Excel 2007. 

Enterprise budget analysis was done using the cost and return structure of piggery business in Balaka. Gross margins were computed for each piggery unit run by each group. Piggery business total returns was defined as total revenue of the business less total costs of production. Enterprise budgetary analysis was calculated as follows:  

Where:

π = Net Profit

TR=Total Revenue

TC = Total Cost

TVC = Total Variable Cost

TFC = Total Fixed Cost

GM = Gross margin

NI = Net Income 

Profitability indices such as profitability index (PI), rate of return on investment (ROI), return on variable cost (RVC) and operating ratio (OR) were computed to authenticate the viability of group piggery

 business in Balaka district. The profitability index, presented in equation 5 was used: Profitability index or return on sale is given by:

Profitability index is the net income of an investment project divided by total revenue. The rule of thumb is that an investment project with profitability index of equal to or greater than 1 indicates a profitable enterprise. 

Rate of return on investment (percent) is given by:

ROI is net income divided by total costs. This is another accounting term and is a measure of how much the business has earned in return for capital outlay. 

Rate of return on variable cost (percent) is determined as follows:

Operating ratio is the ratio of total variable cost to total revenue (TR). Operating ratio is calculated as follows:

Results and discussion

Net income per piggery business group was MK31,735 (US $209). The real profit was obtained by depreciating capital assets and deducting direct labour costs from the gross piggery group income. This was necessary to avoid over-estimation of profit realized. The positive value suggests that all groups were making profits. However, with a net income of MK43,643 (US $173) mixed groups performed better compared to men and women groups. This was attributed to three sows kept per group. 

The profitability index, the rate of return on investment, the rate of return on variable cost and the operating ratio of piggery groups have all been presented in Table 1. The profitability index is 0.49 and was below 1, which means that piggery investments needed to increase level of production to increase profits. However, women groups’ situation needs to improve as they earn 29 Tambala per every kwacha sale. Rate of return on investment and rate of return on variable cost are 94.0% and 333.8% respectively. This implies that for every Malawi Kwacha invested in piggery business, K0.06 Tambala is earned. The value of rate of return indicates that piggery businesses were produced at minimum possible costs. The low rate of return suggests that management practices were not good. The operating ratio is 0.21 which indicates that the total variable cost is about 20 percent of the total revenue. In summary, most profitability indicators show that piggery business is profitable in the study area. Management issues need to be addressed to maintain a profitability index of above 1. 

Analysis of household income for piggery group is presented in Table 2. The mean household income for piggery groups is MK35,655 (US $234). Focus group discussions and individual interviews revealed that farm produce contributed 80% to household income.  

Net profit 

Net profit from piggery enterprise was calculated by subtracting total cost from total revenue. Total costs were calculated by adding total fixed costs and variable costs involved in pig production. The total cost per group piggery business in Balaka was MK20,327 (US $134.00). This was a result of reduced variable costs as most Balaka piggery groups were making their own animal feed and their fixed assets depreciated to about 18%.  

Total Variable Cost (TVC) 

TVCs are those which vary as the level of production increases. In Balaka pig production, variable costs included costs of feed, veterinary services and direct hired labour. Mean total variable costs were MK13,746.00 (US $90) (55%) and are reasonable compared to 60 % and 65 % which were reported by Bamiro et al. (2008) and Adesehinwa (2000) respectively. In Balaka district, variable costs were low due to the fact that piggery groups were able to formulate their own feed using locally available resources. This lowered the cost of feed as indicated in Table 1. With a total variable cost of K12,500 (US $82.00), or K1, 316 (US $8.70) per pig, men’s groups spent least on TVC. These were seconded by mixed groups whose average TVC was K1,407 (US$10) per pig. The mixed groups had a TVC of K1500 (US $10) per pig. 

Total Fixed Cost (TFC) 

TFC are production expenses which do not vary with output in a given relevant range of production. The mean fixed costs in Balaka were MK20,327 (US $134) and mainly covered the costs of constructing piggery housing and initial stock. However, women groups had their assets depreciated to K30,050 (US $120) which was higher compared to both men and women groups.  

Gross Margin Analysis (GM) 

GM was calculated by subtracting total variable costs from total revenue. This analysis was done in order to determine which piggery enterprises gave higher returns with respect to variable costs of production. Mean gross margin from piggery groups was MK52,463 (US $208) which suggests that the return on variable costs was higher than production costs. Basing on gross margin analysis, it can be deduced that piggery business is profitable in the short run. This suggests that piggery groups in Balaka had a big opportunity to make lucrative profits if they addressed level of production and strengthen their management practices. Most groups had a piggery business experience of less than 3 years as they had spent their initial 2 years in the group building their business capital. This agrees with breakeven analysis results. 

Net Income (NI)  

Net income was calculated by subtracting total fixed costs from gross margin. A net income of MK32,136 (US $211) was generated. This suggests that production levels low. Mixed groups had a net income of about K43,643 (US $287) which indicates that piggery business was equally profitable like other lucrative enterprises.  However, with the average group size of ten, this level of profit was not enough. 

Total Revenue (TR) 

Total revenue was the amount of sales generated in group piggery business. This was achieved through sales of piglets, weaners and pork. The mean revenue from piggery was MK66,208 (US $437) as indicated in Table 2. Obviously, this was higher than the mean total cost. The mean total cost of production was K34,073 (US $224) which was almost half of the total revenue. This is an encouraging performance only that the group business was operating on a small scale basis. 

Profitability Index (PI)  

Profitability index is also known as return on sale. This is an investment appraisal ratio which measures the percentage net profit per one Malawi Kwacha of sales. In the case of Balaka piggery groups, PI has been determined in Table 1.  The calculated mean PI is negative 0.49 this suggests that groups were just short of 0.51 to reach a threshold. All groups had a PI of less than 1. Piggery groups need to adopt modern production practices and improve their performance so that they can make adequate profits. 

Rate of Return on Investment (ROI) 

Rate of return was calculated as a percentage ratio of net income (NI) to total capital outlay (TC). With this ratio, it was possible to estimate net earnings per One Malawi Kwacha investment. The ROI for Balaka piggery groups was 0.94 which means that MK0.06 Tambala was earned in every Malawi Kwacha invested as indicated in Table 1. Basically, the positive value indicates that is at least performing. However, the gains per Kwacha are not adequate as to cover high rate of depreciation in capital assets which were determined to be about 80% as at the time of the survey. Women groups had a better ROI value. However, mixed groups were worse off as their value of 1.04 which means their capital assets were declining by MK0.40 per every capital invested. The actual value was found to be higher than 84% when depreciation of capital was added. This performance need to be improved. 

Rate of Return on Variable Cost (RVC) 

This was another profitability indicator which measured net earnings per Malawian Kwacha spent on variable cost. The calculated return on variable cost for piggery groups in Balaka district was positive 333.8% which means that 100% of variable costs had a rate of return K19,834. This means that piggery in Balaka were capable to produce three times returns on variable costs. The cost return structure by gender indicates that women groups were better off on RVC (with 410% profit per 100% of Malawi Kwacha variable costs employed) as indicated in Table 1. 

Operating Ratio (OR) 

Operating ratio is a profitability indicator which measures percentage of variable cost per Malawi Kwacha sale. The calculated OR for Balaka district was 0.21 which means that per every Kwacha sale, the percentage of variable cost was 21%. This indicator suggests that group piggery businesses in Balaka were profitable. With OR of 0.16%, mixed groups were better off. However, this low figure may depict poor management practices like poor feeding since this is below optimal level which is within the range of mixed group (0.6 – 0.8) as suggested by Bamiro (2008). Table 2 is the analysis of piggery and control group incomes by gender. Generally, both piggery and control groups had low income due to low capital base. 

Break Even Analysis 

This analysis builds on enterprise budget analysis discussed above. It was done to determine the number of sows required for an average group in Balaka to recover total costs. Breakeven analysis is a financial variable that measures the amount of revenue that must be achieved to recover total costs of production. The first step involves the determination of revenue required to breakeven. In the case of group piggery business analysis, this was a revenue value, whose amount equated the total costs. The second step involved determination of the number of sows required to produce piggery products in order to breakeven. A model was constructed and is presented in equations 9:  

Given (from cost return structure of piggery business i.e. Table 4.5):  

Therefore:

Based on this breakeven concept, an average piggery business group needed to keep a minimum of one sow to breakeven. In essence, an average group needed to keep more than a sow in order to produce adequate profits for the group. The lower breakeven point is achieved due to higher depreciation costs of fixed assets which were about 80% of the book value. In real terms, the groups needed to optimize their production to recover losses in fixed costs. Factoring depreciation of capital assets, the breakeven point is revalued as follows: 

 Therefore:

Based on this breakeven concept, an average piggery business group needed to keep a more than four sows to breakeven. This was fundamental for each group to produce profit. It can be deduced that in Balaka, number of sows, was an important variable which needed to be addressed right at the beginning of the project.   

Focus Group Discussion Results 

Results from the focus group discussions revealed that topics like heat detection, weaning, castration, and value chain analysis were not covered. Focus groups reported that training organizers promised a follow up training which did not take place until SDIG project closed. Most groups indicated that their businesses were not doing well due to lack of skills in piggery farming and entrepreneurship. This was evidenced by inconsistent pricing, lack of knowledge of market research and customer analysis, which was also an observation by (Ajala et al 2006) who attributed this to lack of experience in pig keeping and level of investment in piggery. Lack of adequate capital at business level affected group’s capacity to invest in efficient production technologies. This was another reason why profitability levels were very low. This was also observed by (Adesehinwa 2007). Further, piggery groups had serious management problems as they were unable to manage production, marketing and business growth. These are considered essential elements which matter in pig farming as also observed by (Chabo 2000) and (Adesehinwa 2007). This resulted into low productivity of sows as they were often serviced by boars after heat period. Almost all business plans lacked time frame, cash flow projection and sources of capital.  It was also noted that most groups treated their business plans just as a future resource mobilization tool. Furthermore, there was a lack of business growth plan, and financial management procedures which heavily compromised on revenue and cost controls in Balaka.  

Most groups relied on the group leader to give them final decisions on most management and leadership aspect of their business just for the sake of his/her being a group leader. Surprisingly, group leaders were not aware of the entrepreneurship management issues that could have raised the profile of the group piggery businesses.

Conclusion

• Several factors affect piggery business profitability in Balaka. Of particular importance are low productivity (as each group kept only a maximum two sows) and inadequate capital. The implication is that ceteris paribus, (i.e. assuming there is no depreciation and other exogenous factors are held constant), an average Balaka group piggery business needs to increase number of sows to at least four sows per enterprise and should be adequately trained in key aspects of pig farming like heat detection, pricing, feed formulation and business management to maximize profit. Lastly, piggery business groups need to form cooperatives to improve bargaining power, reduce costs, tap better extension services, enhance quality of piggery products and link themselves to high value markets for high productivity and profitability.

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Received 27 November 2011; Accepted 18 July 2012; Published 1 August 2012

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