The profitability of such a factory is given even at 40KES for 1kg of potato, a low sales price of 75KES and production of only 2 tons/day. The year round supply of quality potatoes at an affordable price is a challenge for the producers of fresh-cut chips. An efficient production requires 2-5 tons/day per factory every day (10-25 tons daily for 5-10 factories – 4.300 – 10.750 tons per year). The market is not seasonal but supply is between April to June.
From November to December the market is scarce and prices can reach 40-50KES/kg. Potatoes on the open fresh market are mainly not suitable for fresh cut chips due to:
• Deep eyes, skin blemishes, and rotten potatoes lower conversion ratio
• Diseases such as blight lead to discoloration and flavor issues in the final product
• Poor quality potatoes give poor taste (no flavor and fatty)
• Potatoes are often too small (Golf ball size)
But even when the potato price goes up to 45KES/kg one still makes a profit when selling at 75KES/kg (assuming a 20% loss of raw material: 1.2kg of fresh potatoes=1kg of chips). And even when 50% of potatoes are thrown away you still make a profit when you sell at 75KES/kg (assuming 25KES for 1kg of fresh potatoes). But high prices and poor quality often go together. Scarcity and lack of storage drives up prices and lowers quality additionally.
To manage the price and quality of supply contract farming with strict quality criteria and a price linked to the market price can be introduced. Storage might be done at the factory but should be promoted at the farm sites as well. Contract farming here might lock factories and farmers into a contract due to specific processing varieties because processing varieties are often not preferred for fresh consumption, making side selling to the open market difficult. Chips producers on the other hand might source on open markets and need to accept lower quality of the end product and a considerable loss of efficiency.
So contract farming can work if processors are not out-competing each other and poaching suppliers under contract with other processors. Prices in the contracts should not be too different from going market prices for processing potatoes (incentive to side-sell to other processors). The price difference between fresh and processing potatoes is limited. If table potatoes are much more expensive, there is an incentive for farmers to sell to the open market. If they are much cheaper, processors can compensate production efficiency losses with a lower price.
There is therefore the need to have contracts that guarantee a minimum price that moves to an extend with going market prices. Another big challenge is the issue of food-safe processing facilities. The potato has low risks for bacteria and the product is deep fried. However, the consumer expects clean production facilities. At most factories there are few food safety principles in place:
• Absence of staff toilets/insufficient toilets and wash basins, no liquid soap
• No proper clothing
• Dirty raw potatoes not separated from ‘clean’ peeled potatoes & chips
• Usage of wood in for example cold storage
• No proper floor and wall coverage (cracked tiles with dirty grouting, rough concrete)
• No pest control (Rhodents, fly-traps etc.)
• No documentation and staff procedures and cleaning schedule
The owners often have very limited knowledge of HACCP/ good food manufacturing practices but clients will get tougher as well. The fresh-cut chips production is highly profitable if processors can get quality processing potatoes year round. It is a fast growing industry of small processors that can provide a stable and lucrative market for potato farmers. Contract farming with market related price mechanisms and some quality standards are already common practice. Specifically, support is needed in:
• Finding right potato varieties for chips
• Increasing supply of chips-potatoes: supporting farmers, linking to chips processors and facilitating relationships
• Making processing more efficient through small tools
• Improving food safety in production, leading ultimately to HACCP certification
• Marketing strategy
• Product development: par-fried, longer shelf life, different shapes etc.
FINANCING STRATEGY FOR FRESH-CUT CHIPS PRODUCERS
A new factory with 5 – 10 ton/day capacity and delivery vehicles costs about USD 290,000. The initial investment can be reduced to USD 190,000 with a modular building (smaller building but prepared for expansion). 20% – 30% (USD38,000 – USD57,000) equity capital is needed because businesses don’t have assets (rented buildings, old vehicles, and no machinery). 70% - 80% (USD 133,000 – USD 152,000) as a 3 year asset loan from a local bank can work because land and buildings make excellent collateral. At a current scale of 2 tons/day sold at a net margin of KES25 the initial investment of USD190,000 is earned back in 1 year. Potato storage for the low season means about 2 months stock for 5 tons of chips per day, that is 183 tons at 25,000/ ton which equals KES4,575,000 or USD 45,750. This can be financed as working capital bank loan in year 1 or 2, thereafter from retained earnings. Potential sources of USD 38,000 – USD 57,000 coming from equity capital:
• Savings of current shareholders/owners
• Mortgage on personal assets of shareholders such as houses or land
• Retained earnings: keep producing for another year at current low cost
• Business Angel/Silent investor (last resort)
Potential sources of USD 133,000 – USD 152,000 can come from a three year bank loan and working capital loans. Local commercial banks are an option:
• Regular cash flows and contracts with reputed clients
• Underlying assets such as land, buildings and vehicles
• High profitability and short earn-back period
• Clear and growing market
• No grace period needed and interest can be paid monthly