Reading the Economic Chicken Bones

29 December 2009 at 02:10 10 comments

By Ilmari Soininen, KF9 in Thies, Senegal

Christmas kicks off a serious week of celebration for Senegal’s Christian minority. Dispersed families unite, meaning a series of sept-place, clando and bus rides from the capital. Like in many parts of the world, roasted chicken (or turkey) is an important part of the Christmas menu here. The bird is carefully prepared, and cooked to tender perfection. Chicken is not an everyday treat for most of Senegal. Indeed, it is quite a luxury item. But why is this so? And can this tell us something about the country’s future?

A Holiday luxury - but hopefully not forever

Chicken is expensive in Senegal. In fact, it’s really expensive: the average market price for a fresh chicken is almost $7, roughly twice what an American consumer pays. A back-of-the envelope calculation shows the average Senegalese must work a day and a half to be able to afford one, where as the average American needs to work only about 15 minutes. Indeed, chicken is one of the cheapest meats available to American consumers, where as in Senegal it is the most expensive.

Out of interest, I had conducted an informal poll among my colleagues and friends on the best invest opportunities available in Senegal. It was refreshing to hear investments which involved tangible and very real activities – not some esoteric derivative or CDO. Indeed, raising chickens was the most consistent answer. Again very different from the U.S. where chicken farmers will tell you it’s a tough business to make money in (excellent documentary Food Inc.). Indeed, the regional director of my MFI told me he would easily make triple his salary if he went full-time into the chicken business. Crunching the numbers reveals quite an amazing opportunity: starting out with 250,000 FCFA (about $500) in capital and a spare room or enclosure, one could invest in 200 chicks.  The numbers:

  • Each chick costs 450 FCFA, or 90,000 FCFA for 200.
  • The feed for the six-week period is the most expensive part of the operation, costing around 150,000 FCFA.
  • Additional costs, such as water, electricity and vaccinations are quite small, a maximum of 10,000 FCFA.
  • After six weeks, one can expect to have about 190 chickens ready for market (calculating in a 5% mortality rate). One then has the option of selling directly to the customer, or selling to an intermediary at a lower price.
  • If we sell directly to the customer, we can reasonably expect a price between 2,500 and 3,000 FCFA per head (or up to 3,500 FCFA in Dakar). With one’s 190 chickens, one can therefore expect a revenue between 475,000 and 570,000 FCFA, or a net income between 225,000 FCFA and 320,000 FCFA.
  • Selling to an intermediary is easier and less time-consuming, but will reduce one’s income. Perhaps one will fetch only 1,800 FCFA per head, for a profit of 92,000 FCFA.

Of course, there are risks to consider: disease, hungry cats and theft are real concerns. An amateur can easily have his whole flock wiped out by bacteria he carries in on the sole of his shoe. However, managing a flock in the low hundreds is not rocket science, and the risks are by no means astronomical. Even as a secondary activity (selling to an intermediary) and keeping production at 200 chickens, one can have an annual profit margin of 200% with a minimal amount of time invested.

Economics 101 (aka common sense for the ostentatious) would suggest that such a profitable activity would soon be flooded with aspiring poultry entrepeneurs, causing the market price of chicken to drop dramatically. In economic jargon, with an increase in supply, the equilibrium price would adjust downward, along with the returns to the chicken farmer and vendor. However, the market price seems to stick around 2500 FCFA. Indeed, my colleagues told me demand is almost always greater than the supply.

So why aren’t people rushing into the poultry business if clearly there are large profits to be had? Is it that the average Senegalese simply doesn’t know about the profitability? Tough to believe, as everyone I talked with, from the day laborers to the senior bank management, knew it was very profitable. Is the barrier the inadequate access to investment capital? The chicken business (as the numbers show) doesn’t require a great deal of cash upfront and, thanks in large part to micro-finance, credit is available. I think the more critical barrier is a strong aversion to perceived risk. As one of my colleagues explained, a Senegalese graduate prefers a desk-job with a monthly salary to being in business for himself.

Whatever the reason, the worrying point is that these elephantine margins exists, especially given that this is by no means a secret. If the market does not adjust to clear signals, such as a profit margin of 200% – 500% in a sector which requires little capital investment, there is a critical economic dynamism missing. The global economy is ten fold fiercer with margins one hundred times smaller. In the global markets, economic opportunities aren’t served on a silver platter.

Fortunately, there are some who are responding to the tea leaves (or chicken bones). My colleague, Omar, a guard with my MFI, was financed yesterday for a 50,000 FCFA loan to buy a few dozen chicks.

Omar - the man with the (poultry) plan

Entry filed under: Countries, KF9 (Kiva Fellows 9th Class), Senegal, UIMCEC, a partner of Christian Children's Fund. Tags: , , , .

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  • 1. Kelly  |  5 January 2010 at 08:13

    Great discussion Ilmari, thank you for a brilliant and witty post.

  • 2. ALEX  |  4 January 2010 at 01:01

    On some levels I am happy to hear the idea of vertical/horizontal integration has not taken root. Keeping it ‘as is’ spreads the opportunity for economic self-improvement across more people. In this case it seems for those less risk averse. /ALEX, KF9

  • 3. Howard Zugman  |  30 December 2009 at 14:05

    Hi Kate,

    Thanx for bringing additional info into the discussion. Is retailling the unfrozen chicken an option? And if so, is the overall profit greater doing it that way? Do any food suppliers offer quaranteed prices in exchange for all of your feed business?

    • 4. ilmarisoininen  |  31 December 2009 at 00:47

      The devil is definitely in the details. I think Kate you know infinitely more than I do, and it’s interesting to get your input.

      I was looking at small-scale chicken farmers, who usually sell their chickens fresh, without the need for refrigeration.
      Further up the scale, I think refrigeration is an important variable, and one which definitely adds cost. I would guess though this cost is somewhat softened with increasing returns to scale?

      On the large scale (>500), I think the margins depend most on what kind of deal one can cut with a hotel, restaurant, etc. On a scale of <200, one can more easily sell directly to the consumer, cutting out the need for middlemen. This price is quite rigid – between 2500 FCFA and 3000 FCFA.

      If we agree the cost of raising a chick to be around 1200 FCFA and the market price to be a min. 2500 FCFA, I think the larger point is that there is a lot of slack in the margins, and prices could come down. Hopefully to the benefit of the average family.

    • 5. kate  |  5 January 2010 at 13:36

      I want to preface my response by congratulating you and Kiva for your work in Senegal—what you do actually impacts the Senegalese and as you know that is a rarity with ngos here. Now back to chicken talk—my in0laws farm is in Kebemer and so the birds they sell there are mostly fresh, unpluked and sold for 2,500cfa. The chicken we sell in Dakar need to be plucked (200cfa a bird) frozen, sent to Dakar (that adds cost), frozen here (normally my house) and then you have to pay the transport to wherever they are going. Our buyers in Dakar average about 100 chickens and because it is “en grosse” it ends up being about 1,900-2,300cfa. This is an ok rate considering the heavy competition and we are lucky to get a unit price because if it is by kilo it is even less. All and all, I am mire excited about the Turkey business. There is no one doing it, turkeys are big and graze and a turkey can go for 9,000-17,000 cfa in Dakar. You just need a lot of space to raise them!

  • 6. kate  |  30 December 2009 at 12:33

    Hi.. I am an american who has lived in Senegal for four years. My in-laws have a farm and we sell Chicken and Turkeys. On paper chickens do seem profitable, but the feed price changes all the time and can almost double during the winter. Also, the cost of refrigeration was not added into account. In order to sell your chickens they need to be plucked, packaged, and put in the frigde/freezer. As you know electricity is very expensive in Senegal and it costs my in-laws 90,000 every two month just for their 1 freezer. In the end we continue to sell chickens, but the profit margin is small.

  • 7. Kimia  |  30 December 2009 at 10:24

    Great detail about chicken sales in senegal! I lived with a family that sold chickens there, I had no idea how profitable it was!

  • 8. Jan & John, KivaFriends  |  30 December 2009 at 07:43

    wonderful insight you share with us, Ilmari. i will eat my chicken tonight and give thanks for those who laboured to provide it. please pass along our best wishes to your friend, Omar, and tell him that people on the other side of the globe are carrying him and his family and community in their thoughts. jan

  • 9. evacwu  |  30 December 2009 at 07:26

    Fantastic post Ilmari! I especially liked your observation about perceived risk, and this bit: “As one of my colleagues explained, a Senegalese graduate prefers a desk-job with a monthly salary to being in business for himself.” I personally think this applies everywhere. Speaking from a personal level, practically all my friends in the U.S. have desk/office jobs. People like the stability/benefits of an office/desk job. This reminds me of an article critiquing microfinance that I was reading recently, which said that most microcredit clients aren’t microentrepreneurs by choice and would take factory (or office) jobs at reasonable wages if they were available. While I don’t fully agree with this as a sweeping generalization of all microfinance clients, I can see the truth in this statement as well.

  • 10. Howard Zugman  |  30 December 2009 at 04:55

    Thank you for the excellent lesson on chicken raising in Senegal. I can’t believe that some enterprizing ‘KFC of Senegal’ middleman has not seen the value of vertically integrating his/her business yet. It will happen, I’m fairly sure. Perhaps in exchange for providing a certain amount of ‘insurance against loss’ he/she will cut a deal with many, many ‘raisers’ to get a better buy price than his/her other intermediary competitiors. Whether this would improve or degrade the overall business, I’m not sure.

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