IFC INCLUSIVE BUSINESS CASE STUDY | Probiotech Country: Nepal Sector: Agriculture $1.9 million Probiotech IFC Investment: Agriculture is the economic backbone of Nepal. It contributes more than a third of the country’s gross domestic product¹ and is the primary—and often the only—source of income for Nepalis who live in remote areas. These small farmers typically cultivate less than one acre of land and find it difficult to expand their farms and increase their incomes due to a lack of training, inputs, and finance. Agribusinesses like Probiotech, a leading processor and animal feed products to poultry and livestock producers, producer of animal health and nutrition products in Nepal, with poultry farms accounting for 90 percent of the have a big stake in the success of small farmers. Probiotech company’s total feed sales. Many of Probiotech’s poultry works with these farmers at both ends of its value chain, customers run small-scale operations under constant both of which present unique opportunities and challenges threat from high production costs and other inefficiencies. (Figure 1). Probiotech does more than buy grain from farmers and Upstream, Probiotech sources ingredients for its animal process it into feed to sell to poultry producers. By building feed products from grain farmers. A major input is maize, capacity and facilitating access to input finance across often grown by small farmers who lack the expertise its value chain, Probiotech is bringing about tangible and resources to develop thriving farms.² Downstream, improvements that can have a lasting impact on Probiotech engages small enterprises to distribute its agriculture in Nepal. 1 IFC INCLUSIVE BUSINESS CASE STUDY | Probiotech Figure 1: The Role of Key Players in Probiotech’s Poultry Value Chain Upstream Downstream Suppliers Aggregators Probiotech Distributors Customers Farmers* Grain Traders Dealers, subdealers Poultry producers and input shops Role: Grow maize Role: Sell maize Role: Procure Role: Sell poultry feed Role: Purchase feed maize and produce and raise chickens poultry feed *Probiotech also procures rice and soya bean for poultry feed The company grew out of NIMBUS Holdings Private such as vitamins and minerals. As Bagaria learned more Ltd., a diversified family-run business founded in Nepal about the animal feed industry—and poultry in particular— in 1998.³ Today, Probiotech sells animal feed to over he discovered several inefficiencies in the domestic 12,000 customers annually, including an estimated 7,200 production of poultry feed that affected the quality of small-scale poultry producers. Its shareholders are the chickens and ultimately the incomes of farmers. International Finance Corporation, the Global Agriculture and Food Security Program (GAFSP), and the founders of First, high quality feed is critical to producing quality NIMBUS. poultry, but the feed industry in Nepal consisted of many small companies that lacked the capacity to meet local DISCOVERING AN OPPORTUNITY demand and produced feed of variable quality. Also, shortages in the supply of raw materials (mostly maize) Founded by J.P. Agarwal, NIMBUS Holdings’ early business inhibited feed production and forced feed producers to rely model centered on the distribution of imported consumer on imports. And second, the absence of strong distribution goods in Nepal. When Agarwal’s son, Anand Bagaria, joined networks meant that many rural poultry producers were the business he brought entrepreneurial experience—he unable to access high quality feed when they needed it and had previously launched several pilot projects including one often used household food scraps and feed mixed by local, focused on selling veterinary enzymes. Noting demand for informal feed providers. quality products in the veterinary sector, Nimbus began to specialize in the import and distribution of animal health Bagaria set out to address these problems. With no large and nutrition products, including vitamins, vaccines, and corporate players in Nepal’s animal feed industry, organized veterinary medicines. feed companies contributed only about 35 percent of all feed. Bagaria saw this as an opportunity for Probiotech to In 2000 Agarwal and Bagaria established Probiotech as a expand from the production of poultry feed supplements to NIMBUS subsidiary to produce animal feed supplements the production of poultry feed itself.⁴ 2 IFC INCLUSIVE BUSINESS CASE STUDY | Probiotech Probiotech’s Value Chain An Overview of Challenges and Solutions Procurement Distribution Customer & Product Service Development Value Chain • Low productivity • Small poultry • Poor biosecurity and and quality of producers are hard farm practices among locally-grown maize to reach in hilly poultry producers negatively impacts regions • Difficult to train large Challenges in volume and quality • Strikes and road numbers of scattered Providing of poultry feed closures disrupt poultry producers Poultry Feed • Maize farmers lack distribution • Insufficient attention access to training to • Limited credit and to training women improve production logistics resources poultry producers constrain feed • Poultry producers lack dealers access to finance for inputs • Increases long-term • Builds distribution • Trains poultry local maize supply network with producers through by facilitating uptake national reach events, extension of climate-smart staff, and dealer • Uses regional depots Probiotech’s practices among to distribute feed network maize farmers Solutions to dealers • Employs women • Builds maize farmers’ extensionists and • Trains dealers and technical know-how veterinarians to sub-dealers and through demo plots, train women provides working text messaging, and a poultry producers capital finance helpline • Facilitates poultry • Reaches small producers’ access poultry producers to inputs on credit through sub-dealers through dealer network 3 IFC INCLUSIVE BUSINESS CASE STUDY | Probiotech Figure 2: Key Milestones in Probiotech’s History Probiotech Establishes Creates poultry Trains 4,000 founded animal feed extension unit maize farmers mill with IFC & GAFSP 10,000 feed 12,000 customers feed customers 2000– 2004- 2010– 2014– 2003 2009 2014 2016 Produces feed Partners with IFC & GAFSP supplements IFC & GAFSP invest $3.8M on poultry project Transforming Nepal’s Poultry Feed a leading poultry company in India. A year later, Bagaria Industry consolidated all of NIMBUS’s and Probiotech’s business By 2003, Probiotech was actively exploring the idea of lines for animal health, nutrition, and feed under Probiotech producing poultry feed in Nepal. After consulting with feed (Figure 2). companies in neighboring India, Bagaria concluded that domestically produced feed would have several advantages By producing pellet-based feed, Probiotech’s mill did more over imported feed: than increase the supply of local feed—it also improved the quality. Whereas most domestic feed producers sold • Lower costs: High import duties on poultry feed are loose “mash” feed made of ground grain, Probiotech’s passed on to poultry producers, many of whom already mill produced pellet feed, which is easier to digest and struggle to break even. In addition, feed is a bulky promotes better growth among “broiler” chickens raised commodity that costs less to transport locally. for their meat. This increases revenues and income for poultry producers. • Quality assurance: Feed has a short shelf life—just 45 days, or eight days when opened. Local production Today, Probiotech produces more than 20 varieties of minimizes deterioration in quality, especially in warm animal feed, led by Bagaria as Managing Director of weather. NIMBUS and Probiotech. • Timely supply: Local production enables distributors BUILDING THE INFRASTRUCTURE to regularly procure and supply feed for small poultry FOR EFFICIENT FEED DELIVERY producers who don’t purchase in bulk and need frequent deliveries. With its mill up and running, the next challenge for Probiotech was to determine how to deliver its poultry In 2004 Bagaria established Nepal’s first pellet feed mill, feed products to customers. This was a challenge as Shakti Agro Mills, through a joint venture with Suguna, many poultry producers are located in remote areas over 4 IFC INCLUSIVE BUSINESS CASE STUDY | Probiotech hilly terrain. Probiotech sells feed to both large and small network’s reach to small poultry producers. Probiotech poultry producers, but the average customer raises 500 to provides working capital credit on favorable terms to 2,000 chickens, and its smallest customers raise just 100 dealers who, in turn, offer credit to sub-dealers. The chickens at a time. company also trains sub-dealers in financial management and assists them with logistics and product deliveries. Leveraging the dealer network that NIMBUS had built for its import distribution business, Probiotech began to develop its own nationwide distribution network that would eventually cover 68 of Nepal’s 75 districts (Figure Figure 3: Probiotech’s Distribution 3). It found early on that selecting the right people as Network distributors was critical since they would serve as the face of Probiotech for customers. Certain selection criteria were particularly important: people who were trusted in the PROBIOTECH FACTORY local communities, had a good reputation in business, and had a reasonable level of education. Today, Probiotech’s distribution network includes: 8 regional depots Stock ~ 800 MT of poultry feed Depots: Managed by Probiotech, depots are the first link in 110 large dealers  ell 30-600 MT of poultry S feed/month the distribution chain. Located throughout Nepal, depots 500 help the company minimize disruption in feed distribution sub-dealers due to strikes and road closures. Probiotech supplies feed  Sell less than 30 MT of to dealers directly from its factory as well as through depots. poultry feed/month Dealer Network: The next link consists of dealers, 90 7,200 SMALL POULTRY PRODUCERS* Purchase ~ 50 Kgs of feed/month percent of whom work exclusively for Probiotech. Large dealers supply feed to sub-dealers as well as to large commercial poultry producers. Sub-dealers help extend the *Probiotech serves 12,000 large, medium, and small-scale producers of poultry, cattle, swine and fish through its dealer network. Of these, an estimated 7,200 are small poultry producers with 100-300 chickens on average 5 IFC INCLUSIVE BUSINESS CASE STUDY | Probiotech POULTRY PRODUCERS IN NEPAL Input stores: Alongside its dealer network, Probiotech leverages NIMBUS’s agri-input stores called NIMBUS Krishi Poultry farming is common in Nepal where nearly Kendras to sell its feed products. Nine stores are currently half of all households raise chickens in small-scale in operation but that is expected to grow to 200 by 2020, backyard farms, largely in rural areas.⁵ Some increasing Probiotech’s visibility among potential customers. households only produce enough for their own consumption while others are able to earn a Together these feed distribution channels have enabled livelihood or supplement income through poultry Probiotech to increase market penetration. Today the farming. company reaches 12,000 customers, including some 7,200 small poultry producers. Nepali broiler farms, which raise chickens for their meat, are also small-scale in comparison to ENABLING SMALL POULTRY similar farms in other countries. About 95 percent PRODUCERS TO SUCCEED of known broiler farms in Nepal have fewer than 2,000 chickens.⁶ Farms of this size are becoming When Probiotech began marketing feed products it found rare in India, where most producers manage that small poultry producers faced a number of challenges 5,000-50,000 birds.⁷ including low quality inputs, limited market linkages, limited access to finance, and insufficient technical knowledge. Addressing these issues was an opportunity for the company to build loyalty among producers and help them grow their operations—and also increase their use of Probiotech products. The company focused on three areas: Provide High Quality Feed. When Probiotech was founded, the Nepali feed market was dominated by low quality mash feed. The high feed conversion ratios associated with mash feed in Nepal indicates that poultry required a large quantity of feed to obtain sufficient nutrition to produce meat or eggs. With feed representing about 80 percent of production costs for small producers,⁸ those using mash feed weren’t achieving optimal returns. Probiotech’s pellet feed, by contrast, achieved improved conversion ratios that could increase producers’ efficiency.⁹ To convince poultry producers of the benefits of its improved feed, Probiotech presented them with a no-lose challenge: Feed mash to half of their chickens and Probiotech’s pellets to the other half. If the chickens that were fed Probiotech products performed poorly, the company would compensate the farmers. If instead the Probiotech feed helped improve profits, farmers were asked to share their experiences with others in their community. 6 IFC INCLUSIVE BUSINESS CASE STUDY | Probiotech Figure 4. An End-to-End Solution for Small Poultry Producers Dealers Probiotech Pay Probiotech Provides feed balance owed to dealers on feed Dealers Sub-Dealers Provide feed and Sell chickens and pay chicks on credit producers after deducting input costs Pay dealers balance owed on feed Sub-Dealers 7,200 Small Poultry Provide feed and Producers chicks on credit Raise chicks and provide to sub-dealers for offtake Facilitate Access to Finance and Markets. Few pay producers the proceeds after deducting the balance small-scale poultry producers had access to owed for inputs (Figure 4). the relationships and capital necessary to build or expand operations on their own. By Improve Technical Knowledge. Many of advancing feed on credit to its dealers, Probiotech set the Probiotech’s smaller customers do not wheels in motion for many poultry producers to do so. have formal training in farm management and bio-security best practices; one How does this work? At the start of a customer study suggested that 95 percent of Nepal’s small-scale relationship, a sub-dealer typically extends credit to a poultry producers lacked technical training.¹⁰ Improper small poultry producer in the form of chicks and feed. The management of poultry sheds can cause disease and death producer then raises the chicks for a month and a half, among birds. As a result, small producers are often unable and returns fully-grown broiler chickens to the sub-dealer. to cover their production costs and end up abandoning the Sub-dealers sell these chickens on the open market and poultry business. 7 IFC INCLUSIVE BUSINESS CASE STUDY | Probiotech Noting that incremental improvements could bring funding provided in part through the Global Agriculture significant savings for its customers, but that the public Food Security Program (GAFSP), a multilateral mechanism sector provided insufficient extension resources, Probiotech that aims to support agricultural investments in the began to educate poultry producers through events that world’s poorest countries, IFC launched a poultry sector often attracted hundreds of participants. improvement project with several companies in Nepal, including Probiotech. Poultry Partnership with IFC and GAFSP In 2010, IFC began to engage with the poultry sector in IFC worked with Probiotech in a number of areas: Nepal given its importance for rural livelihoods and its role in improving food and nutritional security. Utilizing 1. Improving the quality of poultry inputs. IFC provided advisory services to Probiotech to further improve its feed production efficiency and quality. At the same time, IFC worked with hatcheries that supplied chicks to Probiotech’s dealers to address disease management and other factors that could enhance the quality and lifespan of chicks. 2. Training poultry producers. IFC and GAFSP supported Probiotech to train 4,050 poultry producers in shed cleaning, poultry feeding, and record keeping, among other topics. Since many poultry producers in Nepal are women, the project took steps to increase their participation. Childcare was provided at trainings which were scheduled SUPPORTING FOOD AND NUTRITIONAL at convenient times since family responsibilities often SECURITY prevented women from attending events. Female veterinarians were trained to provide extension Probiotech’s work in the poultry sector not only support. Special efforts were also made to link women benefits small-scale poultry producers but also poultry producers to Probiotech distributors for inputs the wider Nepali population. Nepal is among the and offtake. Ultimately, the trainings reached 1,000 poorest 15 percent of countries worldwide and women poultry producers, 85 percent of which adapted over 14 percent of households lack sufficient food. 11 best practices from the training. Among women Poultry products provide the primary source of producers, the cost of production dropped by 18 percent. protein for many Nepali families, so improvements in the poultry sector are critical to improving food 3. Institutionalizing support services for poultry security. In addition, Probiotech is expanding producers. The project helped Probiotech to operations to convert soya-based byproducts systematize and deepen its approach to supporting from its feed production into affordable, high poultry producers. Before the project, Probiotech had quality soy-based nuggets which will provide an held basic educational events from time to time, but alternative source of non-animal protein for the they were not institutionalized into the company’s local market. operations. 8 IFC INCLUSIVE BUSINESS CASE STUDY | Probiotech IFC’S ADVISORY SERVICES—PAVING THE WAY During the project, Probiotech established a farm TO AN INVESTMENT extension unit and later embedded it within the company. Probiotech also leveraged helplines, IFC and GAFSP observed Probiotech’s growth veterinarians, and distributors to further engage and potential through this initial engagement in the support poultry producers. The company set up its poultry sector. Building on the success of the helpline in 2011 to provide advice and assistance to advisory project, IFC and GAFSP invested $3.8 farmers. Its vets follow up on these calls with farm million in equity financing in Probiotech in 2014. visits to assess poultry producers’ needs and provide In addition to restructuring the company’s equity emergency assistance. The extension unit also base, the financing is being used to develop works with dealers and sub-dealers to disseminate manufacturing units for value-added products information about the latest poultry management that use Probiotech’s feed byproducts, such as soy methods to small-scale producers across rural Nepal. flour, nuggets, and oil. In the years since the project, Probiotech has developed other initiatives to support poultry producers. Shakti Helping Hand, for example, supports producers whose poultry flocks have been affected by avian flu. In the event that a producer has to slaughter an entire flock, the company provides a grant to help purchase chicks to start a new poultry rearing cycle. These efforts have enabled Probiotech to deepen its relationships and build brand loyalty among producers. 9 IFC INCLUSIVE BUSINESS CASE STUDY | Probiotech BUILDING-UP THE MAIZE SECTOR • Low Quality: Probiotech needed high quality maize to maintain the shelf life of its feed products and to Challenges in Supply optimize animal health. Poor quality seeds along with Like many other agribusinesses, Probiotech requires a challenges in soil fertility, irrigation, pest management, steady and high quality supply of raw material to operate and improper storage had resulted in inconsistent quality its feed mill at full capacity. Maize is the predominant grain of locally grown maize. used in poultry feeds worldwide due to its digestibility and energy content, constituting more than half of the raw • Supply Aggregation: Maize is harvested just before the material used in feed.12 onset of the monsoon season. As a result, many small farmers face pressure to sell their grain immediately at a Over the years it became increasingly clear to Probiotech low price since they lack access to grain storage facilities. that it faced three key issues in securing a reliable and steady supply of maize: Without improvements in the local maize supply, Probiotech knew it wouldn’t be able to significantly • Insufficient Volume: Local supply shortages meant that increase its local procurement in the long run. Probiotech Probiotech had to purchase maize imported from India, faced a key question: How could the company effectively as much as 50 percent in some years, incurring import build the skills of thousands of small maize farmers spread duties and driving up procurement costs. over Nepal’s plains and foothills? 10 IFC INCLUSIVE BUSINESS CASE STUDY | Probiotech SMALLHOLDER MAIZE FARMERS The PPCR project works with farmers in Bara, a major Maize farmers in Nepal are located in the “terai,” maize-growing district in the plains, and Parsa, which has or plains, as well as the foothills. They typically a similar climate. The project collaborates with a local cultivate about half a hectare to three hectares nonprofit to train farmers, though they are still free to sell of land. on the open market. The project uses several methods to train maize farmers: The maize growing season lasts four to five months, culminating in June. As such, farmers Demonstration Plots. Set up alongside typically grow maize along with other crops like maize farmers’ own plots, these plots enable rice and vegetables. Their limited access to inputs, farmers to test new practices, tools, and finance, and training reduces the productivity technologies for climate change adaptation of their farms and the quality of maize grown, before they implement them at their own farms. resulting in lower incomes. Awareness-building and training events are often held at these demonstration sites. Face-to-Face Training. Probiotech developed training materials, including a climate-smart practices handbook for farmers. It also hired One commonly used solution is contract farming: In agricultural extension officers to train lead many countries, companies provide training and inputs to farmers who, in turn, shared lessons on climate change contract farmers and commit to purchase their produce at adaptation with other farmers. Training events are timed harvest time. Culturally, this arrangement was infeasible to align with the sowing, growing, and harvesting cycle to in Nepal. Farmers were accustomed to selling to traders ensure farmers get the support they need at the right time. rather than through exclusive contracts with companies, a system that Probiotech was reluctant to drastically disrupt. Mobile Phones. The project uses mobile Moreover, there is no regulatory framework for contract phones to keep farmers informed of market farming in Nepal. A different solution was needed. prices, weather forecasts, and farming practices. Climate-Smart Farming In 2013 Probiotech and IFC joined forces to work on the The company expects that its work with these maize farmers Pilot Program on Climate Resilience (PPCR), a multi- 13 will pay off in the long run as other farmers learn from donor initiative which helps national governments their neighbors. Probiotech is already beginning to see integrate climate resilience into their development plans results, with a 20 percent increase in the volume of local and activities, including through the private sector. One maize the company procures as of 2015. The project has component of the project promoted climate-smart trained approximately 4,000 maize farmers to date, with practices among maize farmers. These practices improve about 70 percent adopting new practices from the the productivity and quality of maize—key issues that trainings. Probiotech has collected data on 2,000 maize constrained Probiotech’s local procurement. farmers plot sizes, the inputs they use, and challenges they face, and the company continues to identify opportunities to support them. 11 IFC INCLUSIVE BUSINESS CASE STUDY | Probiotech NEW ROLES FOR THE PRIVATE For more information on SECTOR inclusive business at IFC, visit www.ifc.org/inclusivebusiness Through a hands-on approach to productivity, quality, and efficiency in Nepal’s agriculture ecosystem, Probiotech demonstrates how the private sector can embrace new RIGHTS AND PERMISSIONS roles in development. It was never simple. Probiotech © International Finance Corporation 2016. All rights reserved. had to work to identify and address the key obstacles The material in this work is copyrighted. Copying and/or that prevent its suppliers, distributors, and customers transmitting portions or all of this work without permission may be a violation of applicable law. IFC does not guarantee the from maximizing their economic potential. In turn, the accuracy, reliability or completeness of the content included in company has benefited from the strengthened capabilities this work, or for the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or of these key players in its value chain. Ultimately, the errors (including, without limitation, typographical errors and sustained involvement of businesses like Probiotech, along technical errors) in the content whatsoever or for reliance thereon. with government and civil society, is critical to promote sustainable agriculture. Probiotech shows companies how this can be done through their core operations as well as through multi-stakeholder partnerships. ENDNOTES 1 USAID (United States Agency for International Development). 2016. “Agriculture and Food Security.” https://www.usaid.gov/nepal/agriculture-and- food-security. 2 USAID (United States Agency for International Development). 2013. “Hill Maize Research Program Factsheet.” https://www.usaid.gov/nepal/fact- sheets/hill-maize-research-program-hmrp. 3 Operations of the companies under Nimbus Holdings span agribusiness and animal nutrition, poly woven fabrics production, chemicals, and trading and distribution. 4 Probiotech also produces feed for livestock. 5 FAO. 2014. “Poultry Sector: Nepal.” Animal Production and Health Series Livestock Country Reviews, pp: 20; Nepal Central Bureau of Statistics. 2015. “2014 Statistical Pocket Book of Nepal. National Planning Commission.”pp: 139. 6 SMDE (Society for Management and Development). 2010. “Integrated Characterization of Four Cross-Border Areas of Nepal in the Border with India for the Risk Assessment of HPAI: A Socio-economic Perspective.” FAO/ECTAD-RAP, Nepal. 7 FAO. 2003. “Project on Livestock Industrialization, Trade and Social-Health-Environment Impacts in Developing Countries.” http://www.fao.org/ wairdocs/lead/x6170e/x6170e2k.htm#fn58. 8 GAFSP Project Card. “Nepal: Boosting Poultry Productivity & Farmer Incomes.” http://www.gafspfund.org/sites/gafspfund.org/files/Documents/ GAFSP_ProjectCard_Probiotech.pdf 9 While existing poultry feed in Nepal provided a high average FCR of 2.2, Probiotech’s standard poultry feed has an FCR of 2 and its premium offering has an FCR of 1.8. 10 Ryan, O., and A. Pant. 2011. “IFC Builds Farming Capacity in Nepal.” Asian Poultry Magazine, November/ December 2011. 11 Nepal Food Security Monitoring System. Nepal Food Security Bulletin, Issue 43. Ministry of Agricultural Development, 2015. Kathmandu. http://relief- web.int/sites/reliefweb.int/files/resources/wfp273073.pdf 12 Ravindran, Velmurugu. FAO. “Poultry feed availability and nutrition in developing countries.” Poultry Development Review. http://www.fao.org/3/a- al705e.pdf. 13 PPCR is a project of Climate Investment Funds and also works with rice and sugarcane farmers in Nepal. 12