Proposal: Zurmat Flour Mill
A business plan proposal to establish and operate a regional shortflow flour mill in Paktiya Province in Afghanistan.
1. Executive Summary
Zurmat Group of Businesses (“ZGB” or the “Company”) proposes to construct and operate the Zurmat Flour Mill (“ZFM”), a regional, state-of-the-art shortflow flour mill to be located in either Gardez City or Zurmat in the District of Paktiya Province. Expected output will be 30MT of vitamin fortified flour per day, expanding to a maximum capacity of 60MT based on projected future increases in planting and harvesting due to higher flour prices and increased demand generated by the flour mill itself.
The current regional market for flour is largely dominated by imported products. The recent upsurge in food commodity prices, and the tightening of imported flour from Pakistan, has created a demand for competitively priced, high-quality domestic flour. As a state-of-the-art regional commercial mill, ZFM will provide locally manufactured, superior quality and competitively-priced flour that is also vitamin fortified and halal certified. Fortified flour is generally not available to most of the Afghan population, and as a new source, ZFM will contribute important health benefits to a significant portion of the general population.
2. Company Summary
ZGB recognizes that, while general contracting is a vibrant growth sector in the current Afghan business climate, increasing demand and commodity prices make agribusiness a highly attractive option for diversification. ZGB is seeking partners and investors to help realize the economic and social value of a regional shortflow flour mill in Paktiya province.
2.2 Government Relations
ZGB believes a regional flour mill will not only create economic gains for Afghanistan, but help address a critical food security gap that plagues Afghanistan. The domestic flour mill market is dominated by Pakistani imports, which are low cost during surplus years, and prohibitively expensive during shortfalls (as is the case during 2008). See Section 5. Market Summary. As a result, during wheat shortages millions of Afghans face starvation. Increasing domestic production capacity is therefore vital to addressing one of Afghanistan’s most pressing food security vulnerabilities. The Government of Afghanistan (GoA) recognizes this reality, and ZFM plans to seek GoA support once suitable private sector partners are engaged.
ZFM will further assist job-creation by stimulating additional wheat production. Many of the country’s poor have access to arable land fit for wheat production, but do not exploit these opportunities due to the absence of reliable purchasers for their crops. ZFM will be a consistent and reliable purchaser of wheat, and will pay producers competitive market prices, thereby incentivizing more growers to produce wheat. Local and regional growers are expected to have the greatest incentives since they will enjoy the lowest transportation costs for supplying ZFM. ZGB will also leverage its existing relationships with the PRT network in Paktiya province. A new PRT Agribusiness Development Team is scheduled to be operational in Paktiya by March 2009.
Significant local community support, strong district government support and very proactive provincial government support is expected for ZFM as food security, employment opportunity and a reliable buyer for surplus wheat will improve the quality of life for the surrounding communities. ZFM is expected to create spin-off gains in the agricultural sector by incentivizing farmers to grow wheat. Farmers will be more likely to stick with wheat as one of their main crops, and those currently growing illicit cash crops will be encouraged to shift production to wheat as local market demand (led by ZFM) becomes more established.
3. Economic and Environmental Trends
World Wheat Prices
Over the past 12 months global market prices for wheat have nearly doubled. There are many reasons for this increase, including higher demand for cereals in some parts of the world, particularly in Asia, China and India; conversion and use of some grains for bio-fuels; and a poor 2007 harvest in a few regions of the world that have traditionally had very strong wheat production.
The strengthening in world commodity prices that became so pronounced in late 2007 and early 2008 may prove to be a new phase in world markets. Local food production can help buffer the region against turbulence in world markets by providing an alternative to expensive imports. High prices will provide the incentives that the agriculture sector needs to increase production, which will ultimately help reduce regional food prices. Agriculture, however, has been neglected in recent decades and will take some time to rebuild. The surge in food prices highlights the importance of ending this neglect and paying more attention to the rural economy.
In the local areas of Paktiya province, increased prices in fuel oil, record high wheat prices, political instability and border closures with Pakistan, and voluntary and involuntary refugee returns have the potential to lead to increased dissatisfaction with the GoA, growing food insecurity and malnutrition, and in extreme cases, food-induced displacement within the local and nearby provinces of Afghanistan. As these factors converge, there becomes a direct correlation with rapid price increases, escalating demand and shortages of supplies relating to wheat and wheat flour in Afghanistan.
3.2 Economic Environment
3.3 Environmental Concerns
4. Industry Overview
Afghanistan also has a severe shortage of wheat milling capacity, which has created a market for surplus flour from Pakistan. Grain storage, marketing, milling, baking and processing infrastructure are all grossly inadequate. Development of these capacities will strongly encourage local wheat production while reducing Afghanistan’s dependency on flour imports and international food assistance. The Afghanistan commercial flour market is dominated by Pakistan to the extent that flour is priced and sold in Pakistan rupees. Even so, Pakistani surplus flour is not available on a regular basis, and quality is not consistent. Therefore flour milling and grain storage requirements of Afghanistan are issues of national food security. There are only eight commercial-sized mills operating in Afghanistan, none of which are in Paktiya, Paktika, Ghazni, Logar or Khost provinces.
In Loya Paktiya, most wheat is planted in October-November and harvested the following July-August. Wheat in Afghanistan is typically milled on a very small scale with grinding stones powered by water or diesel-powered motors. These mills are locally called “zirandas”. Little cleaning or sieving of wheat is done prior to milling; zirandas typically do not separate the husk and the bran, producing yields of 97-99% whole-wheat flour. Despite these high yields, the zirandas typically produce discolored, poor quality flour, and they also destroy some of the nutrients that originally were present in the whole grain. Thus, most bakery and household customers prefer refined white flour from Pakistan. ZFM product will compete directly with high quality Pakistani flour, but will not negatively impact most small ziranda millers that produce inferior, brown flour. Moreover, ZFM plans to incorporate ziranda millers into the supply chain by tapping their networks to supply needed wheat seed/inputs delivery. There are an estimated 5,000 zirandas throughout Afghanistan that collectively grind about 3.3 MMT of wheat per year.
There are only six functioning commercial-sized flour mills in Afghanistan with an estimated combined capacity of 600 MT per day, but utilized capacity is only about 400 MT per day. Only two of these mills are operating full-time, and both are in the north (Mazar-e-Sharif). The two commercial mills closest to Zurmat/Gardez are in Kabul, 180 km north. These mills operate part-time and at less than full capacity, due to power interruptions and limited wheat supplies. Kabul Flour Mill (Surat Zada Mill) is a 4-year old company currently producing approximately 40 MT per day, with a total capacity of 147 MT/day if fully operational. The other Kabul flour mill, Afghan Mills, was recently established and is still under construction; it is producing approximately 36 MT per day of flour, with a total capacity of 125 MT/day when fully operational. All of the functioning mills in Afghanistan are hampered, to varying degrees, by needed repairs or replacement of equipment, limited electricity and water, lack of technical expertise, lack of government investment and inadequate wheat supplies.
ZFM will also seek to leverage wheat production programs like the Village-Based Seed Enterprise Development.
4.2 Domestic Production Levels
Source: IMF Statistical Appendix, 2008
Nearly three decades of civil strife have virtually destroyed the industrial and export sectors in Afghanistan, and have severely damaged agriculture marketing, storage and processing infrastructure. Agriculture is the main source of national output – generating 50% of the country’s GDP – and is a fundamental means of livelihood supporting 85% of its people. An estimated 21 million people depend on agriculture for their livelihood.
Approximately 4% of Afghanistan’s total land area is used for wheat cultivation. From 2002-06 Afghanistan experienced steady increases in wheat production but 2007 production levels decreased 1MMT to approximately 3.4MMT. Similarly, wheat crop yields had been increasing since 2003, but in 2007 yields dropped 25% from the previous year. These recent decreases are largely attributable to low precipitation and drought conditions.
Adverse weather in key exporting countries and disruption of production from conflict and political unrest has strained already tight markets, reducing supply. For several years Afghanistan has relied on imported Pakistani wheat to satisfy domestic demand. Pakistan, however, is currently experiencing both significant political uncertainty and a wheat shortage, resulting in the imposition of export bans on wheat (and Pakistan has even begun importing wheat from neighboring countries).
4.3 Wheat Imports
Afghanistan has historically been the largest importer of Pakistani wheat, its main export crop. As mentioned above, Pakistan is currently experiencing a wheat shortage, which its citizens blame on the government’s decision to allow wheat exports to Afghanistan, and also on traders whom they have accused of “hoarding” wheat to exploit high prices. Pakistan’s current wheat requirement stands at close to 23 MMT and consumption levels are almost equal to this year’s production. In Pakistan, wheat is delivered “just in time” to the flour mills which largely reduces the need for storage. The Government of Pakisan (GoP) intervenes by subsidizing wheat prices and electricity, thereby allowing Pakistani flour producers to sell low-priced flour into Afghanistan as production and market conditions warrant. While GoP policies provide an important advantage to Pakistani flour producers, assistance is only provided in times of surplus production. Currently the high cost of wheat and shortages in Pakistan have resulted in even higher prices and less availability of refined flour in Afghanistan. While ZFM will not enjoy subsidies from the GoA, it will be able to establish and maintain its market presence by delivering consistent quality and competitive pricing to both consumers and wheat growers in Afghanistan.
Reducing reliance on imported wheat from Pakistan is vital for Afghanistan’s food security. Volatile global prices for wheat, political instability in the North-West Frontier Province (NWFP) and the Federally Administered Tribal Areas (FATA) regions of the country, the failure of mills to grind to capacity due to frequent power failures, and continued cross-border smuggling from Pakistan into Afghanistan may result in future supply shocks leading to severe shortages in Afghanistan. While ZFM does not assume GoA subsidies, Mr. Zaland intends to seek GoA support for this project to ensure its economic viability and sustainability.
5. Market Summary
Significant demand for flour exists from approximately 3,200 small bakers nationwide: 1,200 bakers producing cakes, cookies, etc. and 2,000 bakers producing naan bread. With a reliable supply of flour from the regional flour mill, the number of bakeries is expected to increase. In addition, three biscuit manufacturers and all private households have a demand for flour.
Most wheat is consumed by farmers, with excess sold informally in local markets. Surveys have shown that only 80% of Afghan farmers sell their wheat, and most of those who do are only able to sell modest amounts. Annual wheat sales are typically below 5 MMT, with two-thirds of farmers selling less than 1 MMT. The average quantity of wheat sold per household per year is a meager 224 kg, which represents approximately 11% of the total wheat on the market. Farmers typically use an additional 12% of their wheat production for repayment of rent and other obligations and this stock will also enter the local wheat markets. The remaining 77% of wheat produced is typically kept in the households for domestic consumption or later sale.
Imports from Pakistan dominate the bagged flour market in eastern Afghanistan. The flour milling industry in Pakistan is mainly dependent on support from the GoP, which releases wheat to flour mills on an as needed basis and also provides financing to flourmills for the procurement of wheat and for milling operations. Annual harvests vary, and some years Pakistan is a net importer of wheat. During surplus years, the GoP implements special arrangements to facilitate flour exports to Afghanistan (including suspension of regular duties on the export of flour and other concessions to flour mills). The GoP also sells wheat to Pakistani mills near the Afghan border at favorable prices, about US$5.50 below interior Pakistan prices. Pakistan’s export tax is 15% but the GoP lowers it as needed to increase Pakistani flour competitiveness.
Several factors determine price fluctuations for imported Pakistani flour: availability of Pakistani wheat; government release prices to flour mills; waivers of taxes and duties by the GoP; variations in transportation costs; wholesaler costs and margins; and variations in the quality of milled flour. There is no systematic testing or quality control of Pakistani flour, and therefore market demand and consumption determines the perceived "quality" of Pakistani flour.
5.2 Market Trends
For highly import-dependent or highly food-insecure countries, such as Afghanistan, any decline in import capacity stemming from rising food prices or adverse weather conditions can have a dramatic impact on food security. In the current environment, attractive market prices should naturally motivate small farmers to plant wheat and benefit from rising prices while also maximizing the returns on their yields. As winter planting begins, ZFM will be uniquely well-positioned to intake the upcoming harvests and produce and distribute wheat flour to the local market at a competitive price.
6. Market Strategy
As a local producer, ZFM will enjoy lower transportation and delivery cost advantages over imported flour. Additionally, ZFM will attract local farmers by collecting wheat in three ways: farmers will deliver the crop to ZFM directly; ZFM sales personnel will visit different viable crop fields and transport wheat back to the mill; and ZFM will negotiate distribution arrangements with existing ziranda millers who will become purchasers of wheat for ZFM. In the latter cases, the ziranda miller becomes the distribution link to farmers, to both purchase wheat for ZFM and also distribute to farmers quality fertilizers and ICARDA-certified seed for planting. The ziranda millers will also be the logical link between the farmer and the ZFM for post-harvest product storage and shipment to the mill. In this way, ZFM will leverage the established, traditional relationships between the ziranda millers and local farmers.
The main characteristics of these products will be:
A secondary revenue stream for ZFM is the sale of wheat by-products produced naturally during the wheat cleaning and screenings process. In the United States, this wheat by-product is a traditional and economical energy source for livestock. An established animal livestock feed market already exists in Afghanistan, and with the steep increases in prices, this will prove to be a valuable secondary revenue stream. Production costs will be approximately US$5.00 MMT/flour.
7.1 Packaging and Distribution
a) Quality and Cost – Pakistani flour is generally some of the highest quality flour available in Afghanistan. Domestically-produced flour of comparable quality, competitively-priced, is an attractive alternative to Pakistani imports. Pakistan, which currently serves as the primary source of flour for Afghanistan, has imposed restrictions on flour exportation to Afghanistan. Therefore, support of ZFM by the community is a statement of national self-reliance. In light of fluctuations in the availability of Pakistani flour, ZFM will also be seen as an important resource for domestic food security.
b) Vitamin Fortification – Fortified flour is essential for alleviating malnutrition, which is especially common among children. The World Health Organization (WHO) and the World Food Programme (WFP) have both endorsed fortified flour. In May 2005, the Afghanistan Ministry of Public Health (MoPH) held a public briefing to announce the results of the first ever national nutrition survey in Afghanistan (supported by UNICEF and the Centers for Disease Control (CDC)). In the briefing, MoPH stated that the "Number one method for prevention of malnutrition in Afghanistan would be flour fortification." The main findings documented that over half (54%) of Afghan preschool children are stunted (chronically malnourished), over a third (39%) are underweight and about 7% are wasted (acutely malnourished); 72% of children 6-59 months, 48% of non-pregnant women and 18% of adult men tested were classified as iron deficient. Specific micronutrient deficiencies are prevalent in Afghanistan and are likely to contribute to high infant, child and maternal morbidity; decreased learning capacity; lower productivity and higher mortality. To remedy these problems, flour fortification has been supported by the MoPH, UNICEF, WHO and the CDC.
Fortification of commercially-milled flour will reach a substantially larger population than a fortification program relying on zirandas. There are approximately 5,000 of these small millers in Afghanistan, and application of fortification would be extremely costly and labor intensive, while far fewer consumers would be affected.
c) Halal certification – Muslim consumers who observe halal will be assured that ZFM honors Islam and is respectful of the traditional Afghan culture while still placing the highest value on quality. ZFM will provide the highest quality flour, fortified with badly needed vitamins and minerals, in a way that is respectful of Islam and the national culture of Afghanistan. Most imported flour in Afghanistan is not halal certified.
Promotion channels include the use of mass communication, such as print ads, radio and TV. In addition, ZFM has identified a successful direct mailing campaign from a South African flour company, Sasko’s Flour, in which the company used cell phones to reach its clients. SMS messages to local suppliers and buyers would inform the community of promotions and sales.
8. Location and Infrastructure
With either a Zurmat or Gardez location, the mill will be well-serviced by two new major paved roads supported by USAID. One is the Gardez-Khost paved road which is currently under construction and will provide the easiest and quickest link through Afghanistan to and/or from the port of Karachi for any businessman in Kabul or Afghanistan's neighbors to the north. The second paved road now funded and under design is the Gardez to Ghazni road which will link Gardez, through Zurmat, to Ghazni and the ring road to the west. Either site option – Zurmat and Gardez City – will serve as an attractive multi-provincial wheat milling hub.
Security conditions will be a primary consideration in site selection. Current conditions are better in Gardez City than in Zurmat, although security will be reassessed once the project is fully developed and ready for implementation to begin. ZGB has extensive existing relationships with the Provincial Reconstruction Network in Gardez and at Forward Operating Base Zurmat. These relationships will facilitate coordination and assistance with managing security risks in either location.
8.4 Water and Electricity
ZGB will seek to site the mill near a source of steady and reasonably-priced electrical power. Currently there is no electrical grid in Paktiya Province and for the time being, the ZFM will have to rely on generators for power.
There are no commercially-piped water sources in Gardez and Zurmat. ZGB intends to fulfill ZFM’s water needs through locally sourced wells (both existing and new ones at or near the mill site).
8.5 Management Team and Labor
Labor will be used on the packing line, in the warehouse area, and to load-out of bags of finished flour. Other labor capacities may include: additional millers, packers, store-men, and stock clerks; maintenance staff, truck drivers, lab techs, quality assurance technicians, office staff, and marketing personnel. Estimated costs of labor are US$144,000 for the first year of operation.
9. Operations Equipment
The KSU Mill is designed for processing hard, soft, and durum wheat varieties into white flours with high extractions and quality finished products. The Mill has a capacity of 60 metric tons/24 hours day of white flour at an extraction rate of 72-75%.
The Mill will cost approximately US$1,250,000, which includes the equipment structure with floor and handrails, electrical/automation, motors, spouting, dust control, and conveying systems with the module proposed and pneumatic conveying systems to transport the finished products to a destination. Installation is estimated to take 5-6 weeks for a qualified four to five man crew.
Another advantage of the KSU Mill is its compatibility with dry cleaning. Wheat washing or wet cleaning of wheat normally requires substantial water (approximately 15,000 litres per day for a 60MT flour production). In addition, these processes produce significant effluents and contaminants in waste water. Dry cleaning with the KSU mill will consume far less water (which is scarce in Paktiya province) and have far less of an environmental impact. A cleaning house to provide cleaned grain for the mill will cost approximately US$800,000 (excluding shipping).
Both the Mill and the cleaning house will have to be imported from Kansas and shipped through Norfolk to Karachi and then transported overland to Kabul, for forward transportation to Gardez or Zurmat. Five 40-foot containers will be needed for the Mill and an additional five containers for the cleaning house at an estimated US$10,000 per container for a total transport cost of US$100,000. Transportation of 40-foot containers from Karachi to Kabul will be done in summer months only due to the winter weather conditions in the mountains.
9.2 Fortification Feeder
9.3 Flour Bagger
ZFM will balance the packing rates and the flour storage rates as it produces approximately 60MT of product a day at full production with output of 45MT flour and 15MT bran. ZFM will require packing and storage of flour to allow at least a 25% cushion for production and will utilize 24-hour storage of both bran and flour with a capacity to pack 24 hours of product in an 8 hour shift.
9.5 Silos, Conveyors, Catwalks, Elevator and Receiving Hopper and Bins
These galvanized silos, conveyors, catwalks, elevator and receiving hopper and bran/feed bins will cost approximately US$450,000 if purchased in the U.S. Shipment to Afghanistan is expected to require five 40-foot containers. Container loading, inland freight, courier fees, bank fees, ocean freight and insurance will cost approximately US$40,000.
9.7 Bran/Feed Packer
The bran/feed packer is estimated to cost US$80,000 plus transportation costs of an estimated US$7,000 (Rate All-In) in a 20-foot container from Minnesota through Karachi landed Kabul.
10. Estimated Production Start-Up Costs