Agroindustrial project analysi

THE PROCUREMENT FACTOR 99the transport charges are not apparent. For example, a sugar millin a Latin American country wanted to reduce the cost of the rawcane it was purchasing from small farmers because world sugarprices had plummeted drastically, putting the mill in a cost-pricesqueeze. The mill dropped the price to the farmers from $7.00 perton delivered to the factory to $5.00, a price it considered stillprofitable for farmers. Consequently, a large portion of the farmersbegan to shift to different crops, threatening the mill's supply ofraw material. Examining the farm-to-mill cost structure (see table3-5), the mill found that transport charges had absorbed over 40percent of the farmers' revenue at the old price and were absorbing60 percent at the new price, thus making the farmers' operationat the new price unprofitable. The mill invested in a fleet of trucksthat it could operate at one-third the cost of the previous truckingservice, thus preserving the farmers' returns and lowering thedelivery cost of the cane. Alternatively, the producers could havecollectively set up a transport service.GOVERNMENTAL INVOLVEMENT. It is often necessary to trace coststhrough the farm-to-factory chain to uncover the effects of governmentprograms. For example, the poultry-processing industry in anAfrican country ultimately traced costs back to the feed-grainfarmer to find the cause of-and government responsibility forpriceincreases in its raw material. The government was concernedabout the high price of broilers because the poultry industry hadbeen considered a means of providing less expensive animal proteinTable 3-5. Illustrative Cost Structure of Sugarcane Productionand Delivery in a Latin American Country, 1972(U.S. dollars per metric ton)At old priceAt new priceItem Cosf Percentage Cost PercentagePrice paid by mill to farmer 7.00 100 5.00 100Charges paid by farmer totransporter 3.00 43 3.00 60Wages paid by farmer toworker 1.50 21 1.50 30Land costs paid by farmner 1.00 15 1.00 20Net return to farmer 1.50 21 -0.50 10Source: Author estimate based on unpublished company documents.