Monday, October 31, 2016

Final Handbook
"Milk" Joint Stock Company I MSE-SUU

September 2016


Final Handbook

"Milk" Joint Stock Company I MSE-SUU
Labor Union street-37, SH district-29, Ulaanbaatar, MONGOLIA
Tel: 976-11-70003905 (ext.600) I Fax: 976-11-70001901

From:  Katya Chertova, Agribusiness Coordinator

To:  Mr. GANTULGA Bulgan, Chief Executive Officer, Member of Board          

CC:  Baasansuren Sundujiav, Principal Banker, Mongolia RO; Anna Thompson, Principal Banker; Jaejin Lee, Associate Banker; Patricia Traill, EGP Reports Administrator; Mr. Ir. J.H. (Rene) Kremers, Senior Industrial Adviser; Herwin Marks, Specialist.

1.      Brief Project Overview

Suu JCS is the oldest dairy processing company in Mongolia (96% owned by Max Group and 4% float) and leader in the dairy industry in terms of production capacity and market share. The company was initially established in 1958 as the main state dairy processing company. Suu JCS was 100% state-owned until 1992, when it became a 51% state-owned company. In 2006, the company was fully privatized, and is now listed on the Mongolian stock exchange.

The company has 3 processing plants – in Ulaanbaatar (processing capacity of 200 tons of milk/day), Erdenet (40 tons/day) and Batshireet (15 tons / day). Suu works with approximately 2,000 herders and farmers through 400 milk collection points from 30 milk producing areas of the country and produces more than 70 types of dairy products including milk, yoghurt, curd and ice cream.

The company also owns and manages crop fields and a dairy farm through Max Agro LLC, established in 2008. Max Agro LLC is engaged in the growing of wheat on a 5,500 ha plot in the Selenge province and also manages a dairy farm of 300 cows also located in Selenge province.

Initially, the advisory project was focused on assistance to the processing facility, under the first SIA Gheorghe Petrisor (GP). However, the project soon shifted to focus on the dairy farm and crop production, as this was the limiting factor for future development. The new focus also resulted in the appointment of a new advisory team, led by Rene Kremers (RK), with support from Martin Pelleboer (MP) and Herwin Marks (HW) on veterinary issues, as well as Richard Korver (RK) on irrigation issues.

2.      Enterprise Situation at the Beginning of the Project

Mongolia has a very unfavourable climate for growing crops for cattle, with almost 8 months of winter (snow on the ground from September to April) and a very short summer. The situation is negatively impacted by the country’s limited precipitation (300 mm approximately, while 600-700 mm is the minimum for good crop production) and very poor soils. It is therefore difficult to grow good crops to feed cattle and therefore dairy is hard and expensive.

The poor climactic conditions are coupled with market conditions to discourage fresh milk production. For many years the international market for milk derivatives has been highly competitive, resulting in low milk and milk powder prices. This incentivizes dairy processing companies to buy import cheap milk powder instead of sourcing raw milk locally.

In 2012 milk prices on the international market started to rise and in Mongolia the demand for local produced quality milk appeared. A number of investors including Suu JSC decided to set up their own farm. The government supported these investments with subsidized loans.

The project has been focused mainly in the dairy farm of as a tool to improve and secure the raw milk supply to the factory. At the start of the project the dairy farm faced a lot of challenges and there was an ambitious growth and investment plan, to increase the number of cows from 300 to 2000 head.

However running a farm is not easy, and Suu faced a number of challenges. At the time when RK joined the project with his team, all the cows on Suu’s farm were dry and not producing milk.

During his first visit, RK investigated the situation and made an analysis of the situation. First of all the cows (approximately 270 out of 300 initially imported were still there) were all dried off and even a large number not pregnant (approximately 70) - cows need to be pregnant to give birth and start a new lactation. Also the supply of feed was very limited in quantity and quality. The ambition is to increase the farm to more than 2000 dairy cows. RK strongly advised the company to put further farm investments on hold and focus on:
·         Improving general management practices on the farm – milk, feeding, fertility, hoof care, etc.
·         Securing the cow feed both in terms of quantity and quality
·         Ensuring that all open cows are impregnated

During the project the focus has been on improving current management practices and preparing for 2016 crop production season. During the advisory team visits open cows were treated with fertility hormones and inseminated – resulting in pregnancy in almost all cows.

During the last visit, the focus was on improving feeding and fertility, both of which have improved in accordance with protocol. Feeding is still an issue due to broken equipment and poor quality roughage. During the summer, the company installed irrigation and produced roughage, which should improve the feed situation for next year.

3.      Key Objectives Set at the Beginning and During the Project

Objective 1: Long–term Plans and Goals. Assist the company to prepare a realistic and feasible business plan for the expansion of the existing dairy farm to increase the supply of raw milk in terms of quantity and quality. Enterprise responsible and RK will give second opinion and deliver input where necessary, but primary responsibility is with the Enterprise.

Objective 2: Organization Structure. Improve dairy farm structure, ensure delegation of authority and supervision by identifying key responsibilities for each level of management. RK will deliver a set of Job Descriptions, Standard Operation Procedures and action to be implemented. RK responsible to deliver the input and together with the enterprise the documents and actions should be discussed and implemented.

Objective 3: Quality Management System. Improve dairy farm processes and procedures. Improve working practices to ensure that products and services meet customers' requirements and are in line with international quality standards.

Objective 4:  Output capacity, efficiency, quality and design. Set up structure, processes and procedures to purchase and distribute farm inputs such as premix, concentrates, milk-replacer, semen, spare parts, etc. In addition, RK will assist the management with their plans for the development of the dairy factory by giving a second opinion and critical review on issues such as quality management. It is definitely not the main objective, so no major effort will be provided on this subject.

Objective 5: Supply Chain Management. Improve current milk collection system and processes. RK responsible to develop the strategy, however the enterprise is responsible to implement the strategy, especially the short term actions.

Objective 6: Investment planning. Assist on prioritizing investment areas and timelines.

4.      Progress at the end of the Project

Objective 1: Long–term Plans and Goals.

The advisory team prioritized the following long-term issues during the course of the project:
·         Necessity of having enough good quality fodder and feed for the animals.
·         Improve existing management. During the project the current dairy farm management practices have improved a lot, but are still not up to a level that serious investments are reasonable and have a sound base for success.
·         Proper milk collection.

The priority of the company at the start of the project was growth in terms of the dairy farm, but the first visit made very clear that they were not ready for growth, but first had to improve current management practices. Huge steps have been made, but still several fundamental issues are not solved. Especially Human Resource is a very weak point as well as the supply of fodder and quite a number of inputs such as veterinary medicines, seeds and feed ingredients. Last but not least the production of fodder is a huge challenge with a very short growing season (3-4 months) and lack of precipitation.

Besides the improvement of the own farm it is important to keep paying attention to the improvement of milk collection. An own farm can never cover a large part of the necessary milk supply and also from a social point of few it is important to collect milk of good quality from the villages. It is for the factory the cheapest milk and for the village a very necessary source of income.

This objective was discussed at length during the project – however, it was not finalized during the course of the advisory work.
Objective 2: Organization Structure.

The organisational structure has improved. It is clear that Galbadrakh is the farm manager and director (at the start there was a separate director). Taishir and Gantulga are taking care of the farm supervision in good cooperation with the manager Galbadrakh. This team works well together, however all three are very busy with their day to day business and none of them have the experience in dairy farming to oversee long term implementation. Moreover the owner from time to time simply overrules the team and make the decisions his way without taking into account the opinion of this team and or the advisor. This takes away from the authority of the farm staff to make long term plans.

The advisory team recommended that the company send a few young experts for training in Europe. These have been identified and RK is currently exploring options with the company to send these professionals to a farm in Holland under a pre-approved assignment for training an experience. This is good progress, albeit with a serious delay.

Objective 3: Quality Management System.

For the farm Standard Operation Procedures, Job Descriptions and a Veterinary Treatment plan have been developed and implemented. This is definitely a step forward and things have improved substantially. However with poor equipment (especially feeding equipment) it is hard to implement protocol correctly. The purchase of right equipment (no Chinese tractors) has a priority to make the final step for implementation of the SOP’s.

It will be important to implement a monitoring system based on Key Performance Indicators. This was begun by the advisory team during the course of the project, and then incorporated by the local management team.

Furthermore, the advisory team worked with the company on:
·         Hygiene issues at the farm
·         Improving feeding conditions
·         Identifying and supplying necessary vaccines
·         Identifying necessary purchases, including premix, propylene glycol and other supplies.

Objective 4:  Output capacity, efficiency, quality and design.

Together with the local management the output has significantly improved. At the start of the project all cows where dried off and not productive. During the project the production level increased to 15-20 ltr per day. There is still a large fluctuation due to the fact that sometimes feed ingredients are not available, the equipment is broken, etc. So the general picture is that things really improved, not only in terms of milk production but also in terms of fertility. To keep the production going it is important to get the cows pregnant. This was a major problem at the start of the project, but during the project this also improved a lot.

The team also assisted the company in selection of irrigation equipment, the first of which has now been purchased in accordance with the team’s recommendation.

Objective 5: Supply Chain Management.

Suu can obtain milk from three sources:
·         Import of milk powder. This is simplest for matters related to quality and availability; however, it hard currency to purchase in the form of imports. Depending on milk powder imports also means that the company is dependent on the world market, where prices can be volatile.

·         Supply from own farm(s). Operating a farm is a good option to supplement supply, but it will never cover Suu’s whole demand. Additionally, the farm is expensive and can be a challenge to manage, as Suu experienced.

·         Milk collection from small and medium sized farms. The collection of milk from the villages is a challenge in terms of quality and quantity. However, the RK advised the company that this is the best option to secure the highest quantity of milk at a good price. In addition, milk collection from smaller farm also has a positive social impact – this avoids the outflow of money from the country (import of milkpowder) and generates a flow of money to the villages. For the villages this is just one of the few sources of cash income.

RK worked with the company (and is still currently working) to secure a grant from the Dutch Government to organise a study tour for the association of dairy farmers to Ukraine to see the project of Danone / Community WellBeing who executed a very good project in the field of family farming and milk collection of small and medium sized farmers.

Objective 6: Investment planning.

During the project investment planning was discussed several times. The advisory team stresses the importance of focusing on sound performance first and then increasing the capacity; company management would like to move as quickly as possible. Due to this discrepancy, no detailed plan has been made as the ambitions of the owner and the realistic plans are to far away from each other. The team has provided advice at several points, with limited follow-up. Some items have been completed and implemented, but dairy is a very specific business and requires detailed planning. Proceeding on a trial and error basis is ill-advised in a country where there is no market where you can buy feed and recruit experienced farm managers. Therefore, a detailed investment plan has not yet been produced.

5.      Next steps to implement recommended improvements

It will be important for the company to continue to improve technically, operationally, and financially, either through internal improvements or with advisory assistance.

The team strongly recommends limiting the size of the dairy farm and focusing on milk collection from small and medium sized farms (10 cows and up). The team has proposed continuing support to the company, with a visit to Ukraine to see the system of Danone as well as a visit to a farm in Aktobe (which has a similar climate to Mongolia.

Given the situation of the current international milk market with low prices and the challenges with management of the dairy farm (especially growing good quality forage) it is recommended to limit the number of cows to the number that can be kept in the current buildings and also to see how the big barn will do in winter.

Main focus should be for the factory to improve the milk collection practices; this activity has unfortunately not been an area of focus as the expectation was that an own farm would solve the issue of local raw milk supply.

6.      Financing needs

The company is interested in further expansion – increasing production of raw milk as well as diversifying in milk production and processing. They are currently exploring investment options with the EBRD and other institutions.

7.      Environmental aspects/Transition impact/any other follow-up

Transition impact objectives
Monitoring benchmarks
Competitiveness in the dairy sector
COMPANY Suu is one of the largest processors and has also one of the largest dairy farms.
Rural and Urban region activities
The farm is located rurally and employs rural workers. The factory collect milk in the villages
Expansion of markets in other sectors

Transfer and dispersion of skills
The advisory project has focused on the spread of new skills and technical and financial know-how amongst the staff.
Demonstration of replicable new behaviour/activities
The management has taken and standardized new skills and behaviours.
Setting standards for corporate governance and business conduct
The company has adopted a transparent management structure and recruitment procedures.
Key risks to transition impact
Mitigating factor(s)
Management experience/commitment
Management has complied with the program and have set a relatively strong foundation for further growth.
Market/business climate
The market climate has remained the same, however import of raw milk became cheaper then 2-3 years ago.

Katya Chertova                                               Rene Kremers                                                                                                 Herwin Marks             Martin Pelleboer
Team Coordinator     Senior Industrial Adviser                     Specialist                                                         Specialist