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I. Introduction

1.1 The Livestock Industrialization Project

The world is entering a period of rapid change in how animal products are produced, processed, consumed, and marketed. Increasingly the trends that have been observed in developed countries-scaling-up of production and increased concentration of large-scale operations with increased environmental problems-are becoming apparent in the developing countries. Phase I of the project was an attempt to take stock of these changes in four fast growing countries with respect to production and consumption of animal source foods: India, The Philippines, Brazil and Thailand (Delgado and Narrod, 2002). These countries have very diverse experiences and economic structures, and cross-country comparisons have rich lessons. Based on surveys of the literature and focus group interviews, Phase I sought to define how these trends affect producers and consumers, with particular reference to socio-economic, health-related and environmental impacts.

Phase II of the project concentrates on the forces that are driving the trends in scaling-up of livestock production in the four study countries, based on in-depth household surveys and analysis. Implications are assessed for impacts on social, health and environmental outcomes that affect the welfare of poor people and farm animals kept in developing countries. Finding entry points for policy to impact on the process and to make it more pro-poor and generally to be more welfare-enhancing requires being able to separate out the technological, economic, and directly policy-driven factors providing incentives for scaling-up.

While many persons, including many engaged in the livestock sector, think that technology alone is the source of economies of scale in production, and that this is what drives small producers out of business, it is quickly apparent that the truth varies greatly over commodities. The assertion that new livestock production technology is what displaces smallholders in developing countries is an over-simplification even in cases where the most productive technologies are not divisible below certain minimum scales. Other important factors that impact on scaling-up are organizational in nature, and are typically manifested as "transaction cost barriers" to smallholder participation in markets.

Transaction costs are the costs of exchange that arise from asymmetries across market actors in access to information and assets. If both buyers and sellers can easily ascertain the quality of the item being sold at the time of sale and prices in alternative markets, there are no asymmetries in information. But if buyers, say, cannot be sure of the true quality of the good they are purchasing, they will be less willing to pay a premium for it based on quality. An example of this is in hog production, where the use of poor quality feeds produces off-flavors that can only be detected when eating the final product. For this reason, larger producers through regular large sales can get higher prices per unit by developing a steady clientele that gains confidence in the quality of the product. In developing countries, larger producers often assure feed quality by mixing their own feeds, even at significantly smaller scales than would be the case in most developed countries.

Another example of transaction costs involves smallholders that have trouble selling milk outside the local market, because purchasers in anonymous markets cannot be sure without a bacteriological test that the milk is safe. Large-scale producers and cooperatives of small-scale ones, however, may be able to establish trust and reputation in markets, since they will be able to depend on repeat sales to the same clients who can identify the source of the milk. The clients can judge the quality of the next purchase based on a history of purchases from the same farm. Transaction costs are especially prevalent in the livestock business, and clearly play a role in the displacement of smallholders, as markets become more demanding in terms of information about the quality of the product at the time of sale.

Still other forces promoting scaling-up are non-scale-neutral policy distortions, such as subsidies or externalities that benefit large and small producers differently. Low-cost government credit to larger scale producers under the guise of regional development schemes, or the dumping of large amounts of waste into watercourses by larger farms unable to absorb more manure on their fields (presumably unlike smallholders) are possible examples of market distortions that would promote scaling-up. The key point is that the correct set of policies to prevent the premature exit of smallholders from the market place will differ greatly depending on which sort of explanation one adopts, and if all three classes are operating simultaneously.

The overall objectives for the Phase II research regarding the determinants of scaling-up are therefore to assess:

Events affecting smallholder participation in developing country livestock markets are not occurring in a void. The next section seeks to illustrate the stakes involved, given the broader context of what is one of the most important structural changes affecting poor people in rural areas at the present time.

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