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1.4 Issues and Research Questions Investigated in Phase II

The issues discussed above lead to identifying the following issues for investigation in order to understand the displacement of smallholders from the livestock enterprise.

1.4.1 Environmental Issues and the Viability of Smallholder Involvement in Livestock

It was suggested above that if farmers reap the benefits of production, but do not compensate neighbors for negative environmental externalities such as bad odors, flies, and polluted water, they are gaining a cost advantage relative to more eco-friendly or considerate farmers who incur less negative externalities. The issues for the present study are then two-fold: (a) do some farms have higher negative environmental impact per unit of output than others, and (b) how do the associated differences across farms in negative environmental externalities per unit of output explain differences in relative competitiveness across scales of production, given other factors affecting relative competitiveness?

1.4.2 The Role of Transaction Costs in Excluding the Asset-Poor and Information-Poor

It was suggested above that the perishable nature of livestock products and difficulties in assessing qualities of both outputs and inputs at the point of sale make monogastric livestock and milk production activities that are particularly susceptible to high transaction costs. Differences across farms in the amount of information they have on input quality and difficulties buyers have in knowing the quality of smallholder output (and thus being willing to pay a quality premium for it) create the conditions for differential transaction costs across households. Another aspect of transaction costs concerns the ability to secure inputs; large-scale producers are typically more credit worthy because their ability to repay is more easily known. This raises the key research issue of ascertaining the transactions costs faced by producers that differ across scales, which are clearly important to the determinants of scaling-up, but cannot (by definition) be directly observed.

Differential transaction costs may not be directly observable, but one clue to their presence is if prices received by large and small farmers systematically differ. Such differences can be due to factors other than transaction costs, such as clearly visible quality differences, but there is almost certainly more involved that cannot be impartially observed by looking at the commodity in question. Similarly on the input side, differences in feed prices surely reflect differences in feed quality, but price differences also surely reflect differences in the business value of the farmer to his or her input supplier, and differences in the input seller's judgment of the likelihood of being repaid.

1.4.3 Evidence of Higher Implicit Subsidies to Large-Scale Operations

There are cases of clear policy distortion across sizes of farms in the livestock sector, as in the case of large-scale integrated operators in the Philippines that import feed at 35 percent tariff or less, while smaller scale ones must rely on a domestic feed market that reflects a 60 percent tariff on feed corn (Costales et al., 2002). Other forms of direct impact include cases where independent producers pay sales taxes on feed, as in Andhra Pradesh in India, but vertically-coordinated firms do not (Mehta et al., 2002). However, there are indirect impacts of subsidies, as in the case of feedmills that are taxed as non-profits because they operate contract-farming schemes for smallholders (Costales et al., 2003). Smallholders may also be subsidized in some cases, to give them more a fighting chance vis-à-vis large-scale producers, although this seems to be universally less true for livestock production than for other forms of agriculture.

1.4.4 Differences in Cost Structures Faced by Large and Small

Putting all the above factors together, there remains the problem of assessing the relative importance of each in isolation and interactions among them when taken together. To what extent are profit differences per unit of output across farms due to lower transaction costs, differences in the amount of capture of environmental externalities, higher direct policy subsidies, or greater technical/allocative efficiency once these other factors have been accounted for? As noted above, the policy response to each type of issue may be quite different from the responses to other problems. This issue requires methodological innovation to approach, and will be a central point of the contribution of Phase II.

1.4.5 Impact of Vertical Coordination on Cost Structures

Policy solutions to problems generated by transaction costs and market externalities almost always require institutional innovation, with or without the application of technology. Institutional innovation often is prompted by producer perception of the need to overcome a given problem. Cooperatives and contract farming are cases in point. With regard to scaling-up, the research issue here is to know what is the net impact of cooperative membership and contract farming on profitability per unit and environmental mitigation expenditures.

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