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II. Growth, Concentration and Integration of the Livestock Sector in the Study Countries

2.1 Growth and Concentration in the Philippines[4]

At 4.6 percent per annum growth over the 1990s, the livestock sector provided the strongest source of agricultural growth, both during and following the Asian economic crisis of the late 1990s. The crop sector grew at 1.5 percent per annum over the same period. Pork and broiler output have been at the forefront of livestock production growth. Expansion of these two industries, however, has been concentrated in the two regions north and south of the capital city of Manila, which is the largest demand center. These two regions are Central Luzon, north of the capital, and Southern Tagalog (or Southern Luzon), south of the capital (Figures 2.1 and 2.2 in the appendix to this chapter). Not only are these two regions close to the highest income and most urbanized demand center, but the two regions themselves have relatively high income and dense populations, and thus are also centers for growth in consumption.

Although smallholder hog and poultry production has grown nationwide in response to a surge in demand, large-scale industrialized livestock production has grown even faster in Central and Southern Luzon. Changing patterns of production driven by changing urban demand have led to high concentrations of animals near major population centers, and especially Manila.

The scaling-up and concentration of production in broilers and hogs in the two regions adjacent to the Manila metropolitan area have given rise to problems of animal waste disposal. Traditionally, hog waste disposal involves using water to flush waste out of the pens and let it flow to the nearest creek, which carries the waste downstream. With concentration of production, this method can no longer be continued without adverse consequences for neighboring and downstream residential communities. In contrast, a market for poultry waste as organic fertilizer has developed. This has relieved broiler producers of a significant part of the burden of disposing of poultry manure without causing problems in neighboring residential communities.

The broiler sector has been at the forefront of industrialization of the livestock sector, importing grandparent stock, medicines and other technologies, and developing vertically-coordinated enterprises in the Metro Manila area. The latter span the range from feed ingredient importing to retailing cooked meat in sidewalk booths. In the hog industry, visible changes in industry structure have been less dramatic than in the chicken industry. Vertical integration and contract growing have not yet become the norm. No one integrator has a dominant market share. Similar to the broiler phenomenon, however, commercial farm operations have concentrated in the two provinces surrounding Metro Manila.

Large integrators control some 80 percent of the broiler market in the Philippines. The remainder is in the hands of independent commercial broiler producers, who typically maintain inventories of 20,000 to 100,000 birds, and a few smallholders, who typically raise 1,000 to 2,000 birds at a time. The large integrators are banded together into a producer's organization, the Philippine Association of Broiler Integrators (PABI), consisting of six large firms. The integrators engage in breeding and contract growing, processing, and distribution of branded output. They are also a major player in the live broiler market, in which the daily reference price is set by the group in the form of a "gentlemen's agreement" (Costales, 2003). The integrators are the main source of day-old chicks, even for independent commercial producers whose size of operations is insufficient to maintain breeding operations, and who would find it unprofitable to import directly with current tariff protection on day-old-chicks.

The large integrators thus have a major influence on the price of day-old chicks sold to independent commercial producers and smallholders. With regard to feed supply, while small-sized feed mills have their own brands of mixed feeds, the integrators not only supply their own feeds for internal use, but they also compete with small-scale mills on the commercial market for mixed feeds. Indeed, with the integrators' relatively easier access to Minimum Access Volume (MAV) corn imports negotiated under GATT at 35 percent, they are well placed to compete against other popular feed brands based on domestic corn prices that reflect the prevailing corn tariff of 60 percent. It is also possible that being horizontally integrated with grain mills for human food use conveys economies of scope in feed grain milling. With regard to the output market, large integrators can influence the types of products supplied by their contract growers by controlling the quality of inputs. By also exercising control over the dressing and processing of output, they can guarantee product quality for distribution to specific formal or institutional markets.

The live broiler market is the main output market for smallholders and large independent commercial producers. The large integrators, on the other hand, have a firm hold on the market for dressed broilers. In an era of market uncertainties created by international trade in meat, independent producers have less capacity to cushion their incomes from large fluctuations in live broiler prices.

In the hog sector, which is less concentrated than the broiler industry, small, medium-sized and large-scale producers have relatively equal access to the major market for slaughter hogs-the live market. The truly larger-scale commercial firms in the hog sector employ vertical integration in operations: from breeding and contract production to slaughter and processing of branded meat products. These large firms access a different and higher-value market than the medium-sized commercial and smallholder farms. They increasingly service the growing institutional sector in large cities: supermarkets, up-scale restaurants and hotels. They can meet the food safety certification and consistent quality standards required by the institutional food sector.

[4] This section is drawn from Costales, 2003, which gives appropriate citation to original sources.

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