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9.4 Why Are Some Farms More Efficient at Making Profits Than Others?

The same analytical approach that yields the results on efficiency levels in the previous sub-section also permits assessing the determinants of relative profit efficiency across farms. In effect, we are simultaneously explaining why some farms are less profit efficient than others in terms of cross-farm differences in environmental mitigation behavior, differences across farms in access to information and assets, and differences (if any) in access to policy subsidies per unit of output.

9.4.1 The Role of Environmental Externalities

Hypothesis 4 of Chapter 1 posits that the relative profit efficiency of large farms is more sensitive to the capture of negative environmental externalities than is the case for small farms. In other words, the competitiveness of large farms is helped more by negative externalities associated with livestock production than is the competitiveness of small farms. Results on this in Chapter 8 are mixed. Monetizing a measure of environmental mitigation, or internalization of negative externalities, helps explain why some farms are more or less profit efficient in the majority of cases. However the issues are different within the separate categories of large and small farms. Furthermore, differences in environmental mitigation do not seem to be strong explainers of differences in profit efficiency across sizes of operation. The brunt of evidence is that within the class of large-scale operations for swine and poultry, greater effort for mitigation of environmental externalities seems to be associated with greater relative profit efficiency. This is clearest in the case of broilers and swine in the Philippines and layers in India. Interestingly, these tend to be mostly independent operations that are transitioning towards more industrial production, at least as compared with other samples studied. Results for smallholders are more mixed, especially if contract and independent sub-samples are considered together. Most fee (or wage) contractors have to follow a standard set of environmental practices as part of their contract, and they resemble larger scale farms in this respect more than other smallholders.

The environmental mitigation variable did not seem to have much influence on relative profit efficiency in the Thai sample. Egg and swine producers in Brazil, smallholder swine producers in the Philippines, and large-scale broiler farmers in India that spent relatively more on environmental mitigation tended to have lower relative profit efficiency at the end of the day, other things equal. It is interesting to speculate whether these sub-samples operated in conditions where it was relatively easier to ignore environmental issues, or perhaps harder to follow environmentally sound practices because of land scarcity.

9.4.2 The Role of Access to Information and Assets

With regard to hypothesis 5, farm-specific transaction costs seem to matter greatly to explaining relative profit efficiency across farms in most of the sub-samples studied. This means that relatively greater difficulties in securing access to assets and information for smallholders is a prime explainer of differences in relative profit efficiency within their group, and between them and large-scale farmers.

The most notable exceptions-where farm-specific differences in transaction cost proxy variables did little to explain differences across farms in relative profit efficiency-occurred for dairy farms. It is likely that transaction costs for dairy almost all occur in the marketing chain and not at the level of production, at least in the Indian and Thai contexts. Feed is mostly forage (avoiding the high credit and quality-related transaction costs packed into using concentrate feeds) and the timing of sales is a foregone conclusion, viz. daily. This is quite unlike farmers of monogastrics, where the timing of sale is more discretionary (requiring information), much less frequent, but critical to profit margins. For those cases where transaction cost variables matter most to smallholder producers, the main issues appear to be access to telephone service and the market information that goes along with this, and access to credit.

Yet even if transaction costs occur in distribution and processing, they may be greater for integrators or dairies dealing with smallholders than for those dealing with larger farmers. This is the conclusion of the Brazil country study as to why smallholders (in the Brazilian sense) are leaving dairy so quickly in Brazil: they are considered too costly to service by dairies that are now free to not do so. The impact of differential transaction costs from the perspective of the buyer of livestock products also shows up in prices received. The Indian dairy case in Annex III provides a good example: when differences in location and milkfat composition are controlled for, the large-scale farmers in the sample get a better price from private sector buyers than do small-scale farmers, by about 5 to 15 percent. This directly reflects their greater confidence in the product and lower costs in handling it.

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