9.6.1 Prompting Pro-poor Vertical Integration of Small-scale Livestock Farming
Contract farming allows small-scale producers to reduce the transaction cost of selling a perishable product in uncertain or thin markets, and to get higher prices from a buyer who is fairly certain that the farmer will deliver a fresh, quality product on time. The institution also shares risks and captures economies of scale in bulk purchasing of inputs. Properly done, contract farming can leave more wealth to share between producers and processors through the reduction of transaction costs that are a net loss to producers, processors, and consumers combined.
Potential advantages of contract farming are driven by six things. First, the changing needs of markets require changing product attributes, and these changing attributes may not be observable at the time of sale (such as food safety). Contracting may permit processors a higher degree of quality control under these circumstances than employer-employee relationships would do. Second, different commodities embody different types of transaction cost, and thus require different forms of institutional solutions. The information asymmetries between market participants in milk sales are fundamentally different than those for swine sales, for example. Dealing with these asymmetries is one of the biggest advantages of contract farming. Third, contract farming is a sharing of risks and benefits between seller and buyer. As such, the precise form it takes depends greatly on the distribution of power (market and political) between buyers and sellers, as does enforcement of contracts. Fourth, some risks may be much easier for large numbers of small-scale producers to bear jointly than one large farm by itself; the risk of environmental pollution penalties are a typical case. Fifth, some risks such as food safety may be much easier for large-scale producers to monitor than small. Larger-scale farms will find it much easier than small to establish a reputation for safety and quality, and to be remunerated for this in the market. Sixth, contract farming shares the benefits of extension of technology between the integrator and the contractor. Extension rates are typically much higher within contract farming schemes than outside them.
Public policy that has a useful and widespread impact on keeping smallholders involved with the livestock sector needs to harness the resources of the private sector, as in contract farming, but ensure that the form it takes is beneficial to the growers as well as the integrators. This will require a much better understanding in the study countries and all developing countries of what contract farming does, can do, how, and what the costs and benefits of extending and modifying it are.
9.6.2 Environmental, Animal Health, and Food Safety Institutions and Associated Regulations
Different rules and regulations have been developed in the different study countries to control potential environmental problems from livestock. Brazil, Thailand, and the Philippines have the most comprehensive set of rules of the four countries. India has minimal environmental rules regarding livestock. Details are given in the country study annexes and summarized in Chapter 3. The gist is that general regulations and institutions for protecting water quality and reducing air pollution have been amended over the years to apply to livestock, and particularly to the discharge of wastes from large operations. Furthermore, major livestock product exporters such as Thailand and Brazil have already implemented many changes in rules affecting animal health and made sure that they were complied with. This was done by state institutions with the full support of large-scale producers, who have a stake in export markets. It seems probable that this trend will continue and will be extended to environmental concerns.
At the same time, all four study countries report problems with environmental enforcement. Although a large number of rules and regulations on wastewater management have been developed in Thailand, and some incentives are offered to the livestock farms in investing in waste treatment technology, there has been a lack of enforcement even here. The Department of Livestock and Development (DLD) is expected to be a key institution to enforce environmental protection laws, as it currently does animal health regulations. Yet while DLD has the full support of Thailand's large poultry producers and exporters in order to keep foreign markets open through disease control, the consensus might break-down on environmental issues. The latter may be less clearly linked to export goals and have the potential for pitting producer interests against the general population. Thus, it seems likely that responsible environmental management will require building a broader consensus and using an institutional base that is not subject to conflicts of interest through its current strong identification with producers.
Similarly for Brazil, though laws exist, there are problems with the enforcement of environmental laws due to lack of agreement on the part of farmers with government policies in this area. In a survey done in Brazil in 2001 of 3,505 agricultural producers, 76 percent considered the environmental issue as a theme that must be dealt with, yet only 5 percent of the producers approved the current environmental plan of the government.
As the livestock sector has been more industrialized, livestock farms tend not only to be larger in size, but also run more as big businesses. As such, they tend to be under closer scrutiny by national, state, and local authorities than is the case for smallholders. In Thailand, for example, most attention has been paid to large swine farms, both in regulation and enforcement. In the Philippines, regulatory agencies that have in the past cracked down on large farms have only recently begun contemplating issuing regulations on pig waste disposal by small farms. One such agency in the high density Metro Manila livestock zone is the Laguna Lake Development Authority (LLDA) in Southern Luzon.
The institutions necessary to the enforcement of environmental standards for smallholders are quite different than those for large farms. It is not reasonable to expect an environmental impact statement from backyard farmers, nor is it easy for a centralized government agency to monitor compliance where tens of thousands of small producers are involved. Instead, management will have to be community-based, with common technical guidelines from a central agency. There also needs to be a means of appeal to a legal authority outside the local community, to protect both producers and inhabitants of regions dominated by powerful producers.
Different approaches to food safety are at play in the different study countries, as noted above. Both Brazil and Thailand have export-oriented livestock sectors that use process-based approaches to food safety such as HACCP, similar to the developed countries and necessary in order to trade with them. The Brazil country study (Camargo Barros et.al., 2003) does report economies of scale associated with meeting the HACCP standards in processing plants. Smallholders will need to find ways to be vertically integrated with certified processing plants if they wish to remain involved in the long-term. This will require meeting standards and following standards set by processors and integrators. Public policy can greatly reduce asymmetries in the power relationship underlying such contracts, but will need to recognize the realities that integrators and processors face in working with smallholders.
9.6.3 Trade Policies and Market Regulation
Much of the discussion in this study has taken the overall trade environment as given, and has focused on internal competition between large and small-scale producers. However no sector is more due for globalization than livestock in the next twenty years. Opening up of livestock markets to outside competition, as is required over the next six years in the current GATT agreements in the Philippines, for example, will restructure incentives in the livestock sector. How this restructuring occurs will have much to do with the impact on small-scale producers. Current incentives are largely in favor of integration, but much of this has to do with protection on inputs (corn, day-old-chicks), as well as on outputs. Similarly, taxation of feedgrain sales in parts of Southern India have provided a strong incentive to integrate, as vertically-coordinated feedmill/producers do not pay the tax. Liberalization in one area without changing others will change the bottom line and the incentive to integrate.
The happiest picture for pro-poor smallholder livestock farming in developing countries is probably Indian dairy production over the past two decades. Yet changes may soon occur in this picture of dairy in India. As a part of domestic economic reforms and commitments to the WTO, the private processing portion of the Indian dairy sector was liberalized in a phased manner, starting with partial opening-up in 1991. However, a key rule passed soon thereafter ensured that large-scale private dairies could not procure milk in the same milk-sheds where cooperative societies were active. In March 2002, the government revoked these restrictions. It is too soon to tell how this will impact small farmers. On the one hand, only 11 percent of milk is currently handled through the cooperative sector. On the other, the impact of deregulation of procurement in Brazil suggests that an incentive for scaling-up of dairy may now exist. Large-scale private dairies may prefer to contract with larger scale farms to provide milk, cutting procurement costs and possibly enforcing on-farm chilling of milk. The impact on the cooperatives and their members is still to be seen.