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IX. Summary of Results

9.1 Overview of the Livestock Sector

This project aimed at understanding the complex relationships linking smallholder livestock production, policy distortions, market discrimination and environmental externalities in Brazil. The central objective was to test a general hypothesis according to which smallholder livestock production may face difficulties in competing large scale production either because of economies of scale issues or for other reasons associated to policy and market distortions favoring larger producers, to higher costs related to internalizing pollution effects, or yet to higher transaction costs in the input and output markets.

According to CEPEA, the livestock sector (farm and industry) is of salient importance in economic terms in Brazil as it represents 8.4% of the country's GDP. The farm sector alone represents 42% of the livestock sector's GDP. Over the last 15 years the average annual growth rate of the poultry sector was 9.3% and that of the swine sector was 7.9%. Most of this performance has been attributed to productivity increases that led to substantial price reductions: 50% for poultry and 38% form swine during the nineties. As a result poultry and swine domestic consumption increased at a yearly rate in excess of 5% at the same that poultry exports grew at about 17% and those of swine at almost 70% per year. Milk production increase was lower, reaching an annual average rate of 3.4%. Prices of milk fell nonetheless 47% in the nineties, but that was due probably to low-priced imports and/or overvalued currency, which impacted negatively the sector, particularly the smallholders.

Small-scale producers play a fundamental role in livestock production in Brazil. Family farms, with less than about 100ha, represent 89% of the Brazil's farms and occupy 20% of the land, and are responsible for 52% of the value of the production (VP) of milk, 58% of swine and 40% of poultry. In fact, family farms are significant producers of most of the agricultural crops as well as, for instance: 49% of VP of corn, 32% of soybeans. Livestock industries in Brazil vary in terms of the degree of concentration. The higher degree of concentration is observed in poultry sector, where the largest four companies are responsible for 64.5% of total production. For swine the share of the four largest companies reaches 30.5 %. In dairy sector, the corresponding share is 17%. However, 52% of the milk production in Brazil takes place in the informal market, so that, considering only the formal market, the share of the four largest dairy companies would be 32%.

Regarding changes in the size distribution of livestock production the most significant changes has been observed in the milk sector. For instance, according to census data, around 58 thousand milk farmers are reported to have left milk production between 1985 and 1996, probably as a consequence of low prices. Another evidence, suggesting strong scaling-up process, comes from the farm milk supply data to the 12 major dairy industries: only between 1996 and 1998, the number of suppliers fell by 28% and supply by farm increased by 37%.

In the poultry sector, the production size distribution changed as well from 1985 to 1996. In the south the strongest increase took place in the stratum of farms with more than 5000 birds and the flock in the strata of flock size smaller than 5 thousand chickens declined. In the center west region concentration took place in the stratum of more than 10000 birds.

For swine, the size distribution is much less concentrated than for poultry, but experienced a concentration in the larger production stratum (more than 201 saws) both in the south and in the central west region, although small-scale farms (less than 50 saws) still hold 41% and 58% shares in the south and in the central region. This indicates the scale growth of Brazilian producers.

The regional distribution of livestock in Brazil indicates that for poultry around 50% of the inventory is located in the south and 8% in the center west region and these shares tended to increase over the nineties in both regions, that is, the Brazilian production is concentrating in these two regions. As for swine, the south holds a share of 42% that is increasing, while the center west regions has an approximately stable share of 9%.

Among the agricultural crops, only soybeans and corn productions, used as animal feed, and sugar cane have been growing significantly (above 3% per year) in Brazil. One may conclude that it is the livestock sector that is leading and pulling a major part of farm sector as a whole in Brazil in the last two decades. Summing up it is possible to say that there is an interdependence among small and large scale farms: although larger farms hold larger shares of grain production, they depend on a significant extent on smaller livestock farms (and/or of course on external markets) to sustain the demand their crop production.

9.2 Syntheses of the Empirical Results

In this section a summary of the main results related to profit and efficiency is presented for each of the livestock activities analyzed.

9.2.1 Poultry

The large poultry farmers obtained higher profits. They received higher output price but paid higher prices for their inputs. This later observation may be related to the fact that larger farmers are located in the center west where inputs are more expensive. Larger poultry farmers tended to present a lower feed conversion ratio (feed/output)

Larger farmers presented higher schooling levels. However, schooling was not positively associated to profit. Although poultry farmers are less educated than dairy and swine farmers, this has not been a restriction in term of performance in the activity, probably because the contractor and not the farmer is in charge of most the technical and economic decisions.

As far as the mitigation of environmental costs is concerned, it was observed a close relation between mitigation and the possibility of selling the manure. Costs are lower when manure selling is possible. Small farmers and those with low animal density present a higher mitigation cost. Center west farmers also present lower mitigation costs because they can spread manure over larger extension of land. The distance of the farm to the urban centers were not important to explain mitigation costs.

Although the relevance of manure sales in farm revenue does not differ between large and small farmers at standard probability lavels, it is not too small the probability that those sales may be more important to larger farmers.

Profit frontier adjustment results indicate that the output price is the most relevant variable. Among the costs items, the hired labor cost was the only one with a significant effect, although the regression coefficient was small.

Results related to efficiency suggest that it is lower in Santa Catarina - what seems to be a circumstantial, and not normal result - than other regions with the exception of Minas Gerais..

Contrary to the expected, access to information and higher schooling levels are positively related to inefficiency. One possible explanation would be the lower dedication of better educated and informed farmers to farm activities.

The decision maker experience is negatively related to inefficiency and so is the payment of taxes. One possible explanation for this latter result would be the fact that those taxes are really contributions to farmers and cooperative associations. The results would be indicating that participating in those association may enhance the farmers efficiency.

Environment mitigation costs tend to increase inefficiency while animal density tends to enhance efficiency.

Regarding production scale, no statistically significant differences between large and small farmers were detected. Regionally, however, a difference was observed: southern farmers were more efficient than the others.

9.2.2 Layers

No significant effect of scale on profit, feed conversion or schooling level was observed. Schooling was not associated with profit.

Large-scale farmers were observed to pay higher price for electricity, but nor for feed.

As it was observed in the case of poultry, large farmers as well those with a high animal density tended to spend less on environmental mitigation costs. Manure sale is also associated with lower mitigation expenditures by larger farmers.

There was no difference in terms of the relevance of manure sale as a source of revenue between large and small farmers.

The distance of the farm to urban centers was related to mitigation costs: farmers located farther than 5 km form urban centers had higher costs than the others.

With respect to the profit frontier results, it was observed that the feed conversion had a significant impact on profit: the lower the fee quantity per kilo of eggs the higher the farmer´s profit. The feed price was also an important determinant of profit. Hired labor cost also had a significant (but small|) effect. The size of the farm is positively related to profit.

The results indicate that efficiency is lower in Sao Paulo and Parana as compared to Minas Gerais. Mitigation costs were found to increase ineffieiency. Higher schooling levels were associated to less efficiency, as observed in the case of poultry. But a higher animal density tended to lead to more inefficiency. It was observed that the farther the farm was form the urban center the higher the inefficiency of the farmer.

9.2.3 Swine

No significant effect of scale upon profit or efficiency was observed. Scale was not related to feed conversion ratio and output or input prices

The profitability of integrated farmers is higher than that of the independent ones. A rentabilidade dos produtores integrados é maior do que a dos independentes. But no difference was detected between integrated and cooperatives in terms of profitability. Feed conversion ratio is lower for integrated and cooperatives than for independent farmers.

Large swine farmers tended to have higher schooling levels, but higher schooling was not related to higher profits. Independent swine growers were found to reach higher levels of schooling and that may explain their ability to deal with more adverse market conditions.

Environmental mitigation costs are not related to either the distance to urban areas, production scale or regional location of the farm. On the other hand, higher animal density increases the mitigation expenditures Manure is not usually sold in the case of layers since there is no market for it.

Results from the profit frontier indicate that souhthern farmers are less efficient. Farm size, output and input prices are important to explain profit. Feed convertion ratio showed the right sign. In the profit function. Swine farmers operating the complete cycle obtained lower profits.

Farmers from Minas Gerais are less efficient than those form Santa Catarina, Mato Grosso, Mato Grosso do Sul and Goias. Farmers from Minas Gerais were considered as efficient as those from Parana and Rio Grande do Sul.

Contrary to what happened in the cases of poultry and layers, in the case of swine, the farmer´s schooling level is directly related to efficiency. It was also observed that the longer the time the farmer is in swine activity the higher his/her efficiency.

The higher the animal density, the higher is the farm efficiency. As in the case of poultry, access to information is negatively related to efficiency.

Mitigation costs are negatively related to efficiency. The distance of the farm to urban centers is directly related to efficiency.

9.2.4 Dairy

No effect of scale upon dairy profit or efficiency was observed. Nonetheless, larger farmers obtained higher output prices. Input prices, however, are not affected by fram size. Scale is not related to the milk production per cow.

The level of schooling of larger farmers is higher, but no relationship between schooloing and porfit was detected.

Farmers spending more on environmental mitigation costs tended to obtain lower profits. Farmers from Sao Paulo, Goias and Minas Gerais tended to spend more on these costs. Since the sale of manure is usual, the animal density is associated to lower mitigation costs.

The most important variable to explain dairy profit is output price. Input prices are in general negatively related to profit. Daily milk production per cow is positively related to profit, but the amount of family labor and the herd value are negatively related to profit.

Farmers from Santa Catarina are more efficient than those from Goias, Rio Grande do Sul, Parana and Minas Gerais. Framers from Sao Paulo were the least efficient of all.

It has been shown that the lactation length and access to information are positively related to efficiency. Farmers living in the farm increased efficiency and so did the fact that the manager was the farm owner.

The results indicated that more experienced farmers were less efficient. Older farmers were considered less efficient as well. Age and experience seem to be related to the lower willingness to adopt new practices and technologies.

9.3. Concluding Comments

Regarding the main concern of this study, it has been shown no significant association between scale and profitability or efficiency, with the only exception of poultry production. In this case higher profits are related to larger scales. These results suggest the absence of market or technical forces inducing a scaling-up process. On the contrary, the empirical evidences suggest that small and large-scale farmers will tend to live together in the foreseeable future.

The co-existence of small and large farmers may be the result of a re-organization designed to make the small-scale production viable. Swine farmers in the south, for instance, developed the so-called condominium system to cut costs and improve competitiveness. Vertical integration is adopted by 95% of the poultry growers and by an increasing number of swine producers. This also favors the viability of small-scale producers, since there is no apparent preference for large farmers by contractors. As result small farmers has benefited from large-scale purchase of inputs by contractors, for instance, as much as integrated large-scale farmers.

The development of the livestock sector in Brazil during the nineties took place in absence of direct subsidies to farmers. The action of the public sector - particularly Embrapa and the public universities - was relevant to induce productivity increases not only through the generation of specific techniques for the livestock sector, but also by producing new technology that permitted substantial gains in the grain - corn and soybean- sectors.

With respect to the expenditures with the mitigation of environmental costs, it was observed that they tend to be lower in those situations in which there is a market for manure, that is the manure has an economic value since it will be used as fertilizer in other farms. It seems to be the case that in order to have such a market, it is necessary a reasonable volume of manure. That is the reason why mitigation costs are lower when the animal density is higher and when the farm size is bigger. In the center west, because soils are of lower quality, and present organic material deficiency, the demand for manure is higher

Mitigation costs are more expressive, in the cases of swine and in those cases where there is no market for poultry manure. In this latter case, manure is spread in the own farm land and major costs are related to collecting the manure. Swine producers seek to use recommended treatment for manure so that it could be used as organic material as well. The major difficulty is related to scarcity of own farm and for application.

The distance of the farm to the urban areas was no important to explain mitigation costs in many cases. There is, however, an effect related to the region where the farms are located: costs are higher for poultry in the south and for milk in Sao Paulo, Goias and Minas Gerais. In general higher mitigation costs are related to higher inefficiency.

With respect to variables affecting the farm profitability the analyses indicate the output price, on the one hand, and the feed price and labor costs, on the other. The conversion ratio appeared as an important factor determining farm profitability. In other words, genetic improvement and better management seem to be instruments ot increase profitability of livestock production in Brazil.

The effect of the variable family labor was always sigificant negetively related to profit. One possible explanation may be the lack of alternatives for allocation of family labor. Aptitude may not be the relevant factor to select workers in these types of farms. Anyway, in general it was observed that hired labor performed better than family labor, probably because they are evaluated by the farm manager and can be replaced in case of deficient performance.

Higher schooling level may not lead to better performance of decision makers in terms of unit profit, for instance. There were cases in which higher education led to lower profits. With the exception of the case of swine, higher education did not lead to higher efficiency. One possible explanation would be the lower dedication of better educated farmers to routine farm activities. Given, however, the strong evidences that education helps in improving productivity and economic efficiency, the current results frustrate most of the expectation and remain as a puzzle in search for better explanation.

Finally it is worth mentioning two points related to the timing of the survey. On the on hand, it is important to keep in mind the special conditions that marked the year of 2002. The devaluation of Brazil´s currency affected the profitability of the livestock sector. Higher costs resulted both from higher exporting grain prices and higher prices of imported inputs.

On the other hand, the livestock sector, and particularly the dairy sector, was severely affected in the nineties by low-priced milk imports. This fact plus the changes that led to bulk assembly and other measures to improve milk quality ended up resulting in the exclusion of a significant number of small farmers.

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