3. Vertical integration and the livestock industries of the Asia-Pacific region

Appendix 3 - Examples of companies in Asia-Pacific region that are vertically integrated

The industrialization of agriculture is, according to Rhodes (1993), nearly as old as agriculture itself. He points out that industrialization involves a switch from agriculture based upon a fixed resource (land) to one based upon manufactured and hence variable resources. The other key characteristic of industrialization is the development of contractual arrangements between producers and other in the marketing chain. These arrangements have given rise to vertical integration among producers and marketers. The World Bank (2001) points out that vertical integration linking input suppliers, producers, processors and supermarkets is already the common production structure in northwest Europe and parts of the USA. Industrialization of the livestock industries has been occurring through many of the countries of the Asia-Pacific region. For example, the poultry industry of both Thailand and Indonesia has undergone industrialization over the last three decades (Ranong 1999; Soedjana 1999), with 80 percent of poultry production in Thailand in the mid-1990s coming from only ten large, vertically integrated companies supplying feed and day old chicks to medium- and large-scale producers under contract (World Bank 2001). A number of issues of concern to policy makers are associated with this type of development. These include the effect on the environment of large-scale livestock production facilities and how the small livestock farmers (the backyard producers), so much a part of the livestock sector in developing countries, will fare in the face of competition from large-scale producers. The purpose of this chapter is to examine the issue of vertical integration with particular reference to the livestock sector of countries in the Asia-Pacific region.

What is vertical integration?

Vertical integration occurs when a single firm can produce complementary products and services more profitably than a number of firms. Activities are complementary when carrying out one activity reduces the cost of doing the other (Berlin 2001). Put somewhat differently, vertical integration refers to the common organization of an industry across a number of components of the value chain and to increased standardization of production at each stage of the production process. Maturing firms in a vertically integrated industry are likely under certain conditions to try to control more parts of the production process. According to Dobashi et al. (1999), in the poultry industry, there are three levels of integration. These are:

• Non-integrated - firms tend to act as individual business units. Non-integrated industries are likely to be found in developing countries. A small subsistence farm producing food only for the needs of the farm household would be an example of a non-integrated firm.

• Semi-integrated - involves the processor taking over some parts of the production process to control the quality and quantity of output. In the broiler industry, the firm rearing the poultry may be involved in the production of parent stock or in running the hatchery operation.

• Integrated - large corporate entities control all levels of the value chain from feed milling to delivery at the retail level. Firms involved in pigmeat production might own the feedmills used to manufacture the animal feed; they might also be involved in the breeding of pigs for the fattening operation; these firms might also own the slaughtering facilities and retail outlets to sell the product.

Vertical integration is becoming an increasingly noticeable feature of the livestock industries in the countries of the Asia-Pacific region. Vertical integration does not appear to be a particularly prominent feature of the cropping industries, although it has been used in Thailand's canned corn industry and also in that country's cashew industry, as well as for some plantation crops in Malaysia, the Philippines, Sri Lanka and Indonesia.

How do the arrangements in the livestock industries operate?

There are differences across countries in the way that integration arrangements operate, but typically it displaces the decision making authority from the farmer to the downstream producer or processor, turning farmers into quasi-employees (Reardon and Barrett 2000). In the Philippines, the contracts that have been used for pork production are based upon the farmers possessing labour and the production facilities such as housing for the animals. These facilities are often built with finance provided by the firms involved in meat processors. High financing costs for the development of production facilities and for the purchase of stock are said to be behind the high cost structure of that part of the Philippine broiler industry in the hands of the small independent growers (Dobashi et al. 1999).

The nucleus farm arrangements that have been used in Indonesia and elsewhere in South-east Asia are a form of horizontal integration (Box 8). Horizontal integration, unlike vertical integration, involves relationships between farms at the same stage in the production process. For example, a large company owned farm producing pigs could be horizontally integrated with a small operation owned and operated by an independent producer. The large farms provide technical expertise and other variable inputs such as animal feed and veterinary services to the small farm. The operator of the small farm provides labour and fixed inputs such as land and housing for the livestock. The large farms avoid incurring high fixed costs through this form of arrangement and the operator of the small farm learns how to manage livestock in a manner likely to increase the marketability of the livestock product produced on that farm.

Box 8 Indonesia's nucleus plasma scheme

The nucleus plasma scheme (Pola Inti Rakyat) was first introduced in 1993. It was aimed at improving smallholder farmers in partnership with the live cattle import industry. Programmes used in the cropping industry and in the chicken industry motivated the development of the programme. The scheme had three components: the fattening of imported feeder cattle in partnership with existing feedlot businesses; the provision of feedstuffs direct to the feedlots from smallholder farmers; the maintenance and upkeep of breeding cattle owned by the small holder farmer. Adnam and McCarthy (1998) identify a number of problems with the fattening part of the scheme. It was sometimes difficult to find equitable financing arrangements for cattle, feed and the feedlot facilities. The small numbers of cattle and the scattered distribution of nucleus herds made it difficult to provide sufficient supervision and technical support. As a result, profits for farmers and for the feedlot operator suffered. Misappropriation of feed provided by the farmer or the feedlot operator sometimes occurred. In the provision of feedstuffs, the programme was more successful. This part of the scheme centred on the village cooperatives providing funding and an assured market for feed produced by farmer members. Higher yielding seed and better fertilizer use led to an improved level of technology. Under the breeding component of the scheme, 10 percent of imported cattle were to be made available to small holders. While most feedlot operators could comply with this requirement, the government's 1997 directive that this percentage should be increased to 20 percent became a major impediment for many feedlot operators.

The terms and condition of vertical integration arrangements in Thailand vary widely, but they usually specify the quality of the product and the price (Burch 1996). While the private sector has been responsible for the contractual arrangements, guidelines for the development of the agro-industries laid down by the government for 1987 to 1991 state that contract farming would be one of the production systems encouraged by the government (Burch 1996).

Reasons for vertical integration

A number of reasons have been suggested to explain the emergence of vertical integration. Berlin (2001) and the references cited therein, reviews these so the discussion here will be brief.

The avoidance of transaction costs is one possible reason for vertical integration. It is argued that costs inevitably arise as firms bargain and disagree in the normal course of conducting business. Transaction costs include all expenses and foregone opportunities that arise because of disagreements as well as the expenses incurred to avoid potential disagreements. The most important determinant of transaction costs in the view of some writers [for example Williamson (1985), cited in Lazonick (1994)] is the degree of asset specificity. In the poultry industry, firms might invest in sheds to house the birds. The value of these sheds is dependent upon the firm maintaining relationships with other firms, such as those supplying the birds kept in the sheds and/or the feed given to these birds. Assets used in an industry do not need to be physical. Knowledge of customer requirements is an example of a relationship-specific or idiosyncratic asset. This takes time to develop and firms may be reluctant to expend resources to develop them if there is the belief that its relationship with other firms will break down.

Transaction costs are likely to be greater the more unpredictable the operating environment of the industry. An exchange rate change, for example, will require a response by a livestock producing firm using imported inputs, such as animal vaccines or animal feed. Its adaptation to the exchange rate change will have implications for other firms that it has dealings with. Efficiency losses may result from firms expending resources in bargaining with one another about which firm should bear the burden of the change in the industry's environment, rather than using the resources in more productive activities.

Transaction costs can arise if a product is not standardized. In the livestock industries, feed quality and animal quality are just two of the features of the industry where differences in quality can arise. The producer wanting to guarantee access to animal feed of a particular quality - the operator of a broiler farm or a pig rearing operation, for example - can handle this by backwardly integrating with a firm supplying animal feed. This strategy has been used in the Philippines, in Indonesia, and in Thailand. The case for doing this is strengthened if the costs of integrating are less than the transaction costs incurred through not integrating. In countries where the legal system is well developed, producers are able to rely on the legal system rather than integrating with the feed supplier to ensure the quality of their inputs. However, in a number of the countries of the Asia-Pacific region, legal institutions are not well developed and the enforcement of legal rulings may be difficult to implement.

Love and Burton (1997) see vertical integration as a strategy that might be used by firms to reduce competition or extract market rents. Industry structure is also behind the argument made by Moss and Schmitz (2000). They point out that there may be a case for vertical integration if there are a small number of suppliers of an input required by a firm further along the production process. The firms supplying the input, because they are few in number, might decide to collude. In theory, they could raise the input price and threaten to refuse to supply the firm needing the input with the input unless they are given the high price[11]. For this to happen, it has to be assumed that none of the input-supplying firms will cheat on the other input-supplying firms. Consumers would be the clear losers under this scenario.

In the Philippines, where there are a small number of feed mills[12], poultry farms have integrated with the feed mills, lending credence to the argument made by Moss and Schmitz (2000). They argue that as the number of firms increases, the need for vertical integration decreases, and instead firms will enter into contracts with one another.

Another form of vertical integration involves firms integrating forward into the distribution system. Lazonick (1994) stresses the importance of integrating product distribution with production to give firms a competitive advantage over their rivals through product innovation and economies of speed. Superior production processes enables an enterprise to speed up the flow of work through its plant without sacrificing product quality, thus cutting unit production costs through spreading out its fixed costs. This cost cutting phenomenon is economies of speed (Lazonick 1994). Moss and Schmitz (2000) suggest forward vertical integration is a strategy that firms might follow to reinvest profits. For example, a pork producer might see investment in a fast food restaurant as a good use of the profits generated from producing the pork. It also provides the producer with a way of diversifying risk.

Dobashi et al. (1999) list three broad factors driving integration of the poultry industry: market ownership and margin control; biosecurity; and economies of scale (particularly in processing). They contrast the poultry meat industry with the egg industry where the product (eggs) goes through little or no processing. In the egg industry, large firms exist side by side with smaller and often marginal producers able to supply the market on a seasonal basis. In the Philippines, the livestock producer, Monterey Farms Corporation, established retail outlets in the mid-1990s to sell meat products produced by Monterey. This was seen as a way of dealing with concerns that Philippine consumers might have about the quality of the product being sold to them[13]. The Charoen Pokphand Group (CP) in Thailand also operates fast food outlets to sell poultry meat, not just in Thailand but also in China. It also produces chickens for its poultry operations to meet its biosecurity concerns at the production stage. Reardon and Barrett (2000) contend that smaller farmers commonly have trouble meeting stringent quality and safety requirements. This, they say, gives capital-intensive and medium and large sized farm operations the advantage in contract farming that is a part of integration arrangements.

The World Bank (2001) says that there are considerable economies of scale in poultry, pig and dairy production, especially in the important area of disease control. The view of Johnson and Ruttan (1993) is that the evidence for economies of scale in agricultural production is not clear, although they acknowledge that in the purchasing of inputs, in marketing and processing economies might exist (Box 9).

Box 9 Economies of scale and agricultural production

Johnson and Ruttan (1993) examined the experiences of large-scale agricultural projects in six different developing countries: the Tanganyika Groundnut Scheme (1947 to 1949); the Molinos Nacionales sorghum project in Venezula (1964 to 1966); the Dez agribusiness programme in Iran (1968 to mid-1970s); Projeto de Jari forest and rice project in Brazil (1967 to the present); the Philippine Corporate Farming Project, started in 1974; and the Hershey's Hummingbird Farm in Belize (1976 to 1992). The key assumption underlying these projects is economies of scale - gaining a more than proportional increase in output for a given increase in all inputs. Economies of scale arise due to the following: The use of lumpy inputs, such as machinery or management, might lead to economies of scale in the short run. Over the long run, the minimum scale of operations is likely to increase, with the result that the economies disappear. Biological and chemical inputs are likely to be scale neutral. External economies of scale allow larger farms to buy inputs such as capital, storage, transport and marketing and distribution services at a lower price than is possible for smaller farms. This means that larger farms may have an advantage over smaller ones without necessarily being more technically efficient. In some situations, Johnson and Ruttan (1993) say scale diseconomies might exist, and this has been used as a justification for land reform. Situations where this can occur are where labour markets might not exist, where transaction costs in labour markets are high and where the effort of hired labour is affected by level of supervision. Johnson and Ruttan conclude that the consensus is that agriculture is generally not characterized by economies of scale. In the US, changes in the relative price of capital and labour led to a substitution of capital for labour. If there are no economies of scale, then this substitution will occur at all farm sizes. A large part of the capital that is used in the US is machinery. Since machinery allows farmers to work larger areas of land, it may not be all that surprising that farm sizes have been increasing. The seasonal nature of the production cycle limits the opportunity for gains from specialization and division of labour. This is seen by some as a reason for limited opportunities associated with expansion beyond the size of the family farm. Further reasons favouring the family farm are that family labour is inherently more productive than hired labour. Monitoring costs are likely to be much lower with family labour than is the case with hired labour. Further, decisions on the spot are part and parcel of agriculture. With no managers around, hired labour might be unwilling and/or unable to make a decision. As risk increases, it has been argued that farm size should decrease. However, Johnson and Ruttan (1993) note that little work has been done on this relationship. Related to this, it has been observed that it is not a good idea to pool risk across farmers in a given area because of the high covariance of their natural risk. Hence, in risky environments, small farms may be better than large ones. Wealth tends to offset this in the sense that wealthy farmers have been found to be more immune to risks imposed by the weather. Industrial projects are generally perceived to be less risky in developing countries than agricultural projects, with the result that the more industrialized the agricultural project, the less risky it is considered to be.

Effects of integration

There has been very limited analysis of the economic effects associated with large-scale integrated livestock farms. Rhodes (1993) says that the industrialization of animals is a threat to the family farm since he regards the family farm as having few advantages over factory style production. This latter form of production has greater access to capital and skilled management and labour than the family operated farm. Industrialization in dairy and pork production in the United States has aroused more complaints, according to Rhodes (1993), than has been the case with beef and poultry. He attributes this to the fact that demand for pork and dairy products in the United States has grown much slower than the demand for broilers and beef. As a consequence, the "direct competitive struggle for market share between the family farm and the new giant producers has been more direct and obvious" (p.1138).

To gain an indication of the advances in productivity associated with industrialization of the livestock sector, the experience of the United States is insightful since presumably gains of a similar order of magnitude are potentially available to industrialized agriculture in developing countries:

• The poultry industry in the United States is a highly mechanized and concentrated industry (Johnson 1995). The birds used in the industry have been developed through intensive research and have pedigrees protected by patents and trade secrets. This has led to the broiler industry and the egg industry both experiencing enormous gains in output, shown by the fact that the feed conversion in 1920 averaged 13 kg of feed to one kg of broiler meat. By 1990, the conversion rate was 1.9 kg of feed to one kg of broiler meat. For the egg industry, the change has been no less spectacular: in 1930 hens averaged 93 eggs per year, but by 1983, the average was 246 eggs per year (Johnson 1995). Processing of poultry meat has also experienced dramatic change through the industry adopting new technology. In 1959, the United States industry processed seven million birds, with the typical plant handling about 3 000 birds per hour. In 1997, 65 million birds were processed and the throughput of a typical plant was 32 500 birds per hour. By 2005, 125 million birds are forecast to be processed each year, with processors handling 62 500 birds per hour (Dobashi et al. 1999).

• According to Gomez (2000), the first major technology advance in the pork industry in the United States took place in the early 1970s when the animals were moved from pastures to confinement. Since then, the size of farms in the industry has increased markedly (Johnson 1995). Gomez (2000) points out that those supporting large-scale pig farming in the United States argue large farms have lower production costs achieved through economies of scale.

Large farms that characterize the industrialized livestock sector are seen as being in a better position to counterbalance a food processing sector and input suppliers (such as the suppliers of animal medicines) that has become increasingly concentrated through merger and acquisition activity among firms. Negative consequences of large farms are that they displace small family farms, they harm the environment and they result in profits flowing away from the local community[14]. Gomez (2000) sets out to address the issue of the impact of large sized farms in the industry on rural communities using pooled time series cross-sectional data on a sample of 1 106 towns and cities in Illinois. The dependent variable was "gross town output" which was based upon sales tax receipts. It was found that contrary to popular belief, large-scale pig farming does not contribute to the vitality of local communities. Indeed, the results indicate large farms tend to hinder economic growth in rural communities. Gomez (2000) notes that "little has been done to measure the economic impact of large swine farms on rural communities" (p.6).

Evidence on the effect of vertical integration on the small farming operations integrated with the large companies is difficult to find. Burch (1996) presents data suggesting that in the case of the baby corn industry in Thailand, farmer returns have been poor with the daily return below the government minimum wage. The World Bank (2001) cites experience from the Philippines where World Bank funding of smallholder broiler production (500 to 3 000 birds) was not successful since these firms were crowded out by multinational business enterprises. Reardon and Barrett (2000), in discussing the effects of agroindustrialization on small farmers, landless labourers and artisan service providers, conclude that no clear pattern yet exists as to whether the gains for these groups from agroindustrialization outweigh the losses.

Foreign involvement in integrated livestock industries

Foreign involvement in the integrated livestock operations in the countries of the Asia-Pacific region is not uncommon. It is of interest to note that some of the foreign investors have the same local partner. In Viet Nam's dairy industry, for example, VINAMILK is the local partner to Austdairy, Ashta International and is also reported to have a minority interest in Friesland Frico Domo's operation. Kraft (USA) is also reported to be working with VINAMILK to develop new dairy products for the Viet Namese markets. The dairy sector is of significant interest to branded dairy companies because of the potential demand for products ranging from shelf stable sweetened condensed and powdered milks for the mass market to fresh milk and soft dairy products for urban niches.

In some cases, industries with high environmental impact, such as poultry and pig production, have been moved from high-income countries in the face of opposition from communities concerned about the environmental impact of these industries. Weatherspoon et al. (2001) argue along these lines to explain why agribusiness firms from developed countries have expanded into developing countries. The developed countries, with rising regulatory costs related to consumer concerns about animal welfare, waste management and labour welfare, seem to offer less scope for firms to reach profit growth goals, compared to developing countries. Stagnant demand in developed countries is due to a number of factors. These include concerns about the linkage between the consumption of animal products and heart disease and obesity. Outbreaks of bovine spongiform encephalopathy (BSE) in the late 1990s and its association with Jacob-Creutzfeldt disease in humans are additional factors. Investment activity is not only from developed countries to developing countries. Movement has also occurred in the opposite direction as the example in Box 10 indicates.

Box 10 Investment plans of Charoen Pokphand

In early 2002, the Thai company Charoen Pokphand announced plans to invest 265 million Baht in farm and food businesses in Belgium and China. According to a report posted on the web site www.bangkokpost.com on 17 January 2002, this investment will involve the establishment by 2004 of three subsidiaries - two in China and one in Belgium - to oversee new investments. CP Aquaculture (Beihai) Co will be established in the Beihai Industrial Zone in China's Guangxi province. It will produce and distribute up to 30 000 Mt of fish feed since the demand and growth potential is viewed by CP as being substantial. The other Chinese investment will involve the establishment of a Thai restaurant chain - called Bua Bann - in Shanghai through CP Food Products (Shanghai). The investment in Belgium will be made to sell and distribute throughout the European Union processed meats and other food products produced by Charoen Pokphand Foods Plc.

In contrast with the stagnant demand in developed countries for livestock products, Rosegrant et al. (2001) project, using the IMPACT model developed by the International Food Policy Research Institute that by 2020 people living in the developing countries will eat 70 percent more meat than people living in the developed countries. Per person consumption will be 38 percent of the per person consumption of the developed countries (Delgado et al cited in van der Zijpp 1999). A variety of other reasons could be behind the involvement of foreign firms. These include intellectual capital possessed by the foreign firm, the presence of trade barriers restricting access to the country's market, cultural linkages and membership of the home country and the foreign country in the same trading bloc (Henderson, Handy and Neff 1996).

Foreign investment in integrated production might also occur as a means of getting around regulatory barriers in the host country. The existence of import tariffs or non-tariff barriers might be the rationale for a company setting up production facilities in the country with those barriers, rather than producing outside of the country and exporting to it. Foreign investment might also take place if firms believe that by so doing they can minimize production costs or take advantage of government subsidies. For example, in China, preferential taxation arrangements and the establishment of economic cooperation zones have been government measures designed to encourage foreign investment, while in Thailand relief from the payment of import duties and special taxation arrangements have been among the measures used. The time required for investment approval, related to land ownership issues, and the risks associated with investing in agriculture have been - according to Suryana et al. (1998) - some of the factors behind the low rate of private investment in Indonesia's agriculture. They point out that from 1989 to 1996, the proportion of agricultural investment approvals was around 12 percent of the total while agriculture represented only 2.8 percent of foreign investment in Indonesia[15]. Research reported by Everhart and Sumlinski (2001) draws attention to the importance to investors in developing countries of government stability, transparency in decision making and the level of corruption in the public sector. They argue that government instability, a decision making process that is not transparent and the presence of corruption in the public sector amount to an investment tax and can be a strong disincentive for investment.

Within countries, investment activity varies across industries. Viet Nam illustrates this. The meat and egg sectors of Viet Nam are said to be less attractive to foreign investors for several reasons. These are as follows:

• the local meat and egg market is highly price sensitive. It is also commodity driven and revolves around highly localized wet market distribution channels;

• the poor state of processed meat market and industry (including the individual state-owned businesses that operate in the sector) and the animal feed supply sector;

• the lack of local ability/infrastructure to develop meat exports combined with

• the poor image of Viet Namese livestock products abroad, and

• a preference on the part of consumers for animal products from the wet market is a disincentive for investment in food processing industries.

Government intervention and the integration of the livestock industry

Governments in the Asia-Pacific region in general seem to have adopted a laissez faire approach to vertical and horizontal integration by large companies in the livestock industries, although there have been instances where intervention has occurred. Indonesia is one such example of intervention that was intended to protect the small farmers (Box 11). In other countries of the region, the incentives provided to foreign investment may have led to greater vertical integration than would otherwise have been the case. These incentives include reduced taxes, relief from the payment of import duties and subsidized inputs such as electricity. Restrictions on foreign ownership of land may also be a factor.

Box 11 Indonesia's regulation of the poultry industry

Government intervention occurred in Indonesia's poultry industry during the 1980s with the aim of redistributing economic opportunity among producers in the poultry industry. This industry was rapidly developing, mainly through large, vertically integrated production units controlled by feed manufacturers and/or processing companies. Suwartini et al. (1997) explain the policy. They point out that in the 1970s, the Indonesian Government employed an incentive approach to increase the participation of small producers through technology transfers and credit schemes. By the 1980s, small, independent producers were being excluded from the developments and this became a source of concern for the government. A policy, known as Keppres 50/1981, was introduced in 1981 to regulate the scale of production. The policy tried to increase the participation of small producers in the industry by limiting the size of production units to 10 000 birds for layer farms and 15 000 for broiler farms (Dobashi et al. 1999). Large-scale farms and cooperatives were also required to diversify into feed making and poultry breeding to supply these inputs to the smaller independent farmers. According to Suwartini et al. (1997), this policy was modified in 1984 to create the nucleus farming system. As mentioned earlier, in this system which is a form of horizontal integration, larger enterprises (sometimes these were farmer cooperatives) were expected to promote the development of smaller, independent producers through marketing their products as well as supplying them with inputs. Critics of the scheme said that it did little to reduce the growth of vertical integration, as there was an increase in the proportion of broiler production under contract during the 1980s. In 1990 when the policy was officially lifted, the government regulated the maximum scale of broiler chicken production to 15 000 birds per cycle, Since then, further deregulation has occurred since the industry is increasingly being given an export orientation. Suwartini et al. (1997) estimated welfare effects of the government intervention, on the assumption that it would shift the supply curve back to the left. They used a partial equilibrium model in their analysis and focussed on demand and supply at the wholesale level. Lack of data was a problem in the analysis, a point made also by Dobashi et al. (1999). This was particularly so with regard to producer prices and wholesale production. The econometric results that Suwartini et al. (1997) obtained - estimated using linear models for demand and supply with annual data for 1972 to 1992 - indicated that the 1981 policy measure caused a structural change in the industry and lowered output. Corn price, lagged six months, was used as a proxy for input prices in the supply model, but it was found to be not significant. Beef was used as a substitute for chicken in the demand model and was found to be statistically significant, but the cross-price elasticity value was not given. The income elasticity was 2.8. Losses in consumer and producer surplus occurred under the policy. The change in consumer surplus at the wholesale level with no middlemen was -Rp289 per person while for producers the loss was Rp314 per person. At the retail level, per person consumer welfare loss was Rp349, while at the farm gate, per person producer surplus loss was Rp135. Under the policy, middlemen also lost Rp119 per person. When combined with population, the per person losses translated into a loss of 0.1 percent of total Indonesian income. From the viewpoint of consumers, the policy represents a welfare loss equal to 14 percent of consumer expenditure on poultry meat, while for producers the loss in producer surplus is about 8 percent of average annual producer revenue from chicken meat production. Suwartini et al. (1997) draw attention in their paper to their estimate that the producer welfare loss is about 22 percent of the total loss to society, despite producers being the intended beneficiaries of the policy.

Examples of the integration of the livestock industries in the Asia-Pacific region

According to de Dios (1994), a perennial problem for the meat processors in the Philippines is the difficulty of obtaining a continuous supply of meat. Large firms that dominate the Philippine livestock sector have tried to overcome this problem by backward integrating or by contract growing. The largest of the firms is the San Miguel Corporation. Its interests range from beer and bottled drinks to dairy, processed meats, cooking oils, animal feed (from brewing by products), poultry and livestock (including cattle). Republic Flour Mills (RFM) started with flour milling and expanded into feed milling, pig and poultry production, fruit juices, processed meats and margarine, and ice cream. General Milling began its operations with flour and feed milling, corn processing, poultry production and pig production. Other products produced by General Milling include pasta, snack-foods, edible oil and processed milk Purefoods started off as a meat processor in the 1956 and diversified in the 1980s into pork and poultry meat production. It is also involved in tuna canning, flour milling, pasta making and the marketing of powdered milk de Dios 1994. By the late 1990s, most broilers in the Philippines came from major poultry integrators such as San Miguel Corporation, Swift Foods, Inc., Vitarich and Purefoods. Independent farmers, usually purchasing chicks and feed, or feed concentrate, were supplying between 15 percent and 25 percent of the industry (Dobashi et al. 1999).

The Charoen Pokphand Group (CP), mentioned earlier in this chapter, is an important Thai firm. It was established by two Chinese brothers in 1921 in Bangkok's Chinatown (Burch 1996). By 1956, they had set up a feedmill and by the early 1970s, they were supplying the feed to contract poultry producers, processing the poultry from these producers and exporting it to Japan. The CP Group applied this same strategy to other industries, including pork and prawns in Thailand as well as in other countries through South-east Asia. The CP Group holds the Thai franchise for the Seven Eleven convenience store chain, and is a partner in the Makro supermarket chain in Thailand. It operates petrol stations, some of which share their sites with Chester Grill (a fast food chain owned by CP), and it is also the franchise holder for Kentucky Fried Chicken in a number of Chinese cities. China is where its main overseas businesses are located. CP was operating 75 feedmills and poultry breeding facilities that turned out 260 million day-old chicks in 1994 (Burch 1996).

There are many other examples of firms involved in the livestock industries that have integrated their operations. A number of these are listed in the appendix to this chapter. Quite often they span industries, and are involved in operations sometimes far removed from livestock.

Concluding comments

Vertical integration is a feature of the livestock industries in the developing countries of the Asia-Pacific region that is likely to become even more important in coming decades. This will happen primarily because of the growth that is occurring in the demand for poultry and pigmeat, the production of which lends itself to industrial style farming because of its capital intensive nature. Small farms play an important role at present in contributing to the food needs of those living in urban areas through participation in wet markets and informal marketing channels. However, it seems likely this role will be gradually taken over by large vertically integrated farms with the continued expansion of western style marketing systems in urban areas due to the almost inevitable social and economic changes that favour this style of marketing system. In the short to medium term, small farms are unlikely to face competition from the large vertically integrated firms in rural areas. The low incomes typically found in rural areas and the limited supporting infrastructure such as roads and communication facilities provide little incentive for the large vertically integrated operations to set up in rural areas. The vertically integrated firms can play an important part in improving product quality and in disseminating technologies to small farmers. Those that are foreign owned are a source of capital for the economy in which the investment is being made. They might also create export market opportunities for the host country in their home markets conferring another benefit to the host country in the form of export earnings. There is a clear information deficiency surrounding the net effect of a highly integrated agriculture in developing countries and clearly additional research into this issue seems warranted, particularly the impact on the rural poor.

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Appendix 3 - Examples of companies in Asia-Pacific region that are vertically integrated

Company	Source of information	Head office	Business Activities
San Miguel Corporation	www.sanmiguel.com de Dios (1994)	Philippines	Brewing Basic meat products Non-alcoholic malt beverages Wines and spirits Juice and juice drinks Bottling of water Value-added meat products Processed meat Butter, cheese and margarine Coconut and other products Glass, Metal Plastics Paper composite Real estate,
RFM Corporation (Republic Flour Mills)	http://www.rfm.com.ph de Dios (1994)	Philippines	Ice cream, milk and juice production Cans and bottles for soft drinks and water Bottling of water Broiler production Feed production for ducks and fish Processing of meat, canned goods, customized meat products, canned tuna Flour production, noodles, spaghetti, macaroni, cake mixes Butter margarine Bank and Insurance brokers Real estate Semiconductor packages
Purefoods Corporation	www.com.ph de Dios (1994)	Philippines	Meat production · pork · beef · chicken Feed production Flour milling Noodles manufacturing
Vitatich Corporation	http://profiles.wisi.com/profiles/scripts/corpinfo.asp?cusip=C60881370	Philippines	Live and dressed chicken production covering · day old chicken · day old pullets Processed meat products Animal and aqua feeds
Alsa Marine and Harvests Limited	http://profiles.wisi.com/profiles/Food.htm	India	Processes and package shrimps Other marine products under controlled feeding and harvesting procedures
Ng Fung Hong Limited	http://www.irasia.com/listco/hk/ngfunghong/annual/97/res.htm	Hong Kong	Production and distribution of fresh, live and frozen foodstuffs Retail and supermarket operations marine fishing and processing of aquatic products Wine and beverage production Abattoir and meat processing
Charoen Pokphand Group	http://www.cpthailand.com/index.html	Thailand	Fully-integrated operations of agro-industry Aquaculture Seeds, fertilizers and plant protection International trading Marketing and distribution Telecommunication Petrochemicals Automotive and industrial products Real estate and land development
Saha Farms	www.sahafarms.com	Thailand	Poultry production involving§ grandparent stock farms· parent stock farms· hatcheries· broiler farmsSilo ownership (corn, soybean)Feedmilling
Food and drinks public company limited	http://profiles.wisi.com/profiles/Food.htm	Thailand	Manufacturing and exporting of · canned fruit and vegetables · canned fruit juices · canned beef
GFPT public company limited	http://profiles.wisi.com/profiles/Food.htm	Thailand	Frozen chicken and by-products Feedmilling Eviscerated chicken Chicken farm
Surapon Foods Public Company Limited	http://profiles.wisi.com/profiles/Food.htm	Thailand	Farms, processes and exports frozen seafoods including shrimps, squid, octopus, prawns, other fish Frozen foods such as breaded shrimp, fried chicken, breaded vegetables
A.G.V. Products Corp	http://profiles.wisi.com/profiles/Food.htm	Taiwan Province of China	Beverages and soft drink production Production of preserved fruits and vegetables, frozen, canned dehydrated fruits and vegetables Dairy products such as cheese, fluid milk, creamery butter, ice cream and dry, condensed or evaporated products Grain milling products including · prepared flour, cereal, rice, feeds products · bakery products such as cake, cookies, crackers and breakfast cereals Sugar and confectionery products such as candy, chocolate and cocoa products Fats and oils (vegetable oil, animal fats & oils); and other prepared food and seasons
Chia Hsin Food & Synthetic Fiber Co, Ltd	http://profiles.wisi.com/profiles/Food.htm	Taiwan Province of China	Feed, flour, cooking oil, meat and poultry Synthetic rubber Commercial, industrial and residential buildings
Chou Chin Industry Co, Ltd	http://profiles.wisi.com/profiles/Food.htm	Taiwan Province of China	Canned food, juice drinks, instant foods, babyfood Sales and rental of vending machines Operation of restaurant and supermarket
Great Wall Enterprise	http://profiles.wisi.com/profiles/Food.htm	Taiwan Province of China	Vegetable oil, feed, flour, corn, soybean, beverage, and other related by-products Meat processing Securities investment Operation of fast food chains Oilseed plants Chicken farms Feed plants
Tai Fang Foods Industry Co, Ltd	http://profiles.wisi.com/profiles/Food.htm	Taiwan Province of China	Frozen pork and pork related productsFrozen fish, frozen vegetables.
Tai Yu Products Corp	http://profiles.wisi.com/profiles/Food.htm	Taiwan Province of China	Canned foods (meat, fish, chicken, vegetable, fruit, dairy products, other instant foods) Cans and other containers.
Uni-President Enterprises Corp	http://profiles.wisi.com/profiles/Food.htm	Taiwan Province of China	Noodle, dairy products, soft drink, soy sauce, canned pickle, meat products, milk powder, bread, cereal, and frozen Foodstuffs, animal feeds, edible oil, and flour Procurement and distribution - purchasing & selling commodity and vending machine Operating franchised bakery chain store
Wei Chuan Food Corp	http://profiles.wisi.com/profiles/Food.htm	Taiwan Province of China	Ice cream, canned food, milk powder, MSG, soy sauce Agriculture, stock farms Supermarket Tobacco and wine
Bing-Grae	http://profiles.wisi.com/profiles/Food.htm	Korea, Rep. of	Dairy and ice-cream products Instant noodles and snacks
Cheiljedang Corporation	http://profiles.wisi.com/profiles/Food.htm	Korea, Rep. of	Sugar, flour and edible oils Frozen foods, seasonings, beverages Chemicals for medical-use Cosmetics feedstuffs Movies, food supply and bakery
Chun Kwang Industrial Co, Ltd	http://profiles.wisi.com/profiles/Food.htm	Korea, Rep. of	Various kinds of animal feedstuffsCeramic tiles and filter blocks for cigarettes
Daesang Corporation	http://profiles.wisi.com/profiles/Food.htm	Korea, Rep. of	Corn sweetener Seasonings and feedstuffs Lysin and various types of frozen foods (noodles, seasoned meats, lunch boxes) Seasonings Resin Coffee Construction business Chemicals Foods business Hotel business Fertilizer Processed meat
Daesang Feed Co, Ltd	http://profiles.wisi.com/profiles/Food.htm	Korea, Rep. of	Feed stuffs for animals such as pigs, cattle and poultry
Dongwon Industries Co, Ltd	http://profiles.wisi.com/profiles/Food.htm	Korea, Rep. of	Canned tuna, frozen foods, frozen fish Seaweed and sesame oil Commercial fishing and leasing of ships
Del Monte Pacific Limited	http://profiles.wisi.com/profiles/Food.htm	Singapore	Fresh fruit products through its own cannery The group maintains a livestock operation on the plantation area to maximize the use of residue pulp from pineapple processing as feed for cattle
FHTK Holdings Limited	http://profiles.wisi.com/profiles/Food.htm	Singapore	Integrated, value-added processes that include planting, sourcing, processing, packaging (including manufacture of its own packaging materials), cold storage, marketing, distribution, retail and franchise sales of fresh produce and dehydrated products such as fruits, vegetables and other agricultural products. Foodstuff cold-store, warehousing, imports and exports all kinds of food and foodstuffs
Fraser & Neave Limited	http://profiles.wisi.com/profiles/Food.htm	Singapore	Beer, soft drinks and dairy products Glass products Property investment, property development Warehousing Theme park operation Providing management services and investment holding
Singapore Food Industries Limited	http://profiles.wisi.com/profiles/Food.htm	Singapore	Manufactures, processes and distributes fresh fruits, chilled and frozen meats, vegetables and other food products Abattoir related activities Auctioneer of pigs Processing of sea foods Commercial fishing Provision of technical and management services for agri-food business and investment holding.
Yeo Hiap Seng Limited	http://profiles.wisi.com/profiles/Food.htm	Singapore	Manufactures and distributes beverages and canned food and property investment Provides bottling services to Pepsi and Cadbury Schweppes Distributes Asian sauces, canned meat products, canned vegetables, instant noodles and snack foods
PT Japfa Comfeed Tbk	http://profiles.wisi.com/profiles/Food.htm	Indonesia	Chicken breeding Poultry processing Aquaculture farming Processing, animal feed manufacturing Cattle feedlot Beef processing Manufacturing of woven bags for packaging of its feed products Marine transportation service Marine cargo Real estate and investment holding
PT Sari Husada Tbk	http://profiles.wisi.com/profiles/Food.htm	Indonesia	Powdered milk and other baby foods and food substitutes Milk, chocolate formulae Full cream milk pastries Breads Cookies and other milk products Packing and warehousing facility