There was a time in developing countries - not so long ago in many cases - when livestock could be considered a multi-purpose activity from which food was only one of several outputs, and whose products were largely non-tradable once the animal was slaughtered. Livestock were kept for traction power, for hides and skins, as a store of wealth, for important family asset transfers, for manure used as fuel and fertilizer, for prestige, and so forth. This world is changing rapidly, into one where livestock are part of a globally-integrated food production enterprise. Understanding the impact of these changes on poor people in poor countries requires not only understanding the forces driving higher meat consumption, but also the changing nature of the global market for meat products. Some aspects of this of relevance for the current case studies are noted here.
Industrial livestock production systems in East Asia have been growing much faster than mixed cropping systems for three decades.[3] In the United States, the percentage of hogs produced under contract went from 10 percent in 1993 to 72 percent in 2000 (Martinez 2002). Changes in industrial organization have also been associated world-wide with significant scaling-up of livestock production enterprises, most particularly for poultry and hogs. Assessing the impact of global changes on social, health and environmental outcomes in developing countries requires an understanding of the motives for vertical coordination.
Martinez provides a recent, masterful assessment of these motives for the pork and poultry sectors in the United States (2002). He writes: "Contracting and vertical integration provided a means for reducing transactions costs associated with relationship-specific transactions, especially in regions of expanding production. Contracts could provide some safeguards against opportunistic behavior, and vertical integration eliminated the exchange relationship altogether....For product attributes that are difficult to measure, gaining additional control over related production inputs may reduce measuring costs by reducing the need to measure quality." (Martinez, 2002, pp. iii).
Suitably modified, a similar analysis could be applied to developing countries, where transactions costs are especially high in the presence of imperfect markets for information and assets. The key is that vertical coordination potentially allows a net reduction to all parties of the costs of doing business, through the reduction of transactions costs of exchange. The dairy farmer who does not have alternative markets for un-refrigerated milk on a hot day in the tropics gains by having a steady contractual outlet, albeit at a lower-than-spot price on some days; the dairy processing plant has reasonable assurance that milk will be delivered and that it will not be watered down. The purchaser of hogs in Asia is concerned to know whether quality feed was used, to avoid off-flavors and excess back-fat; the latter can only be assessed after slaughter. A contractual relationship can build trust on the basis of reputation, allowing farmers to secure higher prices than they would otherwise.
These simple gains from vertical coordination are greatly added to if governments tax market transactions for feed inputs, as in the case of Andhra Pradesh poultry producers in Southern India (for example), but do not tax transfers of feed between a vertically integrated feedmill and its poultry farm. Similarly, if governments impose a 60 percent tariff on feed maize, as is the case in the Philippines, but only 10 percent on feed wheat (3 percent if claimed for human consumption), and large integrators also own large bread bakeries, it is likely that independent producers will be disadvantaged.
Generally, in a semi-integrated industry the components begin to integrate often as a result of processing business unties efforts to control inputs and demand. Processing becomes more important and often those companies that go into processing tend to later become the leading integrators. Processing is the main driver for integration and efficiency. Distribution and retail often are sill handled by another group. A fully integrated operation controls all included in distribution, retail (PBEC, 1999).
Henry (1960 in Brooks, 1980) suggests that the major factors leading to integration are: (1) the absence of an active spot market at the various stages of production so that quality adjustments are not adequately reflected through pricing mechanisms for these highly perishable products, (2) the volume problems that arise in the various stages of production due to seasonal consumer demand and seasonal differences in growth rates in different climates, (3) inefficient spatial organization among the feed mills, grow-out farms, and processing plants, and (4) the high capital costs associated with new technologies that excluded many small, individual operators. More recently, Henry and Rothwell (1995) suggest that the reason vertical integration occurred was because of the following three needs. First, integration allowed a company to gain from economies of scale and optimisation of their capital resources. Second, integration was important for market ownership and margin control which enabled a company to compete by lowering its production costs by controlling the technical inputs into production at all levels. Third, the integration process enabled a firm to maintain a certain amount of bio-security and quality control.
The larger poultry and swine commercial systems usually contract out production. These contract farms are served by a company's breeders, feed mill, and veterinarians. These contract farms tend to live in close proximity to the processing plant. The purpose behind this is to reduce transportation costs, while also enabling the firm to obtain better co-ordination and management control and thus enabling them to achieve a high degree of operating efficiency. The most common contractual arrangement is for the poultry or swine company to provide stock, feed, other inputs, and technical advice in exchange for the finished birds or hog at a predetermined price per kg of meat, with premiums or deductions according to certain performance criteria (notably feed conversion and mortality rates). The contract farmer owns the land and buildings of the grow-out operation and provides the necessary labor and electricity.
For poultry, integration typically takes place under the auspices of either breeding stock sellers allied with feed suppliers, or processors allied with fast-food providers. The feed industry which was responsible for the initial integration of the poultry industry in places as disparate as Thailand, the Philippines, the United States, the Netherlands, Indonesia, and Australia (Poultry International, 1981; Zeelen, 1986). In India, breeding hatcheries were responsible for growth of the domestic industry and the spread to neighboring countries such as Nepal, Bangladesh, and China (Reddy, 1990). Still in other countries, such as Taiwan and Hong Kong, integration was based on the potential market for further processing and fast food, as processors sought to add value to their business and thus became closer to the final customer.
In countries where the livestock industrial sector is fairly well-developed, single companies tend to be dominant (measured as being twice the size of the second largest company in the same country). Henry and Rothwell (1995: p 4) note examples of such companies that exist in the United States (Tyson Foods), Brazil (Sadia), France (Doux), Netherlands (Plukon), United Kingdom (Hillsdown), Germany (Lohmann-Wesjohann), Australia (Inghams), and Thailand (Charoen-Pokphand). Furthermore, they suggest that in countries where the industry is still developing or has gone through a major change, major players who are in the process of emerging such as in Hungary (Babolna), Turkey (Koy Tur), and China (Shanghai Daijang, Zucheng) may also take dominant positions in the future. In most countries, these dominant firms coexist with a number of strong second-tier companies. Also, there is usually a third tier of small family-based companies using relatively low technology and generally with a low-cost structure that supply a localised market (Henry and Rothwell, 1995).
Figure 1 shows the typical form of integration in broiler and layer operations. The commercial poultry industry in most countries has moved towards large-scale vertically-integrated operations. The specific degree of integration varies between countries and firms. For the most part, integrated poultry operations involve most or all of the following segments: breeding flocks, hatchery, feed mill, production units, assembly of live birds or eggs, poultry slaughtering or packing plants, further processing units, delivery vehicles, and distribution centers in which fewer and fewer firms operate. Feedmills and further-processing segments are not always included in the integration, though they are an essential part of the production system (Henry and Rothwell, 1995).
There are a number of diseases associated with increasing intensity of production and concentration of animals on limited space. Many of them pose a threat to human health; industrial and intensive forms of animal production may be a breeding ground for emerging diseases (Nippah, BSE, Avian Flu), with unknown consequences. Intensive animal production can also amplify a number of potential human pathogens increasing the risk to public health. Large scale production especially pigs can result in environmental pollution due to the large quantities of waste products (effluent) produced and if released, untreated, into waterways, on soil used for agriculture or leaching into subterranean water supplies. While animal manure is likely to harbour a variety of pathogens, few have been identified with a zoonotic potential (Barwick et al., 2000). In addition, effluent consists of faeces, urine, unconsumed feed and waste water and can contain heavy metals (e.g. copper, zinc, chromium and arsenic), antibiotics, antimicrobials and possibly hormones used to improve efficiency of food conversion, growth and reproduction.
Medium and small-scale livestock production also have a potential to contribute to the to animal and human health by virtue of harbouring these pathogens. In developing countries small scale (family farms) often result in close human/animal contact as well as frequent movement of both humans and animals between farms. In many situations animals are kept in and around human dwellings especially pigs and poultry, thus creating a high risk for direct transfer of pathogens from animals to humans. The risk to both animal and man might be worsen by the fact veterinary services are often minimal or do not exist and therefore animals may not be routinely treated for pathogens such as internal parasites that can affect humans, or vaccinated against common zoonoses e.g. Brucellosis or Leptospirosis.
Animal health is often compromised at the village level due to inability to diagnose disease correctly, unrestricted movement of sick animals and animals kept in unhygienic housing with poor sanitation. Further, inadequate response to disease outbreaks increases the risk of spread of disease, and lack of regard of regulations concerning notifiable diseases. Marketing of animals and animal products from small-scale farms through local markets and sale yards further increases the risk of transmission of disease, farm-to-farm and region to region.
With increased animal densities, manure volume, handling and disposal become important issues with social and economic implications for farms and communities. Livestock enterprises are coming under increasing social pressure to control the odors and contaminants from their operations. Waste from livestock farming has increasingly been as a potential source that contributes to the degradation of the environmental quality (Tauxe, 1997). In spite of the perception about the risk from microbes in the manure, the number pathogens in the manure that have been incriminated in human food- and waterborne disease outbreaks is relatively low (Strauch and Ballarini 1994).
At the same time it is well-known that food safety standards are high in developed countries, and that imports to the OECD from developing countries often run afoul of food safety regulations or testing.[4] It is important to recognize than many of the same concerns are held by consumers in the high-end of markets of developing countries, especially in the major cities. Gomez et al 2001 point out that global trends in food safety are also affecting food industries in the south who have to compete with foreign produced products in domestic markets.[5] Food safety is not just a matter of medical suitability for human consumption; in the marketplace it is a demanded attribute that has as much to do with the safety certification the product possesses as it does with its actual safety. Smallholder-produced products that are not certified as having been produced and handled through safe processes cannot compete in these markets, even if they are perfectly fine. Food safety certification has a cost to deliver and requires a price premium to elicit supply for the marketplace. It may not be scale-neutral to produce.
Branding, packaging, and refrigerated handling resolve many of the safety issues in developed countries. Trust and reputation are even more important in developing countries, where animal food products are less standardized, procedures are less predictable, and institutions for assuring quality are even more necessary. As people in major cities in developing countries - the drivers of the Livestock Revolution - increase their demand for food-safety attributes, vertically-coordinated responses are appearing in the livestock sector in developing countries to establish quality control, trust, and reputation. A key issue is whether smallholders can continue to compete in this area; without institutional support it appears unlikely. If not, will they be relegated to a shrinking, low-return "wet" market?
Historically only a small amount of livestock production in the world is actually traded internationally. Excluding intra-EU trade, only 4 percent of meat products were traded across international borders in the early 1980’s (FAOStat, 2002). The figure at the present time is closer to 10 percent. This is in part due to the high cost of transportation and the existing health and hygienic regulations, but it is also because meat and dairy are typically highly protected sectors. Together, they accounted for 38 percent of all Producer Subsidy Equivalents to agriculture in the EU in 1998, with latter calculated at $130 billion (OECD, 2000). Small wonder that many developing country meat exporters perceived tariff reduction or subsidy elimination in the OECD countries as the main constraint on their livestock sectors during the GATT negotiations of the late 1980’s and early 1990’s.
Historically, countries not free of major livestock diseases were not allowed to ship fresh products, due to the concern of spreading disease. Major changes occurred in the 1990’s, in addition to the growing realization that the expanding export market to be captured was in the South, not in the North. With the advent of the WTO/SPS agreements in 1994/1995, environmental, animal welfare, and health issues entered a trade negotiation domain previously focused on elimination of export subsidies and tariffication of quantitative restrictions. At the same time, the World Animal Health Organization (OIE) agreed to the principal of regionalization of certification of disease-free status. This meant that countries that had areas where List A diseases such as Foot-and-Mouth disease were endemic and impossible to control without vaccination could nevertheless have other areas designated as vaccine-free and disease-free export zones. Southern Brazil and Mindinao in the Philippines are cases in point.
In the process, sanitary barriers to animal product exports from developing countries have become much more complex. Products that were formerly excluded because of prohibitive duties, quotas, or country of origin were now sometimes being excluded through more involved sanitary procedures related to the specific shipment in question. Though many developing countries have benefited through this liberalization from accessing nontraditional fruit and vegetable markets, few have been able access the fresh meat market because of animal health and food safety concerns. This is because most developing countries do not have equivalent programs to that of developed countries in place to assure that they have their animal health and food safety situation under control. This makes it difficult for developing countries to participate in the international export market where many developed countries have sophisticated methods to test for pathogens and diseases.
With the liberalization of trade firms in developing countries are finding it necessary to be able to produce a high quality product with food safety assurance so they can compete in their own domestic markets with the increase flow of imported food products (Gomez and Torres 2000). Consequently, it appears that the administration of a system of monitoring and surveillance of the quality and safety of imported foods has had a significant impact on food trade between countries and production within countries (Lupien and Kenny 1998). Firms in developing countries wanting to participate in the international market are finding it necessary to implement procedures similar to developed countries with regard to food safety standards. This usually also means going through an equivalency process which involves an importing country evaluating an exporting country in terms of sanitation controls, animal disease controls (that might affect human health), slaughter and processing controls, residue controls, and enforcement controls. Exporting countries are also required to submit to importing countries each year a list of those plants they certify as being eligible to export to the importing country. This is something that has been hard for small-scale independent operators to do.
Most importantly for present purposes, a powerful incentive was created for export producers to eliminate small-scale livestock producers in their regions. Since exclusion from high-value export markets of animals from a given region can occur if any animal in the region is infected, everyone has to comply with procedures and practices that are expensive. Furthermore, an externality is created, whereby the benefit to the exporter of compliance by the small producer serving the local market is not necessarily captured by the small producer in the form of higher local prices, as might be the case if a dual market is operating.
These conundrums for livestock and animal disease control policy will escalate in the future. How they are handled could have major implications for the ability of small-scale producers to stay in business. Recent disease outbreaks in Europe suggest that major changes in how disease control is handled in Europe may be afoot. Should these occur, the stakes in compliance in the developing countries will change again. Smallholders will necessarily be affected, even if they only serve local markets. As in the food safety case, the development of institutions that can credibly assure that smallholder produce is disease free and food-safe will be vital to the usefulness of the Livestock Revolution to poor rural people.
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[3] The growth rate of
industrial livestock systems in East Asia was estimated at 11 percent per annum
in the 1970’s and 1980’s (De Haan et al. 1997) and is thought
to have been over 9 percent per annum since then (Henning Steinfeld, personal
communication). [4] Food safety regulations are becoming a prerequisite to access to international markets and for a number of countries this cost is prohibitive. [5] "For instance, protectionism policies established in Latin America under the import substitution model after World War II facilitated the development of lage food processing |
