The experiences in the four very different high livestock-growth countries surveyed suggest common ground and significant differences in how changing global market forces, technology, and national and international policies are impacting social, health and environmental outcomes in the livestock sector. This understanding can contribute to the identification of useful policies and projects to reduce poverty, mitigate adverse environmental and health impacts, and improve the treatment of sentient beings all in the context of the major changes occurring under the Livestock Revolution.
Hog production has traditionally been an important smallholder activity in all the study countries, with the exception of India, where, although common, it is limited to a very restricted social group and is not likely to provide a vehicle for the widespread improvement in livelihoods of smallholders. Poultry production has grown vigorously in all four study countries, all of which had traditional smallholder producers and all of which have moved to larger-scale production.
5.1.1 Dairy as a Smallholder Development Vehicle
Dairy sectors have been a major refuge for smallholder producers in the study countries, with the exception of the Philippines, where dairy projects targeted to smallholders have not been very successful. Milk drinking in the Philippines is not common outside the major cities, and existing urban markets have typically been supplied by a few larger-scale operators. Dairy production thrives under increased population density that boosts the demand for product and reduces marketing distances, and - unlike cropping - does not require land. The technical economies of scale in production appear very modest above a few animals per farm, although they may be quite high in processing and distribution.
India has successfully incorporated 50 million small, marginal and landless milk producers into industrial processing chains over the past 30 years (Annex I). A key ingredient has been strong political support for - and strong leadership within - the cooperative movement. Political interference with cooperative management and pursuit of non-economic objectives have been for the most part successfully avoided, although this has not been the case in all States or all co-ops. Subsidization of investment by government and donors alike has been a key element, as has technology transfer and development in processing.
The key ingredient in India’s smallholder-based model has been the cutting of margins between producers and the end consumer. Central to this has been the institutional infrastructure put in place by the cooperative movement. This has allowed smallholders to overcome the transactions costs associated with producing and marketing small amounts of a highly perishable product in a tropical climate. Trust and reputation has been established between farmer and consumer, leading to net gains for both. Furthermore, the positive social impact of smallholder dairy development in India, where it has worked, is undeniable. It is a stunning achievement to witness men and women of all social and religious groups queuing together daily to pour milk into a common vessel.
However, changes are occurring. The older generation of politicians and managers devoted to the interests of the cooperative movement is retiring. Certain co-ops themselves have developed entrenched institutional interests. Furthermore, since 1991, India has steadily opened its previously mostly closed economy. Following the liberalization of dairy processing in 1991, a government decree (the Milk and Milk Products Order of 1992) sought to protect cooperative processing by imposing severe restrictions on the ability of private processors to procure milk in areas already serviced by co-ops. A critical issue ahead in India is how the recent rescinding of this order (2002) will affect the demand for milk by the processing sector. It remains to be seen how private processors procure milk, whether this leads to the scaling-up of dairy farms, and the extent to which the positive social and equity gains of previous public investment are preserved. It will be critical to discover which policies towards processing and marketing allow both the market mobilization of the skills and capital of the private sector, and the productive efforts of the millions of small-scale farmers who produce milk.
Although the rising domestic demand for food safety in India’s cities has affected how the processing sector - whether public or private - operates, it has not prevented involvement of smallholders because of the infrastructure put in place for procurement of milk by the cooperative system (specific gravity checks for watering, chillers on the way to modern plants, etc.). However, a possible surplus in milk in some areas will be difficult to export to other countries if products fail to meet test standards for pesticide residues, which can be especially difficult in smallholder systems that feed crop by-products. In sum, India has been the model of successful smallholder dairy development in a poor country, but the next ten years will be critical to holding on to benefits achieved, not to mention moving to the next stage of development.
In Thailand, government policy - spurred on by direct involvement of His Majesty the King, has had a major impact on encouraging the small domestic dairy production sector, which is predominantly made up of small and medium-scale producers. Production behind high protective walls has grown by a factor of 17 over the last two decades, starting from a very low base. The highest growth period was from the mid 1980’s to the late 1990’s, and was largely driven by policies to promote smallholder development for both political and social stability. Unlike other livestock sector policies in Thailand, the policy for milk is over-arching in the sense that it covers all aspects of the value chain from inputs to the final consumer. Consumption is also promoted through devices such as school lunch programs. Significant scaling up has occurred during the 1990’s, but only to an average herd size of 20 cows. The sector remains small-scale, but not poor in the usual sense of the word in Southeast Asia. Current policies ensure that whatever the sector can produce is used. On the other hand, the high subsidies going to the sector suggest that it does not provide a model for widespread improvement of livelihoods in the region.
Smallholder producers also represent the large majority of producers in Brazil. Eighty-eight percent of Brazilian dairy farmers sell less than 50 liters per day (Annex VII). Most of these are mixed enterprise farmers, who sell milk as one of several activities. The 1990’s were a period of rapid change, with soaring milk imports (up 146 percent). Five companies process the bulk of the milk in the country. The market share of UHT (Ultra-high-temperature - long-life) milk has increased rapidly, at the expense of Grade C (low grade) fresh milk typically supplied by poorer smallholders. Thus access to large formal sector processors has become even more important over the past 10 years, at the same time as there are reports (Annex VII) that processors are turning away suppliers of less than 100 liters per day, which will drive out the smaller suppliers. The future of smallholders in Brazil is likely to be determined by whether the government follows the example of the OECD countries in using dairy policy as a substitute for a rural incomes policy in a time of rapid rural consolidation.
5.1.2 Hog Production: A Sector Where Smallholders Are Hanging On
The Philippines over the last decade represents the case of a country with many very poor people and modest overall growth that has been steadily opening its non-livestock sectors to regional and international trade. Hog production, the main livestock sector, and feed grain production are still 75 to 80 percent in the hands of smallholders, although that share decreases to less than 50 percent around major markets such as Metro Manila. Livestock and feed grains have been deferred from trade liberalization, at least until 2009, as "sensitive sectors.
The Philippines hog "model" is one where smallholders have essentially adopted the improved breeds used by the commercial sector and use commercial feed. They remain in business because of the high price of pigs (partly a result of trade policy), and partly because of their willingness to supply family labor very cheaply. Most backyard production is by persons who will stay at home in any event and hogs are a not-too-distracting sideline.
The exception is the growing contract farming sector, where feedmillers use smallholder labor, land, and present impunity from enforcement of environmental regulations to rear fattener hogs to maturity. The institutional forms observed here offer promise to achieve a form of vertical coordination that can overcome transactions costs barriers to smallholder participation (principally access to capital and market reputation). A major question for the Philippines small-scale hog sector is what happens after 2009, when trade liberalization of the hog market is supposed to occur.
Brazil has vigorously pursued technology acquisition for large-scale hog production and export markets for pork products. Although smallholders were previously involved in the sector, they have been exiting rapidly, particularly in the zones that government policy has attempted to transform into OIE List A disease-free-without-vaccination zones (in the southern part of the country). Brazil has also moved rapidly into promoting biotechnology-mediated productivity gains and low cost feed supplies. It is becoming the world’s lowest-cost producer in its large-scale sectors in the southern parts of the country. It is to be anticipated that patterns of change in industrial organization similar to those observed in the United States in the 1990’s will be observed in Brazil in the near future. This will involve rapid scaling up and increased vertical-coordination. Health barriers on pork exports will remain as a major constraint on the sector and are likely to provoke domestic livestock policies that result in the exit of smallholders from the sector.
Swine production in Thailand is still primarily for a domestic market behind tariff barriers. The last 15 years have been characterized by rapid technology adoption in terms of genetics, feeds, and housing. There has been rapid scaling up, especially in proximity to Bangkok. Export potential at the high end is limited by endemic diseases that are difficult to control across porous borders. As in the Philippines, medium scale producers have good prospects, but vertical coordination will be the only solution to keep smaller scale commercial producers involved in the sector.
5.1.3 Poultry And Egg Production: It Is Mostly Large-Scale Now, But Why?
Both global analysis and the country cases confirm that advanced technology embodied in breeds and feeds appear to be critical to the success stories for poultry around the world, and the same is likely to become true for hogs over time. Much of this technology appears to be transferable, but only at relatively large-scales of operation, at least for poultry. Thus there is strong reason to believe that technology itself is a prime mover of the displacement of smallholders from the livestock sector. However, this is only part of the emerging picture. Understanding the issues for poultry will be critical for understanding what is likely to happen to smallholder hog production in the future.
The issue of scale for monogastric livestock is bound up with increasing levels of vertical coordination, especially with feed milling. Policy distortions play a big role here, since feed is 70 percent of the cost of production, and current policies in parts of India and the Philippines, at least, tax market transactions between millers and raisers, but do not tax non-monetary grain transfers within integrated operations. More generally, vertical coordination seems to be occurring as a market reaction to the high transactions costs involved in lending money and gaining market reputation in developing countries. It is vital to better understand how smallholders can play a role under such vertical coordination in order to get benefit from the Livestock Revolution. Key to this is a better understanding of how policies can nurture the development of institutions that reduce transactions costs without requiring hidden subsidies.
Poultry has grown at extraordinary rates in India in recent years. The sector is largely open, and has transferred in a large stock of advanced technology. It also exports a few high-tech niche poultry products, such as egg powder, to the EU. True smallholders in the sense of poor people appear to have exited the sector in the dynamic southern and central producing zones. Smallholders remain in the poorer, more densely populated eastern parts of the country. Small-scale (but not poor) operators remain involved in broilers in the dynamic poultry zones around Hyderabad in the south, but it seems likely that they will convert soon to contract farming or exit the market. Very small-scale layer operations have already closed. The outlook for smallholder production in both broilers and eggs is not good, although small to medium-scale production in a vertically-coordinated mode with hatcheries and feedmillers may be possible.
Thailand and Brazil have become major poultry exporters. They both operate highly sophisticated large-scale sectors, with high productivity standards. Growth of the domestic sector is largely limited by health constraints on export markets. Newcastle’s disease prevents Brazilian exports to the U.S., and Thailand is faced with myriad and shifting health barriers in their major European markets. China’s development as a major poultry exporter is displacing Thai and Brazilian poultry exports in East Asia. China’s success is based on very low cost labor and cheapening supplies of feed under preparations for WTO entry, all in the context of massive technology transfer.
The Thailand, Brazil, and the Philippines studies indicated that with the commercialization of their poultry and swine industries has brought with it the implementation of HACCP-compatible slaughtering and processing of branded products In all three countries the drive is mainly by the very large commercial companies to meet the growing demand of the export market and by institutional markets for certifiable and traceable food-safe meat products.[31] However in some countries such as the Philippines the drive for improved food safety is also domestically drive by higher-income consumers. In either case for domestic or export need the drive towards improve food safety does not appear to be matched by the small and medium scale operations and it is unclear if the lack of such a system may limit their marketing options in the future particularly if legal liability becomes more important in these countries. Though it is possible that some of the technological changes induced by export demand may have spilled over to the rest of the industry. Whether this is the case in the case studies will need to be explored in the second phase of the study.
If small producers can not meet the standard of the export demand will they be able to participate in a dual market? or will the domestic market be flooded by lower quality product pushing them out of business? In Thailand this originally occurred as the poultry market was initially flooded by a lower quality chicken (including chicken with more residuals such as antibiotics) not acceptable for export. What does that mean for the small scale producers and local consumers? It may mean nothing for countries that are exporting parts rather than the whole bird eg.) the parts not exported are sold in the domestic market, however for countries which are exporting a whole bird does it mean that local consumers get an inferior product safety wise? The Philippines study reported the it was the large integrators and large commercial farms that were able to supply the HACCP certifiable products while the smallholders and small commercial producers in both the hog and broiler industries lacked such facilities. Though not reported in the other case studies it is likely that similar happenings are occurring and it is very possible that the increased drive for safe food will require some sort of policy to aid small holders to meet the new demands such that they are not excluded from the rapidly growing institutional markets for meat and meat products.
In the India case it appears that food safety concerns are primarily domestically driven towards the delivery of safe clean dairy and poultry products to the urban market. One of the limiting factors appears to be the lack of infrastructure to deliver a safe product. The dairy coops have been working to aid in the delivery of milk, but producers who are not members rely on informal methods. Historically much of the poultry has been sold in the live market and most of the slaughter is done through traditional butchers. If food safety begins to play a more predominate role then these butchers will either need to be re-trained or move into alternate livelihoods in order to make progress on food safety, as even their own domestic urban consumers are demanding such.
Environmental problems resulting from intensive livestock production are primarily water pollution and odour problems for neighbours. For all of the case studies there is minimal documentation on the specific impact of the animal industrialization process on the environment. In the Philippines the problem of livestock waste pollution has so far remained on the level of the adverse reactions of residential populations where high pig density and high population density coincide. The growing conflicts have so far revolved around the discomforts stemming from noxious odors, fly concentrations, perceived respiratory ailments and skin allergies associated with living in proximity to high-density pig farms, and the visual and olfactory pollution of creeks and rivers into which solid pig waste and wastewater are indiscriminately dumped. Similar type of adverse reaction is reported in Thailand particularly in areas where there are high densities of animals.
In the Thailand, Brazil, and the Philippine studies there is some concrete evidence of polluted water in the areas with high density of small and medium farms as well as large farms. However it should be noted that intensive livestock farming will hardly ever be the only source of water pollution and other sources were not detailed in the current country case studies. The will also be pollution from industry and urban sewage and may be difficult to determine whether the driver of the problem in these countries is primarily because of 1) many diverse types of industry in a concentrate area, 2) farm size, 3) a concentration of many farms (rather than farm size), or 4) poor human sewage controls particularly in countries that are just beginning to implement waste regulations.
The Thailand study reports that modern poultry farms - which use close-system evaporative housing usually, create less pollution than conventional farm and that most of the environmental problems created by these large farms are indirect ones such as an increase in water requirement in the area that probably put more pressure on other farmers in nearby areas. Any problems with the disposal of the animal waste from such farms still needs to be explored. It has also been suggested in the Thailand study that perhaps there is more of a problem with small farms polluting due to the lack of affordable water treatment technology for small farms. Whether the current technologies can be scaled down to be more appropriate for small scale farms should be explored. The study further suggested that the reason large-scale farms used the technology was because they were subsided. Whether they would continue if it wasn’t subsidized needs to be understood.
Where profitable there do exist some marketed based solutions for utilizing the manure. In the Philippines there exists a market for poultry manure and there are a number of traders are engaged full-time in contract buying and collection of poultry manure from poultry producing areas and sell to vegetable producing areas. The existence of a functioning market for chicken manure, however, does not imply the absence of other environmental problems in the application of chicken manure in the farms in place of chemical fertilizer. In Thailand it has been observed that large-scale poultry farms tend to have better waste management than small poultry farms. For instance, solid waste from large-scale poultry farms are properly collected and sold as animal feeds (fish) or fertilizer. As cattle raising is land intensive much of wastewater created is reused within the farm for watering the grassland. Solid waste is also used as fertilizer within the farm as well.
Some countries are implementing zoning and effluent regulations to limit the negative impact of livestock on the environment. In most country case processing sludge and BOD5 is regulated and treated as a point source of pollution. Often these regulation however are designed for all industrial activities. For instance when the Philippines national industrial standards are applied to pig farms, the effluent standards have been found to be binding only to commercial pig farms at the size of about 1,000 heads, roughly equivalent to a 100-sow level farrow-to-finish commercial operation. It is technically feasible to identify all pig farms at 100-sow level and beyond, require them to put up waste management facilities and pollution control devices, and monitor them closely as point-sources of livestock waste pollution. It is another thing, however, to deal with a far greater number of backyard farms operating in peri-urban areas. Individually, backyard operations fall outside the legal framework for effluent emission standards. Nonetheless, smallholder-owned animals collectively generate equally high concentrations of pig waste and pollution loads per square km in high density areas, especially where no waste management or treatment exists. Thus, the question: "Do backyard producers in the Philippines pollute more than the commercials?"
In the Thailand, Brazil, and the Philippine studies the main focus of environmental regulation has been on the intensive livestock farms. As alluded to in the studies in certain situations the huge number of small-scale farmers might have a serious impact on the water environment in a given region. Their exclusion from regulations may be because they are overlooked or because it has been determined that due to the high number small farmers (in some cases) that it would be inefficient to implement an enforcement activity to bring small-scale farmers in compliance with environmental regulation. The enforcement cost of bringing both large and small farmers into compliance needs to be understood better.
In sum, we are left with a vision of a world where livestock production, its opportunities, and its perils are growing, but where there will be increasingly difficult competition between large-scale integrated operations and part-time small-scale independent operations. Failure to close this gap in a globalizing world will lead at best to missing the best chance there is for poverty reduction in rural areas of developing countries. At worst, it could lead to ecological and public health disasters as the majority of the people who keep livestock do so only for low value, unregulated local markets in ways that escape technological and regulatory solutions to that which will increasingly ail all of us. Most of all, the structure of incentives, opportunities and constraints is evolving rapidly. We draw the following conclusions for policy research.
First and foremost, an effort must be made to identify and promote the replication of institutions that reduce the transactions costs inherent in smallholder involvement in commercial marketing of perishable, quality-sensitive products. Smallholder participation, whether it is in selling milk in Gujarat or hogs in Luzon, requires reliable delivery of unadulterated products certifiably produced with good inputs. The country issues surveys illustrate four areas in particular where policy interventions can be helpful.
5.4.1 Formal Procurement and Marketing Services
Access to regular formal product procurement services is key. The informal sector will always take care of a share of output at low procurement prices, but increasingly smallholders will be shut out of the fast growing high-value urban sector. One of the rapid structural changes shown in the country papers is the rapid rise of more formal urban markets demanding uniformity, reliability, and safety of product. Formal marketing chains typically have higher costs in ensuring that they are getting such products from a large number of smallholders, as compared to getting them from one or two larger producers. Must smallholders therefore be relegated to the typically low end and unreliable "wet markets"?
A critical policy research priority that arises is understanding the relative efficiency (or ability to be competitive) of small and large producers, and how much of the competitive edge of large producers is due to true economies of scale in the use of inputs and outputs, and how much of it is due to the higher transactions costs faced by smallholders. An example of the latter are smallholder pig farmers in Southern Luzon who have difficulty selling pigs into the high-value formal channel in Manila. Buyers cannot be sure that high quality feeds or proper vet care were used (even if they were), raising the risk of ending up with meat of inferior quality, or an otherwise undesirable product.
Formal procurement activities involving purchases from smallholders are rare in the absence of outright subsidy, as in the case of India’s cooperative milk marketing system. Outright subsidies to countervail other policy distortions against smallholders might be justified, but would have to be supported by careful research to show that they really are second-best welfare-enhancing policies, and not just special interest pleading using poverty as a justification. Even where a degree of subsidy is justified, it is probably best administered through an institution of collective action, as in the case of the subsidization of India’s cooperative system for milk. However, a research issue arises as to whether it is preferable to subsidize low efficiency processors, or whether a direct subsidy should be made available to high efficiency private processors to procure from smallholders.
An analogy would be contract farming for pigs in the Philippines. Should preferential tax rates be given to organizations that use smallholders to supply animals destined for processing and sale? What are the alternatives, and the relative costs of different options? What are the returns from having smallholders involved, as opposed to alternatives?
5.4.2 Credit
In-depth assessment of why some smallholders keep livestock and others do not almost always flags access to credit as the key difference between the two groups. It is difficult to cite a "market" rate of credit as a true indicator of the value of credit, since market rates for smallholders in the countries studied typically include a hefty risk premium because of the moral hazard faced by the lenders. Heuristically, one could say that in Southern Luzon the market rate of credit to smallholders is at least 24 percent p.a., the returns to pig fattening are about 18 percent p.a., and the true cost of capital (if assured of repayment) is 12 percent p.a.. The policy research issue is to find the conditions under which more than 12 percent capital finds its way into an 18 percent return activity involving smallholders, which requires reducing the loss rate to less than 6 percent.
To make progress here, we would need to know more about how credit fits into successful smallholder livestock activities, what the characteristics of successful smallholder borrowers are, and what system of incentives keeps the system honest over time. We would want to know how much of the risk premium charged smallholders represents the actual risk of the activity and how much of it is due to the fact that the lender does not know much about the borrower. Similarly, how can an institution such as a co-op spread the costs of information gathering over a group of borrowers. We should also know the extent to which credit subsidies favor one class of borrowers over another, and particularly the role of cheaper credit in favoring larger-scale operations over smaller scale ones.
5.4.3 Certification of Food Safety or Disease-free Product Attributes
In commercial systems, the buyer does not have access to sufficient information about the producer and product handlers along the value chain to know if the product is safe, unless he or she can trust the final point of retail sale. The same applies to each point on the value chain; this is a particular problem for smallholders. Trustworthy certification of the safety attributes of the product is in some sense as important as actual safety.
There is probably some rigidity in the investments that must be made to establish trust and reputation for safety and absence of disease; these can be very high on a per unit of output basis if not offset by a large number of units produced in every time period. The rapid rise of food safety and phyto-sanitary compliance concerns in developing countries since the mid 1990’s suggests that possible economies of scale in food safety and phyto-sanitary could play a significant role in displacing small scale producers in the next decade, unless institutions are found to spread the costs of certification.
To work, certification would need to be coupled with other interventions in common across smallholders in a particular setting to ensure that safety is a reality. A simple example would be a village-level milk chiller. Studies of the system of incentives and industrial organization to make such joint technology/certification ventures work are lacking and critically important. How can smallholders organize to both meet standards and have their product recognized in the market as having met them?
5.4.4 Institutions for Collective Action for Preservation of the Environment
As smallholder systems intensify and concentrate in proximity to cities, large concentrations of animals begin to form, with no single decision agent in place to implement pollution abatement strategies for more than a few animals at a time. The result is that available technologies for pollution abatement, such as covered lagoons and which are not scale-neutral, tend to be used only in large-farm areas, and not in small-farm areas, even if they have equal numbers of animals per square km.
This raises the possibility that negative environmental externalities are actually higher on small farms in concentrated areas, on a per animal basis, than small farms, contrary to the conventional wisdom, and that the problem will get worse over time. Since the environmental problems are pressing, especially in the case of pigs, there is a real likelihood that environmental regulations will increasingly be enforced in smallholder areas. Without ways of spreading the cost of compliance over a large number of units, this could drive smallholders out of business.
It is critical to investigate empirically the magnitude of negative environmental impacts from livestock production, much of which involves work by disciplines other than economics. However, economics research needs to measure the negative environmental externalities from livestock production, and most particularly the interaction between scales of production and the negative externality incurred per unit of output. The economic component of the work might focus on estimating the real amount spent per unit of output for environmental preservation by each farm. This spending will offset negative externalities, whatever they might be.
If the negative externality per unit of output is higher for large-scale production, then failure to compensate for negative environmental externalities is yet another policy distortion that is encouraging the scaling-up of livestock production. If the negative externality per unit of output is higher for small-scale production, then there is a trade-off to be assessed in terms of equity and environmental policies, which puts a premium on finding technologies and institutions for collective abatement of pollution.
No project can attempt to answer all the questions that arise out of the list of priorities above. However several clear, empirically testable statements arise, the answer to which would allow getting at some of the priority questions.
5.5.1 Small-scale producers have lower financial profits per unit of output than large scale producers, other things equal.
If this statement is supported, it suggests that in the absence of action, small-scale producers will eventually be put out of business by competition from large scale-producers, especially since the better producers will scale-up. Note that lower financial profitability as perceived by market actors does not take into account inter-farm differences in un-costed costs, such as transaction costs and environmental externalities.
5.5.2 The profits per unit of output of small-scale producers are more sensitive to differences in transaction costs across farms, other things equal, than is the case for large-scale production.
If this statement is supported, it can be interpreted as saying that dealing with transaction costs (through institutions) is critical to improving the ability of smallholders to compete in the market place with large-scale producers. The analysis should also yield insights at to the relative importance of different kinds of transactions costs faced by producers.
5.5.3 Small-scale producers in densely-settled areas generate a lower negative environmental externality per animal kept than large-scale producers in the same areas
This an open question, since the reverse could well be true, but since enforcement of regulations is not scale-neutral, the answer of whether large-scale or small-scale producers pollute more is relevant to policy, as discussed above, whatever is found.
5.5.4 Small-scale producers are not less efficient in the use of productive resources if family labor is not costed and environmental externalities are taken into account.
If supported, this implies that the displacement of smallholders from livestock production in the areas studied is not some inevitable process driven by technologically-based economies of scale in production, but is more a matter of a lack of supporting institutions to overcome transactions costs barriers to market participation and other non-costed costs, such as environmental externalities.
How to set up a research plan and test these hypotheses is the subject of Phase II of this project, and will be dealt with in a separate paper.
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[31] In Thailand Japanese
importers used to pay about 20 percent premium for the antibiotic-free broilers,
which is sufficiently high to cover the increased costs. However, as more
broiler farms in Thailand are capable to raise and export antibiotic-free
broiler, the premium appears to decrease. |
