1.2 The Context of the Scaling-up of Production: The Livestock Revolution^[1]

1.2.1 Amazing Numbers and High Stakes

From the beginning of the 1970s to the mid 1990s, consumption of meat in developing countries increased by 70 million metric tons (MMT), almost triple the increase in developed countries, and consumption of milk by 105 MMT of liquid milk equivalents (LME), more than twice the increase that occurred in developed countries. The market value of that increase in meat and milk consumption totaled approximately US$155 billion (1990 US$), more than twice the market value of increased cereals consumption under the better-known "Green Revolution" in wheat, rice and maize. The population growth, urbanization, and income growth that fueled the increase in meat and milk consumption are expected to continue well into the new millennium, creating a veritable Livestock Revolution. As these events unfold, many people's diets will change, some for the better, but others for the worse, especially if food contamination is not controlled.

A critical issue raised by these trends is that for once a sector that the poor are heavily involved in is growing. Table 1.1 shows that in fact pork and poultry are the prominent growth sectors of developing country agriculture. If the poor fail to participate, they are condemned to even worse immizeration. If they participate, farm income could rise dramatically, but the conditions under which this could occur are still undetermined. Much anecdotal evidence, most of it based on experience in the developed countries, suggests that the poor and small-scale operators will quickly be displaced from growing livestock sectors as individual farms scale-up. Furthermore, whether the seemingly unstoppable growth of livestock products is a good or bad thing for the poor will also depend on the environmental and public health impact of rapidly rising livestock production in close proximity to population centers (Delgado et al., 1999).

Table 1.1 Production growth in developing countries, 1975-2002

Source: Calculated from data in FAO Statistics Database (http:FAOSTAT.FAO.ORG/default.htm).

The trends affecting all developing countries are especially visible in the four study countries, which cover a wide diversity of experiences for studying the determinants of scaling-up. In the Philippines, the livestock sector (including poultry) almost single-handedly carried the lagging agricultural sector into positive aggregate economic growth over the last 20 years, almost doubling its share in total agricultural value-added within the period. The growth points in the livestock sector were mainly the hog and poultry industries, which accounted for about 85 percent of meat output in 2000 (Government of the Philippines, Bureau of Animal Statistics, 2002). The growth performance of these two sub-sectors occurred during a period of rapid changes in world and domestic market environments and policies, and was also influenced by the shifting political economy within the Philippines of livestock and feed grains.

The commodities chosen for in-depth analysis in each country stemmed from the desire to stick with a manageable task, but to observe the production of those items that had the following characteristics: (a) production was growing rapidly at the national level; (b) the commodities were important for the country concerned, (c) small-scale operators had traditionally and recently been involved in producing these commodities, and (4), there was at least anecdotal evidence that smallholders were being displaced from the sector in the sense that they were losing market share to larger operations, or would soon do so. The result was as follows. Swine producers were surveyed in the Philippines, Thailand and Brazil; broiler operations were surveyed in all four countries, and layers in India, Brazil and Thailand. Dairy producers were surveyed in India, Brazil and Thailand.

Robust growth in the demand for meat in the last two decades in the Philippines has been propelled mainly by continued high population growth rates, at about 2.3 percent per annum (NSCB, 2000) and rapid urbanization, particularly in the provinces around the National Capital Region (Metro Manila), covering the regions of Central Luzon and Southern Luzon. There are also major urban centers in the south, Metro-Cebu in the Visayas islands, and Metro Davao in the southern island of Mindanao. Demand growth for meat has been impressive, even with modest and often interrupted improvements in per capita incomes. Small-scale egg producers have virtually disappeared in the Philippines. Although small-scale broiler producers are now also becoming harder to find, medium-to large-scale independents continue to compete with large integrators. Small-scale swine producers continue to grow in number, and still represented about 70 percent of hog production by weight in the Philippines in 1998. However, large-scale vertically-coordinated production is growing much faster and is reducing the market share of small-scale producers (Costales et al. 2002).

In India, milk production is the most important agricultural activity in the agricultural sector. At national level, around 17 percent of the total value of agricultural production is derived from this sector. The other livestock sectors (meat, poultry, wool and hair, etc.) account for a further 8.3 percent of agricultural value-added. The milk sector generates an especially high proportion of agricultural output in the northern and western parts of the country. Milk production in India increased from 17 million tons in 1950-51 to 84.6 million tons in 2001-02 (Sharma et.al., 2003).

Although cultural and religious factors have meant that India has not followed the path of most other developing countries into red meat consumption, the Indian poultry sector has undergone a thorough transformation from backyard rearing to commercial farming in the short span of three decades. Poultry is today one of the fastest growing segments of the agricultural sector in India. While production of agricultural crops in the country has been growing at a rate of 1.5 to 2 percent per annum during the last two decades, that of poultry has been rising fast, 6 to 7 percent per annum in the case of eggs and around 18 percent in the case of broilers. India ranked fifth in the world in egg production in 2000: producing 37 billion eggs. Similarly, India produced around one billion broilers in 2001.

The number of broiler hatcheries too has grown: around 750 in the year 2000 against 77 in 1980. Capital investment in the poultry industry in 1999-2000 is estimated to be around Rs.13, 000 billion, and the industry contributed Rs.102.34 billion to India's gross domestic product during 1999-2000. The industry has also made significant progress in the areas of breeding, nutrition, management, and health care. Some of its major achievements include availability of several world known brands of commercial hybrid chicks, essential equipment and machinery, medicines and vaccines, compounded poultry feed, disease diagnostic services, poultry training programme, and technical and skilled manpower (Mehta et al., 2002).

Brazil, has witnessed many of the same high growth trends for milk, pork, and poultry products. Yet in Brazil more than in the other countries studied, many of the small and medium size farmers have been increasingly being replaced by large operations that are supplying the agribusiness sector. Two important technological changes in dairy marketing and processing affected the dairy industry, particularly since the mid-90s. The first one was the bulk collection of refrigerated milk; the second technological change was the substitution of pasteurized milk (especially Grade C) for sterilized long-life milk. Both these changes impacted on the desire of processors to procure from smaller farms, and have helped promote scaling-up in Brazil.

Swine and poultry have also grown rapidly in Brazil in recent years, and have become increasingly vertically coordinated. Differences in the structure of production have stemmed in a large part from differences in demand: swine production has traditionally gone for domestic consumption because of the animal disease status (although this is now changing because of the FMD (foot-and-mouth-disease)-free zones in the south), and broiler production has been driven by exports. The most dynamic growth sectors have been in the traditional smallholding areas of the south, where much scaling-up has been observed, and in the newly settled lands of the central mid-west, where the new farms are typically larger-scale (Camargo Barros et al., 2002).

Thailand has been characterized by rapid growth in consumption of meat over the past 20 years, but much more rapid growth in production, at least for broilers, which have been one of the stars of Thai export-led growth. Thailand has just begun to export broilers slightly more than two decades ago and has become one of the leading exporters worldwide. Broiler development has been largely undertaken by the private sector. Many private firms claim that, technology-wise, Thailand's broiler industry could compete with anyone in the world. Although small-scale operations can be found, especially outside designated export zones (exports of fresh swine meat has not been possible because of their FMD status), Thai poultry and swine production operations have been scaling-up at a rapid pace. Dairy remains small-scale, but is heavily protected and directly subsidized throughout the country.

Taken together, the four country cases yield rich insights into both the determinants of growth and the supply response important to better understanding the scope for a future role for smallholders.

1.2.2 The Role of Demand

The Livestock Revolution, particularly in developing countries, is fundamentally propelled by demand. Though people in developing countries are increasing their consumption from the very low levels of the past, they have a long way to go before coming near developed country averages. In developing countries people consumed an annual average in 1996-98 of 25 kg/capita of meat and 44 kg/capita of milk, one-third the meat and one-fifth the milk consumed by people in developed countries. Nevertheless, the caloric contribution per capita of meat, milk and eggs in developing countries in the late 1990's was still only a quarter that of the same absolute figure for developed countries and, at 10 percent, accounted for only half the share of calories from animal sources observed in the developed countries (Delgado, Rosegrant and Meijer, 2002).

Per capita consumption is rising fastest in regions where urbanization and rapid income growth result in people adding variety to their diets. Across countries, per capita consumption is significantly determined by average capita income. Aggregate consumption tends to grow fastest where rapid population growth augments income and urban growth (Rae, 1998). Since the early 1980s, total meat and milk consumption grew at six and four percent per year, respectively, throughout the developing world^[2]. In developing countries as a whole-where income grew at 4-8 percent per year between the early 1980's and 1998, population at 2-3 percent per year, and urbanization at 4-6 percent per year-meat consumption grew between four and eight percent per year.

The Livestock Revolution has been most evident in East and Southeast Asia, particularly China, as shown in Table 1.2. The share of the world's meat consumed in developing countries rose from 36 to 53 percent, and their share of the world's milk rose from 34 to 44 percent (Table 1.3).

Table 1.2 Food consumption of meat and milk by region, 1983 and 1997

Source: Calculated from data in FAO Statistics Database (http:FAOSTAT.FAO.ORG/default.htm).

Notes: Data are three year averages centered on year shown.

"Consumption" is direct use as food, uncooked weight bone-in. "Meat" includes beef, pork, mutton and goat, and poultry. "Milk" is milk and milk products in liquid milk equivalents. Metric tons and kilograms are three year moving averages centered on the year shown. WANA is Western Asia and North Africa.

Table 1.3 The changing consumption share for meat and milk in different regions

Source: C. Delgado, M. Rosegrant and S. Meijer. "Livestock to 2020: The Revolution Continues," paper presented at the World Brahman Congress, Rockhampton, Australia, April 16, 2002, based on historical FAO data and updated projections from the April 2002 version of IFPRI's IMPACT model.

Pork and poultry accounted for 73 percent of the large net consumption increase of meat in developing countries from 1982/84 to 1996/98. Conversely, both per capita and aggregate milk and meat consumption stagnated in the developed world, where saturation levels of consumption have been reached and population growth is small. Nine-tenths of the small net increase in meat consumption that occurred in developed countries over the same period was from poultry. Commercial poultry production in most countries has moved from small-scale to what would be considered by most as medium or large industrialized production units.

The dominant role of China and Brazil in the meat part of the Livestock Revolution is shown in Table 1.2. However, the near doubling of aggregate milk consumption as food in India between the early 1980's and the late 1990's suggests that the Livestock Revolution goes beyond just meat and beyond China and Brazil. At 60-70 MMT of LME for Indian milk consumption in 1996/98, aggregate Indian consumption amounted to 13 percent of the world's total and 31 percent of milk consumption in all developing countries^[3]. The high milk consumption of Latin America in 1996/98, at 112 kg/capita, is half way between the developing world as a whole (44 kg/capita) and the developed countries (195 kg/capita), because of the very high level (75 percent) of urbanization in Latin America.

The rapid rise in livestock production in developing countries has been confronted in recent years by dwindling grazing resources for ruminant animals and a pattern of effective demand largely centered on rapidly growing mega-cities fueled by non-agricultural development. The possible exception to this is a country like Brazil with a huge frontier land base and populated coastal regions where crops and livestock are concentrated in certain pockets where crops grow well. Generally, urban growth has played the key role in promoting livestock demand. The impact of this on scaling-up cannot be dissociated from accompanying changes in the nature of demand. The new middle classes of developing country cities want food safety, and the processors and supermarkets serving these areas increasingly require a reliable supply of product with predictable taste, texture, and safety.

The draw of potential export markets also puts pressures on producers to adopt industrial approaches of production to satisfy urban and export meat demand rapidly. It also puts pressure to be declared free of animal diseases. Together, these trends help explain the large increases in production of non-ruminants worldwide. The decline in the feeding of cereals to ruminants in developed countries and the much larger increase in non-ruminant production in developing countries helps explain a relative shift in the use of feed cereals to developing countries.

Cereals feed use in the developed countries has actually declined since the early 1980's, whereas it increased substantially in developing countries. The share of the latter in world use of cereals for feed went from 21 percent in 1982/84 to 36 percent in 1996/98. This salient fact has inspired many observers to wonder if the rise of production of pork, poultry, eggs, and milk for the urban middle class would jack up the price of cereals to the poor in both rural and urban areas of developing countries. Furthermore, others wondered whether the trends portrayed above could possibly continue far into the future, without resource scarcities or import constraints raising prices to the point that the growth in consumption would peter out (Delgado, Rosegrant, and Meijer, 2002) or would there be a considerable expansion of cereals in developing countries that we are currently seeing in many of the countries in the southern cone of Latin America.

Cheap feed grains have undoubtedly been a factor in encouraging the expansion of pork and poultry production in developing countries through industrial modes based on the use of concentrate feeds. The latter account for roughly 60 to 70 percent of the nominal cost of production of poultry and pork. As suggested by the trends in Table 1.4, the relative prices of pork/poultry and of maize have moved significantly in favor of meat producers since the early 1980's. One wonders what the decline in real maize prices would have been without the Livestock Revolution in developing countries.

Table 1.4 Past trends in real prices of selected crop, feed, and livestock products

Maize: $/ton, US #2 yellow, fob Gulf of Mexico. Source: IMF (http://www.imf.org/external/np/res/commod/index.asp)

Beef: $/ton, Australia/New Zealand frozen, U.S. import price. Source: IMF, same as above.

Pork: $/ton, USDA 5-market average hog prices. Source: (http://www.cattle-fax.com/data/files/hogs/b11.xls)

Poultry: $/ton, USDA Avg. 12-City Broiler Price, Broiler Composite and Georgia Dock Price.

Source: (http://www.cattle-fax.com/data/files/poultry/prices.xls)

Milk: $/ton, whole milk powder, fob Western Europe. After 1994, midpoint of prices reported by NZ Dairy Board. Normal prices in U.S. $ are deflated by the U.S. Consumer Price Index.

Sources: FAO Commodity Review and Outlook 1982-1991, FAO Commodity Market Review 1995-2000, (http://www.ams.usda.gov/dairy/mncs/international/intpr2000.pdf)

If changing relative feed and meat prices have contributed to global changes in livestock output mix, it is also likely that they have affected the distribution of production in developing countries across the size distribution of farms. If larger-scale farms can secure access to feed of a given quality as a lesser price, they gain a great cost advantage over small-scale producers. Similarly, if vertically-integrated operators avoid paying sales taxes on feed, but independent producers do not, independent production is not likely to be viable. Finally, feed concentrates by definition have multiple ingredients, many of which cannot be ascertained by looking at the final product. Where public enforcement of ingredient labels is lax, or branding is unreliable, as is often the case in developing countries, producers who are large enough to mix their own feed are more assured of getting good quality inputs. Put differently, smallholders face a higher transaction cost in terms of having less information about what their feeds contain. Generally, the growing importance of concentrate feeds in total production costs of the aggregate livestock sector in developing countries suggest looking at developments on the supply side in understanding the determinants of scaling-up.

1.2.3 The Supply Side and Prices for Meat, Milk and Feed

Claiming that the Livestock Revolution is propelled by demand does not mean that it was not also shaped by the supply side. Productivity breakthroughs in animal agriculture, and particularly for poultry and swine, have made certain forms of industrial organization the most likely response to a surge in consumer demand for meat. These changes in the industrial organization also helped to determine who would produce the new meat demanded by growing cities and export opportunities. Events on the supply side are also critical to resolving some of the emerging environmental and public health impacts associated with increased livestock production. Furthermore, and most importantly for present purposes, supply-side events may not be scale-neutral.

Improvements in the efficiency of production of large-scale pork and poultry operations clearly keep pork and poultry prices lower than they would be otherwise. Much of the initial growth of poultry production in the U.S. was attributed to rapid technological progress in poultry from the 1950's onwards which led to chicken meat-a luxury good in the U.S. up to that time-becoming cheaper than beef and until recently the staple meat in the U.S. Such a change in world prices did occur, but the trends have changed since 1980 as illustrated in the Table 1.4. Results clearly suggest the decline in prices for agriculture since 1980. Between the first five years of the 1980's and the last five years of the 1990's, average deflated maize and beef prices declined by 44 and 54 percent respectively, relative to the base period. Real prices of poultry and pork, however, declined by only 25 and 28 percent, respectively, over the same period. Real milk prices declined 11 percent. Understanding the impact of these changes on poor producers in poor countries requires not only understanding the forces driving higher meat consumption, but also the forces shaping supply response.