6.4 Comparative Profit Performance^[28]

In this section, we try to explore and test hypothesis 1: Small-scale producers have lower profits per unit of output than do large producers. This hypothesis is investigated using calculations of profits per unit of output by scale for each livestock commodity (dairy, swine, layer, and broiler) across countries. Profit (gross revenue less variable cost), as defined in Chapter 4, was computed directly from the farm survey data. In some study sites, profit was calculated with and without costing family labor. The imputed cost of family labor used is the prevailing market wage rate, varying across regions within each country due to differences in opportunity cost of labor.

6.4.1 Profit Per Unit of Milk Production Across Countries

Dairy farms in India earned an average profit of 1.4 rupees per liter without accounting for family labor (Table 6.26). This value declined to 0.4 rupees per liter when the cost of family labor was included at market wage rates. This decline was more evident on small and medium farms as they use mostly family labor for dairy farming activities. Ignoring the cost of family labor, the average profitability of milk production was higher in the northern region at 1.5 rupees per liter, compared to 1.3 rupees per liter in the west. But when family labor was accounted for, the farmers in the western region made higher profits per liter of milk at 0.7 rupees per liter, compared to 0.4 rupees per liter in the northern region. This is because the market wage rate used in costing family labor is higher in the northern region than in the western region.

On a per unit basis, it seems that small-scale milk producers in India made higher unit profits (as high as 2.5 rupees per liter on farms producing less than 10 liters of milk per day) than the large producers when family labor was not costed. Similarly, when family labor was accounted, small-scale producers continue to receive higher profits but at a lower magnitude averaging 0.5 rupees per liter compared to large producers having an average profit of 0.4 rupees per liter. In particular, small-scale producers in the western region have higher profitability than the large-scale producers in both regions. One possible explanation for this difference is because of the active participation of cooperatives in the western region, which provide not only an assured market outlet regardless of the level of milk produced, but also supply other production inputs and services. As mentioned earlier, farmers in the northern region rely mostly on the middlemen and milk vendors as their market outlet. As a consequence, small farmers have less bargaining power resulting to lower milk prices, and poor access to other inputs and services.

Thai dairy farming has a bigger composition of herds in their farm-size categories (as defined in Chapter 4), compared to India and Brazil. Small-scale farms have up to 20 cows, which are already categorized as large-scale for India dairy. Across farm sizes, the medium-sized (with 21-60 cows) farms made more profit per cow than small-scale or large-scale (more than 60 cows) farms (Table 6.26). This profit difference can be explained by the farms' ability to use the right mixture of concentrate feeds and roughage. Medium-sized farms have gained the highest profit per kilogram of milk because they had the lowest feed cost per kilogram.

In Brazil, average profits per liter of milk did not vary significantly between large-scale and small-scale farms. Smallholders received a profit of 0.04 real per liter of milk while large-scale producers received 0.05 real per liter of milk. (Table 6.26).

Among the countries listed in Table 6.26, dairy farmers from Thailand gained significantly higher average profit in US dollar per liter of milk (at all scales of production) compared to those from India and Brazil. This may be the result of a higher percentage of farms (88 percent of the total sample) operating on contract with cooperatives. Thai dairy farmers who are involved with contract with cooperatives are fairly independent from the cooperatives in managing their farms. The role of their cooperatives is to provide them with services such as loans, consultation, and buyers who could offer guaranteed prices.

6.4.2 Profitability of Broiler Production Across Countries

Of the 159 broiler growers sampled in India, 23 (17 small size farms and 6 large size farms) were contracts and 136 (93 small size farms, and 43 large size farms) were independents. Based on this sample, average profit per bird was compared between production arrangements within farm size. Results indicate that smallholder independents have more substantial profits of 13.1 rupees per bird compared to smallholder contract growers whose profit is only 1 rupee per bird (Table 6.27). It can be recalled from Chapter 2 that broiler growers in India operating on contract receive a fixed fee from their integrators who provide them with all the inputs they need. This explains the lower average profit per bird received by the contract growers compared to independents.

Just like the smallholders, large-scale independents have higher profit at 10.9 rupees per bird than contract growers having profited 3.2 rupees per bird. The differences are wide and significant enough to say that independent growers are more profitable than contract growers. The direction of the relationship did not change when family labor was costed at market wage rates, but the magnitude of the average profit per bird decreased.

In the Philippines, per kilogram profits from production and sale of live broilers were highest for contract growers - especially the fee contract^[29] growers. Small contract growers received marginally higher profits (4.1 pesos per kg) than their large-scale growers (4.0 pesos per kg) (Table 6.27). Small independents earned significantly higher profits per kilogram (1.6 pesos per kg) than the large independents (1.1 pesos per kg). On the whole, smallholders have higher profits per kilogram of output than do large-scale growers.

Costing family labor is expected to reduce the economic profits of the smallholders who uses this resource most intensively. Using the sample wage rates to value the family labor involved, independent smallholders in the Philippines earned an average profit per unit of output of 1.3 pesos per kg, which is slightly lower than the average profit without costing family labor. The adjustment has negligible impact on the three other groups. While this was to be expected for the large producers, the marginal effect of costing family labor on the smallholder contract group is revealing. This arises from the fact that the small contract producers had flock sizes five times larger (on average) than those of the independent smallholders. Profit per unit output, however, remains lowest among large independent producers.

Table 6.26 Average profit per liter of milk across size groups by country, 2002

Note: Numbers in parentheses are average profit in US$ per liter. The currency conversion rates used are based on 2002 foreign exchange rates: for Thailand, US$1=42.96 baht; for India, US$1=48.61 rupees (Rp); and for Brazil, US$1=2.92 reals

Source: Compiled from V.P. Sharma et.al., Annex III, N. Poapongsakorn et.al.,Annex IV, and G.S. Camargo Barros et.al., Annex V.

Table 6.27 Average profit per unit of output of liveweight broiler across farm sizes by country, with and without contracts, 2002.

Note: * Assuming 1 bird weighs 2.4 kg liveweight.

Numbers in parentheses are average profit in US$ per unit of output. The currency conversion rates used are based on 2002 foreign exchange rates: for Thailand, US$1=42.96 baht; for India, US$1=48.61 rupees (Rp); and for Brazil, US$1=2.92 reals; for the Philippines, US$1=51.60 pesos (Php).

Source: Compiled from R. Mehta, et.al.,Annex II, A. Costales, et.al., Annex I, N. Poapongsakorn, et.al., Annex IV, and G.S. Camargo Barros, et. al., Annex V.

Many Thai broiler farmers reported a decrease in price of output and significant increases in price of inputs such as feeds and medicines. Under these circumstances, the broiler farms were not doing well as they used to when the survey was conducted. While all contract farms reported having positive net revenue, several farms showed negative profits-especially small farms under forward contracts that were losing money (Table 6.27). Large farms with more than 10,000 birds were making considerable amount of profit during the study period.

Table 6.27 also indicates that types of contract affect profit of broiler growers in Thailand. The price guaranteed contracts (or forward contracts), which is the typical one employed by large integrators, appears to favor large-scale farms over smallholders. This is probably because larger farms have an advantage over certain performance indicators (such as FCR and mortality rates), which is linked to higher output price. Another possible reason is that large-scale growers can dictate the harvest dates as well as control the price of inputs - particularly feeds.

The smallholder broiler growers in Brazil earned an average profit per kg of live broiler of 0.05 real, which is significantly lower than the profit received by large-scale growers (0.06 real per kg output) (Table 6.27). This result can be explained by the possible market advantages of large-scale producers as well as their easy access to modern technology.

Comparing average profits per kg of live broiler across countries, independent growers from India received the highest profits, followed by contract growers from the Philippines and Thailand, then growers from Brazil. Lower profits for Thailand and Brazil could be due to higher costs of inputs (especially feeds) coupled with lower output price. Price per kg of live broiler received by broiler growers in Brazil and Thailand was only US$0.02 and US$0.60, respectively (Table 6.24). These output prices are lower than US$0.90 per kg, the output price received by broiler growers in the Philippines.

6.4.3 Profitability of Layer Production by Scale

Table 6.28 shows the difference in average profit per egg between smallholders and large-scale growers. In India, average profit per egg is higher for smallholders than for large-scale producers but not statistically significant. However, when family labor was included at market wage rates, smallholders tend to incur losses instead of profits, resulting to higher profits for large-scale producers than smallholders.

Table 6.28 Average profit per egg within farm sizes across countries, 2002.

Note: *1 box = 360 eggs

Numbers in parentheses are average profit in US$ per unit of output. The currency conversion rates used are based on 2002 foreign exchange rates: for India, US$1=48.61 rupees (Rp); for Thailand, US$1=42.96 baht; and for Brazil, US$1=2.92 reals.

Source: Compiled from Mehta et.al., Annex II, Poapongsakorn et.al., Annex IV, and Camargo Barros et.al., Annex V.

Based on the farm survey data collected for layer production in Brazil, both small and large producers faced losses instead of profits (Table 6.28). There is no significant difference in losses between smallholders and large-scale producers. Thai layer farms made positive profits per egg, and just as in India, smallholders in Thailand made a slightly higher average profit per egg compared to the large-scale growers.

Indian and Thai layer farms -smallholders in particular - profited more than the Brazilian layer farms. One possible explanation for this result is the devaluation of the Brazilian real that led to increases in prices of inputs and therefore, to negative profits.

6.4.4 Profitability of Swine Production by Scale

Table 6.29 summarizes profits per kilogram of output and average farm profits by scale of production, with and without contracts. Contrary to the broiler farms, profit per kilogram of liveweight swine is highest among independent smallholders from the Philippines, gaining 26.6 pesos per kg liveweight.

Profit per kilogram of output is least among contract growers, with small contract growers earning the lowest farm profits. Large contract growers, however, generated the second largest farm profits. Small margins per unit output were compensated by relatively large scale of operations. Profit per kilogram of output was about even between medium- and large-scale independents. The difference in total farm profits arises from the difference in scale.

Table 6.29 Profit per kilogram of output of liveweight swine by farm size and production arrangement, 2002

Note: Numbers in parentheses are average profit in US$ per unit of output. The currency conversion rates used are based on 2002 foreign exchange rates: for Thailand, US$1=42.96 baht; for Brazil, US$1=2.92 reals; and for the Philippines, US$1=51.60 pesos.

Source: Compiled from Costales, A., et.al., Annex I, Poapongsakorn, N. et.al., Annex IV, and Camargo Barros, G.S., et.al., Annex V.

Adjusting for cost of family labor affected smallholder profit per unit output most strongly. The absolute and relative change (reduction) in smallholder profit per unit is not large. As expected, per unit profit of the medium- and large-scale commercial farms are hardly affected by adjustments for the cost of family labor. The adjustment for the cost of family labor did not change the relative positions of farms according to scale. Unexpected is the relatively small impact of costing of family labor on smallholder farms. This reveals the small relative share of labor costs in pig production, even when labor is hired (e.g., labor costs amount to 5 percent among medium-sized commercial farms). It also emphasizes the dominant position in the cost structure of expenditures for feeds and growing stock.

Results of profitability analysis for swine production in Brazil suggest that both small and large producers faced losses instead of profits. It was somehow a bad year for the Brazil swine producers at the time of the survey. Smallholders incurred more losses compared to large-scale producers though not statistically significant (Table 6.29).

Camargo Barros et.al. (2003) pointed out that profit per kilogram of output is higher for integrated/cooperative producers (0.04 per kg of output) than for independent producers (-0.40 per kg of output). In fact, it was the integrated farms that gained profits, while the cooperatives (-0.20 per kg of output) and independents incurred losses.

6.4.5 Profitability of Milk, Poultry, and Swine Production Across Countries

In the case of dairy farming, small-scale farms in India have higher profits than do large-scale farms, even after family labor was costed. However, this cannot be easily generalized to other cases, since results of profitability analysis (excluding family labor costs), for Brazil and Thailand suggest that there were no significant difference in terms of profit per liter between small and large-scale farms.

As for broilers, independent small-scale producers in India made more profits than large-scale independent and contract farms with or without family labor costs. The same is true in the case of Philippines independent smallholders versus large-scale independent farmers. However, small contract farms made much higher profits than small and large independent farms in the Philippines, unlike in India. In contrast, large independent broiler farms in Thailand made higher profits than small independent farms and performed much better than small and large contract farms. Compared to the Philippines, Thailand, and Brazil, results showed that independent broiler producers in India made much higher profits per kg, at US$0.1 per kg, across scales of production. This is probably because of the presence of a more closed poultry market in India and partly because of the rapid growth of its poultry industry. Among layer farms, smallholders from India and Thailand had higher profits per egg than did small and large farms in Brazil. When family labor was costed at market rates, smallholders in India have negative profits per egg, while large-scale farms have positive profits.

It is important to keep in mind that profits were computed on the basis of what farmers had reported at the time of the survey in 2002/2003, when some farms experienced negative profits in a very tough price and cost environment for poultry and swine producers. Just like in the case of Brazil where even large swine farms lost an average of US$0.05 per kg. Overall, independent smallholders in the Philippines made the highest profit at US$0.52 per kg, followed by medium-scale independent and contract producers in Thailand (US$0.47 per kg).

From the above findings, it can be concluded that smallholders typically have higher profits per unit of output than do large-scale producers. In some cases, independent smallholders performed better in terms of profit per kg of output than large-scale farms, however, profits per unit made by contract farmers are not far behind.