XII. Conclusion and Policy Implications

During the last two decades, rapid expansion of the livestock production has been made possible through the industrialization process. The expansion was largely initiated by the private sector and driven by the rapid economic growth. Dairy is the only exception as its growth was the result of the government initiative as well as subsidy and protection. In all cases, imported technology has played an instrumental role behind the rapid increases in livestock productivity. In addition to the production technology, the new production organization in the form of contract farming has also been introduced. While the expansion of the broiler sector is fueled by the surge in export demand, the growth of the other livestock sub-sectors is stimulated by the increased domestic demand. As a consequence, the livestock production has undergone the rapid process of scaling up. As the commercial farms expand their scale, the average cost declined sharply. But the industrialization process also takes some tolls. Small farms have experienced increasing difficulty in competing with the more efficient large-scale competitors. They are forced either to exit the industry or to become the contract farms. Meanwhile, the backyard livestock farms have almost disappeared particularly in the major livestock growing areas and nearby provinces in the Central Region. Behind such transformation, there are many factors driving up the scaling-up of the livestock production. In addition to the economic factors, the increased pressure for farms to reduce the negative effects on environment and to produce safe food have also differential impact on the competitiveness of large and small farms. However, there are other factors offsetting the advantages of the large-scale farms. We will first summarize the factors that have positive and negative impact on the scaling-up process. Finally, some policy implications are presented.

12.1 Economic Factors Affecting the Scaling-Up Process

Most large-scale livestock farms, except the piglet and dairy farms, enjoy the economies of scale. There are at least four factors that work in favor of the large-scale farms. The first one is the price of inputs, particularly feeds that account for 60-70 percent of total production cost. Data in the profile chapter, which is summarized in Table 12.1, show that the price per ton of feeds, particularly the price of ready-made feed produced by the modern feed mills, varies inversely with farms size. Larger volume of purchase is entitled to more discount. Although the large-scale farms do not have price advantage on the purchase of mixed feeds, especially in the fattening swine farms, they have lower average feed cost per ton of live animal produced. It should be noted that the small-scale pig and dairy farms incur the lowest price of mixed feeds because they buy the low quality feed, e.g., leftover human food for pig raising. As a result, their average costs of feed per ton of animal are higher because low quality feeds yield very low performance as measured by the high value of feed conversion ratio. For the piglet farms, the medium-scale farms have the lowest average feed cost (per ton of live animal), despite the fact that they pay higher prices of ready-made feeds than the large-scale farm. As argued in the earlier chapter, piglet farming is a care-intensive activity which favor the lower medium-scale farms. Table 12.1 shows that drug costs per unit and drug prices are also in favor of the large farms.

An introduction of the evaporated housing technology has also been in favor of the large-scale farms The new housing, which requires large capital investment, allows farmers to increase herd size in a given area of housing, resulting in lower average production cost per unit of animal. Large farms also have lower average labor cost per ton of live animal because they are able to substitute capital for skilled labor.

Except the piglet and layer farms, the large-scale livestock farms tend to make higher average revenue because they receive the highest price for their animals. Although the layer farms receive the lowest egg price, they enjoy the highest average revenue because they have higher production performance (or yield). On the other hand, the small-scale farms in all sectors (except broiler) receive the highest or the second highest price for their livestock. Interviews with the farmers reveal that most of them sell their livestock in the local retail markets, and thus fetch higher prices than the larger farmers who sell their products to the wholesalers. One possible factor that enables the small farmers to sell in the retail market is that they tend to live closer to the village. (see Table 12.1)

In addition, there are other factors that partially reduce the disadvantages of the small-scale farmers. One important reason is that a few small farmers have adopted the chemical-free livestock production, which enables them to fetch higher prices for their products. The second factor is the transportation cost. Egg transport does not seem to enjoy much economies of scale since eggs have to be carefully packed and shipped in the smaller trucks. Therefore, eggs produced in the Eastern provinces could not compete with the local eggs in the provinces that are too far away from the farm. On the other hand, the transport of milk has to be shipped in the large refrigerated tanker if the average transportation cost is to be reduced. The small dairy farms solve the problem by organizing a producer cooperative which collects milk from the small holders at the collection center and then ship the milk in the large tanker truck. The cooperative business thrives because milk is highly perishable, making it necessary for the small farmers to establish a milk collection station under the cooperative organization. In addition to the benefit of lower transportation cost, the cooperative members are also able to buy the ready-mixed feeds from the cooperative at the lower market price because of large quantity discount. And yet the large dairy farms still pay lower price of processed concentrated feeds.

Some small chicken farmers have also found an alternative of growing the native chicken, which can fetch higher market price due to increasing domestic demand.

In general, the actual profit per kilogram of output classified by farm size is consistent with the technical efficiency index obtained from the stochastic profit frontier. The only exception is the layer farms (see Table 12.2) in which the largest farms are most efficient, (but the medium-scale farms have the highest profit per unit of output.

The large-scale farms in broiler and pig fattening have both the highest unit profit and highest degree of technical efficiency.

For the piglet farms, the lower medium-scale farmers enjoy the highest profit per kilogram of piglet and largest technical efficiency index. The medium-scale farmers pay lower prices of mixed feeds than the large-scale ones. Although the small-scale farmers incur the lowest prices of mixed feeds, they have higher total feed cost than the medium-scale farmers because they have to pay very high prices for the ready-made feeds.

The medium-scale dairy farms also enjoy the highest unit profit and highest technical efficiency.

12.2 Distortions and Market Power

There are some distorting factors that work against either the small holders or the large-scale farmers. Firstly, the administration of tariff quota of maize and soybean is biased in favor of the large-scale producers. Quotas are allocated either directly to the feed producers or the producer associations on a basis of past record of imports. The large-scale layer and pig producers obtain import of maize through their cooperatives, while the broiler producers get the soybean quota through their producer associations. There are several producer associations competing for the quotas. Large-scale producers can form a new association and apply for the quota because there is a small amount of quota for the new comers. Since there are high fixed costs of obtaining the quota and high transaction costs of import, the quota system is biased against the small holders.

Secondly, the contract farming system is also in favor of the vertically-integrated contractors who have dominant market power. When there are fluctuations in both the livestock and the input market, the contractors are in a better position to shift the costs of adjustment to the small contractees. For example, when there is a shortage of day-old chick the contractor may ask the small farmers to postpone the date of new batch of production, while its own farms do not have difficulty in securing adequate supply of day-old chicks. Independent growers also find it difficult to procure necessary supply of day-old chicks. Although one can depend on import alternatives, it usually requires a long time lag before the supply arrives Thailand.

However, there was some government regulations that had affected the development of the pig and cattle industries. Before the late 1980's, no private slaughterhouse was allowed. Pig and bovine carcasses shipment across the specific administrative areas was also banned. There were also maximum price controls of pork. These regulations had significantly retarded the development of the commercial pig farms and slaughterhouses, which in turn might had negative impact on the farm size and market share of the pig middlemen.

12.3 Environmental Impact and Abatement Cost

The pig farms are the most polluting livestock farms in terms of water pollution, smell and files. The percentage of polluting farms reported being complained against is the highest for pig farms.

That explains why the pig farms have the highest costs of pollution abatement. And yet the cost per unit of output incurred by the livestock farms are still very small, ranging from 0.007 per kilogram of broiler to 1.46 per kilogram of pig sold (see Table 7.9). The small pig farms incur the largest investment in pollution abatement mainly because of the pressure by the nearby community. Most small pig farms are also near the river.

Fortunately, there is an active market for the dried animal manure, which can be used as fertilizer (see analysis of sample profile in chapters 8-11). Farmers report that more than 50 percent of the manure are either sold or given away. Therefore, there are some incentives for farmers to invest in the abatement activities. Moreover, in the recent years the government has also provided subsidies for the farmers to build the water treatment ponds or the biogas digester pond.

The interview find that the pollution problem in the livestock farms have declined in the recent years because of the increased pollution abatement. An exception is the small-scale pig farms, which tend to concentrate near the river and the villages (see Table 12.1). Broiler and layer farms can also sell most of the manure, while the new dairy farms are expanding into areas with larger farmland area, which can absorb more pollution.

After controlling for factors affecting the investment in abatement activities, this study finds that the large broiler and dairy farms (measured in term of herd size) invest more in the pollution abatement activities per kilogram of output sold. That the large broiler farms invest more in pollution abatement is not surprising, given the pressure from the foreign consumers. But farm size is not statistically significant in the abatement cost function for swine and layer farms The results are not surprising because pork and eggs are mainly for domestic consumption and there has yet to be strong environmental pressure from the general public, despite the fact that there are frequent local complaints against pig farms that produce negative external effects. On the other hand, the instrumental variable for pollution abatement is not statistically significant in the profit frontier for both broiler and dairy. But the IV for pollution abatement is significantly positive for the swine profit frontier. It is not clear why the dairy farms that invest more in pollution abatement are more efficient since there is not pressure for the layer farms to invest in pollution abatement.

In conclusion, pollution is still the main problem for pig farms despite the fact that there are incentives and subsidy for farmers to invest in pollution abatement. The pollution problem of the broiler farms has drastically reduced because of the external pressure. Pollution from the layer farms is not serious as farmers can profitably sell chicken manure, but the nearly communities are still disturbed by the large number of flies. The dairy industry is the least polluting one as farmers can discharge pollution water and manure on their farmland, and new dairy farms are expanding in the districts which are land-abundant.

12.4 Food Safety

In general, food safety in Thailand has significantly increased and yet there are still needs for further improvement, particularly in the domestic market. There are still two tier markets for chicken meat; the first being the export market which is under heavy pressure from foreign demand to maintain high standard of food safety. The residual products which cannot be exported and have to be sold domestically have, therefore, high safety standards. But most meat from the non-exporting slaughterhouses and eggs sold in the domestic markets still lack the food safety standards as demanded by the foreign consumers. In the recent years, there begins to be a small but increasingly important segment of domestic market for chemical free meat. In addition, the foreign chain restaurants which maintain the same food safety standards worldwide and the giant foreign discount stores may be a driving force that impose strict food safety standards upon the food suppliers who, in turn, will demand that the products they buy from the farmers and slaughterhouse meet the standards. But whether or not the higher food safety standards create the non-level playing field for the small holders is still inconclusive. On the one hand, the large-scale farms and the integrator farms have easy access to the export and the high value domestic markets, which demand high food safety standards. The small contractees who adopt the same production process also have the equal access to such markets. On the other hands, other farmers who sell their products in the domestic market are not under pressure to maintain high safety standards in their production process Even the large dairy processing firms the buy raw milk from the cooperatives do not have incentive to check for chemical residue. The gray markets for dead animals are still active as they provide cheaper supplies of meat for the small food processors that compete fiercely on the price basis. However, in recent years, there are some groups of small farmers who form the cooperative and try to market meat with high food safety standards. They are pressured by the strong competition from the large-scale producers to look for the market niche for their survival.

There are four major factors that affect food safety in the livestock production. First, the livestock farms, particularly the small-scale farms that do not adopt strict disease control, are prone to some major diseases, e.g., pigs and dairy cows are subject to FMD; chicken subject to New Castle, and mastitis in dairy cows. In the recent years, most broiler and layer farms as well as large-scale commercial farms have adopted the strict disease control management which help reducing the mortality rate. But the problems remain largely because of the failure to control the smuggled cattle from neighboring countries. Secondly, there has been tendency among livestock growers to excessively use drugs, particularly anti-biotic. Salbutamol is also very popular among pig fattening farms because it helps improve the carcass quality, which commands higher price. Thirdly, there are alfa toxin residue found in milk due to the feeds problems. Finally, most operators of the small slaughterhouses, who are supposed to examine the diseases in the animals before slaughtering, fail to do so. In addition, the slaughtering process is also very unhygienic.

As a result of these problems, Thailand cannot export pork and eggs to the developed countries, which demand high food safety standards. For example, although Thai exporters can sell eggs to some developing countries, they cannot have access to the Japanese market, which requires that imported eggs must be bacteria free. On the other hand, Thailand could only export eggs to the Middle East only at loss because the world price of eggs is unrealistic low due to the subsidy of the European Union.

Except the inappropriate of pig and cattle slaughtering in the small traditional slaughterhouses, there is no visible evidence from our farm survey to indicate that the animal welfare is seriously compromised in both the industrial and small livestock farms.

12.5 Equity

This study finds that the livestock industrialization in Thailand has favored the large-scale farms, with the exception of dairy farms and the piglet farms. The number of small farms and their production share have significantly declined. The backyard farms, which are marginal farms, are probably the first casualties of the industrialization process. But this does not necessarily result in higher poverty among small farmers. Although they have to switch to other occupation with lower rate of return, they can buy cheaper meat and eggs. The net welfare effect is ambiguous, depending on the relative impacts of both factors. The available information from the household socio-economic survey shows that the percentage of poor livestock households has not only declined proportionately more than the percentage of poor agricultural households, but the former is also much lower than the latter (Table 2.5). Moreover, the Gini coefficient for the livestock households is lower than that for the agricultural households, indicating that income distribution among the livestock households is relatively more equitable. This information do not support the hypothesis that the scaling up of livestock production will lead to increased poverty incidence.

12.6 Policy Recommendations

Although the scaling-up livestock production is dictated by the economies of scale and technological progress, there is some room for the government intervention to help maintain the competitiveness of the small livestock holders.

First, the study finds that the small holders can be competitive, or even thrive, in the local retail market, particularly when they are able to organize themselves and make orderly marketing arrangement and take turn to provide stable supplies of meat. The higher retail prices can partially or completely offset the disadvantages of higher production costs. The government could promote the organization of the small holders in a form of cooperative, provided that the farmers are able to identify their own group leaders and that the farmers are strong enough to organize their own activities. Subsidy, if to be provided, should not be the main policy instrument because it can easily result in adverse incentive which attract farmers who do not have real intention to participate in the program.

Secondly, the government should get rid of the tariff quota for imported maize and soybean and adopt free trade (with minimal or zero tariff rates). Free trade in imported feeds will eliminate the distortions that are biased against the small holders.^[118]

Thirdly, there is some evidence that imperfect information about new technology has prevented some farmers to achieve the highest farm performance. For example, the commercial broiler farms, which use the fully equipped evaporated housings, have the feed conversion ratio of 1.75, while others, which adopt the adaptive evaporated housing can achieve the FCR of 1.97-2.04. Such finding means that the government can provide farmers with the examples of best practices for evaporated housing or other farm technology.

Fourthly, there is an urgent need to revise or to reform the environmental subsidy programs, which are not effective at reducing the externalities. New technology and cheaper methods of waste water treatment for small farms who have small plot of land have to be developed and tested on farm. The existing biogas digester treatment is not only too expensive even for the large-scale farmers, but the farmers also find it difficult to sell the electricity or gas produced from the project. Moreover, new appropriate economic instruments are also needed if the farmer's incentive to pollute is to be substantially reduced.

Although the small farms invest more in pollution abatement than large farms, they are highly concentrated near the community and near the river. Many farms have too small land area to build the water treatment ponds with necessary capacity. Therefore, there is a strong justification for a policy move these farms to a "pig estate" area. Such a policy requires a detailed analysis before the appropriate projects and incentives can be formulated.

Finally, reducing the excessive use of drugs and more effective disease control program are also necessary if the public health is to be improved and pork meat and eggs are to be exported. Proper training for the farmers on how to utilize drugs efficiently is very important. But the most important measure is to promote the role of consumer protection groups so that they can be the main drivers with strong countervailing power. Finally the government may provide some subsidies and slaughterhouse technology to the local pig/cattle slaughterhouses to upgrade their plant to the standards that can guarantee the minimum degree of food safety.

Table 12.1 (a) Prices, Costs and Other Characteristics of Broiler Farms (Broiler 170 obs)

* Investment in water treatment and biogas pond

Source: TDRI, Livestock Farm Survey, 2002

Table 12.1 (b) Prices, Costs, and Other Characteristics of Fattening Farms (Fattening 92 obs)

* Investment in water treatment and biogas pond source: TDRI, Livestock Farm Survey, 2002

Table 12.1 ( c ) Prices, Costs and Other Characteristics of Piglet Farms (Piglet 54 obs)

*Investment in water treatment and biogas pond
Source: TDRI, Livestock Farm Survey, 2002

Table 12.1 (d) Prices, Costs and Other Characteristics of Dairy Cow Farms

* Investment in water treatment and biogas pond
Source: TDRI, Livestock Farm Survey, 2002

Table 12.1 (e) Prices, Costs, and Other Characteristics of Layer Farms

Source: TDRI, Livestock Farm Survey, 2002

Table 12.2 Actual Profit and Technical Efficiency (TE) By Farm Size

(Baht per kg. and Proportion)