Research Report No. 157The research underlying this report investigated factors affecting the scaling-up of selected livestock products in Brazil, India, the Philippines, and Thailand, with particular attention directed at understanding issues affecting small-scale producers.1 Scaling-up is defined here as growth in the average size of farm in terms of annual livestock sales. The urgency of the topic is driven by the fact that livestock are among the few commodities that smallholder farmers widely produce that are growing rapidly in demand, and thus the interest for poverty alleviation is strong. However, there are signs that smallholders may ultimately be displaced from this source of livelihood by competition from larger-scale farms. Furthermore, the rapid growth in production of pigs and poultry has also been associated with significant environmental problems in the zones of most rapid growth. The interactions between overall growth in production, size of farms, and sustainability are crucial to rural poverty alleviation in a sustainable manner.
Therefore, the objectives of the research were to assess whether the market share of large farms is growing relative to small farms and, if so, why. The analysis is directed primarily toward the issues of efficiency in production and its determinants, but also deals with the unit costs of inputs received and the unit prices for outputs obtained. The study specifically does not investigate the likely existence of economies of scale in output marketing, which are anecdotally thought to be large and will over time largely work to the disadvantage of independent (nonintegrated) farmers, especially small-scale ones. This important topic is deferred to a different study on contract farming in poultry and dairy using different data and approaches.
The research was pursued by setting up models and collecting farm-level data to test the following hypotheses:
- Small-scale producers have profits per unit of output that are higher than or equal to those of large producers.
- Small-scale producers are more efficient users of farm resources to secure profits than are large producers, other things equal.
- Small farmers expend a greater amount of effort or investment in abatement of negative environmental externalities per unit of output than do large farmers.
- Uncompensated negative environmental externalities favor the nominal profit efficiency of large farms over small ones, ceteris paribus.
- Profits of small producers are more sensitive to "transaction costs" than are those of large-scale producers.
- Contract farmers are more profit-efficient than independent farmers at comparable scales of operation.
Chapter 2 looks at evidence of growth and concentration of the livestock sector and establishes that scaling-up in livestock production is in fact occurring in all four countries studied. It suggests that production in the 1980s and 1990s tended to concentrate around capital cities and other major demand centers with the exception of Brazil. Since the late 1990s, larger-scale farms have been increasingly locating in remoter areas farther away from population centers, disease, and environmental challenges. Smallholder output continues to grow at high rates in certain cases, such as that of dairy farmers in India and swine producers in the Philippines, but the output from large-scale enterprises is growing even more rapidly, taking market share away from smallholders. This is particularly relevant in Brazil and Thailand, where there are relatively small numbers of small-scale producers left in the broiler business and the role of smallholders in both dairy farming and swine production is shrinking in relative terms. The question, then, is whether large-scale livestock production will outcompete that of smallholder producers everywhere and eventually provoke their exit from the sector.
To analyze the scaling-up of livestock production, Chapter 3 defines a quantitative measure of relative farm competitiveness in production based on the use of stochastic profit frontiers estimated for each country and commodity, with technical inefficiency effects included, following the approach of Battese and Coelli (1995). It looks at factors that differ across farms that might explain higher relative competitiveness of specific farms. These factors include the usual determinants of profit efficiency, such as prices faced by the farm and fixed farm resources not traded in markets, asymmetries in access to assets (credit, liquidity, fixed capital) and information (education, experience, communication facilities), externalities (some farmers get away with uncompensated pollution, while others do not), and policies (some get a better deal from the state than do others). Chapter 4 describes field surveys that were conducted on cross-sections of farms of different sizes (small-scale, medium-scale, and large-scale or commercial) and type of production arrangement (independent and contract).
Chapter 5 summarizes the descriptive results of the survey and seeks to establish through descriptive statistics scale-related differences in farm-specific transaction costs, such as access to information and input and output markets, to direct further analytical work on explaining farm profit per unit of output. Results show that small-scale producers across the countries studied are characterized by small landholdings, low levels of education, few years of experience in livestock production, moderate use of inputs, and limited access to input and output markets. Large-scale farm households, therefore, may have a better chance of overcoming high transaction costs than do small-scale producers. On the other hand, smallholders have a chance to compete with larger-scale producers if they can cost family labor at less than the full opportunity cost of hired labor doing the same tasks on larger farms, perhaps because much of the labor on small farms consists of extra tasks performed by women or children who are at home for other reasons. The study does not claim that the opportunity cost of family labor is zero, but it repeats the relevant calculations with family labor costed either at full market wage rates or not at all, with the correct answer postulated to fall somewhere in the resulting range between the two.
Chapter 6 first discusses the likely impact of scaling-up of livestock production on the environment, then investigates the issue of whether large-scale sample farms make less of an effort per unit of output to mitigate pollution through expenditures on lagoons, manure spreading on farm land, and other mitigation activities than do small-scale sample farms in the study countries. If so, by hypothesis they would be polluting more per unit of output than are small farms, assuming that each unit of output produces the same effluent regardless of production system. Results show that across countries and commodities, small-scale farms have higher environmental mitigation “expenditures” per unit of output than large-scale farms. The exceptions are poultry farmers in Thailand, where large-scale operations in the densely settled export-certified zone spend more per unit than smaller farms, and dairy farmers in Thailand, where the larger-scale farmers have more crop land per animal than do the smaller-scale farmers in the sample. Results are backed up by a second, more conventional procedure that estimates mass balances of nutrients per hectare added to farm soils on different farms. Again, it is shown that large farms load more excess nutrients per hectare of land than do small farms, suggesting that in fact large farms benefit from a higher uncompensated environmental externality per unit of output than do small farms, giving them a distorted cost advantage.
Chapter 7 reports the econometric evidence from stochastic profit frontier analysis using the Battese-Coelli (1995) approach to technical inefficiencies on why some farms are relatively more profit-efficient than others at making farm profits from livestock. Chapter 8 then ties these results together with the preceding descriptive analysis. The main findings are as follows:
- Independent small farms in India and the Philippines typically have higher profits per unit than do independent large farms, but this is not the case for large and small contract farms. On the other hand, large independent farms are relatively more profit-efficient than small independents almost everywhere, suggesting that over time they will continue to outcompete smallholders and gain further market share. India, where most farms are small and dairy dominates, is a notable exception.
- In Brazil and Thailand in particular, where scaling-up has already occurred to a large extent in monogastrics,2 the outlook for independent smallholder producers of the items studied is not rosy. In the Philippines, there is considerable scope on economic grounds for the improvement of smallholder farming through vertical coordination of those farms that are presently a little larger than the bottom 20 percent of the size distribution of farms, especially for swine producers.
- Small farms have less of a negative impact on the environment than do large farms. Hence, environmental concerns are compatible with promoting small-scale livestock production. Large farms that are more environmentally responsible are also more competitive within the class of large farms (particularly Philippine broiler and swine farms). Efficient large-scale production is compatible with good environmental behavior, although it seems likely that both are correlated with some third factor, such as the chicken and swine inventory held on-farm or the ability to sell manure produced on-farm. It seems plausible that over time enforcement of environmental regulations will be more similar to enforcement of health regulations, and all producers will be forced to bear the same costs regardless of size. While a level environmental playing field will probably benefit small farms more than large ones, it will not by itself reverse the profit-efficiency advantage of large farms over small ones.
- Beyond maximizing the use of (assumed) lower-opportunity-cost family labor, the relative competitiveness of smallholders is largely determined by farm-specific abilities to overcome barriers to information and assets, such as credit and market information. Therefore, a possible key to pro-poor livestock development is institutional development that overcomes the disproportionately high transaction costs that smallholders face in securing quality inputs and getting market recognition for quality outputs. This is also in line with the finding that as markets gravitate to higher-end concerns of quality, safety, and reliability of supply, smallholders will have to be associated with institutions that can supply the technology, inputs, information, and accreditation necessary for competing in higher-value markets.
- Contract farmers have higher profits per unit of output than do independent farmers in some but not all cases, and they tend to be more profit-efficient than independent farmers at all scales (except for small swine farms in the Philippines). Therefore, contract farming has real potential to better help incorporate smallholders in high-value supply chains that require specialized inputs and sell to markets for specialized outputs. However, the country studies reveal that contract farming covers a multitude of arrangements, some of which are more beneficial to smallholders than others.
- Contract farming is shown to be even more useful in improving the competitiveness of large farms than in improving that of small ones. From the integrator standpoint, there are also likely to be cost savings in dealing with a few large farms than in dealing with lots of small ones. Therefore, the policy environment for contracting will be especially important to its usefulness as a tool for poverty alleviation.
Overall, the study concludes that in many cases smallholders other than the smallest backyard producers will be able to stay in the livestock business for a long time. However, if the opportunity cost of family labor rises and begins to approach local market wage rates, as is beginning to happen in periurban areas of China, for example, much of the competitiveness of smallholder operations vis-à-vis large farms will be vitiated. Furthermore, emerging disease threats and environmental backlash suggest that the future of large and small producers will sink or rise together in a context of growing demand and the ability to act collectively to deal with emerging threats. Finding ways to increase synergies between the two groups is very much in the social interest. Finally, there is reason to believe that there are significant economies of scale in livestock product distribution as supply chains become longer, wider, and more anonymous, although this is not investigated in the present study. If so, the future for independent livestock farmers, whether large or small, will eventually depend on the options for integration with input supply and output marketing operations, which must necessarily be the subject of a different study.
1. The commodity samples are: Brazil—broilers, eggs, swine, and milk; India—broilers, eggs, and milk; the Philippines—broilers and swine; and Thailand—broilers, swine, eggs, and milk. [Back]
2. Monogastrics are animals with one stomach compartment; examples are pigs and poultry. [Back]