Research Report No. 151Among all sectors in the Philippine agricultural economy, livestock exhibited the fastest and most consistent growth (4.6 percent on average per year) in the 1990s and well into the twenty-first century, steadily increasing its share of contribution to gross value added in agriculture from 18 percent in 1990 to 24 percent by 2003. The expansion of the industry has been propelled mainly by growth in domestic demand for meat in general, and for pork in particular, fueled by a still-rapid population growth, increased urbanization, and modest improvements in per capita income, particularly in the national capital and in major urban centers in the provinces around the Metropolitan Manila area.
Pig production is the largest contributor to meat output in the Philippines. It is also an economic activity in which smallholders still dominate, accounting for close to 80 percent of total pig inventories. The strong growth in demand for pork presents a potential for increasing income opportunities, and therefore for poverty alleviation among rural and agricultural households in the Philippines, where rural poverty incidence for families remains high at 40.3 percent. In the two major hog-producing regions of Southern and Central Luzon adjacent to the national capital, however, the observed trends depict a more rapid decline in the share of smallholder pig producers in regional output, such that by 2003, smallholders held the minority share. In these two regions, although the number of registered commercial pig farms significantly increased, the number of farms raising pigs declined between the 1990s and 2000s. These numbers suggest a scaling up of larger farms and a displacement of smaller ones.
The more rapid growth in larger commercial farms is not solely premised on the existence of economies of scale in production but is attributed, in large part, to the commercial sector being able to escape or at least overcome transaction costs that cannot be handled as easily by small producers. In addition, the cost advantage of large farms over small ones is also hypothesized to stem from their ability to access privileged prices of crucial inputs that are linked to policy subsidies.
On the demand side of the meat industry, consuming households in the metropolis and in the major urbanizing centers in the two regions, with their higher incomes and purchasing power, are not only increasing their consumption of meat but also their demand for quality, convenience, and greater product differentiation. On the supply side, large meat products companies are vertically integrating pig-production operations; exercising control over their own breeding farms, feed formulation, and animal health services; and establishing Hazard Analysis and Critical Control Point-compatible slaughtering and processing plants. They are also producing differentiated meat cuts and meat products, packaging them in convenient forms, and establishing their own brands. In the regulatory scene, the government's National Meat Inspection Service is strengthening monitoring, inspection, and grading functions on the sanitary conditions of all slaughterhouses, public and private, for local, national, and international trade in meat. These changing market forces, compounded by structural factors and the policy environment, pose a serious challenge to the continued survival of smallholder pig producers.
The poverty implications of the displacement of smallholders in the market raise important social questions. This report attempts to respond to these questions by investigating empirical evidence about the scale and access issues that affect smallholders. The study employs two methods to quantify the contributions of market forces and policies affecting the scale of livestock-production operations. Then it relates each contribution to measures that can be taken to overcome transaction cost barriers and policy distortions faced by smallholders that tend to ease them out of mainstream markets for their output and consign them to marginal ones.
Chapter 1 provides the background of the study, states the objectives, and lays down the scale issues related to competitiveness in markets for livestock that are to be investigated. The chapter breaks down the objectives into three main questions on: (1) whether small pig-producing farms can compete with large farms; (2) the role of transaction cost barriers in smallholder participation and performance in hog production; and (3) redressing transaction cost barriers if these barriers affect small and large farms differentially.
Chapter 2 lays out the two approaches that the study uses in investigating the role of transaction costs in economic activities. The first is a direct approach through a market participation model. The second is an indirect approach through the estimation of an efficiency model. A brief review of the literature on these approaches is provided. The market participation model assesses the roles of household characteristics and factors outside the household in determining participation in pig production and the level of market participation. The profit-efficiency model assesses farm-level differences in efficiency in generating profits from a given level of resources, input and output prices in terms of differences in transaction costs, and policy subsidies across the scale of operations studied (from small, backyard-level to medium-scale farms).
Chapter 3 focuses on the determinants of participation by households in the economic activity of pig production. It begins by providing a brief description of the Southern Tagalog region and the subregion consisting of Cavite, Laguna, Batangas, Rizal, and Quezon provinces (CALABARZON), where the study was undertaken. The investigation draws on field data collected in 2000-2001 from three cities in the two major pig-producing provinces in the region. Household-level data were obtained from a sample of 144 pig-producing households and 141 households not producing livestock, randomly picked from identified pig-producing villages.1 A probit market-participation model was estimated and results were analyzed to explain why some households engage in pig production whereas others do not. Among the significant factors that influenced the decision of households to participate in pig production were the availability of household resources, particularly family labor, and the opportunity costs of the household head and spouse in engaging in pig production, a labor-intensive economic activity. Households with more members of working age tended to participate, whereas those with household heads or spouses that were government or private sector employees tended not to be engaged in pig production. The decision to participate was also influenced by the capacity of the households to deal with fixed transaction costs related to access to financial resources for engaging in the activity and to negotiations involved in a market-oriented activity. The results of the Heckman two-step selection model reveal that the price of slaughter hogs and the access to market outlets that are not limited to the confines of the village are significant factors that influenced the household's level of participation in pig production.
Chapter 4 focuses on the pig-producing households, further disaggregated into independent and contract producers. The chapter compares independent and contract farms in terms of the types of production activities engaged in and access to information and credit, feeds and growing or breeding stock, animal health services, and markets for inputs and outputs.
Most contract growers tended to specialize in fattening pigs to slaughter hogs. In contrast, independent producers tended to combine the production of weaners (piglets) with slaughter hogs or specialized in weaner piglet production. Both independent and contract producers were highly market oriented, although in varying intensities, from purchasing mixed feeds and growing or breeding stock, to selling output to various outlets.
Smallholders were grouped into size quintiles according to the level of their annualized outputs. The levels of activity covered a wide range. Those belonging to the lowest quintile produced very small volumes of output (averaging 315 kilograms per year). Mean output was equivalent to approximately five slaughter hogs per year, or about 20 piglets per year, in one or two batches. Producers in the third quintile produced about six times as much as the first, whereas those in the last quintile produced about 200 slaughter hogs per year, 40 times more than the average production per farm of the first quintile.
In general, contract growers in the sample operated at significantly higher levels of activity than did independents, with the majority of them falling in the fourth and fifth size quintiles. Even so, they are still rightfully classified as smallholder producers engaged in a nonformal enterprise, having very similar household characteristics to the independent smallholder sample except for the number of animals kept. The two groups mainly use unpaid household labor (rarely employing hired labor) and have similar nonlivestock sector resources. Contract growers exhibited better access to quality feeds and stock, feed credit, veterinary health services, and credit for expansion purposes. Contract growers also had better access to markets for slaughter hogs, even if their location relative to that of independent producers was at a greater distance from Metropolitan Manila, the main market for live hogs. The advantage of contract growers in the market relative to independents can be traced to the former's integration into a formal institution—a feedmilling and multipurpose cooperative—for the production and marketing of their output. Because of the interesting and innovative features of the contract growing scheme, which helped smallholder pig producers overcome transaction cost barriers through access of information, technology, and markets, an Appendix to this report describes in greater detail the institutional arrangements that smallholders had with their multipurpose cooperative.
Chapter 5 compares farm profits per unit of output of smallholder pig producers, according to scale of production, grouped ex post into quintiles. Smallholders specializing in the production of weaners were excluded from the quintile grouping and treated as a separate sample. Profits were computed with and without imputing the costs of family labor at market wage rates. The results showed that when family labor was not costed, the group of pig producers in lowest quintile had the lowest profit performance. Progressing from the smallest to the largest farms, profit performance sharply rises from the first to the second quintile, gradually falls to the fourth quintile, and then moves up again at the last quintile. When family labor was imputed a cost using the minimum rate for agricultural wage workers, the smallholders in the lowest quintile were the worst performers, with their profits almost disappearing. The profit performance follows a similar pattern when family labor was not costed. Thus, smallholders making up the first quintile would not likely survive under conditions of increasing competition. The smallholders in the next two quintiles of smaller farms performed relatively well, even managing to post nominally higher profit per unit of output than did larger farms when family labor was not costed. Even when family labor was costed, these groups of smaller farms still, on average, registered profits per unit of output that were comparable to those earned by larger farms. This group of smaller farms have a decent chance of competing with larger farms.
The profit performance of independent farms was also compared with that of contract growers. When no cost is put on family labor, there was no significant difference in the mean performance between the two groups. When labor cost was imputed, however, independent producers performed significantly worse on average than did contract growers. The cost of family labor thus mattered more to the relative competitiveness of independent producers than to that of contract growers. This result mainly stemmed from the larger scale of operations of contract growers compared to that of independents.
Chapter 5 also presents the estimates of the profit efficiency of smallholder farms and the factors contributing to their inefficiency. In general, the pattern of relative efficiency followed the pattern of profit per unit of output for the quintiles. The smallest farms were the least efficient in generating profits, given their resources and prices of inputs and outputs. This group of producers is not in a position to compete in the market.
The frontier estimation results presented in Chapter 5 showed that the prices of slaughter hogs, feeds, and growing stock were significant determinants of profit performance. Profit per unit of output was most sensitive to the price of feed. Access to reliable feed was the most crucial factor in reducing inefficiency, followed by the existence of other income sources of the household head. When the sample of smallholder producers was bisected by farm size to explain the differences in profit inefficiencies, transaction cost barriers linked to the access to feeds of known quality and access to veterinary services had significant effects on the efficiency of the group of smaller farms, but not to the group of larger producers.
The last chapter of the report (Chapter 6) is devoted to the policy implications derived from the results of the study. It summarizes the conditions under which smallholders can reasonably be expected to compete with larger, more commercially oriented farms for some time, at least under the current level and nature of market demand.2 The study concludes that the segment of smallholder producers with the smallest holdings of pigs (fewer than 10 slaughter hogs per year) will likely not survive market competition for much longer, by virtue of their relative profit inefficiency and their very low profit performance relative to the rest. Furthermore, their very low levels of output will not allow them to continue to make a living from this activity. Exit for this group may not be immediate but is likely to be inevitable. Public policy in this case might focus on alternative schemes for poverty alleviation for this group, particularly those directed at improving the human capital of households to allow them to be more easily absorbed in lucrative nonfarm employment, as well as toward improving the environment in which business enterprises can flourish.
Apart from the group with very low levels of operation, many smallholders, even those with quite modest levels of output (20-40 slaughter hogs per year) are quite competitive: they can be as efficient as the larger farms in earning profits from pig production, even when the opportunity cost of family labor is considered. Even so, the smaller producers bear with greater difficulty the adverse effects of transaction costs barriers than do larger producers.
Participation in market-oriented livestock production is more likely by households with lower opportunity costs of labor, but barriers exist for those that have little access to capital and financial resources to start the activity. Policy interventions to enhance participation among such households could be directed at improving the business investment climate and institutional environment for commercial enterprises with resources and technological expertise in livestock production (nutrition, breeding, and animal health). These commercial enterprises would then find it profitable to invest in smallholder producers, financing the intermediate input requirements, while taking advantage of the willingness of households to engage in livestock production at wages that are below legislated or market wages.
This study found that access to feeds of known quality and access to veterinary services were critical transaction cost barriers to smaller producers but not to larger farms in determining profit efficiency and thus competitiveness. Hence, a policy addressing these issues can improve the performance and viability of smallholder pig producers in general. To improve information on feed quality, government can devise simple and clear rules on feed and feed ingredient labeling, accompanied by straightforward methods of spot-checking and proper enforcement. This practice can be combined with measures that facilitate vertical coordination schemes between firms engaged in commercial feed and/or livestock production for highervalue markets and smallholders with pig-raising expertise and facilities.
Among the variables hypothesized to affect profit efficiency, the price of feed has the strongest significant effect on profit performance of the smallholder producers. Thus feed pricing policy would have an important impact on the competitiveness of pig production in general and the viability of smallholder pig production in particular. At present, the domestic feedgrains industry is protected by relatively high tariff rates from import competition (35 percent for in-quota, and 50 percent for out-quota import levels), aimed at protecting domestically produced corn. The livelihoods of smallholder farmers throughout the country, of which more than 40 percent are raising pigs, are adversely affected by a feedgrains policy distortion that is purportedly pro-poor. Hence, removal of such protective restrictions on feedgrains will undoubtedly boost the livestock sector in general. Finally, this policy needs to be complemented with cost-effective measures in producing corn at the farm level and improved transport and distribution infrastructures at the marketing level to improve efficiency in the domestic corn industry.