Livestock Industrialization in...

Livestock Industrialization in Asia : Growth, Scaling-up, Competitiveness

and Outlook for Smallholders

Nipon PoapongsakornThailand Development Research Institute

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A Keynote Speech at the Regional Policy Forum on Asian Livestock Challenges, Opportunities and Response Organized by FAO, APHCA and ILRI.

16 August 2012. Royal Orchid Sheraton, Bangkok

1.Livestock industrialization in Asia : growth and concentration

• Livestock sector provided the strongest sources of growth in Asia after the Asian crisis in 1998 and Avian Flu in 2004– Poultry meat and eggs have been at the

forefront of livestock production growth in Philippines

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• Growth of livestock production in Thailand – Production of broiler went from 0.47 mil tone in 1983

to 1.2 mil tons in 2001 or about 22 mil chicken per week. It dropped to 15 mil during HPAI outbreaks and surges to 24.5 mil birds in 2011

– Swine production increased by 5 % ; eggs by 4.7% and milk by 13.2 % during the 1980-2009 period

– Stock of layers is now 40-45 million birds, comparing to 35-36 mil birds before the liberalization of import of parent stock in 2010

– Standing stock of sows is 0.8 million sows in 2011, with production of fattening pigs of 12-13 million pigs per year in the last few years, thanks to the constant trend of consumption

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1. Livestock industrialization in Asia : growth and concentration

Production crop and livestock growth rate (in volume) in world and Asia,1980‐2009

Product World Asia China India Philippines Thailand

Cereals 1.34 2.00 1.35 2.02 2.50 1.97

Fruit 2.43 4.60 9.52 4.08 2.28 2.02

Vegetables 4.05 5.55 7.86 3.10 1.78 2.02

Cattle 1.00 5.28 12.46 0.26 4.58 -0.51

Milk 1.24 4.48 8.85 4.14 -4.92 13.17

Pork 2.53 4.72 5.02 1.22 5.32 5.04

Poultry 4.64 6.72 9.11 9.30 5.20 4.48

Source : Calculated from data in the FAO Statistics Database. Notes : "Poultry" includes chicken,duck,and turkey meat and "Milk" excluding Butter and "Fruit"excluding Melons

Consumption crop and livestock growth rate(in volume) in world and Asia,1980‐2009

Product World Asia China India Philippines Thailand

Cereals 1.42 -1.55 0.04 1.34 2.91 2.80

Fruit 3.05 4.58 8.10 4.20 1.90 2.83

Vegetables 4.04 5.36 7.23 3.28 1.56 2.46

Fish 3.04 4.39 5.59 3.62 2.16 1.76

Cattle 1.01 4.57 7.87 -0.45 6.41 -5.13

Milk 1.78 4.09 10.33 3.35 -0.03 3.00

Pork 2.56 4.88 3.60 -0.73 4.27 5.24

Poultry 4.63 6.92 7.03 7.12 6.28 0.52

Source : Calculated from data in the FAO Statistics Database. Notes : "Poultry" includes chicken,duck,and turkey meat and "Milk" excluding Butter and "Fruit"excluding Melons

• Scaling-up of livestock production has become apparent in the developing Asia after the introduction of modern livestock some 30 years ago– In developing Asia, livestock

industrialization first took place in East Asia, particularly Taiwan, them in Thailand in the 1975-78 period, and other countries in 1980’s and 1990’s

– Scaling up of livestock production in Thailand

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• Farm size has increased dramatically in all subsectors of the livestock industry almost every where

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Thailand – Chicken Farm Sizes

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Percentage Share in no. of chickens Percentage Share in Number of holding

Source: NSO, Agricultural censal and intercensal survey.

Thailand – Swine Farm Sizes

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Percentage Share in no. of swine Percentage Share in Number of holding


Thailand - Dairy Farm Sizes

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Percentage Share in no. of dairy cow Percentage Share in Number of holding


• In Thailand average farm size for broiler farms is 10,000 birds per house, while the corporate farm size will be 20,000-100,000 broilers.

• The broiler industry has been completely dominated by a dozen vertically integrated companies, 3 of which are dominant oligopolists

• Integrators control 60-70 % of the layer industry • There are now 22 importers day old chicks

comparing to 9 importers when there was 9 monopolized Egg Board

• Average swine farm size for contract farmers is 300 sows, up from 100 sows in the early 2000 because integrators have to minimize their transaction costs

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Thailand •The swine sector is still dominated by independent growers, many of which have very large modern farm with full cycle of production, thanks to the imported pure line from Europe and the extension services and breeding improvement by Kasetsart University•The dairy industry is still dominated by small and medium-scale growers who form the cooperatives at the district level, with average farm size of more than 50 cows in 2008

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• Commercial farms in the Philippines– In the Philippines, large integrators

control some 80% of broiler market– Though the Philippines hog sector is less

concentrated than the broiler sector, the large-scale vertically integrated farms have become more important particularly in a higher value modern retail market

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• India has also participated in the global livestock revolution through the rapid growth in the production and consumption of milk, eggs and poultry mect– Production of eggs are broiler grew faster than

the production of crops– Increase in poultry farm size has also been

observed. Now units with 5,000-50,000 birds pec cycle are common both for broiler and layer farms, thanks to the role foreign MNC

– But milk production is still dominated by small holders and cooperatives, thanks to the cultural significance in the Indian diet, and heavy regulation and high level of protection

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• China has also seen an enormous increase in production of poultry meat and eggs in the last 2 decades through a combination of larger farm and higher productivity per bird– Large scale commercial farms with

annual production of 10,000 birds now account for 30-50 % of production

– The commercial broiler market is now dominated by large, integrated companies

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2. What are the key drivers of Asian livestock industrialization ?

• Livestock growth in China– Between 1985 and 2005, some 70 million

small poultry growers left the sector– Though there are still more than 34

million rural households who keep backyard poultry, they play marginal role in meeting the increasing market demand

– Livestock is becoming less important as a source of income for small-scale farmers

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– Five factors : three of which are at macro level

MarketTechnological changeInstitutional change : contract farming and vertical coordination Policy distortions/supportTransaction costs arising from asymmetric information

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• In most Asian countries, the livestock revolution has been driven by the growth of domestic demand, thanks to the sustained economic growth in the last 3-5 decades and the introduction of foreign technology in broiler production (more discussion below)

• A recent study (Pica, Pica-Ciamarra and Otte 2008) shows that livestock sector productivity growth (supply side) can also lead to GDP growth, thanks to the large backward and forward linkages– In some countries, the causality is both way

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• Livestock revolution in Thailand is attributed to a combination of 3 factors, export market, technology and contractual arrangement

• The Thai poultry revolution began with the introduction of modern poultry farm by CP which saw the export opportunity in Japan– It applied for the investment privilege to

establish the first chicken export processing plant

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– The BOI law allowed CP to by-pass the domestic law requiring that all slaughterhouses were owned by the local governments

– But such export opportunity would not be realized without the imported technology from Arbor Acres, which drastically increased the broiler productivity

– Imported technology came in the form of imported breeds, improved feeds and medicine.

– An econometric study by clare Narrod of IFPRI finds that imported technology is one of the most important factor explaining the high productivity of poultry in 24 countries

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– Yet to capture the economic rent from technology CP had to introduce a contract with farmers which required them to buy day-old chicks, modern efficient feeds as well as animal drugs from CP

– To attract farmers to enter into the contract farming, CP introduced the price-guarantee and wage contracts which substantially reduced the price risks for the farmers. The contract was the copy of the one used by Arbor Acres in USA.

– Farmers under the contract also have access to credit from the commercial banks

– Following the success of CP, other integrators have entered into the poultry industry, thus creating the competitive poultry industry, with CP being the largest player at every stage of the supply chain, except the export of fresh chicken

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• A few observations – Most contract farms in the 1980s were

smallholders thanks to plentiful family labor and land ownership of smallholders which are used as the collateral for loan

– Note that there was almost no government regulation of the contract farming. Yet smallholders were not unfairly treated because of the competition among integrators

– CP later on went on the transfer the poultry technology through FDI in Vietnam, Indonesia, China , Cambodia and Laos, etc.

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• The development of swine industry in Thailand has occurred much later, i.e., around 1990s, thanks to the expansion of domestic demand caused by the rising per capita income– But there are 2 major factors limiting its

growth, i.e., the slaughter house law and the difficulty of controlling FMD

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• The success of the dairy industry is attributed to the long-term government support and high wall of tariff and non-tariff protection– The government support includes free land

allocation for poor farmers, access to cheap long-term credit and veterinarian services, etc

– As in the case of pigs and eggs, the rapid growth of the dairy industry is attributed to the rise in pre capita income and the school milk campaign

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• The expansion of poultry production in most Asian countries has also been caused by the same drivers, i.e, rising percapita income together with the introduction of foreign technology and the government support– In India, a joint venture between a local

company and Cobb introduced imported grand parent stock to produce pure line parent stock in 1980

– The dairy industry in India has been supported and highly protected as in a case of Thailand

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• In China, besides the increasing per capita income, agricultural reform, dramatic improvements in transport infrastructure have facilitated the rapid intensification of the poultry sector

• It was CP who first introduced the modern broiler farms and established the animal feed factories in china, thanks to its closed relationship with the Chinese leaders

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3. What is the competitiveness of small-scale producers ?

• I will discuss some major findings from the IFPRI-FAO study on Determinants and Implications of the Growing Scale of Livestock Farms in 4 countries

• Competitiveness of smallholders– A study by Delgado, Narrod and Tiongco (2008)

finds that smallholders typically have higher profit per unit of output than do large-scale producers, with or without labor cost

– So smallholders have a chance to compete with large-scale producers

– But higher profit is only a necessary condition for survival of smallholders

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Average profit of dairy farm-India

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Rupees/liter

3. Is there a future for small-scale producers ?

Average Profit of dairy farm-Thailand (with labor cost)

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Rupees/liter


Average Profit for broiler-independent farm

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India PhilippinesRupees/kg Pess/kg


Average profit per egg

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India ThailandRupees/kg Baht/kg


Average profit per kg live weight of swine output

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Philippines‐independent Philippines‐contractRupees/kg Rupees/kg


Average profit per kg live weight of swine output

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Thailand ‐ independent Thailand‐contractRupees/kg Rupees/kg


• A sufficient condition for smallholders to survive is their ability to use their farm resources more efficiently than the large-scale producers – The study employs the stochastic profit

frontier to explain the relative inefficiency– Bad news for smallholders: the results

supports the view that small farms are less efficient at securing profits than large farms

– Relative efficiency is fairly static in the medium farm size, and rises again only with much larger sizes of operation

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– Only one case shows larger profit efficiency for the smallholders, i.e., the small independent swine farmers in the Philippines

– But there is some hope : The overall results for swine in Brazil and Thailand poultry in Thailand, broilers in India and milk in India and Thailand show that efficiency advantage of smallholders increases substantially when going from the “small backyard producers” to the “small commercial farms”

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Broiler farm ‐ ThailandRupees/kg Rupees/kg

Mean relative efficiency of broiler farms

Broiler farm ‐ India

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Thailand%

LayerIndia%

Swine-Weaners in Thailand

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%

• So there appears to be significant profit-efficiency gains in going from finishing 15-20 piglets a year as in the backyard case, to finishing 150-200 as in the small commercial holders (with 8-10 sows)

• Policy implications : a viable route in Asia is the technology and institutional development targeted at improving swine smallholders– Yet other conditions are also important, e.g.,

availability of farm labor39


• The second important finding is that contract farms are more efficient than independent farms (except the small-scale swine producers in the Philippines)– So contract farming and cooperatives (which

are a form of contract farming) seems to improve farm efficiency by reducing transaction costs faced by smallholders

– This is because capital costs and risks are shared by integrators

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Efficiency of contract VS independent farms

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%

4. What are the outlook and challenge for smallholders?

• Third finding: Why are some farms more efficient at making profits than others ?– Delgado-Narrod-Tiongco discusses 2

important factors, i.e., the role of environmental externalities, transaction costs (or asymmetries in information)

– I’m not going to discuss the issue of environmental mitigation effort here

– The main conclusion is that the transaction costs matter most to small producers, especially access to various sources of market information (i.e., a cell phone, education, experience) and access to credit

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– Yet the impact of transaction costs differed across the countries and sectors studied, e.g.,

– (a) The farm specific differences in transaction cost proxy variables did little to explain differences across farms in relative profit efficiency, i.e., smallholders’ profits are more sensitive to transaction costs than those of large farmers

– (b) Transaction costs play much more role in the production of monogastrics where timing of sale is more discretionary and quality inputs is critical to quality of output

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• Smallholders still have a better chance in milk production in the countries where scaling up has not progressed to the point as it already has in Brazil &Thailand

• Though the large dairy farms have higher profit efficiency, the smallholders still have a good chance in milk production, thanks to the advantage of family labor and the nature of care intensive dairy farm, and the coordination role of cooperatives. Note that milk cooperatives are successful largely because of the perishability nature of milk which forces the smallholders to form cooperatives

• Yet it is likely that the 1-5 cow dairy farms will grow in size to the 10-30 cow farms as already happened in India & Thailand 44

• Evidence from the Philippines show that smallholders are more competitive in the informal local market than large scale farmers – Since markets tend to gravitate to higher end

concerns of quality, small holders will need to be associated with institution that can supply technology, information and accreditation necessary for them to compete in higher value market

– In Thailand, the small independent weaner farms are reasonably efficient and can survive in the local markets, thanks to the effort of family labor

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• Contract farms are more profit-efficient than independent farms at comparable scales because contract farming reduces transaction costs for farmers– That is why the broiler industry in Thailand

& Brazil is now almost completely dominated by integrators

– The scaling up process will continue because the integrators have incentive to contract only a few large farms

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– Therefore, it is likely that monogastric livestock development will continue to see increasing vertical coordination to overcome the high transaction costs faced by farmers in securing low-cost quality inputs on credit and achieving market recognition for quality outputs and animal welfare

– But it is possible that in some areas with small market and plentiful family labor, the small contract farms may survive

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5. Concern and policy implications• The main concern is that the forces

promoting the scaling-up of livestock production may drive small producers out of business– Evidences in Thailand and China show that

number of smallholders has significantly declined

– But the good news is that livestock income distribution across farms become more equitable in Thailand. Those remained in business successfully improved their competitiveness

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Share of poor farm households in agriculture and livestock

Note : 1986‐99 definition of livestock occupation is livestock workers, dairy farm workers and poultry farm workers2000 definition livestock occupation is market‐oriented animal producers and related workers2006‐09 definition livestock occupation is type of farm operation livestock, poultry and other animal farming

Source : Calculated from National Statistical Office, Socio‐economic Survey data tape

% Poor livestock/livestockPoor agri./agriculture % livestock/agriculture

5. Concern and Policy Implications (cont.)

• The issue is not whether such displacement will occur, but whether it is being sped up artificially by policy distortions– A number of contract farmers in Thailand

have complained that they were asked by the contractors to put more investment to improve their farm.

– The integrators explain that they are following the government policy of bio-safety farm which requires more investment.

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Three Policy Implications• A need for research on viable technology on food

safety with the minimum scale that allows smallholders to survive, let alone thrive

• For smallholders to stay involved with the fast-growing demand for safe food and quality products, they need to meet the evolving food safety standards and establish market trust and reputation. This requires some form of innovative institutional arrangement which involve the private sector, the government, the farmers and social entrepreneurs

• The research on livestock is still limited by data availability at farm levels , and have to depend on small sample survey.– Obviously there is a need for the national farm survey of

the modern (industrial) livestock sector• 51

Thank you<[email protected]>

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