1. UN Conference Center, Bangkok, Thailand, 9-12 August 2004
Contract Farming and Other Institutional Arrangements in Livestock Markets in North Viet Nam: Issues and Research Methodology
A. Costales (FAO PPLPI), C. Delgado (IFPRI-ILRI) & M. Jabbar (IFPRI-ILRI)
ADBI-UNESCAP Regional Workshop on Contract Farming and Poverty Alleviation: Issues and Research Methodology
UN Conference Center, Bangkok, Thailand, August 2004

2. Outline
Livestock revolution in developing countries and the place of smallholders and the rural poor
Institutional innovations in response to changing domestic and global market environments
Issues and research methodology
Results from previous work on contract farming in livestock in the Philippines, Thailand and India (IFPRI-FAO LEAD Livestock Industrialization Project)

3. Increases in value of food consumption for meat, milk, fish & major cereals, 1975-1995

4. Growth in production per capita in Developing Countries, 1975-2001

5. Viet Nam: Pigs and Poultry are High Growth Areas
Growth in meat production
Poultry meat: 8.1% p.a.
Pigmeat: 7.3% p.a.
Sources: FAOSTAT 2004; ESCB, 2004

6. Low and Middle Income Developing
Annual Growth Rates
(% per annum)
Low and Middle Income Developing
OECD Developed
Population
1.9
0.7
Urbanization
3.3
0.9
Income Per Capita
2.2
2.1

7. Projected increase in per capita consumption of meat, from 1997 to 2020

8. A Changing World for Producers
Rapid scaling-up of production
Increased demand for food safety, convenience, quality
Rapid vertical coordination in market channels
The rising importance and complexity of trade
The rapidly rising stakes in disease control
Increased environmental concern and enforcement

9. Scaling up: Backyard vs. Commercial hogs in S
Scaling up: Backyard vs. Commercial hogs in S. Luzon, Philippines,
Backyard hogs
Commercial hogs

10. Summary
The demand of meat and milk will continue to expand in the developing countries
Growth in demand will continue to be propelled by increasing population, urbanization, and per capita incomes
There is increasing demand for food-safe and high quality products in both export and domestic markets

11. Summary (cont.)
Smallholders are increasingly finding it harder to compete in the rapidly expanding markets
Individual market-entry investments to comply with production and sanitary standards are prohibitively high for small-scale producers
To overcome such constraints, a variety of organizational arrangements that allow small production units to benefit from various forms of collective action have emerged (e.g., contract farming)

12. INSTITUTIONAL INNOVATIONS FOR GREATER MARKET PARTICIPATION OF SMALLHOLDERS
Cooperatives
Producers’ associations
Marketing organizations
Contract growing arrangements
Others

13. CONTRACT FARMING
An institution that facilitates market access for smallholders in high-value supply chains that require specialized inputs and sell to markets for specialized outputs.

14. Potential Benefits of CF to Smallholders
Access to capital
Protection against systematic loss of capital (risk sharing)
Access to better stock (genetics)
Availability of inputs, credit; quality assurance of inputs (feeds)

15. Potential Benefits of CF to Smallholders (2)
Absence of daily supervision and monitoring
Protection against loss of animal from disease mortalities (animal health programme)
Access to extension and vet services - better health control
Reliability of output market

16. Societal Benefits from Contract Farming
Facilitates transfer of technology
Facilitates integration of smallholders into a modernizing and globalizing national economy
Raising level of activity & incomes of smallholders
Raising overall employment, triggering infrastructure and market development for a wider community
Potential increase in access to lucrative export markets through links with transnational agribusiness companies

17. What is not yet known? Societal Impacts of CF:
How various terms and conditions of contracts raise incomes of, or impoverish, respectively, smallholders in the longer term;
Whether or not the formation of different types of organizational arrangements, based on partnership between livestock farming households and agribusiness firms, is part of an emerging trend.
Whether and how contract farming is associated with environmental impacts

18. Potential Pitfalls of Contract Farming
Loss of autonomy of producer
Contract terms may be stacked in favor of the company from windfalls of increased output prices
Can lure smallholders into indebtedness that increases dependency on company
May be restricted to a relatively small group of larger farmers (with a ‘bond’ to put up front); usually male gender

19. Contract Farming & Other Institutional Arrangements
The Viet Nam Study
Contract Farming
&
Other Institutional Arrangements

20. Goal
To facilitate forms of contract farming and other institutional market arrangements in livestock that better allow smallholder producers to flourish under rapidly changing markets.

21. Outputs
A comprehensive characterization of the true costs and benefits of contract farming, in contrast to other institutional and organizational schemes, in overcoming transaction costs
A set of policy options based on the assessment of efficiency and efficacy of contract farms, and other institutional organizations, in the promotion and facilitation of profitable livestock farming partnerships.

22. Tasks and Methodology
Tasks – set of specific activities for specific outputs (4)
Methodology – sets of procedures and techniques (5)

23. Methodology Literature review
Focus group interviews (qualitative information on supplier-buyer relations, quality control, volume requirements, incentives and penalties)
Household and farm surveys (250 hog farms; 250 poultry farms)
Different types of institutional arrangements, various types and terms of contracts
Non-contract farms (independents)

24. Methodology (2)
Value chains mapping - geographical distribution of chains, and distribution of margins
Econometric analysis of primary data
Profit per unit output comparisons
Stochastic profit frontier estimation
Relative efficiency comparisons
Estimation and evaluation of determinants of relative farm-specific inefficiency

25. Stochastic Profit Frontier Estimation
Differences in Farm-specific Inefficiency and their Sources

26. Calculate the Dependent Variable
where:
PRi is total profit of farm i
  TRi is total revenue of farm i
TVCi is total variable cost of farm i
Qi is quantity of output of farm i
Yi =

27. Define a Stochastic Profit Frontier
The v and u random errors are due to measurement error, etc. (v), that is distributed two-sided and inefficiency (u), that is one-sided (downwards) relative to the frontier.

28. The stochastic frontier and actual farm performance
Input prices (given output price and farm fixed resources)
Stochastic frontier
Profit per unit of Output (Y)
Average relationship
Actual performance farm i (Yi)
Ideal for farm i (Y*) y* y
OLS
MLE
· · ·
· · · ·
· ·
· · · ·
· ·
· · ·
· ·

29. A Translog Profit Frontier
Derived from supply-side & farm subscript “i” dropped

30. A Translog Profit Frontier (cont.)

31. A Translog Profit Frontier (cont.)

32. Estimating the Inefficiency Effects

33. Hypothesized determinants of farm-specific inefficiency
Policy distortions – favoring large commercial enterprises over smallholders
Investment incentives
Importation privileges
Transaction costs - costs of making, monitoring and enforcing exchange agreements; often intangible (can be proxied)
Linked to market power and reputation of firm
Linked to access to assets and information
Expressed to farmer as prices received or paid per comparable unit (High TC implies lower price rec’d for output)

34. Salient Findings from Previous Studies
Philippines
Thailand
India

35. Comparisons on Profit per kg of Output

36. Differences in output prices for hogs received: Independents vs
Differences in output prices for hogs received: Independents vs. Contract Farmers, Phil., 2000

37. Profit per kilogram (PhP/kg)
Comparative profit per kg: Independent vs. Contract Farms in Broiler, Philippines, 2002
5.00
4.50
4.05
3.96
4.00
3.50
Profit per kilogram (PhP/kg)
3.00
2.50
2.00
1.59
1.50
1.07
1.00
0.50
0.00
Independent
Contract
Independent
Contract
Smallholder
Large-Scale
Source: UPLB, FAO-IFPRI Livestock Industrialization Study

38. Broiler: Independents, and Price vs. Fee Contracts, Thailand, 2002
(Profit per kg) 3
2.48
2.5 2
1.51
Average profit per kg (Baht/kg)
1.5
1.35 1
0.71
0.5
Forward Contract &
Per-bird Wage
Contract
Forward Contract &
Per-bird Wage
Contract
Independent
Independent
Smallholder
Large-scale
Broiler Farms

39. Comparative Efficiency and Sources of Relative Inefficiency

40. Comparative Efficiency of Broiler Farms: Independent vs
Comparative Efficiency of Broiler Farms: Independent vs. Contract Farms, Philippines, 2002 80 75 72 70 60 50 45 40
Efficiency (%) 33 30 20 10
Independent
Contract
Independent
Contract
SMALLHOLDER
COMMERCIAL
Source: UPLB, FAO-IFPRI Livestock Industrialization Study

41. Comparative efficiency: Contract vs
Comparative efficiency: Contract vs. Independent Broiler Farms, India, 2002 70 66 60 50 41 40 40
Efficiency (%) 30 24 20 10
Independent
Contract
Independent
Contract
SMALLHOLDER
LARGE-SCALE

42. Comparative efficiency in Swine: Contract vs
Comparative efficiency in Swine: Contract vs. Independent Farms, Philippines, 2002
Source: UPLB, FAO-IFPRI Livestock Industrialization Study

43. Sources of Relative Inefficiency: Broad Findings
For small farms, can be traced to the high transactions costs certain farms face
For large farms, factors other than transactions costs determine relative efficiency

44. Broad Findings (cont.)
The most important differences among small farms are in access to working and fixed capital and then reliable inputs (genetics, feed , medicines)
A key barrier to smallholders is lack of market access provided by low trust and reputation, translated as lower prices to them (typically 10-15% lower in a low profit-margin industry)

45. Smallholders Need Collective Action
Coops and/or contract farming schemes may be the only hope to keep smallholders in the game
Contract farming covers a wide variety of institutional approaches in developing countries, some better some worse
The balance of both political and market power between contractor and integrator (company) is crucial
The key issue is governance; producer participation is essential

46. Concerns Beyond the Farm…
Need to be complemented by Value-Chain Analysis

47. Events Beyond Farmers and Integrators Also Affect Scale
There are large economies of scale in marketing chains, where transactions costs also abound
Food safety concerns and demand for reliable timing and quality drives concentration of supermarkets
Cheaper to monitor safety & quality from a few larger farms--even most reliable and safe small farmer may by unattractive
Scaling-up of wholesaling probably leads to scaling up of primary producers

48. Events in the World Markets Affect the Viability of Smallholders
Disease-free certified export zones within developing countries increase pressures for monitorable sanitary and traceability compliance by all; current technology is not scale-neutral
Need to understand how the rapidly changing food safety, animal disease control, and trade policy environment in developed countries will affect developing countries (directly/indirectly)