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I. Introduction

1.1 Background

In the last twenty-five years, livestock production has become more industrialized and farm size has also substantially increased. The expansion is made possible by imported technology and increased domestic demand as a result of rapid economic growth. But the rapid growth of the broiler production is also reinforced by export demand. Right from the beginning, the first private agri-business firm that introduced modern technology in broiler production saw the high export potential and applied for the investment privilege to build the export-oriented slaughterhouses. In addition to the income effect, the increased production of broiler and eggs has also lowered their prices relative to the prices of beef and fish. As a result, consumption is further stimulated.

The expansion of most of the livestock subsectors resulted from the market forces and the private sector initiation. While the large-scale agri-business firms were the driving force in the broiler industry, it was the independent farmers who took lead in the development of the pig and layer industries. On the other hand, dairy is an exception because its growth must largely be attributed to the government's initiation and its continued promotion and protection. The government has also attempted to develop the cattle industry but without success. But government intervention can also be detrimental, as it has discouraged the private sector from entering into the swine industry. The differentiate impact of government policy and the contrasting role of the government and the private sectors have been thoroughly analyzed elsewhere (Poapongsakorn, 1986; Preecha, 1985), and thus will only be briefly discussed in chapter 2.

The livestock industrialization comes in several shapes and forms. Broiler industrialization began with the private company importing and introducing modern packaged technology (including breeds, feed technology, and farm management) through contract farming and also company farm. Its success has attracted several new agric-business firms. Consequently, these integrators have been able to control the largest share in production and export. Similar means of contract farming has also been applied to layer and pig farms, but the success is still very limited. On the other hand, the development of the dairy production is dominated by the small holders who organized themselves under the cooperative system. The question is why each of the livestock subsectors is governed by different production organization, an issue to be discussed also in chapter 2.

Before industrialization, backyard livestock production, which provided supplementary income and consumption for farm households, was prevalent. However, since the industrialization, the backyard production was replaced by the professional specialized livestock farms. A significant number of small holders, except the dairy sector) also declined, though at the lesser extent. Yet, the expansion of the commercialized farms has created a large number of new jobs for poor farmers. Some small and backyard farmers who still want to raise animals can also have a choice to build the modern farm by entering into a contract with the agri-business contractors. Even farmers who have neither adequate capital nor sufficient technology can participate in the contract farming because, with the assistance from the contractor, they can secure the low-interest rate agricultural loan from the commercial banks. Moreover, a large number of small and medium-scale independent farms (in poultry and swine), who are successful in imitating the imported technology, can also upgrade themselves and expand their business to be the contractor competing with the existing integrators. The impact of displacement of small livestock farms depends on the adjustment costs or the flexibility of adjustment among the small holders. After documenting the process of displacement, this study will assess the poverty implications of the displacement.

But the transformation process can also have negative impact, particularly on the poor and the small holders who lack adequate resources and information to adjust themselves. The small holders may find it increasingly difficult to compete with the large-scale farmers. In addition to the economic factors, e.g., the low transaction cost of doing business and the scale economies enjoyed by the large farms, changing product requirements in the market place may also accelerate the pace of scaling up of the livestock production. Such requirements include the environmental pressure and the increasing public concern about food safety, food quality and animal health. The issues are the main focus of this study.

1.2 Overall Objectives

i. Describe the process of industrialization in livestock production, its causes, and its impact on the structure, growth and farm size distribution of the livestock sector in Thailand.

ii. Document the importance of smallholder livestock production and its declining role in Thailand.

iii. Assess the extent to which the displacement of small livestock farms is due to policy distortions.

iv. Assess the role of differences across farms in the capture of environmental externalities.

v. Assess the extent to which this displacement is due to changing product requirements in the marketplace (animal health, food safety, quality, etc.)

vi. Assess the role of higher transaction costs facing small holders in reducing their competitiveness.

vii. Assess the potential to keep small-scale farms competitive within a competitive market economy framework through institutional innovation.

viii. Assess the implications for poverty reduction and environmental strategies.

1.3 Scope of Issues to be Investigated

The following are the scope of three major issues to be investigated in this study.

First, small holders will be displaced for several reasons. They may be less efficient and make less profit per unit of output and thus are prone to disappear. But making less profit does not necessarily means less efficient because they may simply incur higher transaction costs as a result of difficult access to the market, particularly the long-term credit market, and with poor information. Still there may be some policy distortions that increase their production cost. And yet, casual observation suggests that the small holders do not totally disappear even in the most industrialized livestock production areas. This suggests that there are some factors, which work in favor of the small holders. Even in the most commercialized broiler production provinces, one sees a large number of small contract farms exist with the mighty large-scale farms belonging to the agri-business corporation. Whether or not the relationship between the small contractees and the integrated contractor are interdependent or dependent is an issue to be investigated. Another important factor that partially helps maintain the competitiveness of the small holders is to produce the products for the nearby local retail market or to identify product niche, which will enable them to fetch higher output price than the large scale farms.

The second issue is the important of environmental issues and policy to the viability of livestock smallholders, both with regard to financial profitability and environmental sustainability. The costs and benefits of investment in pollution abatement may differ among farms according to the types of animal, or scale of operation. The incentive to reduce environment externalities may also depend on whether or not there is a market for animal manure. Therefore, the questions are whether or not the investment in pollution abatement activities would result in differentent profit rates among farms with different animals and scale.

Finally, although the market for meat is rapidly growing, the consumer taste is also becoming more sophisticated, as the consumers are not demanding for higher quality of meat and food safety. There is also international pressure on the issue of animal welfare. Whether of not changes in product attributes in the market will negatively affect the survival of the smallholders depend on their ability to effectively cope with the new pattern of demand.

1.4 Specific Research Questions:

There are four main research questions.

i. Do some farms have higher expenditures than others on environmental mitigation costs? Is this correlated with scale, density of animals, location (proximity to residential centers; to centers of economic activity), or certain types of soils? Are profits affected by internalization measures?

ii. Is there a systematic difference in the profit per unit output between large farms and small farms? Is the effective cost of feed at comparable levels of quality, lower for large-scale producers as compared to others? Do large farms systematically receive higher prices for output than small farms? Is this due to scale, or by some other factors?

iii. How do transaction costs faced by different producers affect their profit? What options are there for reducing transaction costs?

iv. How does contract farming affect the costs faced by different scales of farmers and their profitability?

1.5 Specific Hypotheses to be Tested

i. Small-scale producers have profits per unit or output that do large producers.

ii. This higher profitability is due in part to reduced transaction costs and scale economics that the large scale farms enjoy.

iii. Small-farmers expend a higher amount of effort/investment in pollution abatement per unit of output that do large farmers; this creates a lower capture of environmental externalities per unit of output by small farms

iv. Prices per kilogram of output are systematically higher for larger-scale producers relative to small-scale farmer.

v. The product of small-scale contract and cooperative framing is more uniform and certified in advance by contract schemes.

vi. Contract and cooperative farmers have higher nominal profits per unit compared with independents of similar scale.

1.6 Organization of the Report

There are 12 chapters. After an introduction, the trend in livestock production and marketing is described in chapter 2, followed by a chapter on emerging social, environmental, health and welfare issues. Chapter 4 describes the approach and common research methodology to estimate the profit frontier, and then the data and surveys are presented in chapter 5. Chapter 6 provides the profile of survey sample. The assessment of potential environmental problems is presented in chapter 7. Chapter 8-11 are the econometric results of the profit frontier equations for swine, broiler, layer and dairy farms, respectively. Finally, chapter 12 is the conclusion and policy implications.

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