Global Poultry Sector Trends and External Drivers for Structural Change

1. Global Poultry Sector Trends and External Drivers for Structural Change What is the future of smallholders? Presented by: Clare Narrod Co-authors: Marites Tiongco and Achilles Costales Eugenia Saini

2. Livestock Industrialization Process Rapid changes happening; many smallholders moving out of livestock production-poultry sector no exception

3. Talk covers • What are the external drivers of change promoting the industrialization process? • What has happened to poultry smallholders in the process of industrialization? • Will changing demands for food safety, food quality, and ensuring animal health disfavour smallholders? • Are there opportunities for smallholders to be competitive in the market given the changing structure of the poultry sector?

4. Key Driving Forces for Structural Changes (1) • Demand driven • Urbanization and population growth • Urbanization contributes to shift away from grains to animal products • Population growth increases demand for all food • Expenditure elasticities for some livestock products such as chicken has remained high – as incomes rise, households diversify diet toward animal products including poultry • Consumer preferences- food safety perceptions; quality and organic certifications – global effect unknown same as impact of animal welfare & labeling legislation (EU); affecting suppliers – global effect unknown – effect • Globalization and trade

5. Key Driving Forces for Structural Changes (2) • Technology change/transfer • Improved technologies  shorter production cycle, lower feed-conversion ratio (1.75) • New breeds and better feed formulations • Temperature-controlled housing (evaporative cooling system) • Better management and disease control • Food safety and traceability • More attention to SPS, less on tariff and sanitary barriers

6. Mostly Urban Population and Income growth (Annual Growth Rates 1975-2009 % per annum)

7. Poultry Production and Consumption Meat production moving south

8. Outlook for Global Production and Consumption Growth to 2030 Source: World agriculture: towards 2015/2030 AN FAO PERSPECTIVE. Edited by Jelle Bruinsma. 2003

9. Major Trends Driving Growth • Increasing per capita consumption of livestock products (worldwide) • Moving toward more consolidated larger production system (Brazil, Thailand) • Increasing “borderless movements” of commodities and inputs

10. Increases in productivity in LDC’s paralleled those in DC’s Developing countries steadily transiting to more specialized enterprises using hired labour, borrowed capital, and purchased inputs so as to produce a more uniform quality livestock product under different modes of industrial organization so as to meet demand worldwide.

11. Changes in market share for poultry meat- top exporters Source: United States Department of Agriculture. Foreign Agricultural Service. PSD online. 2010

12. Past trends of real prices of livestock products, 1980-2005 Poultry

13. Outlook to 2030: Prices to decline and then strengthen

14. What has happened to smallholders?

15. Change in the size distribution of poultry farms : Thailand

16. What is happening to the smallholders? (cont.) • Most work to date is descriptive, little systematic empirical analysis. • (2002 – 2006) - number of colleagues set out to empirically capture various factors affecting profitability including transaction costs and efforts to mitigate against environmental externalities for different size producers in a number of countries involving HH surveys • Case studies in Thailand, the Philippines, India, and Brazil

17. Average Profit per kg broiler Mixed results

18. Average profit per unit of output of liveweight broiler Small indep >$ than Large indep = CF Better off Large =

19. Case study findings (1) • Farm-specific transaction costs, such as access to market information, credit and reliable inputs (genetics, feed) greatly matter in explaining relative profit efficiency for small farms • For large farms, factors other than transactions costs determine relative efficiency

20. Case study findings (2) • For India and the Philippines, smallholders have higher profits per unit than medium and large-scale farms if family labor and negative externalities not costed (less formalized contracts with slaughter facilities) • But large farms are more profit efficient than small farms evenwhen family labor and environmental externalities are not costed • The key barrier to smallholders is lack of market access provided by low trust and reputation, translated as lower prices to them (typically 10% lower in a low profit-margin industry)

21. Output price of live broiler across farm sizes by country, 2002

22. Overall implications Small farms are not less efficient in all cases at securing profits per unit of output when family labour and environmental externalities are controlled for. • For smallholders to survive livestock industrialization process, the key issue is the ability to use farm resources more efficiently than large-scale producers. • If large–scale producers are more efficient on average, then they will be able to drive their costs down and survive on smaller unit profits and bigger volume of sales. • Possible that smallholders will be driven out of the market because of their small volume of production. • But smallholders have a chance; • Issue is access to output markets, since they face high transaction costs in selling • Contract farming schemes in some cases enables smallholders to remain as profitable as medium and large farmers • if they are able to successfully link to the rest of the supply chain

23. Commercial Broiler Supply Chain: Thailand

24. Traditional local markets Dynamic urban domestic markets Export markets Food safety control Standardization, grading, supply Supply chain organization Price level for grower and consumer Value added Participation of smallholders Types of markets and their characteristics

25. Increased demand for ensuring the delivery of animal sourced foods with specific attributes Emerging food systems are trying to meet the high demands of food safety, traceability and compliance and ensuring animal health often disfavour smallholders over larger operations for supplying specific supply chains due to: • high coordination costs • high transaction and marketing costs of sourcing from smallholders

26. Events Beyond Farmers and Integrators • 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 be unattractive • Scaling-up of wholesaling probably leads to scaling-up of primary producers

27. Global Concerns Possibly Affecting the Viability of Smallholdings • Disease-free certified export zones within developing countries increase pressures for monitored sanitary and traceability compliance by all, current technology or control measures are 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) and smallholders in particular • Need to also understand how location of production, people, and zoonotic diseases might be intertwined and how this might affect developing countries current producers

28. Market failures effecting smallholder’s market access Presence of market failures • information asymmetry and transaction costs • organizational constraints • regulatory failure

29. Information Problems-zoonotic diseases – food safety • Lack of information due to poor surveillance – Agents do not know the state, hence a case of imperfect information. • Incomplete information regarding strategies and payoffs about different players who determine the occurrence or transmission of the disease. • Asymmetric information-lack of credibility of institutions to diagnose the problem in animals thus selling the idea to stakeholders along the value chain. • Adverse selection problems relating to the information asymmetry where livestock keepers know the disease status and the public agencies do not.

30. Reality is that smallholders might disappear Even if they have market access…they may be unable to meet • High transaction costs for certain market outlets • Costs of compliance to meet standards: • Import requirements...disease status, traceability, animal welfare, GAP, SPS, compulsory inspection • Product requirement.....quality cuts, hygiene standards, packaging, labelling, traceability • Changing marketing channels • concentration in export, processing, and retailing • changes in vertical coordination of supply chains (for example, thought Thailand switched from contract farming to full vertical integration because of disease threat (AI)- not happening as expected)