Integrated Contract Broiler Farming: An Evaluation Case Study in India (long)
This USAID-funded MEAS project evaluated integrated contract and non-contract broiler farming systems in India’s Karnataka, Telangana and Andhra Pradesh states with the following research questions:
- Do contract and non-contract farmers incur significantly different production and marketing costs and earn different marketing margins?
- Does the provision of extension advisory services (EAS) by private companies enable contract farmers to make better profits than non-contract farmers?
- Have assured markets, competitive price and guarantee against risk resulted in successful value chain development through contract broiler farming (CBF)?
- Are the value chain development and provision of EAS by private CBF companies really win-win situations for both integrators and farmers, or are these a socially acceptable way of exploiting the farmers?
The study applied Bennett’s hierarchy of evaluation model by adapting sets of methods. Through individual surveys, this hierarchy evaluates CBF and non-contract broiler farming (NCBF) systems, beginning at the bottom step with inputs and progressing to the top-end results. The study employs strengths, weaknesses, opportunities and threats (SWOT) analysis and focus group discussion (FGD) to supplement the survey data. The data, collected in 2014 from the three states, came from in-depth personal interviews with 120 contract and 120 non-contract broiler farmers and the focus group discussion with stakeholders. The key findings and differences between CBF and NCBF systems are:
- Demographics of contract and non-contract farmers were comparable except that non-contract farmers had significantly greater experience. Women were participating only as laborers, not owners, in both systems. Also, ownership lay with socially affluent members, with the exclusion of disadvantaged communities in both systems. Basic economic resources were required in the form of fixed (for CBF and NCBF) and working capital (for NCBF) to participate, which the marginally poor farmers cannot afford.
- Contract farmers had more broiler sheds, produced fewer batches per year, and used less family labor and more hired labor than non-contract farmers.
- Flock size, mortality (numbers) and number of birds sold were higher, but bird lifting days and sale rate were significantly lower in CBF.
- Mortality (percent), birds sold (kg) and feed consumed (kg) were higher, and birds' sale weight (kg) was significantly higher in CBF.
- The feed conversion ratio (FCR) was the same in both systems, but marketing age and weight gain (grams/day) in CBF were significantly higher.
- Among the inputs, the chick cost in CBF was significantly lower, and feed and medicine costs were slightly higher in NCBF. Among other costs, labor cost was significantly higher in CBF, whereas bedding material, electricity, EAS and miscellaneous costs were significantly higher in NCBF.
- All the outputs -- sale rate of birds, manure and feed bags -- were significantly higher in NCBF.
- Though the total cost of production was significantly lower in CBF, the total return was significantly lower than that in NCBF. In CBF, the average net return per bird was Rs.11.06, and in NCBF, it was Rs. 17.05. Overall, the contract farmers were losing a margin of Rs. 5.99 per bird to avoid marketing, production and investment risks.
- The integrating company was the sole source of EAS in CBF, which is free. In NCBF, the major sources of EAS were private poultry consultants, self-service and government veterinary doctors on payment. From the FGD and interactions with contract farmers, it was clear that the EAS providers were trained supervisors but not poultry veterinarians. Veterinarians from the contract company visited the contract farms only in case of disease outbreak or when unusual mortality was reported.
- No marketing risk, regular and quick returns, and low working capital required were the major motivational factors to participate in CBF. Regular and quick returns, high margins and ease of operation were the major factors of motivation in NCBF.
- The majority of contract farmers had not changed integrators; the majority of non-contract farmers had changed input provider(s) in the past two years.
- The contract farmers’ perceptions on inputs such as chicks, feed and medicines were higher and their perceptions on EAS were significantly higher than those of non-contract farmers. Overall, contract farmers’ perceptions on total inputs were significantly higher than those of non-contract farmers. Among the subcomponents of inputs, contract farmers’ perceptions on cost of chicks, timely supply of chicks, and cost of feed and medicines, and understandability, frequency and timeliness of EAS were significantly higher. Non-contract farmers’ perceptions on batches per year and quality of medicines were significantly higher than those of contract farmers.
- Among the outputs, the contract farmers’ perceptions on payments received were significantly lower, and perceptions on broiler bird, manure and total outputs were significantly higher than those of non-contract farmers. Among the subcomponents of outputs, the contract farmers’ perceptions on quantity of manure produced, method of manure disposal and economic benefits from manure were significantly higher. Non-contract farmers’ perceptions on rearing charges and regularity of payments were significantly higher than those of contract farmers.
- Overall, the combined score of perceptions of contract farmers on inputs and outputs was significantly higher than that of non-contract farmers.
- The difference between contract and non-contract farmers’ perceptions on the intention of EAS was significant.
- Adoption of technical advice related to housing and feeding was better in CBF; medication practices were better adopted in NCBF.
- No marketing risks, doorstep delivery of inputs and EAS, and low variable costs to the farmers were the major strengths in CBF. Comparatively higher margins, ease in changing input providers and quick returns were the major strengths perceived in NCBF.
- Low rearing charges, high investment in fixed costs and low margins, and production cost estimation favoring companies were the major weaknesses in CBF. High marketing risk, high investment in fixed and variable costs, and high production costs were the major weaknesses in NCBF.
- Enhancing rearing charges and sharing rate incentive margins with farmers, including input standards in agreements along with outputs standards, and scope for further expansion and value chain development were the important opportunities in CBF. Assured marketing, minimum support price above production cost and agriculture status to poultry farming were the major opportunities perceived in NCBF.
- Unilateral contracts favoring integrators, lack of regulations/specifications on inputs and monopoly by a few companies were the major threats in CBF. High marketing risk and high production cost leading to withdrawal from poultry farming, volatile markets and control of markets by a few contract companies were the major threats in NCBF.
In spite of low production cost, the returns in CBF were significantly low because efficiency surplus is largely taken by companies. On the other hand, though production cost was high, farmers in NCBF were gaining a margin of Rs. 5.99 per bird produced despite facing marketing, production and investment risks. This leads to the conclusion that contract and non-contract farmers incur significantly different production and marketing costs and earn different marketing margins. The standard deviations on returns under both systems confirm that the net returns in CBF are guaranteed, but in NCBF they vary widely depending on the market rate. This points to the conclusion that CBF does not enable contract farmers to make better profits than NCBFs; rather, it gives a lower but assured return. Despite low returns, farmers are participating in CBF largely because of assured income, low working capital requirement and absence of marketing and production risks. On the other hand, through improved technology, low margins on inputs, economy of scale and stringent norms, the companies are reducing production cost, leading to lower retail chicken prices. All these factors resulted in successful value chain development through CBF.
Nevertheless, in the absence of a regulatory body, all privileges and rights were in the hands of contract companies. Though standards on infrastructure and outputs were fixed by companies in their favor, the contracts were silent on input standards. With meager rearing charges, stringent production cost incentives and penalties, the agreements clearly favored the contract companies. The survey and FGD findings revealed that the value chain development and provision of inputs and EAS by large private poultry companies did not really result in a win-win situation for both integrators and farmers. However, findings revealed that, with private sector participation, poultry EAS and other input services reached every individual commercial poultry farmer with efficiency and effectiveness. This is an effective and successful model of modernization of EAS and related input delivery as a complete package through the private sector, which needs to be encouraged elsewhere.
To make CBF profitable to the companies, to benefit farmers and also to address environmental and welfare issues that emerged in the study, the specific policy interventions suggested and discussed include: further promotion and regulation of CBF farming through an authoritarian body; enhancement of rearing charges and increase in rate incentive norms to transfer part of market margins to the contract farmers; increased numbers of batches per year by contract farmers; transparency in executing contract agreements; more government support to CBF and NCBF and to other small farmers for equitable and inclusive development; and replication of the EAS model of CBF/NCBF in other sectors as an example of modernization of EAS through the private sector’s participation to develop entrepreneurship among farmers.