EXECUTIVE SUMMARY BACKGROUND: Rapid technological progress in the modern poultry sector has resulted in a remarkable reduction in the costs of production and marketing of poultry meat and eggs. Falling retail prices of poultry products relative to those of other animal products due to this improved technology has resulted in increased consumption of poultry products worldwide. The development of confinement systems and controlled environment have broken agriculture's traditional ties to land and climate, making modern poultry production technology potentially transferable to almost anywhere in the world, including developing countries (Vocke, 1991).Successfully transforming the poultry sector, however, requires not only transferring the technology for poultry production, but also the institutions and coordinating mechanisms which facilitate the transfer of the system of intensive poultry production and marketing. OBJECTIVE: The aim of this case study is to examine a few of the developing countries which have been particularly successful at developing their poultry sectors and to draw some lessons from these examples about the technologies, policies, and coordinating mechanisms that facilitated the transformation process. EVOLUTION OF THE POULTRY SUBSECTOR: There are three discernable phases through which the poultry sector has evolved: (1)traditional systems, (2) semi-commercial systems, and (3) commercial systems. Each of these systems requires a unique set of technologies, policies, and coordinating mechanisms. Traditional systems of poultry production are typically referred to as a "backyard business." Traditional poultry producers raise small numbers of domestic fowl for home consumption with small, mostly seasonal surpluses being sold at village markets. Farmers invest minimal resources in poultry production: they raise their own stock, the birds are left to scavenge for food and are occasionally given table scraps, they do not provide any type of vitamins or veterinary services,and often with no housing provided. Finally, there is no differentiation in the traditional system between birds used for eggs and those raised for meat. The mortality rate for poultry in traditional systems is high due to a high incidence of disease as a result of poor or no veterinary care and their increased vulnerability to predators due to a lack of housing. Productivity of these birds is generally far below that of commercial growers because the amount and quality of feed is not monitored, and the genetic characteristics of the birds make them less efficient at converting quality feed to meat and eggs. There are, however, various benefits to the traditional system, including: domestic birds' adaptability to the climate and resistance to disease, and the important role of traditional systems in improved rural nutrition,income distribution, agricultural diversification, and as a source of liquidity (Wilson, 1986). Due to the low level of exchange, specialization, and investment in the traditional system, producers risk and uncertainty are minimized. The traditional system is still the most common type of poultry production in the developing countries. Between the two extremes of traditional and commercial poultry production are semi-commercial systems of medium-size family farms. In this system, farmers grow improved local breeds or cross-bred stock, although there still tends to be no differentiation between stock used as layers and stock used for meat. Semi-commercial farmers provide rudimentary housing structures, may purchase at least part of their feed, and use vaccines and veterinary services when available and accessible. Semi-commercial growers sell most of their production to nearby urban centers, although no formalized system of marketing exists except, in a few cases, oral contracts. Where oral contracts do exist, they are typically made with hotels or restaurants and they have little or no effect on choice of technology, supply of inputs, or quality of the product. The purpose of these contracts is to give producers the right of first refusal with respect to a price offering and buyers the opportunity to make an offer to a known supplier (Billings, 1987). Moreover, independent semi-commercial poultry farming often seems to represent a transitional stage, with many of these farmers eventually being "integrated" into large companies in order to ensure regular supplies of inputs and to secure a market for their products at a guaranteed price (Krostitz, 1984). Commercial systems are characterized by large-scale production using specialized and mechanized facilities which require low levels of labor. In this system, feed is the most important variable cost component, representing 70-75% of the production costs. For this reason,profitability in commercial systems relies heavily on the ability to secure stable supplies of low-cost feed. Growers use genetically improved, specialized stock which are bred for their specific use as either layers for eggs or broilers for meat. These strains respond efficiently under commercially intense feeding systems, with broilers reaching a market-ready weight of approximately 1.8 kg in as little as six weeks. High productivity depends on well balanced rations and requires close nutritional supervision, thus requiring careful management. Additionally, these birds are extremely susceptible to feed changes, and any disruption in a feed supply can have severe economic consequences for producers (Kane, 1987). Along with improved nutrition and genetics,important advances in disease prevention and technology and management have facilitated the growth of commercial systems. COORDINATION MECHANISMS, INSTITUTIONS, AND TECHNOLOGY ADOPTION: Institutional innovations have led to more effective coordination in the subsector,thereby facilitating the transformation process from traditional to commercial systems. These institutional innovations include a formalized system of contracts associated with vertical integration and larger sized units capturing economies of scale. Vertical coordination is motivated by the need to reduce transaction costs and to ensure technological complementarity between the stages of production and marketing (Minot, 1986). The poultry subsector lends itself to vertical integration because of the precise supply timing requirements (e.g., in chick production and in processing), the amount of specialized inputs, and the perishability of the product. The vertically integrated company can plan an optimum scale of production at each stage so that economies of scale can be achieved, while at the same time achieving economies of information on quality and demand conditions which are articulated throughout the subsector. Although the grow-out stage of poultry production is not carried out by the large firm, the quality, timing, and quantity of poultry supplied can be integrated into the operations of the firm through resource-providing contracts. Although the types of contracts vary among and within countries with commercial systems, the most common form of contract is one in which the producers are provided with an agreed number of chicks and the required amount of feed, drugs and veterinary services as well as technical services at no cost. Under this type of contract, growers basically rent their growing facilities and contract their labor, and at the end of the grow-out period they are paid a fixed amount per pound per marketable broiler. In many cases, a premium is paid for above average weight broilers as a reward for more efficient use of feed and better management practices. For growers, contracts reduce risk and uncertainty because the intermediary -- the integrator --links the growers with the input suppliers and markets. With a secured market outlet as well as an assured source of inputs and technical advice, growers are provided with both an incentive and an improved capacity to invest in specialized equipment and to adopt new technologies for more efficient production of poultry products (Jaffee, 1990). For the integrators, a contract provides tighter control over all the vertical stages of production including the inputs used, quality of the final product, and the timeliness of delivery of predetermined quantities (Glover, 1987). The transition from traditional to commercial systems is increasingly dependent on the use of modern technology and commercial inputs, institutional and policy innovations, and internalized coordination mechanisms. Given the nature of the product and the required timeliness in the delivery of input supplies and processing as the scale of production and investment increase, these innovations serve to decrease transaction costs, manage risk, and achieve economies of scale throughout the different stages of the subsector. TRANSFORMING THE POULTRY SECTOR: Experiences of Five Developing Countries:This paper examines the experiences of five developing countries in developing their poultry sector: Bangladesh, Brazil, India, Nigeria and Thailand. Each of these countries are at different stages of transformation and have experienced different paths depending on their constraints and opportunities. Brazil and Thailand, for example, are the world's third and fourth largest exporters of value-added chicken meat products. The rapid transformation in the poultry sector of these countries is evident from the per capita consumption of poultry meat which in the last two decades has risen from 2.4 kg/year to 18.5 kg/year in Brazil and from 0.9 kg/year to 10 kg/year in Thailand. The successful transfer of technology in the Brazilian and Thai poultry subsectors were ver similar. The private sector played a leading role in developing new technologies through joint ventures with international (primarily US) companies.Technologies such as the development of improved breeding stock, hatching, vaccinations, and automated processing equipment were originally imported into the countries. However, domestic firms quickly developed the technology to produce these inputs locally, as well as the domestic human capital necessary to sustain the sector. The integrators, originally pork processors in the case of Brazil and feed companies in the case of Thailand, maintained tight control over the vertical stages of production through integration and contracts. These coordinating mechanisms allowed integrators to achieve economies of scale, quality control, and timeliness of inputs in various stages of the subsector as well as provide incentives for participants in the subsector to increase productivity and adopt new techniques. There are also some important differences between the experiences in Brazil and Thailand. While the objective of large-scale commercial poultry production in Thailand was conceived and implemented by the private sector, the government initiated this transformation in Brazil by providing the incentives for the initial private sector investment. The Thai government had very little involvement in the sector beyond the provision of basic quality and sanitary standards, an open policy on the import of essential inputs, low export taxes, and a few investment incentives in processing for exports. In Brazil, however, large amounts of public funds were invested in the sector, subsidies on feed grains were provided, very low interest loans were made available to subsector participants, and exchange rate adjustments were made. The transformation initiatives undertaken in India and Nigeria differ from those of Brazil and Thailand, and have produced mixed results. The governments of both of these countries have played the leading role in transforming their poultry sectors to commercial systems. In the case of India, the government assumed primary responsibility for developing the technology and making it available and accessible to participants in the subsector. The government has taken on the task of identifying alternative feedstuffs (given that supply of feedgrains are limited), developing breeding programs for improved stocks, and providing the technical services and inputs such as training,veterinary care and vaccinations. The Indian government's strategy has been largely successful because the plan included the institutional innovations necessary to create the incentives for improved performance and adoption of new techniques in the subsector. For instance, there is no formal system of contracts or vertical integration which would help growers to manage risk, however, the government's flock insurance program serves this function, thereby creating an incentive to invest in commercial scale grow out facilities. Also, the government established poultry estates (the 'cluster approach')which grouped a large number of growers in one area, facilitating economies in input supplies and health cover. Finally, the government licensed the import of breeding stocks, equipment and feed ingredients in order to control foreign exchange spending and to encourage local production of inputs. The shortcoming in the Indian initiative, however, is that there is no provision of a guaranteed market for chicken meat since there is not a system of contracts and because government cooperatives have not been successful. The lack of cold storage and a guaranteed future price for chicken meat has created a disincentive for potential investment in the sector (Panda et al., 1993). Although the transformation in Nigeria was similar to that of India's, it has been less successful in transferring the system of commercial poultry production and marketing. The Nigerian government established state-run feedmills and hatcheries, however, the strategy did not develop the technology to sustain commercial systems at other stages in the subsector. For instance,vaccinations, technical services, processing facilities, and marketing services were either not available or were not complementary to the scale of production at the grow out stage. Additionally, there was no plan for developing the human capital necessary to adopt and adapt new techniques. A lack of technological complementarity and the lack of tools for risk management created an important disincentive for investment and technology adoption in the sector (Bessei, 1993). Government policy also led to adverse consequences for the poultry sector in Nigeria. Import taxes on maize, dependence on foreign exchange for the purchase of inputs, and a ban on poultry exports were some of the policies which resulted in a serious reduction in the production of poultry products (Sonaiya, 1990). Although Nigeria is still the largest producer of broilers in Sub-Saharan Africa, the government's strategy has not succeeded in transferring the poultry production and marketing system in the country. The government of Bangladesh has taken a different approach to improving productivity in the sector. Faced with few raw materials for compound feed and a lack of foreign exchange for purchasing essential inputs for commercial systems, the government has pursued a plan based on small-scale rural poultry production. The government has attempted to improve existing small-holder production through the following measures: (1) providing vaccination against the country's most important disease (Newcastle disease) by government-trained village vaccinators; (2)improving protection of birds against predators; (3) introducing improved genetic stocks (dual purpose breeds); and (4) providing feed supplements to complement scavenging (Bessei, 1993).The government has devised various schemes to distribute birds to rural households along with the necessary inputs and marketing facilities. To date, the Bangladesh strategy has been largely successful. Poultry production in the country represents approximately 37% of the total meat production and had a 24% annual growth rate of production during the 1980s (Panda, 1989). The strategy chosen by Bangladesh, however, relies heavily on the government for training of large numbers of village extension workers, distribution of vaccines at the village level, and overall coordination of input supplies and marketing facilities. The long-term sustainability of the institutional framework and training programs is still questionable. LESSONS LEARNED AND IMPLICATIONS FOR SUB-SAHARAN AFRICA: There are several important lessons to be learned from these case studies with respect to the innovation and coordination necessary to transform the poultry sector. The first important lesson is that transformation of the poultry sector is not simply the transfer of a single technical innovation, but rather the transfer of a system. Development of the sector was not initiated and implemented under the discipline of atomistic competitive markets; due to the perishability of the product, the required timeliness of inputs, and the scale economies of the larger system, the same effectiveness of coordination could not have been achieved across spot markets. Furthermore, the transformation of the poultry sector was an iterative process in which the system was not transferred all at once, but followed a path of technological transformation. Changes were introduced in the subsector in close succession at different stages, but on a limited scale at any point in time, so that the whole subsector grew in an even, balanced manner. Inclusive and important in following this technology path was the significant build-up of human capital to sustain the system. The international market was an important source of technology in these case studies, and the formation of joint ventures between firms and agencies in developing countries and firms in industrialized countries (particularly the U.S.) has been an effective transfer mechanism. Those countries experiencing the greatest success in achieving commercial poultry industries, however,have included in their original objectives a long-run strategy for domestic adaptation of the necessary techniques. For instance, climatically adapted breeds were developed from imported stock. Various coordination mechanisms were used to differing degrees in order to assure reliable input supplies, technical assistance, quality of production, and final markets. Contracts and vertical integration have been particularly effective in coordinating the poultry subsector, however, other coordinating mechanisms, such as the cluster approach used in India, have served this function as well. Institutional innovations and the institutional environment played a pivotal role in transforming these countries' systems by providing incentives for participants throughout the subsector. Institutions and services which reduced the effects of price variability, dispersed risk, and lowered transaction costs, such as the provision of contracts, insurance, credit, etc., created an environment in which input suppliers, producers, and processors had an increased incentive to invest in the sector and to adopt new techniques. Transforming the poultry sector in developing countries has the potential to improve nutrition and income as well as provide an important linkage in the process of structural transformation. A successful transformation to commercial systems offers gains from specialization and exchange,increases farm-level productivity through the use of new techniques and management practices,and benefits the long-run process of change in productivity gains from expanded use of land and labor to increased use of knowledge from outside the farm (i.e. the integration of agriculture with other sectors of the domestic and international economies). The extent to which countries succeed in transforming their poultry sectors will rely not only on transferring the techniques for commercial poultry production and marketing, but also an environment which enables the successful transformation of the system.
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Paper provided by Michigan State University, Department of Agricultural, Food, and Resource Economics in its series Food Security III Papers with number
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