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Alternative Institutional Arrangements for Contract Farming in Poultry Production in Bangladesh and Their Impacts on Equity

MA Jabbar
International Livestock Research Institute, Addis Ababa, Ethiopia

MH Rahman
Bangladesh Agricultural University, Mymensingh 2202, Bangladesh

RK Talukder
Bangladesh Agricultural University, Mymensingh 2202, Bangladesh

SK Raha
Bangladesh Agricultural University, Mymensingh 2202, Bangladesh

Abstract/ Executive Summary:

The present farming systems of poultry in Bangladesh can be broadly divided into two categories: traditional rural backyard or scavenging/semi-scavenging system and commercial farming system. Traditional poultry production is an essential part of rural farm household activities; a few birds are reared with little or no feed supplement to produce eggs and meat for home consumption and any surplus is sold. Commercial poultry farms are defined as those that raise birds in confined conditions based on high-yielding breeds, commercial feeds and management practices (Ali 1993). However, the Department of Livestock Services (DLS) and a non-governmental organization (NGO), Bangladesh Rural Advancement Committee (BRAC), have promoted a small-scale semi-scavenging commercial poultry model using local or crossbreeds and partial supplementation with concentrate feeds (Saleque 2000; Islam and Jabbar 2005). In this study, the focus is on the first type of commercial poultry though some references to the second will be made where appropriate. The goal of the study was to identify forms of market institutions that would allow smallholder poultry producers to commercially produce broilers and eggs to raise household incomes under rapidly differentiating livestock markets in Bangladesh. The specific objectives were to: 1. Document the range and extent of contract farming and other organizational arrangements used in smallholder poultry production in Bangladesh. 2. Analyse the structure and conduct of the hatchery, feeds and equipment industries serving the poultry sector and compare the geographical distribution of and access to these inputs along with health, extension and credit services of poultry farming under independent and contract farming arrangements. 8 3. Identify factors that influence participation or non-participation in contract farming. 4. Compare net incomes and production and marketing costs under independent and contract farming arrangements. 5. Analyse determinants of cost per unit output and net income under independent and contract farming arrangements. 6. Identify policy implications of the findings to promote and facilitate profitable poultry farming. Aratdars are large traders and one of the basic institutions in the traditional market system. They buy and store products for varying periods of time. Broilers and eggs are stored for relatively short periods of time because live birds cannot be stored for more than a day without incurring extra feed costs and risking loss of weight, and eggs cannot be stored for long without the risk of spoilage. Aratdars may also engage in forward purchase arrangements either directly with producers or through traders without getting involved in the provision of inputs and services. Wholesalers are large traders but smaller than aratdars and deal with one or more inputs (feeds, drugs or equipment) and/or products (broilers or table eggs). They are licensed full-time traders with fixed business premises in the wholesale market and they handle bulk transactions. They purchase products from producers and small traders and sell to the retailers. Unlike aratdars, wholesalers operate in both Dhaka market and production areas. Output retailers are the smallest traders and have permanent stalls in sections of the markets for broilers and table eggs. Input retailers sell one or more inputs and operate in local markets or convenient places close to producers. They mostly buy products from wholesalers for sale to consumers. In each category of contract arrangements, there are various other elements which will be discussed later. In this regard, ABFL’s self-financing insurance scheme that covers normal disease risk should be reviewed to assess its suitability to include epidemic diseases like avian influenza. Other integrators or insurance industry players may adapt and scale up this scheme throughout the country. By accommodating such high-risk events, the insurance scheme will allow small producers to remain engaged in the poultry sector alongside large operators. However, the public sector needs to provide a general policy and regulatory framework to facilitate the use of such insurance schemes by individual enterprises and to ensure that the interests of all parties are adequately safeguarded

Keywords: Contract farming, Organizational arrangements, Smallholder poultry production, Hatchery, Feeds, Poultry sector, Poultry farming, Marketing costs, Cost per unit, Profitable poultry farming

Location: In Bangladesh

Start Date:

End Date:

Program Area: Animal Health and Management

Commodity: Poultry, Farming System

Objectives:

The specific objectives are:

1. Document the range and extent of contract farming and other organizational arrangements used in smallholder poultry production in Bangladesh.

2. Analyse the structure and conduct of the hatchery, feeds and equipment industries serving the poultry sector and compare the geographical distribution of and access to these inputs along with health, extension and credit services of poultry farming under independent and contract farming arrangements.

3. Identify factors that influence participation or non-participation in contract farming.

4. Compare net incomes and production and marketing costs under independent and contract farming arrangements.

5. Analyse determinants of cost per unit output and net income under independent and contract farming arrangements.

6. Identify policy implications of the findings to promote and facilitate profitable poultry farming.

Methodology:

Commercial poultry production is a relatively recent business enterprise in Bangladesh and contracts poultry farming is even more recent. A stakeholder consultation was held in February 2006 to collect initial information on the types of contract farming arrangements in the country and to identify the market actors involved in the commercial poultry industry. Representatives of various segments of the poultry industry, livestock experts and policymakers were present. Key informants provided information on enterprises that have been involved in contract farming arrangements and on the types of actors involved in the industry. Based on key informant interviews at the stakeholder consultation, three groups of producers involved in the commercial poultry industry were identified: • Independent farmers rearing layer or broilers. Independent farmers run their businesses without any contractual agreement with a third party and bear all production expenses and risks. • Contract farmers rearing layers, broilers or breeders. Contract farmers have contractual agreements with integrators, feed mills or traders to supply or purchase inputs and/or supply or sell outputs at pre-determined prices or prices negotiated at the time of final transaction. • Non-poultry farmers who are not engaged in commercial poultry farming though they may raise a few scavenging poultry for home consumption or sale if there is a surplus. Independent commercial poultry producers are found throughout the country although more independent poultry farmers occur in districts around Dhaka and some districts linked to large cities like Chittagong and Khulna.1 ABFL practises formal contract arrangements for broiler and breeder stock production in Kishoreganj district only. Several other enterprises are involved in formal input or output contract arrangements. Their areas of operation overlap to some extent but others operate in exclusive areas. The following categories of actors are involved in the poultry input supply and output marketing chains: • Day-old chicks: hatcheries, agents and retailers • Feed: feed millers, wholesalers, agents, and retailers • Equipment: wholesalers and retailers • Drugs: distributors and retailers • Broilers and eggs: aratdars, wholesalers, retailers. Aratdars are large traders and one of the basic institutions in the traditional market system. They buy and store products for varying periods of time. Broilers and eggs are stored for relatively short periods of time because live birds cannot be stored for more than a day without incurring extra feed costs and risking loss of weight, and eggs cannot be stored for long without the risk of spoilage. Aratdars may also engage in forward purchase arrangements either directly with producers or through traders without getting involved in the provision of inputs and services. Wholesalers are large traders but smaller than aratdars and deal with one or more inputs (feeds, drugs or equipment) and/or products (broilers or table eggs). They are licensed full-time traders with fixed business premises in the wholesale market and they handle bulk transactions. They purchase products from producers and small traders and sell to retailers. Unlike aratdars, wholesalers operate in both Dhaka market and production areas. Output retailers are the smallest traders and have permanent stalls in sections of the markets for broilers and table eggs. Input retailers sell one or more inputs and operate in local markets or convenient places close to producers. They mostly buy products from wholesalers for sale to consumers. In each category of contract arrangements, there are various other elements that will be discussed later.

Source of Information: International Livestock Research Institute, Research Report–7, Nairobi, Kenya. 98 pp., ISBN 92–9146–215–2

Article Link (Online Journal):

Funding Source:

Total Budget (Tk.) :

Achievement/Findings:

Formal production-marketing contract farming or classical contract farming represents a small share of the commercial poultry industry in the country. Therefore, one may conclude that formal contract farming offers few opportunities for potential commercial poultry farmers in Bangladesh to participate in such farming arrangements. Among the three operators, BRAC has a greater potential to help small-scale farmers to participate in contract poultry production; the average landholdings and flock sizes of BRAC’s contract farmers are the smallest among the three operators. The main advantage of production-marketing contracts to the producers is an assured outlet for their products. However, sharing of production and price risks, and mode of payment for inputs vary among the three operators. The lack of regulations on minimum wages in the poultry industry has led to wage discrimination between male and female workers in independent and contract farms. This problem probably may not be solved immediately but creation of awareness about this inequality may be a first step towards redressing the problem. Formal input marketing contracts cover the supply of inputs and services. The three large enterprises that operated this type of contract will continue to play a dominant role in the expanding poultry industry. A dual structure is emerging in the hatchery and feed industries whereby a few large operators derive economies of scale and control large market shares. If policy distortions (e.g. cheaper credit, import subsidy on raw materials and tax relief) continue to favour the large operators, their smaller counterparts may be pushed out of business. The input- and output-related factors that led to business failure can be addressed by market institutions modelled on contract farming. In the Bangladesh context, contract farming currently covers a small share of the industry so there is wide scope to expand this type of market organization for the benefit of producers, hatchery owners, feed manufacturers and integrators.

Knowledge Management: Report/Proceedings