An assessment of the contract farming system in improving market access for smallholder poultry farmers in Bangladesh
Ismat Ara Begum[1], Mohammad Jahangir Alam[2], Sanzidur Rahman[3] and Guido Van Huylenbroeck[4]
Abstract
The poultry sector in Bangladesh has undergone a phenomenal transformation from a backyard system to commercial farming since the 1990s. However, the sector faces a number of obstacles to overcome before small farmers can get remunerative price from their production. Contract farming system is one such institutional initiative that could play an important role in mediating and bridging these issueswhich are beyond reach of the small scale poultry farmers. The present chapter explores ways to link smallholders with commercial poultry production and examines whether contract farming can improve market access for smallholder poultry farmers in Bangladesh. Contract farming can improve market access and inadequate farm income amongst smallholder through production credits, marketing facilities and extension services. Our results show that contract farming can be taken as a promising strategy for small scale commercial poultry farming businessaimed at enhancing farm income, improve efficiency in production and providing assured market.Well-organized contract farming does provide such market linkages and appear to offer an important way through which smallholders can run farms commercially.
1
1. Introduction
The poultry sub-sector is an important avenue in fostering agricultural growth and reduce malnutrition for the people in Bangladesh. Poultry meat alone contributes 37 percent of the total meat production in Bangladesh. Apart from this, poultry contributes about 22 to 27 percent of the total animal protein supply in the country (Prabakaran, 2003). This sub-sector has proved asan attractive economic activity, thereby, indicating its`importance for the entire economy.The sector accounts for 14 percent of the total value of livestock output andis growing rapidly (Raihan and Mahmud, 2008).During 1970-80, the poultry population growth rate was 0.7 percent which increased to 4 percent per year during 1990-2005 (Begum, 2008). The current market size is $1 billion with about 150,000 small and medium enterprises. The sector employs nearly 5 million people directly or indirectly (The Poultry Site.com, 2007).
Althoughmeatproduction has been increasing over time in the country but the per capita availability (2.92 kilogram/year) is far below the minimum requirement (7.67 kilogram/year) (Begum, 2008). Moreover, local scavenging chickens dominate poultry production (86 percent) and remaining 14 percentof the meat comes from commercial farming system, of which 90percentcomes from small scale commercial farms and only 10percentfrom large scale commercial farms (BBS, 2005). The poultry production of Bangladesh is mostly under small farmers’ management system. Huque and Stem (1993) found that about 96 percent of egg and 98 percent of chicken meat were produced by small farmers in Bangladesh. However, this situation has not changed significantly over time.
Despite the contribution of poultry sector to the economy and small farmers’ livelihood, the production system is not adequately market oriented. There are a number of obstacles to overcome before small farmers can get remunerative price as well as profit from poultry production. Given this backdrop, the present chapter explores ways to link small farmers with commercial poultry productionsystem and evaluate whether contract farming can improve market access for smallholder poultry farmers in Bangladesh.
The remainder of the chapter is organized as follows. Section 2 provides an overview of the existing poultry production and input-output marketing system in Bangladesh. A case study of contract farming system in Bangladesh poultry sector is discussed in Section 3. Section 4 discusses the effectiveness of contracting system in promoting smallholders’ access to modern marketing channels which is then followed by a discussion of external factors. Section 6 provides conclusions and draws policy implications.
2. Overview of current poultry production and marketing system
2.1. Existing poultry productionsystem
Thepoultry farming system in Bangladesh can be broadly divided into two:(a) traditional rural backyard or scavenging system; and (b) commercial system. Scavenging poultry farm can be defined as domesticated fowl (from a few to 60 birds) maintainedeither for hobby or for non-commercial egg and meat production. These chickens roam in and around the farmer’s homestead area which serves asa major part of their feed requirements. Commercial poultry farming can be defined as those farms which have a number of domesticated fowl (more than 200 birds) maintained primarily for commercial egg and meat production with housing, management and marketing facilities. Operationally, small scale commercial producers in Bangladesh refer to those having less than 5,000 birds in each batch, whereas large scale poultry producers have more than 5,000 birds. Most of the poultry farms in Bangladesh are under small commercial farm category.
2.2. Marketing system of poultry products
Transformation from backyard to commercial farming was not only due to technological progress or sectors` development policy but also by institutional innovations in input delivery and marketing of outputs. The expansion of the commercial poultry sector has resulted in a decline in real prices of poultry products and consumption has consequently increased (Begum et al. 2012). But marketing system of poultry products are not well organized yet. Till now broilers are sold as live birds on weight basis and table eggs are sold at a rate for 100 eggs through bargaining. A brief discussion on input and output market for poultry and its products is presented below.
2.2.1. Day old chicks
Among 120 hatcheries in the country,50 are fully functional at present, others are either partially operating or are temporarily closed. Out of these hatcheries, 50percent are located in those areas where concentration of poultry farms is the highest. Of these, approximately 56 percent of the hatcheries are involved in the production of day-old chicks (DOCs) from parent stock and 11 of these hatcheries procuring DOCs are government owned (Saleque, 1999). Main hatcheries in Bangladesh such as Aftab Bahumukhi Farm Limited, Paragon Poultry Limited, Biman Poultry Complex, Quazi Farms Limited etc. are totally dependent on import of parent stock from USA, the Netherland, France, Germany etc. Bangladesh totally depends on exotic strains of chicken which is sensitive to temperature, nutrition and management. As a result, the productive performance of foreign strains in Bangladesh varies widely. However, buyers and sellers use strain of breeding stock as the main criteria to differentiate products. Hatcheries use different brand names for broiler DOCs and some of them have established goodwill among buyers by providing quality DOCs, which also established differentiated products in practice. The hatchery owners set the price of DOCs independently but consider the reaction of competitors in the market. The price of DOCs varies month to month, as for example during 2010, broiler DOCs price varied from Taka[5] 18 to Taka 75, and Layer DOCs varied from Taka 12 to Taka 75 (Chowdhury, 2011). There is no bargaining between buyer and seller of DOCs at any point in the supply chain, it is basically a supply driven market. They usually sell DOCs in cash at a fixed price to farm owners and agents but provide a commission to the agents. The hatchery owners sell the DOCs at the hatchery or through their sales center’s directly or through sales agent’s to poultry farmers. Generally DOCs are packed either in paper boxes or bamboo baskets. A few hatcheries use their own or hired pickup to transport DOCs from the hatchery to the sales center’s and/or agent’s store. Generally most of the time poultry farmers do not transport DOCs by specialized vehicles; usually they carry on by passenger buses, rickshaw or vans. Such transportation is hazardous and increases the likelihood of mortality during movement.
2.2.2.Poultry feed
One of the major problems of the development of the poultry sub-sector in Bangladesh is related to lack of sufficient and appropriate feeds (Mitchell, 1997). Two types of feeds, manufactured and mixed ingredients feed are used in the poultry sector. The manufactured feeds of different feed mills available in the market are not homogeneous in nature. The manufacturers differentiate poultry feeds on the basis of quality, brand name, sales promotion, and packaging. Marketing chain of feed is also different. Some feed manufacturers distribute feeds through agents, some use wholesalers and retailers; some have their own sales centers. By looking at the competition in the market, the feed millers set the price of feeds independently. Feed millers usually set the prices for wholesalers and aratdars, giving little scope for bargaining except that rates of commission may vary depending on the volume of purchase. Feed millers usually promote their products through advertising and providing quality assurance and incentives such as differential commissions to wholesalers and some millers also provide incentives to farmers. Generally, feed manufacturer do fix the prices for wholesaler. The wholesalers sell feed both in cash and credit to retailers and farmers. In setting sale price, some of the wholesalers charge a fixed margin on the total cost of feed marketed and others add a certain percent of total cost as profit. The price of feed varies from brand to brand. For example, during 2010, broiler feed price per ton varied from Taka 30,000 to Taka 32,000, and layer feed price varied from Taka 24,000 to Taka 27,000 (Chowdhury, 2011). Most of the feed ingredients such as maize, meat bone meal, soybean meal, protein concentrate etc. are imported and therefore sensitive to the movement in world prices. Poultry feeds are mainly imported from Germany, China, Thailand, India and Taiwan. The exact number of feed mills in operation at present is not definitely known but a report stated that there are 35 feed mills with 850 dealers at the private sector who are producing and distributing poultry feed in the country. These feed mills are owned and operated by the private sector, but their distributional system in rural areas is inadequate and their production does not meet quantity demanded.
2.2.3.Veterinary drugs
Vaccination and medication of Newcastle, Fowl Pox, Fowl Cholera, Fowl Typhoid, Coccidiosis, Gumboro, are usually done by the poultry farmers. The mortality rate of poultry is high (35-40percent) due to disease and predators. Although the government gives some necessary vaccine at low cost price to help poultry farmers, but in most of the cases, the farmersare in urgency to buy vaccines at a high price from the open market. However, vaccines are not served equally in all parts of the country, especially in the remote parts of the rural areas. Vaccination failure is very common in Bangladesh due to improper transportation and storage, handling and application. Most poultry farmers use vaccines without knowing maternal antibody status of the flocks they are raising. The marketing chain for drugs is simple and composed of three actors: the pharmaceutical companies, the wholesalers and the retailers. The pharmaceutical companies distribute drugs to wholesalers. The retailers purchase drugs from wholesalers and sell to poultry farmers.
So, from the above discussion it is clear that the poultry input sector in Bangladesh is plagued with multifarious problems including high prices of inputs. Production risk is another leading problem in the poultry sector. It mainly occurs in broiler farming due to death or loss of birds. Outbreak of disease also causes considerable economic loss and erodes confidence in poultry farming. For example, Gumboro and New Castle are epidemic diseases, and they cause large quantity of losses. Aside from production oriented problems, one of the main factors that obstruct growth of poultry sector is the lack of efficient marketing system, such as collection, storage, processing and marketing of poultry products. Farmers also face problems related to marketing of their products. However, previous research studies have pointed out and recognized that the production oriented problems faced by commercial poultry farms are: lack of capital, inadequate knowledge of poultry rearing, outbreak of diseases, inadequate availability of inputs, inadequate institutional credit, guaranteed and profitable markets for their output etc. (Karim and Mainuddin, 1983; Ahmed, 1985; Haque, 1985; Islam and Shahidullah, 1989; Ukil and Paul, 1992; Bhuiyan, 1999; Uddin, 1999; Begum, 2005; Begum and Alam, 2005; Begum et al., 2005).
2.3.Poultry output price and marketing channel
Poultry outputs particularly broilers are live product. Therefore, if farmers fail to sell broilers at the right time, they face great losses. Thus, the biological nature of broiler is one of the important causes of output price instability. Broilers are sensitive product. They cannot be stored for a long time without proper storage facilities. For this reason, the farmer wants to sell their products immediately. Moreover, market price can fluctuate. Prices observed in time are the results of seasonal patterns of change. Measuring seasonal variation is required to know the short run fluctuations in time series data. Average monthly wholesale price of big size (1 to 1.5 kilogram) poultry in Dhaka market was used to measure seasonal price variation. Data were collected from the Department of Agricultural Marketing (DAM). Data covered the period from January 1992 to December 2003. The ratio-to-moving average method was used in this study to measure seasonal variations. Figure 1 depicts the seasonal indices. As shown in Figure 1, poultry price in March is 106 percent of those of the average month, typical October price is 93 percent of those of the average month, and so on.
Figure 1: Poultry seasonal price fluctuation in Dhaka market during 1992-2002
Poultry marketing channel is a long traditional marketing system. Number of intermediaries is higher for poultry products (Figure 2). Consequently, farmers sometime are forced to sell at lower price because of inadequate market information, transport facilities etc.Moreover, price spread is higher; therefore,sometimes the farmers’ prices are not remunerative.Chand et al., (2009) showed that, in 2009, DOC cost was Taka 38 per unit and production cost per bird was Taka94, but due to price fluctuation farmers had to sell matured bird between Taka 80 to Taka 100 per kilogram at the farm gate.
Figure 2: Marketing channels of poultry products
From the above discussion, it is clear that that the poultry input markets are not competitive and demand supply imbalance is a barrier to smooth functioning of the market implying that thecommercial poultry sector is not well organized in Bangladesh. For good sectoral performance, markets should function well which is not present in the case for Bangladesh poultry sector.
However, the modern technology adapted in the poultry sector seems appropriate for easy transfer to remote and small rural villages of Bangladesh. But, successful transformation of the modern technology throughout the poultry sector requires institutional support, particularly for the poor and small farmers, to facilitate greater market access which has been changing dramatically in its procurement practices, specification and standard requirements by various stakeholders (e.g., food manufacturers, wholesalers/ exporters and retailers) upto the final consumers. Contract farming system is one such institutional initiative that could play an important role in mediating and bridging these issues/limitations that are largely out of reach of the small scale poultry farmers.
3. Contract farming system in Bangladesh poultry sector
Contract farming offers several potential advantages over independent farming. Contract farming has been proposed as one important avenue for private farms to take over the role previously served by the state in the provision of information, inputs and credit (World Bank, 2001). It is the context of the contract which can make a big difference as there are many actors and factors in the environment which influence the working and outcome of the contract. The way farmers perceive contract farmingdefine their relationship with companiesand differ across cultures (Asano-Tamonoi, 1988). In fact, there is so much diversity in the type of farms, farmers, nature of contracts, and socio-economic environment that it is better to focus on the specific situation than the generic institution of contract farming.As the contract farming system in poultry production is relatively a new concept in Bangladesh, there is a need to assess the pioneer company’s profile and also to discuss the contractual agreement between farms and farmers.
Contract poultry farming system was started by a big company named Aftab Bohumukhi (Multipurpose) Farms Limited (hereafter ABFL). Besides ABFL, some other non-governmental organizations like BRAC, PROSHIKA have also came forward to support rural people by providing kind or cash through setting up of contract farming and running of small scale poultry farms.
ABFL is one of the leading poultry farms in Bangladesh established in 1991 at Bhagalpur in Kishoregonj district located about 110 km northeast of Dhaka city. ABFL is one of the subsidiary companies of the Islam group that predominantly engaged in the agricultural sector. ABFL first introduced contract growing system of commercial broiler as an experimental extension program for a selected group of 20 farmers who had to enter into an agreement (contract growing) with ABFL on production and marketing of broiler products.
The ABFL farm is different from the integrated farms in other countries because it started as an agro-based farmand tends to include small farmers in its activities. ABFL’s activities are associated with poultry, dairy and agro-services. The main objectives of ABFL are to generate farmer’s income and to look after their interest. As a result, ABFL includes all categories of farms according to land sizes (small, medium and large) in their contractual agreement.