SLIDE 1
Formal and informal contract farming in poultry in Bangladesh
Mohammad A. Jabbar
International Livestock Research Institute Nairobi, Kenya Presented at the Conference on Poultry in the 21st Century Organized by FAO Bangkok, Thailand 5-7 November 2007
SLIDE 2 Classifying types of contract farming
Criteria used for classification may include:
- scope, products or services covered
- formation, enforcement and monitoring mechanism of
contract agreement including dispute settlement
- sharing of benefits, risks, responsibilities and liabilities
- scope for participation of smallholders
SLIDE 3 Contract farming types in Bangladesh poultry
- Production-marketing contracts
– Supply of inputs and services by integrators – Purchase of products – Sharing of risks and benefits – Written contracts with producers
- Input marketing contracts
– Only supply of inputs and services by hatcheries and feed industries – Risks not shared by input suppliers – Written contracts with input traders who have secondary contracts with producers
- Output marketing contracts
– Forward purchase of products from producers – Risks borne by producers – Generally unwritten contracts
SLIDE 4
Production-marketing contract operations
2003 1997 1992 Year established Broiler Broiler Broiler, Breeder stock Products covered Producer Producer Shared Price risk 215 25 350 and 122 N of producers 500-2000 Av 800 1000-5000 Av 2500 1500-2500 Av 1800 Batch size 100% producer 100% producer 100%producer with insurance Production risk Fixed price Fixed price Market price plus margin Output purchase On credit On credit Credit till 2003, then cash Input supply Partial Partial Yes Vertical integration
BRAC Biman Aftab Ltd
SLIDE 5
Input marketing contract operations
? ? 1996 Year established DOCs, feeds DOCs, feeds DOCs, feeds Inputs covered 100% producer 100% producer 100% producer Price risk 160 205 600 N of trader agents 0.3 mil DOCs 2300 t feeds 0.4 mil DOCs 1000 t feeds 1.5 mil DOCs 3500 t feeds Volume of business per week 100% producer 100% producer 100% producer Production risk Cash, advance Cash, advance Cash , advance Mode of payment Vet service free, drugs at cost Help product sale Vet service free, drugs at cost Help product sale Vet service free, drugs at cost Help product sale Other services Nourish Feeds Paragon poultry Kazi Farms
SLIDE 6 Output marketing contracts
- Wholesellers and stockists of broiler and eggs in Dhaka
forward purchase from producers directly or through agents by making advance payment (can be considered tied loan)
- Price supposed to be prevailing market price at time of
delivery but usually less due to buyer cartels
- Production and price risks borne by producers
- Main advantage is access to cash for input purchase when
access to formal credit may be difficult or costly
- Practiced widely throughout the country as for any other
market oriented commodity
SLIDE 7 Implications of contract types: Production- marketing contracts
- About 600 farm households are involved covering a tiny share of
broiler market
- Main advantage assured outlet for product, other conditions variable
among operators. Aftab’s insurance scheme has something to recommend it for wider applicatio b
- Operators operate in different geographical areas so there is no
competition as such as producers can’t choose between options
- BRAC’s contractees include smallest farms, Aftab’s breeder stock
farmers are relatively rick
- Potential risk of Avian Influenza may limit expansion of this type of
contract and also may also lead to emergence of terms more favourable to integrators.
SLIDE 8 Implications of contract types:
Input marketing contracts
- A dual structure is emerging in the input industry: few large operators
deriving economies of scale and controlling large market share, may push smaller operators out of business if policy distortions (cheap credit, import subsidy, tax relief…) continue to favour large operators
- Competition in the industry will be beneficial for both suppliers of
inputs, input traders and producers as it will keep prices low, improve product quality and services
- Hatchery industry is underinvested, capacity lower than demand, so
advance order with advance payments at higher prices are required to maintain production cycle by producers
- Dependence on imported raw material and uncertainty with electric
supply are major bottlenecks for expansion of the industry
SLIDE 9 Implications of contract types:
Input marketing contracts
- Asymmetric information on supply, demand and prices and
market power of buyers derived from these are main problems for producers under this type of contract
- Easier access to formal credit at interest rates and terms
comparable to large operators will increase bargaining power of producers
- Forward purchase contracts will continue to play important
roles in the poultry sector but expansion of formal contracts and appropriate policies with respect to formal credit, input industry and prices will be needed to make it beneficial for smallholder producers.
SLIDE 10 Cause of dropping out of poultry (survey of 140 drop outs in last 5 yrs)
29 Moved into other business 31
26 Disagreement among family members/partners 47 High mortality 33
51 DOCs- poor quality, low productivity 60 Shortage of capital 63 High price of day old chicks 73 Low output price 81 Input price higher than output price
% sample Reason for drop out
SLIDE 11 Potential role of formal contracts
- Uncertainty of product price, inconsistency between input
and product price, shortage of capital and problems with supply of day old chicks (poor quality and productivity, inadequate supply, untimely supply…) are major problems faced by producers.
- Unless formal contract arrangements can mitigate some of
these, producers will remain vulnerable to the forward purchase contractors , who are basically money lenders.
SLIDE 12
Thank you
