An assessment of the contract farming system in improving market access for
smallholder poultry farmers in Bangladesh
Ismat Ara Begum1, Mohammad Jahangir Alam2, Sanzidur Rahman3 and Guido Van
Huylenbroeck4
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 issues which 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 business aimed 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
Department of Agricultural Economics, Ghent University, 9000 Ghent, Belgium and Department
of
Agricultural
Economics, Bangladesh Agricultural University, Bangladesh;
E-mail:
ishameen@yahoo.com
2
Department of Agricultural Economics, Ghent University, 9000 Ghent, Belgium and Department
of Agribusiness and Marketing, Bangladesh Agricultural University, Bangladesh
3
4
School of Geography, Earth and Environmental Sciences, the University of Plymouth, UK
Department of Agricultural Economics, Ghent University, 9000 Ghent, Belgium
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 subsector has proved as an attractive economic activity, thereby, indicating its` importance for
the entire economy. The sector accounts for 14 percent of the total value of livestock output
and is 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 19902005 (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).
Although meat production 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 percent of the meat comes from commercial
farming system, of which 90 percent comes from small scale commercial farms and only 10
percent from 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
2
with commercial poultry production system 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 production system
The poultry 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) maintained either for hobby or
for non-commercial egg and meat production. These chickens roam in and around the
farmer’s homestead area which serves as a 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
3
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, 50 percent 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 Taka5
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
5
Local currency (1US$=69 Taka)
4
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
5
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 (35-40 percent) 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 farmers are 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
6
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
7
percent of those of the average month, typical October price is 93 percent of those of the
Dec
Nov
Oct
Sep
Aug
July
June
May
Apr
Mar
Feb
108
106
104
102
100
98
96
94
92
90
88
86
Jan
Seasonal Indices
average month, and so on.
Month
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 Taka 94, but due to price fluctuation farmers had to sell
matured bird between Taka 80 to Taka 100 per kilogram at the farm gate.
Farmer
Wholesaler
Retailer
Consumer
Institutional buyer
Figure 2: Marketing channels of poultry products
8
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 the commercial 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 farming define their relationship with
companies and 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
9
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 nongovernmental 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 farm and 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.
To develop the poultry farming system as an income generating activity as well as to
promote proper scientific and professional support, ABFL took up in 1994 an elaborate
contract growing program involving rural people. ABFL has its own feed mill and hatchery.
The farm consists of a modern hatchery that produces 60,000 broiler and layer parent birds
and supplies 100,000 DOCs per week for the fast growing poultry industry. Also, the farm
has commercial facilities to supply eggs and poultry meat to Dhaka city to consumers
10
through conveniently located sales centers. The poultry complex of ABFL is one of the
biggest and largest complexes in the country. ABFL’s poultry feed mill was first established
primarily to provide balanced feed for the ABFL contract poultry farm. It was later
expanded to meet the demand of poultry feed throughout the country. At present ABFL has
3 feed mills with a capacity of 10,000 metric ton/month and it distributes balanced feed to
farms throughout the country using its own distribution system.
The term ‘contract’ in broiler production may vary from country to country and the nature
of the integrator company. The agreements between ABFL and the farmer are very simple
indeed. Any farmer located in the company area is eligible to enter into a contractual
agreement.
The responsibilities of the contract farmer and ABFL in the vertically integrated farming
system are shown in Table 1.
Table 1: Salient features of contract arrangements of ABFL in Bangladesh
I.
Name of the Company
AFTAB Bahumukhi Farms Limited
II.
Type of the Company
Private Limited Company
III.
Product/services dealing with
a) Commercial broiler: live broiler,
dressed broiler
b) Parent stock
IV.
Form of contract arrangement handled Formal input-output
(up to 2003)
V.
Backward linkage activities for
contracted product/services
a) Package of input/Services
i) Day old chicks
ii) Feed
iii) Veterinary and medical services
iv) Cash loan for operational expenses
b) Size of the contract farmers (in 2003)
i) Commercial broiler: 560 farmers
ii) Parent stock: 122 farmers
11
c) Geographical locations covered
Only Kishorganj district
d) Volume of input/product delivered per i) Commercial broiler: Feed: 100 metric
month
ton (MT) per month
ii) Parent stock: Feed 1000 MT per
month
e) Value of input/service delivered per i) Commercial broiler: Taka 50,000,000
month
ii) Parent stock: Taka 175,000.000
VI.
Forward linkage activities for contracted
product/output/services
a) Output/services
Own sales center for dressed broiler,
dealer for feed and chicken
b) Criteria for selecting contract farmers:
Anyone can enter
c) Approximate market share of the 10 percent for chicks
company:
VII.
Provision for enforcement of contract
VIII. System of ensuring product quality
Mostly informal and social
Inspection, supervision, laboratory test
Source: Begum (2008)
According to the agreement, ABFL extends credit facilities to the farmer, provides DOCs,
feeds, veterinary supplies by kind on credit, and implements the final marketing of the
output. The feed and other inputs supplied by the contractor represent over 90 percent of
the total cost of the production which means farmers only pay 10 percent of the annual
average cost. According to the agreement, a farmer builds a covered shed at his/her own
cost ensuring congenial and healthy environment for proper growth of the birds under the
direct supervision of the ABFL experts. The average duration of the grow-out cycle is
roughly 5 to 7 weeks for an averaged sized (1.5 kilogram) broiler. ABFL buys the matured
broiler from the contract farmer by paying a fixed price per kilogram of live broiler and then
market these broilers through ABFL sales centers in Dhaka. All the credit liability of the
contract farmer is adjusted against the price of their products. Thus, in this farming system,
farmers can get financial support from the integrator without any interest rate to run the
12
business smoothly. However, the number of birds per batch to be reared and managerial
decisions are taken by the farmers. The vertical stages of ABFL broiler contract farming
system are shown in Figure 3.
However, after the bird flu rumor in 2003 following incidences in Asia, ABFL has changed
the contractual agreement from input supply on credit to cash but till now in ‘parent stock
contract system’, ABFL follows credit system.
ABFL Hatching Egg Farm
Feed
Eggs
ABFL’s Feed Mill
ABFL’s Hatchery
Feed
Broiler Chicks
Contract farm
Live Broilers
ABFL’s Processing Plant
Dressed Broilers
ABFL’s Broiler Sales Center
Figure 3: The vertical stages of ABFL broiler contract farming
There are two types of risks in poultry production. One is production risk and another is
price risk. Numerous studies of contract farming have emphasized risk reduction as a
principal incentive for producers to enter into contracts (Roy, 1972; Covey and Stennis,
1985; Dornbush and Boehlje, 1988; Herbert and Jacobs, 1988; Lawrence and Kaylen, 1990;
13
Johnson and Foster, 1994; Knoeber and Thurman, 1995). There have been varying degrees
of success over the years, across countries and across several types of insurance programs
(Hazell et al., 1986; Hueth and Furtan, 1994; Mishra, 1996). ABFL is the only farm in
Bangladesh that has introduced an internal insurance scheme to cover the risk of loss of the
contract farmers in case of immature death of chicks by diseases and other cogent reasons.
In contractual system, ABFL’s growers’ payment depends upon production outcomes and
not upon price outcomes, thus farmers can avoid price risk. ABFL’s contract growers are
freed from production risk such as outbreak of diseases or epidemics since the integrator
provides technical assistance and insurance. According to ABFL’s insurance scheme, ABFL
operates a contributory security fund. Farmers contribute Taka 1.50 per chick to the fund at
the time of purchase. For chick mortality of within a range, a portion of the initial
contribution or risk premium is refunded. For example, if chick mortality is less than 3
percent, 4-6 percent, 7-10 percent and 11-15 percent then 80, 40, 20, 10 percent of
contribution respectively is refunded to the farmer. If the mortality rate is above 15 percent,
the farmer can claim full insurance compensation. In this case, for birds up to 20 days of age
Taka 20 per bird is paid after deducting 15 percent from the total number of lost birds. For
birds beyond 20 days of age, Taka 30 is paid per bird after calculating the benefits from bird
upto 20 days age (Table 2). This means that lower mortality rates lead to higher rates of
compensation, but over 15 percent mortality leads to claim of full insured value
compensation. Because of this measure, farmers feel secured and are encouraged to take up
this venture.
Table 2: Poultry insurance scheme of ABFL
Premium
Taka. 1.50 per bird
Claim
Mortality rate
Refund
0-3%
80% premium
4-6%
40% premium
7-10%
20% premium
14
11-15%
10% premium
Above 15%
Taka 20/bird
Within 20 days deducting 15%
After 20 days deducting 15%
Taka 30 /bird
Source: Begum, 2008
Integrator also faces same production and price risk, moreover the company has to anxiety
whether Farmers sell broiler outside the contract or divert inputs supplied on credit to
other purposes. Sometimes poor management capacity of illiterate farmers may reduce yield.
4. Effectiveness of contracting system in promoting smallholders’ access to
modern market channel
In the era of market liberalization, globalization and expanding agribusiness, there is a
danger that small farmers could face difficulty in participating successfully in the market.
Evidences say that in many countries such farmers could become marginalized as larger
farms get more emphasis for a profitable operation. So, for Bangladesh, like in many
developing countries across the world, it is necessary to find out whether benefits of
contract farming system reaches small farmers or not.
Thus, to ensure efficiency and equity, it is necessary to develop institutional mechanisms
which facilitate small farmers’ access to inputs, credit, and technical assistance and reduce
uncertainty in marketing of output. This will in turn raise their productivity, profitability
and income. Contract farming is an appropriate institutional form that tackles many of these
constraints in an integrated manner.
In developing country, small poultry farms always play a central role in sectoral
development. But the main constraints of small farms are access to resources and markets.
First, small farmers often lack necessary production and marketing information. Second,
small farmers may lack sufficient savings and the availability of external credit is limited
because of bureaucratic complexities. Third, small farmers operate near subsistence level
and are at more risk averse than the large farmers. Finally, public intervention (such as
15
public extension service and policies) to promote commercial poultry production have had
higher impact on large farmers than on small farmers. Thus, it is clear from these
constraints that, in the interest of both efficiency and equity perspective, contract farming
could be a possible institutional mechanism which could facilitate small poultry farmer’s
access to credit, technical assistance and inputs and also reduce the uncertainty in
marketing of output. Therefore, if the contract farming system can be developed and policy
biases towards large scale commercialization reduced, then small farmers will be able to
raise their income by taking poultry as a main or subsidiary occupation.
Contract farming system involves small farmers for some reasons. One of the main reasons
is that in developing countries the integrated farm faces difficulties in finding enough small
farmers to produce the amount they needed. Another reason is that, the farmers fear that
large farmers might collectively bargain to bid-up prices paid to them for their product.
Moreover, large farmers sometimes try to break the contract rule. As scale economies are
associated with specialized technology adoption, a vertically integrated farm tries to involve
few large farms into their production and distribution system. Contract farming has also
been a component of the most successful income generating projects for small farmers in
developing countries. Some studies, especially in Latin America, found that contract farming
system could run smoothly by including small farmers. For example, there has been
widespread use of contracts involving small farmers in Latin American countries. In
Guatemala, smallholders are contracted to produce broccoli and snow peas for export to the
United States. In Ecuador, the multi-national Frito Lay contracts small farmers to produce
a particular variety of potato for processing into chips for the domestic market. There are
some more case studies such as frozen vegetables in Mexico (Runsten and Key, 1996; Key
and Runsten, 1999), confectionery peanuts in Senegal (Warning and Key, 2002), and various
agricultural commodities in Indonesia (Patrick, 2004), that follow the examples of contract
farming and have successfully incorporated small farmers in their operation.
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On the other hand, some evidences from different countries suggest that the vast majority
of contract farming schemes exclude small farmers (Singh, 2000). Generally, capital
intensive large farms make small farmers’ entry to the contracting system difficult because
of high transaction cost and economies of scale. The total number of poultry farms has
decreased in developed countries like Japan, USA and Canada after the introduction of the
vertically integrated contract faming system. In the mid-1990s, eighty percent of the
poultry production in Thailand came from only ten large companies (World Bank, 2001).
Recently, a new FAO guide argues that well managed contract farming has proven to be
effective in linking the small commercial farm sector to sources of extensive advice,
mechanization, inputs and credit, and to guaranteed and profitable markets for products.
When efficiently organized and managed, contract farming reduces risk and uncertainty for
both parties. The approach would appear to have considerable potential in countries where
small scale agriculture continues to be widespread. In many cases small farmers can no
longer be competitive without access to services provided by contract farming companies
(FAO, 2001).
In the case of Bangladesh, ABFL is different from integrated farms operating in other
countries because ABFL has started as an agro-based farm and it include all categories of
farms according to land size in its poultry contract farming. There was perhaps no special
consideration for small farms but they were included as long as other requirements for
engaging in poultry were met. Unlike vertically integrated farms in developed countries
where big trading companies usually prefer contracts with large-scale farms and farmers to
minimize transaction costs, ABFL has tried to be inclusive. One of the objectives of ABFL
was to increase income and welfare of small farmers in the areas around the farm
headquarters. This motivation may partly lie in the fact that the owner of the Islam Group,
of which ABFL is a component, comes from the locality, so contribution to the improved
17
welfare of his local people through his business ventures might serve both a business as well
as a welfare objective.
Small farmers hold a strategic position in the economy of Bangladesh. They have limited
working capital but they can provide abundant disguised family labor in the farming
system. Although ABFL started with small farmers in its operation, it realized that it is in
their interest to contract with large growers as well. They did this for two reasons. First,
the firm encountered difficulties finding enough farmers to produce the amount of poultry
they needed. Second, the government of Bangladesh restricted large-scale poultry farms by
licensing to protect the small farmer. Begum (2008) found that ABFL’s contract farming
system is based on the economic development perspective of small farmers. Out of 560
farms, about 93 percent were classified under small farm (having less than 2.5 acres of land),
category. By considering poultry flock size, out of 560 farms, 201 farms reared up to 1200
birds/batch, 281 farms reared 1201 to 2000 birds/batch and only 78 farms reared more than
2001 birds/batch, thus it is overwhelmingly characterized as the operation of small farms.
However, the study also mentioned that if the official classification of large farms (i.e., more
than 5000 birds/batch) is considered, than only 3 farms out of the total 560 contract farms
can be designated as large farms in the study area.
4.1. Smallholder’s benefit from contract farming system
The contract farming system provides tremendous benefit to the integrator farm and the
contract farmers. The integrator farm provides guarantee of regular supply of raw materials
while the small farmer have access to a ready market for their products. Benefits from
contract participation include improved market access, access to credit and technology,
better management of risk, improved family employment and indirectly, development of a
successful commercial farming system.
4.1.1. Contract farming and market access for smallholders
18
Generally, small farmers in Bangladesh are unable to take advantage of market
opportunities and often have trouble accessing credit, obtaining information on market
opportunities or new technologies, purchasing inputs and accessing output assured market
with fair price. When markets are accessible, farmers may be subjected to price fluctuations
or inequitable prices. For farmers, technical constraint in transforming from scavenging
poultry farming to commercial poultry production is less obstructing than market
constraint. Therefore, one of the principal motivations for smallholders to enter into
contract farming is having an assured market with favorable price. Comparing the
marketing system under conventional and contracting system, marketing channel of
conventional system is longer than the contracting system. In contracting system, farmers
sell poultry product to integrator directly. Consequently this system may serve to lower
transaction cost associated with searching, collecting market information, negotiation, etc.
can provide necessary backward and forward linkage, provide all the marketing facilities,
increase the producers` price thus reducing price spread, consequently integrate small
producers into the market.
4.1.2. Contract farming, productivity and profitability differences
Contract farming generally implies that small farmers get benefit from contracts in terms of
enhanced net return. Begum (2008) showed the difference in poultry production output
between contract and non-contract farmers is statistically significant. Poultry production
output for the contract farmers (11783 kilogram) is significantly higher than that of noncontract farmers (6763 kilogram). Productivity of labour is also significantly higher for
contract farmers than non-contract farmers. Profitability of poultry farming was measured
in terms of gross margin and net profit. Begum (2008) estimated per bird net return gain
from contract and non-contract poultry farming system. The gross margin and net return
(18.2 Taka and 17.2 Taka, respectively) of contract farms are significantly much higher than
19
the independent farms (Taka 12.9 and 10.0, respectively.). However, both contract and noncontract farmers operate profitably.
4.1.3. Contract farming and efficiency differences
Contracting system is significantly related to farming efficiency. Begum et al., (2011)
determined the level of technical, allocative and economic efficiency of small farmers of
commercial and independent poultry farmers and also identify the factors causing efficiency
by examining the relationship between efficiency level and possible socio economic factors.
The study found that technical efficiency, allocative efficiency and economic efficiency of the
non-contract farms are 91, 89, and 81 percent, respectively, which are below than the
contract farms estimated at 96, 98 and 94 percent, respectively. Therefore, contract farms
are more efficient than non-contract farms. The study also found contract farming is the
most statistically significant factor associated with efficiency. This result is expected
because under contractual agreement, in order to obtain sufficient supplies of the right
quality of poultry meat at the right time, ABFL’s provides technical know-how assistance
through ABFL’s recruited supervisor, production inputs, and production credit, which in
turn improves farm efficiency.
4.1.4. Contract farming and income differences
Begum (2008) compared contract and non-contract poultry farm income with non-poultry
farm’s average income and showed average gross income of non-poultry farm was Taka
107121 per year whereas non-contract and contract poultry farm earned Taka 76653 and
127833 per year respectively only from poultry enterprise and poultry farm satisfies 55
percent of total income of contract farmers. Thus, the study concluded that if small farms
plan to enter in contract farming system, they can obtain substantial income gains.
4.1.5. Contract farming and risk reduction
20
Increased income in contract farming is generally accompanied with lowering price risk for
farmers. Risk and uncertainty are quite common in the poultry business. Small farmers have
little access to information and face the risk of dropping substantial income if prices
fluctuate downward. In contract farming system, a predetermined price for the poultry
product is established during contract negotiations. As a rule, firms typically purchase the
final product that falls within specified quality and quantity in accordance with the contract,
and farmers are not subjected to incur losses in sales due to price fluctuations. In this
respect farmers can lower their price risk.
4.1.6. Contract farming and production capacity utilization
Contract farming can utilize production capacity more efficiently than non-contract farm.
Begum (2007) found that, due to a lack of capital, non-contract farm sometimes fail to rear
same amount of birds in every batch, whereas contract farms do not face such a problem.
The author found that if non-contract farmers utilize the average maximum bird rearing
capacity per batch, then average number of birds to be reared per year would be 8239 but
actually they reared only 4251 birds (i.e., 51.5 percent of full capacity). In case of contract
farms, the relevant figures are 10,466 birds whereas actual reared was 9,179 birds (i.e., 87.7
percent of full capacity). So, it indicates that contract farms can utilize their capacity more
efficiently as compared with the independent farms.
From the foregoing discussion it is observed that contract farming worked well before bird
flu scare in the context of Bangladesh small farmers. Begum (2008) estimated per bird profit
gain from contract and independent broiler farming system after changing contractual
agreement because of bird flu. Results reveal that even after bird flu, per bird net return of
contract farm is 1.4 times higher than the net return of independent farm.
21
No. of contract farm
2011
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
700
600
500
400
300
200
100
0
Figure 4: Number of contract farms of ABFL from 1994 to 2011
However, although ABFL started with 20 farmers in 1994, and the number reached to 650
in 2003, but after bird flu incidence, the number of ABFL’s contract farms came down to
200 in 2004 but subsequently increased to 315 in 2005 and 375 in 2011 (Figure 4). The
figure indicates that the small farmers started taking interest to enter into contract poultry
farming system by knowing its profitability although ABFL has changed its contractual
agreement.
So, it could be concluded that contract farming plays a significant role in small farmer
development, because, existing rural credit institution such as agricultural bank in
Bangladesh do not have many of the features which ABFL’s contract farming system have,
such as collateral-free input loans, assistance with access to input and product markets,
opportunity to get technical know-how and supervised credit. Thus, contract farming is
undoubtedly an authentic way to produce quality chickens. This has been substantiated by
research findings all over the world.
4.2. Integrator’s benefit from contract farming system
Vertically integrated contract farming system will sustain in long run if both parties
(integrator and contract farmers) benefit from the contract system in a sustainable way.
Begum (2008) showed poultry farming is also profitable from integrator’s point of view. In
22
the study period ABFL bought the birds from the contract farmers at Taka 52.5 per
kilogram and sold it to ABFL’s sales centre at Taka 85.05 per kilogram, so, gross revenue
was Taka. 32.5 per kilogram. However, ABFL’s cost elements include credit, input supply,
staff hires etc. which could be substantial but cannot be estimated with accuracy. Therefore,
Taka 32.5 per kilogram was taken as the ABFL’s per bird gross return, not net return or
profit.
5. External factors associated with contracting system
Although, there are good reasons for expanding contract farming, but the evidence of it’s
benefits to smallholders is mixed. Contract farming in developing country has experienced a
mixed fortune, yielding some successes and some failures. Positive views basically maintain
that contracts are an adequate mechanism to incorporate small farmers into dynamic
modern markets by substituting failing markets for credit, insurance, information, factors of
production, outlet produce and diminishing transaction costs and transfer of technology,
(Glover, 1984; Grosh, 1994; Key and Runsten, 1999). Conversely, other authors warn about
some undesired welfare effects for smallholders (Willson, 1986; Rickson and Burch, 1996).
However, like many developing countries Bangladesh lack the laws and legal framework to
support contractual agreements. Agreements at times may not be easily enforceable or even
legally binding. Since prices specified in contract are based on expectations about future
market behavior, substantial variations in the realization of the expectation can lead farms
to engage in contractual holdup. For example, during the bird flu incidence, Bangladesh
poultry sector got affected and as a result price varied significantly. Since an effective
enforcement mechanism is absent, poultry farmers could do nothing to avoid the negative
impact of contractual holdup. Some issues from integrator’s point of view is that the
smallholder farmers may exercise opportunistic behavior by misuse or deviation of inputs
supplied by the farm, fluctuating demand for poultry products, poultry diseases specially
23
avian flu, extra contractual sales by farmers, miss selection of appropriate farmers, miss-use
of feeds etc. Farmer may also consume part of the production or even sell to third party as
FCRs (feed conversion ratios) are not followed presently. The external factor outside of the
control of the smallholders point of view includes delay payment from integrator,
abnormally price hike of poultry feed and medicines etc. However, given the external factors
which could undermine the system, the ABFL is a successful story of contract farming.
6. Conclusions and policy implications
The future outlook is positive for the Bangladesh poultry industry because the demand for
poultry products is expected to increase given its current low level of per capita
consumption and anticipated growth in population and household incomes. To compete, the
Bangladesh poultry industry must pursue production and marketing efficiency and the
government must provide an environment that is conductive to productivity improvement.
The chapter reveals that contract poultry farming system in Bangladesh is

Dominated by smallholders.

Potentially a way of overcoming market imperfections, minimizing transaction costs
and gaining market access for smallholders.

Benefits from this system include access to credit and technology, better
management of risk and enhanced family employment opportunity.

Increases productivity, profitability and efficiency, a win-win situation.
Thus, contract farming undoubtedly is the most authentic way to produce quality poultry
products and this system has to be spread all over Bangladesh to meet the domestic meat
requirement and also for generating export market potential. Government policies are
required to prevent malpractices by the companies and to restrict exploitation tendencies. It
can be suggested that to increase poultry production and develop the poultry industry, the
24
government as well as other private integrators can take initiatives to establish an effective
and well organized contract farming system in Bangladesh.
25
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The Poultry Site news desk:
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