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
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. Poultry contributes about 22 to 27 percent of the total
animal protein supply in the country (Prabakaran, 2003). This sub-sector 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 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).
Although meat production has been increasing over time in the country but the per capita
availability is far below the minimum requirement shown in Table 1 (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 farming system (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 meat of chicken 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 farmer’s livelihood, the
production system is not adequately market oriented. There are a number of obstacles to be
1
Department of Agricultural Economics, Bangladesh Agricultural University, Mymensingh-2202,
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
overcome before small farmers will be able to 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 production and evaluate whether contract farming can
improve market access for smallholder poultry farmers in Bangladesh.
1.1. Existing poultry production system
The present poultry farming system in Bangladesh can be broadly divided into two: (a)
traditional rural backyard or scavenging farming system; and (b) commercial farming
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 and meet-up 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. However,
Bangladesh poultry sector has undergone a phenomenal transformation from backyard to
commercial farming since 1990s.
1.2. 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. 2011). 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.
1.3. 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 from parent
stock and 11 of these hatcheries procuring day-old chicks are government owned (Saleque,
2
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, therefore, 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 day-old-chicks
(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 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.
1.4. 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 ingredients mixing 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
5
Local currency (1US$=68 Taka)
3
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 subject to the
movement of international 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.
1.5. 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
death or loss of birds. Outbreak of disease also causes a considerable economic loss and
erodes confidence in poultry farming. For example, Gumboro and New Castle are epidemic
4
diseases, and they cause large quantity of losses. Aside from production oriented problems,
one of the main factors that obstruct growth of poultry products 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).
1.6. 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.
5
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 in forces 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) show 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
From the above discussion, it is clear that that poultry input markets are not competitive
and demand supply imbalance is a barrier to smooth functioning of the market therefore,
6
commercial poultry sector is not well organized in Bangladesh. For 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.
2. Contract farming system in Bangladesh poultry sector
Contract farming offers several potential advantages over independent farm. 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 is, i.e. define their relationship with
companies differ across cultures (Asano-Tamonoi, 1988). In fact, there is so much diversity
in the type of farms, farmers, nature of contracts, 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 nongovernmental organizations like BRAC (Bangladesh Rural Advancement Committee),
PROSHIKA have also came forward to support rural people by providing kind or cash
through the setting up of contract farming and running of the small scale poultry farms.
ABFL is one of the leading poultry farms in Bangladesh established in 1991 at Bhagalpur in
the district of Kishoregonj, about 110 km northeast of Dhaka city. ABFL is one of the
subsidiary companies of the Islam group that predominantly addresses its activities to the
agricultural sector. ABFL first introduced contract growing system of commercial broiler as
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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 (small, medium and large) of farm according to land sizes 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 firm consists of a modern hatchery that produces 60,000 broiler and layer parent birds
and supplies 100,000 day-old chicks 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 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
1.
Name of the Company
AFTAB Bahumukhi Farms Ltd.
2.
Type of the Company
Private Limited Company
3.
Product/services dealing with
(a) Commercial Broiler: Live broiler,
dressed broiler
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(b) Parent stock
4.
Form of contract arrangement handled Formal input-output
(up to 2003)
5.
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
(c) Geographical locations covered
Only Kishorganj district
(d) Volume of input/product delivered per (i) Commercial Broiler: Feed: 100
month
Metric 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
6.
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:
7.
Provision for enforcement of contract
Mostly informal and social
8.
System of ensuring product quality
Inspection, supervision, lab. test
Source: Begum (2008)
According to the agreement, ABFL extends credit facilities to the farmer, provides day-oldchicks, 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
9
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
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, the 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
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Furthermore, ABFL is the only farm in Bangladesh that introduced an internal insurance
scheme to cover the risk of loss of the contract growing farmers in case of immature death
of chicks by diseases and other cogent reasons. 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). However, 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; Johnson and Foster, 1994; Knoeber
and Thurman, 1995). 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 age- Taka 20 per bird is paid after deducting 15 percent from the total number of
lost birds. For birds beyond 20 days 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
Claim
Taka. 1.50 per bird
Mortality rate
Refund
0-3%
80% premium
4-6%
40% premium
7-10%
11-15%
Above 15%
Within 20 days deducting 15%
After 20 days deducting 15%
20% premium
10% premium
Taka 20/bird
Taka 30 /bird
Source: Begum, 2008
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3. Effectiveness of contracting system in promoting small farmers’ 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. 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 reach to small
farmers or not before drawing positive conclusions about the system.
Thus, to ensure efficiency and equity, it will be necessary to develop institutional
mechanisms which facilitate small farmers’ access to inputs, credit, and technical assistance
and reduce the uncertainty in marketing output. This will in turn raise their productivity,
market, 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 economic
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 as
well because of bureaucratic complexities. Third, small farmers operating near subsistence
and are more risk averse than large farmers. Finally, public intervention (such as public
extension service and policies) to promote commercial poultry production have had more
impact on large farmers than on small farmers. Thus, it is clear that, in the interest of both
efficiency and equity, 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 to the marketing of output. To some degree that contract
farming system is developed and policy biases reduced, small farmers will be able to raise
their income by taking poultry as a main or subsidiary occupation.
Contract farming has been considered as one system that has considerable potential for
providing a way to integrate small farmers into the modern economy. Contract farming
system involves small farmers for some reasons. One of the main reasons is that in
developing countries the integrated farm faces difficulties to finding out 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
12
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), processing tomatoes in Mexico (Runsten and Key, 1996), 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.
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 barriers to the contracting system 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 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. It is an approach
that can contribute to both increased income for farmers and higher profitability for
sponsors. 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 service provided by contract
farming companies (FAO, 2001).
In the case of Bangladesh, ABFL farm is different from integrated farms in other countries
because the ABFL started as an agro-based farm; it included all categories (small, medium
and large) of farms according to land size in its poultry contract farming. There was
perhaps no special consideration for small farms but they were included so long as other
requirements for engaging in poultry were met. Unlike vertically integrated farms in
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developed countries where big trading companies usually prefer contracts with large-scale
farms and farmers to minimize transaction costs, the ABFL has tried to be inclusive. One of
the objectives of the ABFL was to increase income and welfare of small farmers in the areas
around the firm headquarters. This motivation may partly lie in the fact that the owner of
the Islam Group, of which the ABFL is a component, comes from the locality, so
contribution to the improved welfare of his local people through his business ventures
might serve both a business and a welfare objective.
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 three reasons. First, the
firm encountered difficulties finding enough farmers to produce the amount of poultry they
needed. Second, they feared that larger farmers, being few in number, might collectively
bargain to bid up the prices paid to them for their product. Finally, the government of
Bangladesh restricted large-scale poultry farms by licensing to protect the small farmer.
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 such as day-old chicks, feed, and
vaccine and accessing output markets. When markets are accessible, farmers may be subject
to price fluctuations or inequitable prices. Such difficulties are barriers to the development
of the commercial poultry sectors and represent a ‘bottleneck’ in the development process.
Farmers get access to new technology and inputs through contracts which may otherwise
be outside their reach. That’s why for small farmers, contract farming is potentially a way of
overcoming market imperfections, minimizing transaction costs and gaining market access.
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. Moreover, according to the poultry development policy of Bangladesh, the
establishment of large-scale poultry farms has been restricted to protect small farmers.
Considering all these and for the well-being of the small farmers’ AFBL modified the
conventional contract farming system in broiler production.
3.1. Small farmer’s benefit from contract farming system
For this section we used Begum (2008) and Begum et al (2011) study’s outcome and two
different dataset collected by the first author.
Data set 1: The contract farming data were collected from two Thanas- Bajitpur and
Kuliarchar located in Kishorganj district. In order to fairly spread the sample over the entire
14
study population, at first a list of all 560 contract growing farmers was prepared with the
help of officials of ABFL to obtain a representative sample and then the farmers were
categorized according to their farm sizes as follows- 1) Small farmers raising 1200 birds, 2)
Medium farmers raising 1201 up to 2000 birds, 3) Large farmers raising more than 2000
birds. According to this criterion in the study area among 560 farms 202, 280, and 78 farms
were small, medium and large farms respectively. Fifty contract broiler farms were selected
from 560 farms by using stratified sampling method, based on the observed ratio of the
population of farms. As a result 18, 25 and 7 selected farms belonged to small, medium and
large farm categories, respectively. However, to know the farm size of the total population
of farms, data were collected from all contract farmers under ABFL’s, i.e., 560 contract
farmers who were categorized on the basis of both land size of the farm as well as the
number of birds.
For a comparative analysis, we have selected Gazipur district purposively because it was
declared by the government of Bangladesh as the poultry region. The samples of farms
collected here are all independent and are not under any contractual system. A field survey
was carried out on 25 commercial poultry farms selected randomly from Kaliakoir and
Sripur Thanas (sub-districts) of Gazipur district.
Information was collected covering a one year cycle of poultry farming and belongs to
December 2001 to November 2002. Actual data collection took place during December 2002
to January 2003. This data set is used for estimation net return and efficiency.
Data set 2: Data set 2 is used to know the bird flu impact on contract farming. In this data
set 20 contract poultry farms, 20 non-poultry farms and 20 independent poultry farms were
selected randomly in order to understand and compare effects on the incomes of small
farms’ irrespective of raising poultry or not. In this dataset all types of farms were selected
from Bajitpur in order to neutralize any location effect.
Table 3 represents the farm size of ABFL’s contract farmers. It is found that ABFL’s
contract farming system is based on the economic development of small farmers. Most of
the farms (93 percent) were classified under small farm category, while another 4.3 percent
was identified as medium farms. The remainder 2.7 percent was categorized under the large
farm category. Thus, it appears that population of contract farm size is overwhelmingly
characterized by the operation of small farms.
Table 3: Size distribution of farm households of ABFL’s contract farmer
15
Land holdings
Small farm (less than 2.5 acre)
Medium farm (2.5 to 5.0 acre)
Contract farm
(Number of farm)
521
24
% of total
contract farm
93.0
4.3
15
560
2.7
100.0
Large farm (above 5 acre)
Total
Source: Begum (2008)
By considering poultry flock size, the ABFL’s contracting system is also overwhelmingly
characterized by the operation of small farms (see Table 4). However, if actual meaning of
large farms (more than 5000 birds/ batch) considered, than only 3 farm found as large farm
out of total 560 contract farms in the study area.
Table 4: Bird size distribution of farm households of ABFL’s contract farmer
Flock size
Contract farm
% of total contract
(number of farms)
farm
Small farm (up to 1200 birds/batch)
201
36
Medium farm (1201 to 2000 birds/batch)
281
50
Large farm (more than 2001 birds/batch)
78
14
Source: Begum (2008)
Benefits from contract participation result to improved access to markets, credit and
technology, better management of risk, improved family employment and indirectly,
development of a successful commercial farming. Small farmers could be benefited from
contracting system in one hand by generating their income, and by getting employment
opportunity on the other.
3.1.1. Net return
Positive evaluations of contract farming generally indicate small farmers either benefit from
contracts in terms of enhanced net return or get out of the business. Here, an attempt is
made to determine per bird profit or net return gain from contract and independent broiler
farming system. Independent farmers are those farmers who run their business themselves
without any contractual agreement with a third party, bear all production expenses by
themselves and enjoy all the risks and benefits as a consequence of their decisions. Broiler
production input costs are high and small farmers receive advances from the firm for feed,
day old chicks, vaccine and medicine in kind to overcome potential credit constraints.
Integrator provides major share of total cost. Under variable costs, feed, day old chick and
medicine/vaccines were the major expenditures, accounting for 56, 28 and 4 percent,
16
respectively. Variable costs were the major costs (more than 96 percent) of the total cost
(see Table 5). This was indicative of the high operating capital investment required in the
broiler business. It is also evident from the Table that 100 percent of the average total
returns were contributed by the total cash income. This was attributed to their contract
with the integrators, under which the later was to take all the broilers produced. ABFL
fixed prices before contract and farmers got the price on the basis of that contract. In the
survey period average price and average bird per year were Taka 54 per kilogram and 9179
respectively. It is evident from Table 4 that net return and gross margin of contract farms
are significantly higher than the independent farms.
However, contract farmers were better off in their net income since the major cash inputs
were provided by the integrators and had a guaranteed market. Net return of contract farm
is highly positive, therefore indicating profitable business.
Table 5: Comparative annual average cost, return and profit of independent & contract
broiler farms (per bird basis)
Particulars
Independent farm
%
Contract farm
%
(Taka per bird)
(Taka per bird)
Day old chick
19.2
27.6
15.2
28.7
Feed
38.8
55.8
29.7
56.2
Vaccine & Medicine
2.8
4.0
2.4
4.5
Electricity
0.9
1.2
1.6
2.9
Pollythyne
0.3
0.4
0.1
0.2
Transportation
0.4
0.5
1.3
2.5
Litter cost
1.2
1.7
0.5
0.9
Miscellaneous cost
0.0
0.0
0.1
0.2
Hired labor
1.6
2.2
0.6
1.1
Family labor
1.3
1.8
1.3
2.4
Interest on operating capital
3.3
4.7
0.2
0.4
Sub total
69.5
96.1
52.9
98.1
Depreciation on equipments
0.3
9.5
0.2
18.8
Depreciation on housing
1.6
55.1
0.6
54.5
Land rent
1.0
35.3
0.3
26.7
Sub total
2.8
3.9
1.0
1.9
Total cost
72.4
100
53.9
100
Total fixed cost
17
Total cash return
Broiler sold
80.8
97.5
68.8
96.7
Faeces sold
0.7
0.9
0.3
0.4
Feed bag sold
0.4
0.5
0.3
0.4
Insurance
_
_
1.8
2.6
Sub total
81.9
98.9
71.1
100.0
Home consumed
0.5
1.1
_
_
Total return
82.4
100.0
71.1
100.0
Gross margin
12.9
18.2
Net return
10.0
17.2
Source: Begum (2008)
This section also evaluates the profitability of contract poultry farming system compared to
independent farm per farm basis. Begum (2008) showed that net return of contract farm is
more than 3.6 times higher than the net return of independent farm (Table 6).
Table 6: Comparative annual average net return of independent and contract broiler farm
(per farm basis)
Particulars
Independent(taka/farm)
Contract (taka/farm)
Gross margin
56,592
161,188
Net return
42,338
151,896
Source: Begum (2008)
3.1.2. Efficiency
Contracting system is also positively and significantly related to the farm’s efficiency.
Begum (2011) have found that under constant returns to scale (CRS) and variable returns to
scale (VRS) specification, technical efficiency (TE), allocative efficiency( AE) and economic
efficiency (EE) of the independent farms are 86 percent, 87 percent, 74 percent and 91
percent, 89 percent, 81 percent, respectively, which are below than the contract farms (93
percent, 99 percent, 93 percent and 96 percent, 98 percent, 94 percent, respectively) (Table
7). Therefore, contract farms are more efficient than independent farms. 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 services, and
production credit along with intensive supervision, which in turn improves farm efficiency.
Table 7: Frequency distribution of efficiency estimates from the DEA model
18
Efficiency
index (%)
TE
CRS
61-70
Independent
AE
0
0
4
(16)
18
(72)
1
(4)
2
(8)
0.86
2
(8)
18
(72)
5
(20)
0
0.87
Standard
deviation
Maximum
Minimum
VRS
61-70
0.06
71-80
71-80
81-90
91-99
100
Mean
81-90
91-99
100
Mean
Standard
deviation
Maximum
Minimum
EE
3
(12)
22
(88)
0
DEA Frontier
Number of farms
Contract
TE
AE
EE
TE
t-statistics
AE
EE
0
0
0
-
-
-
0
0
0
-
-
-
1
(2)
48
(96)
1
(2)
0.99
18
(36)
31
(62)
1
(2)
0.93
-
-
-
-
-
-
-
-
-
0.74
16
(32)
30
(60)
4
(8)
0.93
6.40
(0.000)
13.10
(0.000)
21.58
(0.000)
0.04
0.03
0.03
0.02
0.03
1
0.72
1
0.76
1
0.66
1
0.88
1
0.87
1
0.87
0
0
0
0
0
2
(8)
10
(40)
8
(32)
5
(20)
4
(16)
10
(40)
9
(36)
2
(8)
1
(4)
13
(52)
8
(32)
1
(4)
2
(8)
0
0
0
5
(10)
37
(74)
8
(16)
1
(2)
45
(90)
4
(8)
12
(24)
34
(68)
4
(8)
2.85
(0.007)
7.29
(0.000)
7.83
(0.000)
0
0
0.91
0.89
0.81
0.96
0.98
0.94
0.07
0.06
0.08
0.03
0.02
0.04
1
0.75
1
0.77
1
0.70
1
0.90
1
0.87
1
0.87
Source: Begum et al. (2011)
Begum et al. (2011) also found that the factors behind variation in efficiency level. In their
study, the variation in economic inefficiency is explained using various farm-specific human
capital variables. Evaluating factors associated with inefficiency suggests that engagement
in contract farming is the most statistically significant factor associated with technical,
allocative and economic inefficiency. The elasticity estimate reveals that a 1percent increase
in the number of contract farm increases technical, allocative and economic efficiency by
19
0.05 percent, 0.09 percent and 0.14 percent respectively in CRS specification and 0.03
percent, 0.07 percent and 0.09 percent, respectively in the VRS specification (Table 8). This
increased efficiency of contract farming may be due to a transfer of technical know-how
from integrators to farmers.
Table 8: Tobit regression analysis of factors associated with inefficiency
Constant
DEA frontiers
Constant return to scale (CRS)
Variable return to scale (VRS)
TE
AE
EE
TE
AE
EE
0.829***
0.8479***
0.6982*** 0.9064*** 0.8549***
0.7681***
Age
0.0005
-0.00001
0.0004
0.0001
0.0008*
0.0009
Schooling
0.0082
-0.0026
0.0046
-0.0017
-0.0106
-0.0106
Occupation
0.0172
0.0155**
0.0296***
0.0108
0.0093
0.0185
Contracting
0.0689***
0.1249***
0.1759***
0.0418***
0.0945***
0.1274***
δ
0.0501
0.0312
0.0346
0.058
0.0361
0.0596
Log-Likelihood
97.40
146.45
138.87
71.66
115.73
81.50
LR (χ2)
31.45
115.31
148.62
9.34
76.42
58.57
P> χ2
0.000
0.000
0.000
0.053
0.000
0.000
75
75
75
75
75
75
Factors
No. of
observation
Source: Begum et al. (2011)
Note: ***, ** and * indicates 1%, 5% & 10% level of significance
3.1.3. Employment opportunity
The unemployment rate in Bangladesh was 1.9 in 1991 and reached to double (3.7) in 2000
(BBS, 2001). Agriculture still provides employment for the vast majority of the population.
The existence of significant unemployment and under-employment rate suggests that the
country has significant surplus labor and by using those labor force the country has an
opportunity to flourish its’ economy.
Commercial poultry farming system has also created job opportunities. The poultry sector
could generate employment by using family labor as well as hired labor. The survey also
collected information on labor use for poultry production activity. Table 9 presents
information on labor utilization of the different size categories of contract poultry farm. It
appears that the total labor man-days per farm were 492, 572 and 497, respectively, of
20
which 38, 40 and 37 percent man-days were family labor and 62, 61 and 63 percent mandays were hired labor.
Table 9: Utilization of labor in contract farming system
Types of Labor
Small farm
Medium farm
Large farm
(m-day/farm/year
(m-day/farm/year)
(m-day/farm/year)
Family Labor
188,82 (38)
225,75 (40)
185,75 (37)
Hired Labor
302,84 (62)
345,76 (60)
311 (63)
Total Labor
491,67 (100)
571,51 (100)
496,75 (100)
Source: Begum (2008)
Note: Values in parentheses indicating percentage of total labor
Furthermore, the broiler industry generated jobs within the industry. In 1994, ABFL
started the broiler contract system with 20 staff members but in 2002 the number increased
to 200, which represents a positive impact on the country’s unemployment problem. Jobs
were also created at the farm level by using family labor.
3.1.4. Opportunity of market access
Comparing the marketing system under conventional & contracting system, we find that
marketing channel of conventional system is longer than contract system. In contract
system, farmers sell poultry product to integrator directly. Consequently contract system
may serve to lower the transaction cost associated with searching, collecting market
information, negotiation, etc, 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.
3.1.5. Small farmer’s income after bird flu incidence
To draw an overall picture of vertically integrated contract farming system this chapter also
focused how this system worked after the bird flu (avian influenza) incidence when
Bangladesh like other countries in Asia faced huge financial losses.
From the foregoing discussion it is observed that contract farming worked well before bird
flu scar in the context of Bangladesh small farmers. Begum (2008) also took an attempt to
determine 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
contract farmers earned more profit than independent farms in the changed contractual
agreement, the contract farmers appeared to be better-off in their net income. Per bird net
21
return of contract farm is more than 1.4 times higher than the net return of independent
farm.
From the above discussion it is clear that small farmer can be benefited by entering
contracting system both in enhancing net income and employment generation and get
opportunity to access market.
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 framer started taking interest to enter into contract poultry
farming system by knowing its profitability although the farm 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
system seems to be a new key to unlock these constraints by contractual agreement with
small farmers to expand their productive potential of poultry and to overcome poverty.
Contract farming is undoubtedly the most authentic way to produce quality chickens. This
has been substantiated by research findings all over the world.
4. External factors
22
Although, there are good reasons for expanding contract farming, but the evidence on its
benefits to smallholders is mixed and unsubstantial. Contract farming in developing
countries has experienced a mixed fortune, yielding some successes and some failures
regarding the potential of this contract farming system as a “bridge” for trading between
integrated farms and small farmers. Positive views basically sustain 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 associated with the search of prices and markets,
transfer of technology, and distribution of bargaining power, monitoring and enforcement
in transactions (Glover, 1984; Grosh, 1994; Key and Runsten, 1999). Conversely, other
authors warn about the downside of contract farming in developing countries, which may
yield some undesired welfare effects for small farmers (Willson, 1986; Rickson and Burch,
1996).
Also many developing countries such as Bangladesh lack the laws and ensuring legal
framework to support contractual agreements. Agreements at times may not be easily
enforceable or even legally binding. In most developing countries, contract farming
arrangements are operated in accordance to traditional values and norms than legal
agreements (Glover and Ghee, 1992). This gives room for opportunism on the part of both
parties. Contractors might renege on contractual terms if market circumstances change or if
other conditions for opportunistic behavior arise. 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 force renegotiation or to engage in contractual hold-up
(Glover and Ghee, 1992). Contract farming may disguise by rejecting broilers delivered by
smallholders under pretext of non-conformity to quality regulation just to transfer the
financial losses arising from unexpected market turns to the farmer. Due to the absence of
effective enforcement mechanisms, the farmer does nothing to avoid the negative impact of
contractual holdup.
Another issue is that under contract such as poultry contract farming in Bangladesh, the
smallholder farmers may lose flexibility in enterprise choice. Being bound to a particular
contract with integrator, they cannot adjust production mixes so as to benefit from market
opportunities.
There is also tendency that the farmers may abandon their traditional products. Patterns
that emerged from the optimal utilization of locally available resources might be
23
irreversibly lost as farmers become used to different technologies. Then it might be difficult
to re-establish the traditional ways if the farmer wishes to stop the contract.
The smallholder farmers may exercise opportunistic behavior by misuse or deviation of
inputs supplied by the farm. Farmers may use feeds provided under contract for domestic
herds or flocks. They may also consume part of the production or even sell to third party.
As a result, farm may provide a formula price which takes into account the feed conversion
rate and the percentage mortality rate of the flock, among other performance indicators.
Farms in their own way may use it as an opportunity over farmers.
However, there have been many success stories of contract farming in many parts of the
world, both in the developed countries as well as developing countries. ABFL is also a
successful story of contract farming.
5. Policy implications and recommendations
Based on the major findings of the chapter, the following recommendations are made:
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 broiler industry must pursue production and marketing efficiency and the
government must provide an environment that is conductive to productivity improvement.
Contract farming undoubtedly the most authentic way to produce quality poultry products
and this method is proven all over the world. This system is well established in developed
countries and has to be spread in all over Bangladesh if we have to take advantage to meet
the domestic meat requirement and also for export market potential. So, this system has not
only the potential to increase incomes of contracting farmers but also to have multiplicative
effects in the broader economy.
To expand contract farming system to all over Bangladesh is a long term goal. It is not
immediately possible to set up a nationwide vertically integrated farm in the short run,
because establishment of such vertical integration requires huge credit support from the
banking system for various players and for ensuring quality output. Aside from that banks
have to adopt proactive and liberal approach in financing poultry sector to take advantage of
opportunities thrown open due to the implementation of policy on poultry development. On
the other hand the government has to monitor whether or not integrated farms are looking
after the benefits of all categories of farmers. Combined with favorable government policies
like extension of subsidies to poultry farmers and exporters and protection from imports,
24
will help Bangladesh to play a significant role in global poultry products trade besides
meeting the ever increasing domestic demand. It can be suggested that to increase poultry
production and develop the poultry industry, the government as well as other private
integrators can take initiatives to establish an effective and well organized vertically
integrated contract farming system in Bangladesh.
The findings of the present study are expected to be helpful benchmark information for
economists, researchers, as well as policy makers and will provide useful information for the
further development of poultry farming in Bangladesh. The study may also provide useful
information to the researchers for further research in this area.
25
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