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

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 School of Geography, Earth and Environmental Sciences, the University of Plymouth, UK

4 Department of Agricultural Economics, Ghent University, 9000 Ghent, Belgium

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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.

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1. Introduction

The poultry sub-sector is an important avenue in fostering agricultural

growth and reduce malnutrition for the people in Bangladesh. Poultry

meat alone contributes 37 percent of the total meat production in

Bangladesh. Apart from this, poultry contributes about 22 to 27 percent of

the total animal protein supply in the country (Prabakaran, 2003). This

sub-sector has proved 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 (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

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farmers in Bangladesh. However, this situation has not changed

significantly over time.

Despite the contribution of poultry sector to the economy and small

farmers’ livelihood, the production system is not adequately market

oriented. There are a number of obstacles to overcome before small

farmers can get remunerative price as well as profit from poultry

production. Given this backdrop, the present chapter explores ways to link

small farmers with commercial poultry 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

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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 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

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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)

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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

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assurance and incentives such as differential commissions to wholesalers

and some millers also provide incentives to farmers. Generally, feed

manufacturer do fix the prices for wholesaler. The wholesalers sell feed

both in cash and credit to retailers and farmers. In setting sale price,

some of the wholesalers charge a fixed margin on the total cost of feed

marketed and others add a certain percent of total cost as profit. The

price of feed varies from brand to brand. For example, during 2010,

broiler feed price per ton varied from Taka 30,000 to Taka 32,000, and

layer feed price varied from Taka 24,000 to Taka 27,000 (Chowdhury,

2011). Most of the feed ingredients such as maize, meat bone meal,

soybean meal, protein concentrate etc. are imported and therefore

sensitive to the movement in world prices. Poultry feeds are mainly

imported from Germany, China, Thailand, India and Taiwan. The exact

number of feed mills in operation at present is not definitely known but a

report stated that there are 35 feed mills with 850 dealers at the private

sector who are producing and distributing poultry feed in the country.

These feed mills are owned and operated by the private sector, but their

distributional system in rural areas is inadequate and their production

does not meet quantity demanded.

2.2.3. Veterinary drugs

Vaccination and medication of Newcastle, Fowl Pox, Fowl Cholera, Fowl

Typhoid, Coccidiosis, Gumboro, are usually done by the poultry farmers.

The mortality rate of poultry is high (35-40 percent) due to disease and

predators. Although the government gives some necessary vaccine at low

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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 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,

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inadequate availability of inputs, inadequate institutional credit,

guaranteed and profitable markets for their output etc. (Karim and

Mainuddin, 1983; Ahmed, 1985; Haque, 1985; Islam and Shahidullah,

1989; Ukil and Paul, 1992; Bhuiyan, 1999; Uddin, 1999; Begum, 2005;

Begum and Alam, 2005; Begum et al., 2005).

2.3. Poultry output price and marketing channel

Poultry outputs particularly broilers are live product. Therefore, if farmers

fail to sell broilers at the right time, they face great losses. Thus, the

biological nature of broiler is one of the important causes of output price

instability. Broilers are sensitive product. They cannot be stored for a long

time without proper storage facilities. For this reason, the farmer wants to

sell their products immediately. Moreover, market price can fluctuate.

Prices observed in time are the results of seasonal patterns of change.

Measuring seasonal variation is required to know the short run

fluctuations in time series data. Average monthly wholesale price of big

size (1 to 1.5 kilogram) poultry in Dhaka market was used to measure

seasonal price variation. Data were collected from the Department of

Agricultural Marketing (DAM). Data covered the period from January 1992

to December 2003. The ratio-to-moving average method was used in this

study to measure seasonal variations. Figure 1 depicts the seasonal

indices. As shown in Figure 1, poultry price in March is 106 percent of

those of the average month, typical October price is 93 percent of those

of the average month, and so on.

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Farmer

Wholesaler

Institutional buyer Consumer

Retailer

Jan

Feb

Mar

Apr

May

June July

Aug

Sep

Oct

Nov

Dec85

90

95

100

105

110

Month

Seas

onal

Indi

ces

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.

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Figure 2: Marketing channels of poultry products

From the above discussion, it is clear that that the poultry input markets

are not competitive and demand supply imbalance is a barrier to smooth

functioning of the market implying that 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

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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 Bangladesh, there is a need to assess the

pioneer company’s profile and also to discuss the contractual agreement

between farms and farmers.

Contract poultry farming system was started by a big company named

Aftab Bohumukhi (Multipurpose) Farms Limited (hereafter ABFL). Besides

ABFL, some other non-governmental organizations like BRAC, PROSHIKA

have also came forward to support rural people by providing kind or cash

through setting up of contract farming and running of small scale poultry

farms.

ABFL is one of the leading poultry farms in Bangladesh established in

1991 at Bhagalpur in Kishoregonj district located about 110 km northeast

of Dhaka city. ABFL is one of the subsidiary companies of the Islam group

that predominantly engaged in the agricultural sector. ABFL first

introduced contract growing system of commercial broiler as an

experimental extension program for a selected group of 20 farmers who

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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 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.

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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 broilerb) Parent stock

IV. Form of contract arrangement handled (up to 2003)

Formal input-output

V. Backward linkage activities for contracted product/services

a) Package of input/Services i) Day old chicks ii) Feediii) Veterinary and medical servicesiv) Cash loan for operational expenses

b) Size of the contract farmers (in 2003)

i) Commercial broiler: 560 farmersii) Parent stock: 122 farmers

c) Geographical locations covered

Only Kishorganj district

d) Volume of input/product delivered per month

i) Commercial broiler: Feed: 100 metric ton (MT) per monthii) Parent stock: Feed 1000 MT

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per month

e) Value of input/service delivered per month

i) Commercial broiler: Taka 50,000,000ii) 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 company:

10 percent for chicks

VII. Provision for enforcement of contract

Mostly informal and social

VIII. System of ensuring product quality

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

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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’, ABFL follows credit

system.

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Feed Eggs

Feed Broiler Chicks

Live Broilers

Dressed Broilers

ABFL’s Processing Plant

Contract farm

ABFL’s Feed Mill ABFL’s Hatchery

ABFL Hatching Egg Farm

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;

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

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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 Claim

Mortality rate Refund

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Taka. 1.50 per bird

0-3% 80% premium

4-6% 40% premium7-10% 20% premium11-15% 10% premiumAbove 15% Taka 20/birdWithin 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.

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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 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

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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.

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

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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,

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so contribution to the improved 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

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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

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

25

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 non-

contract 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 the independent farms (Taka 12.9 and 10.0,

respectively.). However, both contract and non-contract 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

26

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

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.

27

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

28

return of contract farm is 1.4 times higher than the net return of

independent farm.

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2011

0100200300400500600700

No. of contract farm

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.

29

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 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).

30

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 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

31

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 government as well as other private

integrators can take initiatives to establish an effective and well organized

contract farming system in Bangladesh.

32

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