Contract Broiler Farming in the Indian Poultry Sector – A Discussion

 

Introduction:

 

Poultry is one of the fastest growing segments of the agricultural sector in India today. It is growing at a much faster rate than any element of agriculture or allied agriculture sector. While the production of agricultural crops has been rising at the rate of 1.5 to 2 percent per annum, the production of poultry (eggs and broilers) has been rising at the rate of 12 to 15 per cent per annum (Walt Poultry, 2008).

 

The total value of the poultry sector was Rs162 billion in 2005-06, which accounted for 10.5 percent of the total value of livestock output and 2.6 percent of the agricultural sector as a whole. The sector has evolved over the years from a backyard activity to an organized and scientific industry. India has the unique distinction of being the third largest producer of eggs (after China & the USA), ninth largest producer of broiler and fifth largest producer of poultry meat in the world. India produces more than 55.6 billion eggs per year with a per capita availability of approx 47 eggs per annum.

 

(See table below)

 

Table 1: Value of Output Share and Growth in Poultry Sector in India

 

Year	Poultry Meat	Eggs	Poultry Total	Livestock Total	Total Crop and Livestock
Value of Output in Billion Rupees (at 1999-2000 prices)
TE 1981-82	32	16	48	616	2950
TE 1991-92	64	32	96	966	3965
TE 2005-06	108	54	162	1536	6192
Share in Total Crop and Livestock VOP (percent)
TE 1981-82	1.1	0.5	1.6	20.9	100.00
TE 1991-92	1.6	0.8	2.4	24.4	100.00
TE 2005-06	1.7	0.9	2.6	24.8	100.0
Compound Annual Growth Rates (percent)
1980/81-1989/90	8.4	7.9	8.3	4.9	2.8
1990/91-1999/00	4.2	4.1	4.1	3.8	3.2
2000/01-2005/06	4.6	4.1	4.5	3.6	5.0
1980/81-2005/06	5.0	5.2	5.1	4.0	3.1

 

Source: Ministry of Statistics and Programme Implementation, Govt of India (http://mospi.nic.in/) as quoted in AERC Report of the Gokhale Institute of Politics & Economics by Dr Kalamkar (2011)

 

 

 The importance of the poultry sector can be viewed from the following angles:

 

1. Poultry has the potential to meet the protein requirements of a nation where malnutrition is rampant- since both eggs/broilers are a good source of protein
2. The income generated from poultry activities helps to augment the income of the rural masses. It does not require the trappings of space or any major infrastructure investment
3. Poultry is one of the most efficient converters of plant products / waste into edible food that can in some measure tackle the problem of malnutrition especially in a country like India.
4. Unlike other meat (beef, pork) which have religious taboos-chicken is widely accepted in India and is cheaper than goat meat ( also referred to as ‘mutton ‘in India)
5. Poultry litter has high manure value and can be used in agriculture activities
6. Poultry provides an excellent source of employment for the rural masses .Generally the entire family can be involved in various aspects of the business ( helps contain costs and maintain better supervision)
7. Generates relatively quick returns with low investment requirements ( in terms of the space, low capital reqd to enter the business and relative simplicity of day to day operations)

 

It is believed that the Indian poultry industry is 5000 years old. The Indian Red Jungle Fowl is the acknowledged ancestor of modern day hybrid chickens [1].  The two main categories of output from the poultry sector are:

 

• Broiler : Focus is meat
• Layer : Focus is Egg Production

 

Broiler Chicken Industry in India: Overview

 

Broiler production has grown at a very fast pace: from 4 million in 1971 to 1563 million in 2006. The broiler chicken market in India is estimated to be Rs 60,000 million and estimated to be growing @ 15% in the last few years (RNCOS, 2005). Andhra Pradesh, Kerala, Karnataka and Tamil Nadu accounted for 40% of the market. Maharashtra and Goa accounted for about 15% with the balance being shared by the Central, Northern and Eastern Regions of the country. Integration has helped to propel poultry to a commercial level. The increase in scale has provided the ‘push factor’ to take care of the ‘pull factor’ caused by the growth in the per capita income thereby providing choices to the consumer and keeping the price in check. However stringent penalties (only a 5% mortality rate is allowed- lower price or a penalty is levied by offering a lower procurement price in case the mortality rate is higher), absence of insurance, and delay in picking up the grown chicks and the loss incurred due to the interpretation of the contract formalities and the virtual lack of voice of the farmer/grower are some of the drawbacks of this system.

What is Contract Farming or Integration?

A farmer interested in engaging in poultry development activity has two options:

1.  Opt for Contract Farming also referred to as Integration

1. Non Contract Farming : In this scenario the farmer is responsible for all the activities viz procurement of day old chicks ( to rear them for the broiler market) or acquiring a pureline / good breed which will be able to produce eggs that have a ready market. In this case the farmer solely bears all the expense involved in procuring the: feed, overhead expenses for (water/heating/cooling/disinfecting the poultry farm) , medical costs transportation and marketing etc plus he is also exposed to the ‘market risk’ ( in other words to the possible risk of there being an unfavorable demand for the broilers/ eggs at the time that they are ready to be sold .In case of broilers the usual cycle of procuring day old chicks rearing them and selling them in the market is about 40 days. In case of eggs (layer) the sale can be immediate.

It is estimated that at present 36.7% of broiler production in India is under contract farming out of which about 78 % of the contracts are concentrated in Southern India. The Coimbatore-Salem belt is the front runner and leads the pack in broiler production in India. Another prominent belt for broiler production is the Pune-Nashik area (Maharashtra).Hyderabad and Bangalore have also seen a rapid growth of the contract broiler type of arrangements. The key players in this sector are Venkateshwara, Suguna, Godrej etc.

A contract farming arrangement involves a wage contract between an integrator who supplies the intermediate inputs and procures the output (as per pre decided terms) and a poultry farmer who provides inputs such as administration, rearing and care taking.

The process can be described as under:

• Integrator supplies the ‘raw-material’ which in this case are the day old chicks (DOC)
• He also supplies the feed, medications, veterinary supplies and implements that may be required (E.g. : Water dispensers, feeders etc)
• The contract farmer provides his services (labor) and space for the shed and other related services or equipment that may be required
• The integrator also bears the marketing responsibility (risk) and the expense involved in transportation ( to and from the farm)
• Since the major chunk of the expense ( working capital) is borne by the integrator-he is the absolute owner of the moveable stocks ( broiler) on the farm
• The farmer’s role is like that of a ‘care-taker’ who gets a pre determined wage which is listed in the contract
• This wage paid to the farmer is linked to various parameters such as the ‘Feed Conversion Ratio’(FCR) or  in other words the quantum of feed consumed by the bird to produce the weight, percentage of birds dead etc.
• A farmer is rewarded for surpassing the set standards and penalized if any of the agreed criteria is not met
• This penalty is deducted by calculating the loss incurred per bird and deducting that amount from the money to be paid ( wage bill)

Some Issues in Contract Farming & Recommendations:

A.    Need for Suitable Status, Incentives & Support for the Poultry Sector by Policy Makers/Government

 

1. The status of the poultry sector has been a grey area for bankers and policy makers alike. While NABARD and commercial banks classify this sector under the ‘agriculture’ category most of the benefits viz concession in electricity, water costs, and tax benefits are not extended to this sector.
2. Most farmers (both contract and non-contract) treat this as a secondary occupation. This can be changed by encouraging poultry producer’s co-operatives and subsidizing the feed costs. Moreover such co-operatives will enable the participating farmers to get an avenue to voice common concerns, and seek solutions that can have a positive impact on all stakeholders.
3. Adequate infrastructure such as efficient cold chain system is required to ensure efficient forward and backward linkages. The perishable nature of the product requires minimal intermediaries (opposite situation prevails in the current scenario). The fate of the non contract farmers becomes even more difficult since grown broilers cannot be retained beyond a certain time.

 

B. Integration: Not a Panacea (Common Problems faced by the Farmers)[1]

 

• Late / Early pick-up of the birds by the integrators depending upon the market conditions.

In case of a ‘late pick-up’ the Feed Conversion Ratio (FCR) of the bird increases after the 42 day maturity period. A high FCR lowers the procurement price for the farmer and profitability. Incase of an ‘early-pick-up’ the FCR is low since the bird has not reached the desired maturity which again lowers the profits to the farmer.

• Limited growth opportunity:

Low growing charges coupled with the cost of making investments in the infrastructure such as sheds, feeders, breeders, heating and cooling systems result in a low income for participating farmers. Since there is little government support to the sector, non contract farmers are dwindling in number. The stringent mortality norms (only a 5% mortality is permitted in most integration contracts-else the farmer gets penalized and is offered a lower rate) leaves the farmers in a vulnerable position and with no avenue to voice their grievances

• Delay in receipt of payments, or receipt of DOC’s[2]:

Leads to fewer batches in a year and thus a lower annual income.

• Extent of rural penetration of   poultry activities:

As per the current situation most poultry farms are located in close proximity (approx 8 kms from the nearest town [3] for contract farms and about 8.5 kms for non contract farms) because of the need to access inputs in time as well be able to offload the output. The locational proximity to the market becomes even more critical incase of non contract farmers who have to arrange and bear cost of transport. Lack of proper access roads especially in the interior parts of Indian villages has been a contributor for this industry becoming a ‘fringe’ industry’ (i.e. developing close proximity to towns).

• Lack of Access to Institutional Credit:

 Non Contract Farmers are generally unable to self finance a poultry endeavor. Due to lack of adequate government policy there are no incentives for banks to lend to poultry farmers. Integration therefore becomes a default route for farmers wanting to augment their income. In the process they have to accept the terms of the integrator.

 

C. Automation/Infrastructure Development: Imperative to gain Competitive Advantage

The pace at which the Indian market is able to transition from a live bird market to a chilled market will also be a factor in the expansion of the poultry sector. At present, live bird sales form the major component- limiting the scope of exploiting regional comparative advantages in production within the country. A shift to automated processing may also have public health benefits and stabilize prices.

 

D. Certification Norms/ Testing to ensure International Compliance

At present minimal official data is available on variables such as production, feed composition, vaccination, pesticide application etc[4]. There is a lack of comprehensive system to check for pesticide, antibiotic and hormone residue compliance as per international norms. Available data on production costs and prices in India vis a vis other countries suggest that India is an internationally competitive producer of poultry meat. Hence if we have to exploit the comparative cost advantage then compliance to international norms is an imperative.

E. Poultry Feed Prices: Cause for Concern

If the recent trends in poultry and egg production are to be sustained then the growth in feed demand particularly corn and soybean is likely to outpace domestic production. There is a need (at the government level) to encourage production of corn and soybean and also invest in R&D to create breeds that can be managed with local resources and feed options giving a higher FCR. In a study (McKinsey 2007) it was noted that the FCR for the Indian Poultry is 6 to 14% lower than those of their US Counterparts[5]. Hence genetically enhanced breeds suitable to the Indian climate would result in higher profitability for all stakeholders.

F. Lack of Availability of Reliable Data about the Sector

Government and industry sources publish very little reliable data on the sector. Available government data generally consists only of periodic poultry population estimates.

Conclusion

The poultry industry has demonstrated its capability to revitalize the economy (multiplier effect) as well as to contribute towards the national goal of nutrition security. At this crucial juncture a proactive government policy can easily propel our country to a premier position on the global horizon.

 Acknowledgement : This article would not have been possible without the support, data and insights received from Dr S Kalamkar of the Gokhale Institute of Politics & Economics -Pune. I’d like to thank him for his time and patience in explaining various nuances of the sector and for dealing with innumerable questions from my end. What was supposed to be a fifteen minute appointment streched to over 1.5 hours as we shared mutual insights (mine ofcourse were very limited !) and pondered over the happenings in the sector. Dr Kalamkar can be contacted on shrikantkalamkar@yahoo.com.

 

 

 

---

[1] Based on a  recent study conducted by Dr S Kalamkar of the Gokhale Institute of Politics& Economics on the Economics of  Contract Broiler Farming in Maharashtra

[2] DOC: Day old chicks

[3] Kalamkar S ‘Economics of Contract

[4] USDA Report : India’s Poultry Sector : Development & Prospects 2004

[5] Low FCR: would imply that more feed is required/consumed to gain the same amount of weight.

---

[1] Source: Thee VH Group