The piggery contract growing scheme in the Philippines : a study on cost-benefit

Abstract

This study evaluates the profitability of a piggery contract growing agreement in the Philippines. The assessments are made from the owner's, growers', and social viewpoints. Chapter 1 contains a statement of the problems of development efforts; of the objectives, significance and limitations of the study, and of the sources of data. Chapter 2 includes a discussion of the swine industry and a piggery contract growing agreement in the Philippines. This chapter covers the problems and status of the swine industry and also some marketing practices. The chapter also highlights some provisions in the contract, including its advantages and disadvantages from the owners' and growers' viewpoints. Chapter 3 sets out the analytical framework. This involves a discussion of cost-benefit analysis, sensitivity analysis, and evaluation criteria. Investment criteria, choices of discount rate, and the derivation of the cash flow are also discussed in the chapter. The investment criteria used are the internal rate of return, net present value, benefit to cost ratio, net present value to investment ratio, and average yearly present value of net benefits. The first four criteria are used in ranking the project from the owner's and social viewpoints. All five criteria are used in assessing the profitability of the project from the growers' viewpoint, with emphasis given to the last criterion (i.e., average yearly present value of net benefits). Chapter 4 deals with the coats relevant to the owner and to the growers. For the owner, three situations are examined: no contracting of pigs to growers (0 per cent contract growing scheme); contracting 60 per cent of pigs owned to growers (60 per cent scheme, and contracting 100 per cent of pigs owned to growers (100 per cent scheme). The cash flows for each of these schemes are presented. For the growers, the cash flow for raising 100 pigs is presented. Chapter 5 involves the adjustments of the costs to reflect the value of the piggery contract growing schemes to society. Some of the cost components are shadow priced to reflect their relative scarcities and some of them are treated as transfer costs. Decomposition and adjustment of capital outlay and current cost items into unskilled labor, foreign exchange, and taxes are also discussed in the chapter. No adjustment is made to the benefits. The economic appraisal is undertaken in Chapter 6. This involves the presentation and discussion of the results obtained and the conclusions and recommendations based upon them. The cost-benefit analyses reveal the following: (1) that the 60 per cent and 100 per cent contract growing schemes are more remunerative to the owner than no contracting; (2) that the 0 per cent, 60 per cent and 100 per cent schemes are highly profitable socially as proven by internal rate of return of more than 30 per cent. The 60 per cent and 100 per cent schemes are more remunerative than no contract growing; (3) that the growers earn an average yearly present value of net benefits of about P2,700 (P500 more than the minimum wage of P2,200) raising 100 pigs at a time. On the other hand, the sensitivity analyses show that: (1) The 60 per cent and 100 per cent schemes remain more remunerative to the owner than no contracting, assuming changes in the opportunity cost of capital by plus or minus three percentage points. The rankings of the schemes, however, are affected by reducing the number of pigs per grower. For 25 or 50 pigs per grower, the 60 per cent scheme was most remunerative, followed by the 0 per cent and then by the 100 per cent schemes. Assumptions of a 10 per cent reduction on the prices of pigs or a 10 per cent increase on the prices of feeds prove to be disastrous to the owner. These sets of assumptions fail to pass any of the adopted investment criteria. (2) From the social viewpoint, the order of results achieved is not greatly dependent on the assumptions made about the social opportunity costs of unskilled labour, exchange rate, and capital. The assumption made about the number of pigs per grower does not greatly affect the order of results regarding social returns to capital, but does greatly affect the order of results regarding employment. (3) For the growers, assumptions of 1 per cent more mortality than allowed, or a change of the opportunity cost of capital by plus or minus three percentage points, are still more remunerative than being labourers. Assumptions of 2 per cent more mortality than allowed, or a penalty for underweight pigs, or raising 25 or 50 pigs at a time, prove to be less remunerative. Based on the results obtained, several measures may be suggested in order to encourage piggery contract growing in the Philippines: (1) a stabilization subsidy to counteract the disastrous effect of a reduction in the prices of pigs or an increase in the prices of feeds; (2) veterinarians from the Philippine Bureau of Animal Industry to provide professional services free of charge to the scheme; (3) a change in the basis for providing credit; (4) creation of an insurance market for the scheme. These measures would not be costless, but in view of the high potential social returns to piggery contract growing, they may be justified. However, they would require a cost-benefit study in their own right. Some Important Notes on the Study (1) On May 24, 1976, $A1.00 is equivalent to P9.63, or PI.00 is equivalent to $A0.104. (2) The Board of Investments (BOI) is a government administrative body created by a legislative act (Republic Act No. 5186) primarily to encourage both local and foreign investment. A package of incentives - mostly in the form of tax deductions - has been offered to investors in both pioneer and non-pioneer preferred projects. (3) The Investment Priorities Plan (IPP), as prepared by BQl and approved by the President of the Philippines, delineated the various industries which were given preferred status for purposes of enjoying the incentives and guarantees offered under the Investment Incentives Act. The choice of areas of investment included in the list was based not only on the commercial feasibility of the projects, but also on the desirability of the activities for balanced economic growth. (4) Assessment of the piggery contract growing agreement is based solely on a "flat fee" scheme. However, a full assessment of contract growing arrangements would also require "guaranteed price" contracts to be examined. Show more