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THE RELATIONSHIP BETWEEN CONTRACTING AND LIVESTOCK WASTE POLLUTION

Published by the American Society of Agricultural and Biological Engineers, St. Joseph, Michigan www.asabe.org

Citation:  Pp. 135-154 in Animal Agriculture and the Environment: National Center for Manure and Animal Waste Management White Papers. J. M. Rice, D. F. Caldwell, F. J. Humenik, eds. 2006. St. Joseph, Michigan: ASABE.  .(doi:10.13031/2013.20250)
Authors:   Tomislav Vukina

The policy discussions about the potential linkages between contracting and livestock waste problems have been focused on two sets of issues. One set relates to the emergence of livestock waste as a major environmental problem that requires urgent regulatory intervention. Implicit in this debate is the notion that animal waste related environmental problems have been caused or exacerbated by the organizational structure of the livestock industry, notably its high degree of vertical integration via production contracts with independent farmers. Another set of issues relates to the design of regulatory policies that could be implemented given the existing organizational structures of various livestock industries.

As far as the emergence of animal waste as a major environmental problem is considered, the central objective of this paper is to try to answer the question of whether contracting worsens livestock waste management problems, how, and to what degree? The evidence about the potential linkages between contracting and animal waste management problems presented in the paper fits into four categories. First, contrary to the widely held belief that contracting leads to larger scale production (more animals per operation) and thus larger volumes of waste per operation, the existing literature does not support the hypothesis that the contract livestock producers tend to be larger then the independent farmers. Second, farmers tend to apply livestock manure in excess of the amount that would require just substitution of the chemical fertilizer because by applying manure on any given field they not only receive the nutrient benefits of that application but also save on the transportation costs relative to applying the same manure on more distant fields. This result shows that the use of manure can be expected to worsen nutrient runoff and leaching from croplands regardless of whether the livestock producer is a contract operator or an independent farmer. Third, contract production results in high concentration of livestock production facilities in a few geographic areas. However, there is also a tendency for the independent livestock producers to concentrate in certain geographical areas due to significant agglomeration economies. Fourth, given the fact that monitoring the nutrient content of feed and manure is costly and imperfect and each party cannot observe the effort exerted by the other party, the net benefits (cost) of nutrient application may fail to get incorporated into the payment schedule of a production contract. Therefore, the question of the division of responsibilities for providing inputs in livestock production and the resultant payment schemes used to settle the contracts become important for purposes of optimal contract design.

When it comes to designing an appropriate regulatory regime, the paper focuses on the question of how to apportion the burden of regulation among the contracting parties in a socially optimal way. The conclusions can be summarized as follows. First, in light of substantial multi-tasking problems, the regulation toward some form of a shared responsibility between the integrators and growers for manure disposal may render the currently used relative performance piece rate remuneration schemes obsolete. It is conceivable that rather then switching to fixed wage contracts as a method of rewarding their growers, integrator companies may gradually change their organization structure towards more company owned farms. Such an important shift in the industry structure away from contracting may have dire implications for local rural communities in many parts of the country. Especially strong impact could be felt in the Southeast where many small family farms heavily depend on the supplemental income from contract poultry operations. Second, the incidence of anticipated increases in environmental compliance cost will depend on the market power 1 Department of Agricultural and Resource Economics, North Carolina State University, Raleigh, NC 27695-8109. 136 The Relationship between Contracting and Livestock Waste Pollution of the integrator on the market for growers. In markets with absolute monopsony power of the integrator, the increased cost of environmental regulation will always be borne by the integrator regardless of the initial design. If the market for growers services is such that growers are actually earning positive rents, then the incidence of costs depends on the distribution of bargaining power between parties as well as the presence of other regulatory and legal requirements governing the specification of the contract form. Finally, the anticipated move toward shared responsibility for accidental waste spills between the integrator and growers may or may not be welfare enhancing, depending on the relative bargaining power of the integrator on the market for growers. In geographical areas where the competition for growers is fairly fierce, making integrators liable for environmental damages caused by the growers may not be theoretically justifiable. On the other hand, if the integrator is the only game in town and the probability of growers defecting to another integrator is low, making integrators liable for environmental damages caused by the growers may be socially optimal.

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