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THE IMPACT OF 2003 FEDERAL CAFO REGULATIONS ON THE INTEGRATOR-GROWER RELATIONS

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

Citation:  Pp. 155-160 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:10.13031/2013.20251)
Authors:   Tomislav Vukina

In the previous round of research sponsored by the National Center for Manure and Animal Waste Management, USDA, I investigated factors and mechanisms that influence the relationship between contracting and animal waste pollution (see Vukina, 2003). The policy discussions about the potential linkages between contracting and livestock waste problems focused on two sets of issues. One set of issues was related to the emergence of livestock waste as a major environmental problem that required urgent regulatory intervention. Implicit in that debate was the notion that animal waste related environmental problems had 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 was related to the design of regulatory policies that could be implemented given the existing organizational structures of various livestock industries. The central objective of that paper was to try to answer the question of whether contracting worsens livestock waste management problems and if yes, then, how and to what degree? When it came to designing an appropriate regulatory regime, the paper focused on the question of how to apportion the burden of regulation among the contracting parties in a socially optimal way. The evidence about the potential linkages between contracting and animal waste management problems presented in that paper were organized into four categories: (1) scale, (2) specialization, (3) concentration, and (4) division of inputs and contract settlement. The paper concluded that:2 1. While the impact of contracting on productivity is substantial, contracting does not appear to have large-scale effects. This result suggests that the increased productivity of contract operators is not a major force driving the increase in the scale of production of hog farms. On the other hand, the production technology, which displays increasing returns to scale regardless of the ownership structure, does serve as a motive for increasing the size of both independent and contract operations. Also, large is not necessarily bad. Again, because of significant economies of scale, this time in waste management, intensive livestock production units could in fact be environmentally friendlier than small family farms because they can make technologically advanced (capital intensive) waste management systems economically feasible.

2. It is true that contracting creates more specialized animal production operations thereby breaking the tradition of joint production of crops and livestock that characterizes traditional independent family farms. However, the joint production of crops and livestock is not necessarily friendlier than specialized production. Farmers tend to apply livestock manure in excess of the amount that would require a simple 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.

3. 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. The established network of feed mixers, slaughtering plants, specialized construction companies, extension specialists, veterinarians and banking services geared around the specific needs of livestock producers as well as the local availability of skilled labor could become important factors of industry growth in certain regions. However, concentration is not necessarily bad either. An empirical estimate of environmental damages caused by the neighborhood presence of large scale hog operations suggests that social welfare would be enhanced by directing the livestock industry expansion towards the areas where the concentration of animal units is already high rather than trying to distribute the future animal industry growth more evenly across the landscape.

4. The amount of nutrients from animal waste that ends up deposited in the environment is directly related to the composition of animal feed. The tension in the contract arises from the fact that integrators determine the nutrient content of the manure through decisions about genetic makeup of animals and their feed rations, but growers own the manure and are legally liable for its removal and disposal. 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.

Since the Final Rule (National Pollutant Discharge Elimination System Permit Regulation and Effluent Limitation Guidelines and Standards for Concentrated Animal Feeding Operations, 68 Fed. Reg. 7176) was not passed until February 12, 2003, at the time the first round of research was done, the nature of the future changes in the regulation of animal waste was not precisely known. Therefore, the conclusions related to regulatory issues reached in that paper need to be updated to reflect actual changes introduced by the Final Rule. This is precisely the objective of this paper. The rest of the paper is organized as follows. In the next section I discuss major changes to the regulation of CAFOs as a result of the Final Rule. Then, I present the economic analysis of increasing environmental compliance costs resulting from the Final Rule on the vertically integrated livestock industries and especially on the integrator-grower relations. The last section concludes.

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