NC state economist [2004 : January-February]

NC STATE UNIVLHSITY North Carolina Cooperative Extension Service NC COOPERATIVE EXTENSION COLLEGE OF AGRICULTURE & LIFE SCIENCES nc state Economist Agricultural and Resource Economics *J anuary/February 2004 Livestock Production Contracts, Waste Management and the Environment Tomislav Vukina, Professor and Extension Economist Agricultural contracts are an integral part of the production and marketing of selected livestock commodities such as broilers, turkeys, eggs, and hogs. The potential impact of livestock production on environmental quality has become a nationwide concern, especially in areas with high concentration of large-scale, confined animal feeding operations (CAFOs) such as North Carolina. It is increasingly common for environmen¬ tal advocacy groups to argue that contracting per se is a cause of environmental problems related to livestock production. Their claim is based on the grounds that contracting increases the scale of livestock operations and simulta¬ neously reduces opportunities for economics of scope in livestock utilization through increased specialization. An opposing view promulgated in corporate agriculture circles is that large, intensive livestock production units are, in fact, environmentally friendlier than small family farms because they can afford technologically advanced waste management systems due to significant economies of scale. This issue of the NC State Economist discusses the evidence on linkages between agricultural livestock contracts and environmental quality, as well as the impact of recent changes in EPA waste management regulations. Modern Livestock Production Systems Two distinct characteristics of modem livestock production systems have potentially important environmental implications. The first is the shift to large-scale, intensive, specialized operations. This process, which is often described as industrializa¬ tion, brings different land-use patterns compared to traditional livestock produc¬ tion systems. In addition, large scale CAFOs are able to adopt certain waste management technologies that are not economically feasible for smaller family farm units. The second characteristic of the modem livestock industry with important environmental ramifications is a shift away from a supply chain consisting of indepen¬ dent sole proprietorships exchanging inputs and outputs through open spot markets to one in which vertically coordi¬ nated farms, feed mills and processors are linked by production contracts, marketing agreements or common ownership. Con¬ tracts, as an instrument of vertical coordi¬ nation, have emerged in response to some form(s) of market failure. The way spe¬ cific contracts are written reflects an attempt to mitigate a particular set of incentive problems related to an uneven distribution of information among the various participants in the supply chain. An important implication of this is that regulatory changes may well alter the nature of the information asymmetries, which would in turn lead to contract renegotiations (with difficult-to-predict welfare effects). Employment and program opportunities are ottered to all people regardless of race, color, national origin, sex, age, or disability. North Carolina State University, North Carolina A8T State University, U.S. Department of Agriculture, and local governments cooperating.