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Q .\._ . .l in... i. v‘ - {l‘ V WP : u .v - II - Ell-E ABSTRACT THE VENEZUELAN BROILER INDUSTRY: STRUCTURE, PRACTICES AND PERFORMANCE By Alejandro Graterol-Jatar The objectives of this study are to: (1) analyze the Venezuelan broiler industry with Special reference to pro- duction, processing, and marketing stages, as well as the degree of market coordination, (2) evaluate the market performance, (3) identify the main obstacles in improving market performance, and (u) provde a prOposal for improving market coordination and performance. The study was undertaken in order to answer the follow- ing questions regarding the Venezuelan broiler industry: 1. What phase of growth has the industry reached? 2. Have the growth and deveIOpment been uneven? 3. Are there problems of short-run instability due to drop in price and demand fluctuation? 4. What degree of coordination exists in the broiler marketing system?l 5. Has some level of integration been achieved? 6. Are processing plants active elements of the total market strategy? 7. Does the quality of the processing system provide flexibility for distribution of final products? Alejandro Graterol—Jatar The objectives of the study were achieved by: 1. Comparing the evolution of the broiler industry in Venezuela and several develOped countries, among them England and the United States. 2. Determining the factors that have contributed to the deve10pment of higher levels of market coordination and performance. 3. Selecting from the findings those that can be ad- justed to the Venezuelan needs. This study has found that: 1. Economies of scale and coordination have not yet been fully exploited in Venezuela because the relationship between successive stages or functions in terms of optimum size and physical efficiency is seldom considered: 2. The industry, in general, has shown progressiveness as far as feed mill, hatchery, hatchery-supply farms, and grow-out Operations are concerned, while problems of short- run instability are now stimulating the improvement of processing and marketing techniques, as well as coordination. 3. Product performance is not as good as desirable. Short shelf life affects processing schedules and product appearance. #. Lack of research in important areas such as supply and demand patterns, market coordination, and so on, induces misinterpretation of the factors on which to base Alejandro Graterol-Jatar decisions and hinders the achievements of economies through large scale and coordination. 5. The high degree of growers' independence and the fact that most of them tend to observe current prices rather than the expected prices at time of marketing when they order chicks for placements, are important factors affecting the supply-demand relationship and leading to short-run instability. Some recommendations which would narrow the gap between actual and potential performance are presented in the last part of the study. THE VENEZUELAN BROILER INDUSTRY: STRUCTURE, PRACTICES AND PERFORMANCE BY Alejandro Graterol-Jatar A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of MASTER OF SCIENCE Department of Agricultural Economics 1972 To my parents 11 ACKNOWLEDGMENTS The author expresses his sincere gratitude to: Dr. Henry E. Larzelere, Chairman of his Graduate Com- mittee, for his time, ideas and encouragement during the conduct of this study and for his assistance during his studies at Michigan State University. Dr. Larry E. Dawson of the Department of Food Science, member of the author's advisory committee, for his time, advice, and encouragement. Drs. Charles C. Sheppard and Kelly Harrison for their ideas, help and suggestions. Protinal C. A., Venezuela, for his financial support in the form of time off from duties during the two years of study in the United States, as well as by covering field trips and tuition expenses. iii TABLE OF CONTENTS 5:7 Chapter I. INTRODUCTIONOOOOO0.0.0.000.000.000.0000.... STATEMENT OF THE PROBLEM................. OBJECTIVES............................... HYPOTHESES............................... PROCEDURE................................ OVERVIEW................................. II. FACTORS AFFECTING DEMAND................... \I-th‘wwI-J H INTRODUCTION......OOOOOOOOOOCO00.0.0.0... THE DEMAND FOR POULTRY MEAT IN DEVELOPED COUNTRIESOOOO....OOOOOOOOOOOOIOO.0...... THE DEMAND FACTORS FOR POULTRY MEAT IN VENEZUELAOOOO.........OOOOOCOOOOOOOOOOOO 9 Population and Total Demand............ 10 Total Consumption of Meat Products..... 12 Per Capita Consumption of Meat......... 14 Income Elasticity of Demand............ 17 Consumer Habits and Preferences........ 20 Price Relationships.................... 23 Price of Meats....................... 23 Long-run Relationships Affecting Prices...’OOOOOOOOOOOOOOOOOOOOOOOOO. 24 Seasonal Fluctuations and Short-run Price VariationOOOOOOOO00.000.000.00 2? PRELIMINARY CONCLUSIONS ON DEMAND........ 28 (I) III. FACTORS AFFECTING SUPPLY: INPUTS.......... 31 INTRODUCTIONOOOOO.....OOOOCOOOOOOOOOOOOOO 31 BROILER INDUSTRY INPUTS IN DEVELOPED COUNTRIESOOOO0.0.0.0..........COCOOOOOO. 32 BROILER INDUSTRY INPUTS IN VENEZUELA..... 34 The Government and the Deve10pment of the IndustrYOOOOOOOOOOOIOOOOOOOOOOOOO. 36 iv Chapter HatCherieSOOOO...OOOOOOOOOOOOOOOOOOOOOO Number, Size, and Utilization of capaCityOOOOOOOOOOOOOOOOOOOOOOOOOOOO Hatchability and Broiler Chick Pro- duCtion by Breed-.000000.000.0000.... Chick Sale Practices................. Price Received and Hatching Nargins.. Hatching Egg Farms..................... Number, Size, and Location of Farms.. Production of Hatching Eggs.......... Prices Received by Producers......... Feed Mills............................. Number and Location of Feed Hills.... Types of Feed Produced and Sources of Feed Ingredients.................... Feed Delivery and Credit Practices... Feed Prices Variations............... FIbIAL CONSIDERATIONS.OOOOOOOOOOOOOOOOOOOO IV. FACTORS AFFECTING SUPPLY: PRODUCTION...... INTRODUCTION............................. BROILER PRODUCTION IN DEVELOPED COUNTRIES Some Facts about Prices and Production. BROILER PRODUCTION IN VENEZUELA.......... Number, Size, and Location of Farms.... Output................................. Production Practices................... Broiler Sale Practices................. Production Costs....................... Prices Received by Growers and Pro- duCtion COStSOOO.OOOOOOOOOOOOOOOOOOOOO Some Facts about Prices and Production. Long-run Production Costs and Impli- cationSIOOO.00OOOOOOOOOOOOOOOOOOOOOOOO FIrJAL CONSIDERATIONSOOOO...OOOOOOOOOOOOOO Page #1 #1 #5 #5 47 48 49 52 53 53 56 58 59 60 62 62 63 65 7o 71 73 75 79 80 82 85 88 89 Chapter V. FACTORS AFFECTING SUPPLY: POULTRY PROCESSING................................ INTRODUCTION............................. POULTRY PROCESSING IN DEVELOPED COUNTRIES POULTRY PROCESSING IN VENEZUELA.......... Number, Size and Location of Processing PlantSOOOO...000........O'OOOOOOOOOOOOO Average Capacity and Rate of Use of Processing Plants..................... Processors' Practices.................. Buying and Assembling Practices...... Processing Practices................. Sale and Delivery Practices.......... Processing Costs....................... Price Received and Processing Margins.. FINAL CONSIDERATIONS..................... VI. FACTORS AFFECTING SUPPLY: NARKETING....... IIITRODUCTIONOOO..........OOOOOOOOOOOOOOOO MARKETING OF BROILERS IN DEVELOPED COUPJTRIESOOOO.........OOOOOOOOOOOOOOOOOO MARKETING OF BROILERS IN VENEZUELA....... Geographic Movements of Broilers....... Marketing Channels..................... Marketing Practices.................... Prices Received and Retail Marketing Piarginsoooo00.000000000000000000000000 FINAL CONSIDERATIONS..................... VII. ORGANIZATION OF PRODUCTION................. IDITRODUCTIONOOO.0.......OOOOOOOOOOOOOOOOO ORGANIZATION OF PRODUCTION IN DEVELOPED COUIqTRIESOOO..........OOOOOOOOOOOOCOOOOO Who is the Integrator?................. Effectiveness of Changes in Organi- zationO...000...........OOCOOOOOOOOCOC vi 91 91 92 95 95 97 102 102 104 106 107 109 111 112 112 113 117 118 122 127 131 135 136 136 137 139 141 Chapter Page ORGANIZATION OF PRODUCTION IN VENEZUELA.. 1GB The Integration Movement in Venezuela.. 144 Poultry Associations in Venezuela...... 1A8 FINAL CONSIDERATIONS..................... 152 VIII. THE VENEZUELAN BROILER INDUSTRY: EVALU- ATION OF ITS PERFORMANCE.................. 154 INTRODUCTIONOOOOCOO......OCOOOOOOOOOOOOCO 15LP BASIS FOR EVALUATION-coo00000000000000... 155 THE VENEZUELAN BROILER INDUSTRY: EVALU- ATION OF ITS PERFORMANCE................ 156 Technical Efficiency................... 156 Technical Efficiency of the Venezue- lan Broiler Industry Organization... 156 Internal Efficiency of Individual Firms of the Venezuelan Broiler IndustrYOoooOOOOOOOOOOOOOOOOOOOOOOOO 159 Relationship of Market Structure to Technical Efficiency of the Venezue- lan Broiler Industry................ 161 Allocative Efficiency.................. 162 Progressiveness in Production Tech- niquesoooococo...0.0000000000000000... 164 Product Performance.................... 165 Size of Promotional Costs.............. 166 Market Performance in Other Dimensions. 167 FINAL CONSIDERATIONS..................... 168 IX. THE VENEZUELAN BROILER INDUSTRY: A PRO- POSAL FOR IMPROVING MARKET PERFORMANCE AND COORDIIJATION...’......OOCCCCCOOCOOCOOO 171 INTRODUCTIONOOOO......OOOOOOOC00.0.0.0... 171 IDEAL AND WORKABLE PERFORMANCE........... 171 GENERAL NORMS FOR IMPORTANT DIMENSIONS OF D'IARKET PERFORPIAIQ’CEOOCO......OOOOOOOOOOOO 172 A WORKABLE PERFORMANCE FOR THE VENEZUELAN BROILER INDUSTRY........................ 174 GUIDELINES FOR A WORKABLE PERFORMANCE.... 176 vii Chapter Page Industry Policy........................ 176 Human Decisions and Decision Centers... 177 Collection and Presentation of Data.... 178 Grow-out............................... 179 , Product................................ 180 Markets................................ 181 Personnel.............................. 181 Research............................... 182 FINAL CONSIDERATIONS..................... 182 BIBLIOGRAPHOOO.00......00............OOOOOOOOOOOOO 185 APPENDIXA GLOSSARYOOO.000.00.000.00...0.000000... 187 viii Table II-l II-2 II-3 II-4 II-5 III-1 III-2 III-3 III-4 III-5 III-6 III-7 III-8 LIST OF TABLES POpulation, Gross National, and Disposable Income in Venezuela - 1963-1970......... Total Consumption of Red Heats and Poultry Meat in Venezuela, Selected Years - 191‘s-19700...O.OOOOOOOOOOOOOOOOOOOOOOO. Per Capita Consumption of Poultry and Red Meats in Venezuela. Estimated Averages for Selected Years - 1950-1970........... Monthly Family Expenditures in Food, Red Heats, and Poultry Meat, by Income Level in Selected Cities, Venezuela 1968 Wholesale General Price Indexes. Venezuela 1960-1970000..0.0OOOOOOOOOOOCOOOOOOOOOOOO Imports of Frozen Poultry Meat in Venezuela 1950-1960000000000000000000000000.0000... Imports of Broiler Chicks in Venezuela 1951‘195700000cocoon.oooooooooooooooooooo Imports of Hatching Eggs in Venezuela 1959-1967000.COO.OOOOOOOOOOOOOOOOOOOOOOOO Number and Location of Hatcheries, by States in Venezuela, 1964-1970.................. Annual Capacity and Annual Rate of Use of Hatcheries, and Classes of Chicks as Per- centage of Those Hatched, by States, in venezuela. 1970.ooooooocooooooooocoooooo Broiler Chick Production by Breed in Vene- zuela. Year 1970........................ Average Selling Price for Chicks, Hatching Margins and Additional Selected Data for a Sample Hatchery in Venezuela. 1967-1971 Number, Size, and Location of Hatching-Egg Supply Farms, by States, in Venezuela 1970 ix Page 11 13 15 19 26 37 38 40 1+2 46 47 50 Table Page III-9 Production of Hatching Egg in Venezuela 1962-1970000.cocc00000000000000.000000000 51 III-10 Changes in Hatching Egg Prices in Venezue- la. 1965-1971...oooooococooooooooooooooo 52 III-11 Number and Location of the Major Feed Mills, by States, in Venezuela (1971)........... 54 III-12 Feed Production, by Subsectors, in Venezue- la, Selected Years 1950-1970............. 57 III-13 Changes in Broiler Feed Prices 1958-1971... 60 IV-l Number, Size, and Location of Broiler Farms, by States, in Venezuela, 1970............ 72 IV-2 Broiler Production and Production Rate of Growth in Venezuela 1961-1970............ 76 IV-3 Estimated Costs of Rearing Broilers in Ve- nezuela...‘COO...OOOOOOOOOOOOOOOOOOOOOOOO 81 IV-4 Live Broilers. Price Received by Growers, by States, in Venezuela. 1967-1970...... 83 IV-5 Margins Between Production Costs and Prices per Pound of Live Broiler in Venezuela 1965'19700ocoooncoo00000000000000.0000... 84 V-1 Number, Size, and Location of Poultry Processing Plants, by States, in Vene- zuela. 1971.00.000OOOOOOOOOOOOOOOOOOOOOO 96 V-2 Average Capacity and Rate of Use of Processing Plants, by States, in Vene- zuela. OCtOber197100.000000000.0.0.0... 100 V-3 Effects of Capacity Rate of Use on Processing Costs Sample Plant. 1970 108 V-4 Average Processing Margins in Venezuela 1965-1970000.coco.oooococooooocoooooooooo 110 VI-l Weekly Interregional Movement of Broilers and the Average Annual Consumption of Broilers per Urban Inhabitant, by Region in Venezuela............................. 122 Table VI-Z v1-3 VI-4 VI-5 Page Relative Volume of Ready-to-Cook Plus Broilers Moving Through Retail and Institutional Outlets in Valencia, 19700...I..00...O.OOOOOOOOOOOOOOOOOOOOOOO 126 Retailers Reasons for Not Buying Frozen Broilers. Valencia 1970................. 128 Average Retails Marketing Margins in Ve- nezuela 1960-1970000000000000000000.0000. 132 Average Retail and Wholesale Prices and Retail Marketing Margins in Maracaibo, Caracas, and Puerto La Cruz. 1965-1970... 134 xi Figure II-l III-1 III-2 IV-1 IV-2 IV-3 IV-4 IV-5 VI-l VI-2 VI-3 LIST OF FIGURES Page Indexes of Retail Prices for Broiler Meat, Beef and Pork in Venezuela. 1958-1970.... 25 Functions of a Typical Integrated Broiler in the United- States.....OOOOOOOOOOOOOOOO 35 Location of Feed Mills, Hatcheries, and Hatching-Egg: Supply Farms, by States, in venezuela 1970000000000000000000.0000. 55 Prices of Live Broilers in Detroit and the Number of Chicks Placements in 7 Commer- cial Broiler Areas in the United States.. 66 Broiler Chicks Placements and the Nine-City Weighed Wholesale Average Prices of Ready-to-Cook Broilers in the U.S.A. 1966-1969000.oooooooooo00.000000000000000 67 Location of Broiler Farms, by States, in Venezuela. 1970.......................... 74 Broiler Feed Conversion in Venezuela 1953-197100000..00.00.0000.0.00.00.00.00. 78 Broiler Prices Received by Growers and Number of Chicks Sold by a Sample Hatch- ery in the Central Region of Venezuela... 86 Location of Broiler Processing Plants, by States, in Venezuela. 1971.............. 98 Location of Broiler Processing Plants Larger Than 400 Birds/Hour, by States, in Venezuela. 1971...................... 99 Major Marketing Channels for Ready-to—Cook BrOilerS inU.S.A00000OOOOOOOOOOOOOOIOOOO 114 Geographic Movements of Broilers, by Week, for the Eight Major Consumption Areas in Venezuela. October of 1971.............. 120 Major Marketing Channels for Broilers in Venezuela. 1971.0ooooooooooooooooooooooo 123 xii CHAPTER I INTRODUCTION STATEMENT OF THE PROBLEM Analysis of the develOpment of the broiler industry in several countries reveals that they have shared similar ex- periences in the industry's growth} Initially, the broiler industry expanded very rapidly because demand increased fast enough to absorb the increasing supply. Next, as soon as the industry approached its Optimum size, from the demand standpoint, there was a persistent tendency to continue ex- panding. Finally, this trend resulted in (1) severe problems of overproduction with periodic declines in price, and (2) consequent readjustments to the structure of the industry to bring supply into line with demand at an ade- quate price. This seems to indicate that short run instability is the main problem in the growth of the broiler industry. There are three major sources of instability in the 1See for example: Bernard F. Tobin and Henry B. Arthur "Dynamics of Adjustment in the Broiler Industry," Boston Division of Research, Graduate School of Business Adminis- tration, Harvard University, 1964; and Eric S. Clayton, "The Economics of the Poultry Industry“ London, Longmans, Green, and Co., Ltd. 1967; and Alejandro Graterol-Jatar, "Comparative Study of American-Venezuelan Broiler Industry and Processing Methods," unpublished paper, Michigan State University, 1971. relationship of supply and demand. First, the cyclical patterns of production impose a natural lead time due to the relationships among biological processes such as rearing re- placement pullets, producing eggs, hatching chicks, and rearing broilers. Second, the many stages involved in the production and marketing processes and their independence Of action are another source of short-run instability. There might be expected that the more independently the stages Operate, the lower is the level of coordination and the more frequently bottlenecks and surpluses appear along the product chain. The third source of uncertainty in the supply-demand relationship is the human decisions, which deal with actions that affect the lead time flexibility and the level of coordination. Although human decisions are of major importance so far as fluctuation of total supply is concerned, they also provide important instruments for human control of the industry. TO reduce the adverse effects of these problems, structural changes and adjustments, directed toward more ef- ficient coordination, have taken place within the industry. In some countries this has led to a successful, vertically integrated structure which has allowed economies of scale and lowered costs. Of course, the behavioral and attitudi- nal patterns shown by members of the industry also may have played an important role in their increased efficiency. This study analyzes the Venezuelan broiler industry in light of these Observations. The study evaluates the indus- try's performance, with Special reference to market struc- ture and conduct, and provides a prOposal for improving market coordination and performance. OBJECTIVES The objectives of this study are to: 1. Analyze the Venezuelan broiler industry with Spe- cial reference to production, processing, and merchandising stages, as well as the degree of market coordination. 2. Evaluate the market performance. 3. Identify the main obstacles in improving market performance, and 4. Provide a proposal for improving market coordina- tion and performance. W The study has been undertaken to answer the following questions regarding the Venezuelan broiler industry: 1. What phase of growth has the industry reached? 2. Have the growth and deveIOpment been uneven? 3. Are there problems of short-run instability due to drOp in price and demand fluctuation? 4. What degree of coordination exists in the broiler marketing system? 5. Has some level Of integration been achieved? 6. Are processing plants active elements of the total market strategy? 7. Does the quality Of the processing system provide flexibility for distribution of final products? PROCEDURE The objectives of this study were achieved by: 1. Comparing the evolution of the broiler industry in Venezuela and several develOped countries, among them Eng- land and the United States. 2. Determining the factors that have contributed to the develOpment of higher levels Of market coordination and performance. 3. Selecting from the findings those that can be ad- justed to the Venezuelan needs. I Accomplishment Of these steps was based upon: 1. Venezuelan data and information obtained from both the public and private sectors. 2. Field trips and informal interviews with growers, hatching egg producers, hatcherymen, processors, feed mill administrators, wholesalers, and retailers in Venezuela. 3. Field trips and informal interviews with members of the industry in the United States. These included horizontally and vertically integrated enterprises, and owner-integrated complexes as well. 4. Research and Publications from Venezuela, the United States, and England were reviewed. OVERVIEW The remainder Of this study has been organized as fol- lows. In Chapter II the factors affecting demand for poul- try meat in Venezuela are analyzed and some preliminary conclusions are derived. Chapters III, through Chapter VII consider and discuss the structural and organizational as- pects of the broiler industry. This discussion provides important background information about the Venezuelan broil- er industry and tends to bring it into better perSpective. In Chapter III, information dealing with hatching egg sup- ply flocks, hatcheries, and feed mills is presented. The production - growing out stage - is considered in Chapter IV, while poultry processing and marketing practices are dis- cussed in Chapters V and VI reSpectively. In Chapter VII the organizational patterns of the whole industry are snap lyzed, with Special attention given to the most recent changes and trends in the industry. In each of these chapters, a brief discussion Of the subject in develOped countries is presented as a basis for (1) comparing and measuring the evolution and stage of development Of the Venezuelan broiler industry, and (2) selecting the factors that would allow the Venezuelan broiler industry to shorten the path toward an improved market performance. Chapter VIII is titled The Venezuelan Broiler Industry: Evaluation Of its Performance. This evaluation is based upon the findings of the preceding chapters, and it attempts to identify the main obstacles to improving market perform- ance. In Chapter IX a proposal for improving market perform- ance and coordination is provided. This prOposal has been designed in light of the results of this study, and the Venezuelan broiler industry at its present stage of growth and develOpment. CHAPTER II FACTORS AFFECTING DEMAND INTRODUCTION The Venezuelan broiler industry has reached a stage in which problems of short-run instability are frequently faced. This has given investors considerable concern about whether expected sales and returns on investments over the next years are likely to justify the risks. Therefore, they are looking for reasonable assumptions or estimates of long-run market conditions on which to base their decisions. Will growth in demand maintain the same rate as growth of capaci- ty and output? Will average costs and annual average prices continue to fall in the future? If so, how far are costs and prices likely to fall? These questions are very diffi— cult to answer precisely. Nevertheless, a reasonable pre- diction may be obtained, based upon a systematic analysis of general trends of the industry. In Venezuela as well as in the United States and Eng- land, the annual production of poultry meat has shown a SUS-{ tained increse. In all these countries, the most important 7 factor affecting this trend in poultry meat production is the supply Of broilers. Therefore, analysis of this trend, and its possibilities for continuing or changing, should be I focused on the interaction of supply and demand conditions { f in the broiler industry. It means that the rate of expan- sion of the broiler industry in the United States, England and Venezuela as well, will depend upon the following fac- tors: (1) On the supply side, expansion will depend upon the possibility of production costs, and thus Selling prices of broiler meat, continuing to fall relative to selling prices of other meats and close substitutes for meat products; (2) 0n the demand side, expansion will de-, pend upon total national pOpulation, consumer incomes, con-E sumer tastes and preferences, prices of other meats and I close substitutes, and prices of other commodities and serv; ices. The aforementioned demand factors affecting expansio of the industry are considered and discussed throughout this Chapter. The Demgpd for Poultry Meat in Developed Countries Analysis of the factors affecting demand for poultry in develOped countries reveals that: 1. Total consumption of poultry meat has shown a sus-/ tained increase due to a rise in both, pOpulation and con- i sumer expenditures. 2. Increasing consumer expenditures has brought on an increase in per capita consumption Of chicken, mainly be- cause Of the high income elasticity of demand for poultry. 3. A strong diet consciousness has developed lately and has favored poultry consumption because of the low fat content Of the meat. 4. Increasing productivity has allowed prices to de- ; . 1 cline in such a manner that chicken is not a luxury anymore;_ on the contrary, it is the cheapest meat and its consumption has been extended to week-days. 5. The quality of the product has always received { great attention because of its significant value in creating an image that appeals to consumers. 6. Broilers are usually merchandised in a fresh, ready-to-cook form because Of consumers' preferences. In England broilers are frozen when a surplus situation exists. 7. A seasonal pattern of demand has been found at least in the United States. This is due to shifts in demand which causes changes in output and prices. In light of these Observations we can then start ana- lyzing the demand factors in the Venezuelan broiler indus- try. The Demapd Factors for Pogltry Meat in Venezpela The analysis of the factors affecting demand for poul-i try meat in Venezuela is performed by taking into consider- 1 \, ation the following six aSpects: POpulation and total 10 demand; total consumption of meat products; per capita=é consumption of meat; income elasticity Of demand; con- : sumer habits and preferences; and price relationships. Population and Total Demapd POpulation and population changes are relevant factors in analyzing future demand for poultry meat, because these changes influence total long-run and short-run demand for meat. In the long-run, total demand is influenced by the{ f !_ size of population and the level of consumer income. In the short run, if a rapid rate of pOpulation growth coin- cides with a high level of employment and income, there may be an increase in prices and, thus, a decline in per capita consumption of many products may occur. In Venezuela these changes have taken place as illus- trated in Table II-l. Analysis of these data indicates that: 1. During the last eight years, the annual rate of pOpulation growth has been estimated around 3.5 percent. Although this rate is expected to decrease in the future, according to national estimations it will be still high and close to 3.0 pereent in 1980} 2. During the same period, the gross national product has shown a steady increase. Comparison of the growth rates 1Direccion General de Estadisticas y Censos Nacionales, Ministerio de Fomento, Venezuela. 11 .mpmH one as encodesoemospoo Ooaaosoom osaomsH .mamsucgm> co flamenco oosmm use “Hmma haze .xoom oasosoom QH¢ .Oopcasoo mo peoapsmaoa .m.b "scam ompmaoanm $0de $3 an mHHHOo \m. mHanHm>m nos u .m.s .s.s ome.ofl eem.oe came . o.m e.m mes.e mme.m nmo.oe some s.e m.m e.m smo.e mmm.m eme.m meme m.m H.m e.n oae.m Hmm.m Nam.e meme m.m 8.: n.m ens.m mes.m omo.o some m.e s.m m.m mefi.m mmm.m mms.m meme m.e m.m n.m 055.: mas.s ems.m Some A.He e.mfi m.m osm.s Nem.e see.m meme unconcm a mo msOHHHHs pscosom w.do msodammm. psooaom meqmmsose amp» spaces as Hesse spaces as Hesse assess co mpsspessssH muwm. deg 096m H6563 mpwm HMSgd MO $09532 \mosoosH mapmmOdmaa \Mum .z .w :oHpmHsQom Ohmfi .. mood zH mzoozH mqm "909m 0mpmgonwfim pzmfioz mmmome\m .Ammmmmoaw oomv 003903 059m xoooa00u90mom\m ”I I'll 0.00 0.00 0.0 0.0 0.00 0.00 0.0 0.09 0909 0.00 0.00 0.0 0.09 0.00 0.99 0.0 0.09 0009 0.00 0.00 0.0 0.0 0.0: 0.09 0.0 0.09 0009 9.00 0.00 0.9 0.0 0.00 0.09 0.0 0.00 0009 0.00 0.00 0.0 0.0 0.00 0.09 0.0 0.09 0009 0.00 0.00 0.0 0.0 0.90 0.09 0.0 0.09 0009 0.00 0.90 0.0 0.0 0.90 0.0 0.0 0.0 0009 0.00 0.90 0.0 0.09 0.00 0.9 0.: 0.0 . 0009 00909 90009 090000 9900 0000 90009 000 0090000 9009 00002 990 \00000: 000 \00002 9909000 ‘ .iiii‘igt i l E i ~ i1! AMpHQwo non mdnsomv 0009 n 0009 00409 00900000 009 00040090 009429900 000000209 29 0900: 000 020 9090000 90 20990200200 «99000 000 0.99 04009 16 Consumption of all meat products, on an annual per - capita basis, has grown from 43.4 pounds in 1950 to 74.3. pounds in 1970. This represents a total increase in per' capita meat consumption of more than 71 percent in 20 years. However, this increase has not been the same for every meat product category. Therefore, a further analysis of the par- ticipation of each major meat category is provided. Poultry meat consumption shows the most impressive in- crease. It has grown from an estimated 1.8 pounds per cap- ita in 1950 to an average of 18.4 pounds in 1970. This indicates an increase of more than 10 times in consumption in that 20-year period. At the present the per capita consumption of broiler meat is estimated at 15.9 pounds. This means that the broiler industry has contributed more than 28 percent of the total 100 percent previously indicated. From the figures shown in Table II-3, it is possible to observe that per capita consumption of broiler meat has been rising at different rates in recent years. This may well be interpreted as evidence that the Venezuelan broiler industry has reached the stage at which problems of short- run instability are frequently present. Red meat consumption has shown an almost steady in- crease during the period under consideration. The major cause of this increase has been the rise in consumption of beef from 30.9 pounds per capita in 1950 to an estimated 17 45.4 pounds in 1970. Consumption of pork has fluctuated considerably. In 1950 the estimated per capita consumption of pork was 10.3 pounds. After drOpping to a low of 8.6 pounds per capita in 1965, this figure went up to 9.9 pounds in 1970. The main cause of the decrease in pork consumption was the structural organization of this young industry, which has led to poor market coordination and relatively high prices. Other red meats, such as lamb and goat, have been characterized by an uneven production and availability. So far they have contributed only a small part of the total consumption of meat, and their demand fluctuations do not seem to affect the demand for other meat products. Income Elasticity oQZDemand The income elasticity of demand is one of the most im- portant factors affecting demand because it gives an indi- cation of the response in quantity demanded which can be expected to result from a change in consumer income. Little research has been conducted in Venezuela to in- vestigate consumer expenditures according to their average income. 0f the research which has been undertaken, the most valuable seems to be the research directed by the Office of National Coordination and Planification (CORDIPLAN) in 1962? 2CORDIPLAN, "Primera Encuesta Nacional de Ingresos y Gastos Familiares en Venezuela," 1965. 18 and the Central Bank of Venezuela (BCV) in 1968-1969? Sub- stantial differences exist between the research areas cov- ered by the two agencies. 0n the one hand, the CORDIPLAN research covers almost the whole country, presents the con- sumption data in terms of units of weight or volume per family, and has classified the income per family into two broad levels that seem to be very arbitrary. 0n the other hand, the BCV research has been published by regions, and data are represented in terms of consumption value and ac- cording to eight different levels of family income. Data from the BCV are preferred for the purpose of this study, and are presented in Table II-4. Analysis of these data indicates that families with higher incomes expend more money on meat than do families with lower incomes. CORDIPLAN research findings indicate the same trends. Nevertheless, there are disparities be- tween the elasticities based upon expenditures and quantity because, as incomes rise, families purchase higher quality meat. Therefore, total consumption of meat at the various income levels is less dissimilar in terms of quantity than when measured in terms of expenditures. The income distribution in Venezuela is unequal not only between rural and urban zones, but among regions and 3See for example: COBDIPLAN, "Los Gastos Familiares y el Indice del Costo de Vida en el Area MetrOpolitana de Ca- racas,” 1968; and BCV-VLA, "Estudios sobre Presupuestos Fa- miliares e Indices de Costo de Vida para las Ciudades de he- rida, Valera, San Cristobal y Barinas," 1969. 19 .0009 .00999mm 0 909090990 900 .09 n09m> .009902 00 00000090 009 0900 0090 00 Opmoo 00 0009099 0 0090999000 0O9000000099 09900 0090:00m .¢9>n>om 090 “@009 .0000900 00 0909990009002 0090 90 no m09> 00 Opmoo 00 009099 90 0 0090999000 000000 009 .009090000 90099 00999000 0.9 m n 0.: .0m \m 00 009 000 00 000 009.9 0000 0000 opoe 00 090 909.9 90 009 000 0000 - 9000 00 009 099 m0 009 009 0000 n 9000 00 N09 009 00 009 009 0000 - 900m 00 099 000 00 909 090 0000 u 9009 00 009 090 mm 90 090 0009 n 9009 09 09 000 99 09 900 0009 u 900 0 90 090 09 00 000 000 0000 0000 0000 90090o0 0000 000 0oo0 0000,90090o0 0000 000 0000 90900 000009 99 009099090090 Hmpoa 99 009599090990 proe 009000 0000000 \mASpsoz 909 0909990mv 0009 000000000 .009990 00900000 09 00900 000099 90 .9000 9090000 000 .09000 000 .0000 09 000099000090 909000 9009000 0-99 00009 20 members of the pOpulation. Many of those receiving large incomes in Venezuela live in Caracas, the capital city, and the big cities. In general, the larger the city the larger the average income tends to be. As a result, consumption expenditures, and thus consumption of meat, is concentrated in big cities and urban areas. Therefore, data based upon urban pOpulation trends and changes should be very helpful in estimating future meat consumption. gonsumer Habits and Preferences The analysis of consumer habits and preferences serves a very useful purpose in providing some indication of con- sumer behavioral and attitudinal patterns and, eventually, brings out some of the factors that may influence these patterns. In Venezuela, although the price of poultry meat is lower than that of the average first grade beef? poultry isi often at a disadvantage because of consumer preferences and : merchandising practices of the industry. First, consumers have shown a greater preference for beef than for any other meat. It already has been indicated that beef consumption represents more than 60 percent of the total meat consump- tion. Second, almost all poultry meat is merchandised as a . whole bird, with feet and part of the head on, while beef is “Venezuela, Ministerio de Agricultura y Cria, Anuario Estadistico AgrOpecuario 1970,“ p. 485 and 501. 21 classified and priced according to cuts and ”quality". As a result, second grade beef has been priced just slightly hiqher than poultry5 but are many times preferred because of the greater yield in number of servings. Initially, most broilers and culled hens were bought alive and processed by consumers themselves. The growth and develOpment of the industry has changed this pattern and today practically all poultry is sold in ready-to-cook plus form (dressed and eviscerated but with feet and part of the head on). However, in some areas consumers still prefer to buy broilers alive, rather than in ready-to-cook plus form. In general, consumers accept frozen hens but show re- luctance to buy frozen broilers. This is due, in part, to a preference develOped a long time ago, when most poultry meat was imported frozen. At that time, practically no processing plants existed in Venezuela, and national produc- tion was synonymous with freshness, while frozen poultry meat frequently was thawed and spoiled because of failures in refrigeration and high holding temperatures. Not many years ago, poultry meat was a very expensive item. At that time, poultry was a fancy article reserved for Sunday dinner or very special occasions. Although times have changed and poultry meat is cheaper and usually 5Venezuela, ministerio de Agricultura y Cria, loc. cit. 22 available, the habit has continued for many families and poultry meat sales reach their peak during week-ends. This fact, coupled with the short shelf life of the product, has given rise to problems of diseconomies of scale because many processors have designed their plants with a capacity which is fully used only once or twice a week. Short shelf life of the product is due mainly to inef- ficient processing and handling methods and unscrupulous practices which are sometimes followed by members of the industry. This has given rise to severe problems which have affected the product image. Among these problems, two should be pointed out in this section: (1) the poor ap- pearance of the product displayed at supermarkets and meat stores, and (2) the lack of consumer confidence in product quality. Both problems have had a negative influence on consumers, who sometimes change their minds and buy a dif- ferent product. These problems also are reSponsible in part, for the reluctance of consumers to buy frozen broil- ers. Therefore, there is no question about the need to im- prove product quality and appearance in order to improve product image and hence to motivate consumers. Achievement of this goal depends upon processors, as well as wholesalers and retailers, because of the need to improve processing and handling systems and to maintain prOper holding temperatures. 23 Price Relationships In addition to the general influences of population, income and consumer preferences on demand for meat, price of poultry meat also will depend upon prices of other meats and on the supply of poultry. Therefore, analysis and com- parison of past price trends of various meat products will bring out some of the competitive relationships among them. The analysis is performed in three steps: (1) prices of meats, (2) long-run relationships affecting prices, and (3) seasonal fluctuations and short-run price variations. 1. Prices of meats. The average retail price of beef has been fairly stable throughout the past fifteen years. Prices drOpped to a low in 1961 and increased continuously until 1968, when there was a downturn that has continued thus far. The total price variation during the whole peri- od was six cents per pound (U.S. dollars) with average price ranging from a minimum of 55 cents to a maximum of 61 cents per pound of first grade beef? If beef cattle production continues to match demand the way it has until now, prices should remain fairly stable and within the in- dicated range. Pork prices also have fluctuated somewhat. They reached a peak in 1958 and diminished continuously until 6Venezuela, Ministerio de Agricultura y Cria, loc. cit. 24 1963. In 1964 the average price was higher but it went down to reach the minimum price in 1965. From there on, average prices have generally been increasing, and are ex- pected to follow this trend in the future, due to feed prices and marketing inefficiencies. The average retail price of broilers has shown a down- ward trend, which will continue in the future unless changes in grain prices raise production costs. Finally two other factors may also cause some changes in meat prices: (1) a better application of available and new techniques may increase yields per animal, or (2) an increase in price of grain may occur due to government measures to foster and protect the agricultural subsector. The latter would strongly influence prices of pork and poul- try but not beef, because there are very few cattle feed- lots. 2. Long-run relationships affecting prices. To understand the interaction of the prices of various meat categories, it is important to consider their movements simultaneously and in relation to one another. For this purpose, annual data are available over a period of 13 years, from 1958 to 1970, for average retail prices of chicken, beef, and pork. Obviously, a thirteen-year period does not seem sufficient for analyzing a long-run relationship, but these are the only data available. Figure II-l was extended by using the price data for 25 ON $2.3. Esotmdaqaomaomoq ooimafimm o_m§2<..o.<.2. "20E omeqmoqu mm mm mm mm mm mm cm mm mm 6 om mm mm _ _ _ _ _ _ _ _ _ _ _ 82E xxoa..\\....,.... n-\ D... to on ova-p ...-u can/ muoid mudomm Om Tom [00. IO: 1 ON_ I On. I 03 AOhmemm: <4m3~wzm> z. xmoa oz< mmwm .._.waom msmmpd flzwmpmous¢ Hmamcom chappmao 3H IHH Ion—144.35! in H r-INH INHHMQI L\ H NNHINIHN m H NNH INHHMVW m H HHHHH IHO’NU‘1 MHer-«HHUNm' H N ‘O H CO \0 an Mama 3?. $12 a \O H mumpm ommfl I smmfi <4mnmmzm> 2H .mM9 "scam emcmaonmam .mmame mam co£0pmz mxoflso campummo mo pnmopma om pMSp wcfiezmm¢ \m .mpaommmo amassm an pmpfisHp mafimsgsm pom wwwm \m .cpmpm an mpfiomnmo mmc unencumn Hm6>ma pmnpflmz .empmchmo mm: pH 30s mpmoH©2H no: op hose .mmfiozomm unmanam>om an sm>Hm mm smxme \m lul. . L I'I. ll -‘ I! 3.0 n.0m 0.3a mHm.mao.smH om mecca qul. N4mm H.mw. mamawms.mmz m: mHHsm o.mm m.mm m.aw mmm.mma.aH a macwth m.mH m.:o 0.0a aae.HNm.m H mermz m.mm :.sm m.as mHa.HmH.H H mama 0.5 m.:w s.ma mso.maa.om m ococmcmo a.HH m.ea m.aa www.0He.oH m engage . o.ooH o.ma mmm.oos.s H Hammpmomea a.m m.mw 4.3m was.Hoa.s H Hmhmema oqupmHa ammonom unmoamm pcmopmm amnesz 909552 mumpm mumaadm maNHLMMM mama amaaoam \maufiomamo \mauflomamo meLmQOpmm Hmssmd wo Hmsms< \mem:0pmm mmose co mmmpsmopmm mm monso mo mammmao amp mo opmm camH- «qmammzms xH .mmeaam am .ommoeam mmoma mo mm azmommm m< monmo mo mammaqu axe .mmHmmmoaam mo mm: mo ream damage az< aeHo¢ mpmodosm .mfiao m mHSpHSOHamd we oflampmflsfiz .macsmosmb "some dcpmsflpmm .mxooam :H mpozma mo Hopes: an domeHme cNHm \m ‘II .0! n l ‘i: mm NH 5 b d H N H H H 1 1 m H u H m H u H H u H u H u u H e N H H H - H .. m m m u H u s H H H s u m m u . Hence Hoo4mw seep ones ooo.om . Hoo.oH oeo.oH seen mmoH exooam a“ mpcmmq mo sonssz mHHSN haemamw oHHHmsna maHsome madam mm03m3ppom mogmnH: mcHacz ononmamo Hm>flaom mamma¢ Hmcmccm OpHHpmfla \mesaH «Hmbnmzms 2H .mmaeem an .mzmea Nuance eemueaHmoeem do :oHecooq one muHHH sumac .mNHm .mmma.n 51 TABLE III-9 PRODUCTION OF HATCHING EGGS IN VENEZUELA 1962 - 1970 (Thousands) Years Tational Production Imports 1962 6,849 41,328 1963 12.816 37,570 1964 32,701 32,227 1965 41,589 19,4188/ 1967 62,128 7,474— 1968 71,220 b/ 1969 78.237 9/ 1970 89.963 2/ é/Estimated by the author 2/Imports of hatching-egg for broilers was eliminated in 1967. The data correSpond to hatching-egg for breeding chicks and they are not available. Source: Venezuela, Ministerio de Agricultura y Cria, Pro- duccion de Pollitos Bebe 1970, p.5 52 Eggpes Beceiyed by Producers. Prices of hatching eggs do not change during the year as broiler prices do. Thus far, their price changes have been a result of increasing efficiency and feed price variations. In 1965, the price of hatching eggs imported from the United States was $0.875 a dozen (FOB New York). Since 1965, the prices received by hatching egg producers in Venezuela have changed as follows: TABLE III-10 CHANGES IN HATCHING EGG PRICES IN VENEZUELA 1965 - 1971 Date Price Index fildozen 197; = 100 1965 1.211 100.0 02-20-1966 1.367 112.8 12-01-1967 1.256 103.? 06-07-1968 1.111 91.7 09-02-1969 1.122 92.7 05-06—1971 1.211 100.0 r Source: Confidential The latest increase corresponds to the latest increase in feed price which occurred in 1971. Producers are also eligible for a bonus if hatchability results are higher than 75 percent. The amount of this bonus is directly prOpor- tional to hatchability in excess to 75 percent. 53 Feed Mills Feed mills have played a very important role in the growth and development of the Venezuelan broiler industry so far, because they have been the major source of finan- cial and technical assistance to broiler growers and egg producers. Since the very beginning, there has been in Venezuela a persistent tendency toward integration and co- ordination of the various phases of the broiler industry. The trend started with the installation of hatcheries and develOpment of hatchery supply farms, and continued through processing plants. Recently, because of price instability, strategic movements have been directed toward the integra- tion of broiler production through both ownerships and con- tracts. Of course, feed mills have not been the only marketing channel captain? Some growers also expanded their Operations: backward through hatcheries to hatching egg supply flocks, and forward to processing and marketing of the final product. This trend and the fact that feed is the most costly item in both hatching egg and broiler production are reasons that make it necessary to consider feed mills in this study of the Venezuelan broiler industry. Number andggocation of Feed Mills. Although some re- ports have indicated the existence of nearly 20 feed mills LPIn this study marketing channel captain is understood as the firm or stage which exercise control on or stipulates marketing policies to other channel members. 54 in Venezuela? most of them are very small units owned by stock farmers, who use them in mixing feed for their ani~ mals. Therefore, for the purpose of this study, it is con- venient to consider only the seven commercial feed manufac- turersthat Operate in the country. Of these, the four major firms are located in the Central region of the country and the others in the Western region, the former being bigger and more efficient than the latter. (See Table III-11). TABLE III-11 NUMBER AND LOCATION OF THE MAJOR FEED MILLS, BY STATES, IN VENEZUELA (1971) State Number Aragua 1 Carabobo 2 Yaracuy 1 Zulia ..3 TOTAL 7 Figure III-2 illustrates the location of hatching-egg supply farms, hatcheries, and feed mills in Venezuela. As can be observed, they are mostly concentrated in the Central region of the country which is also the largest consumption region. 5Ministerio de Obras Publicas, Direccion de Planeamiento, "Analisis de la Region Central. III.Economia. Industria Ma- nufacturera," Caracas, 1965, p. 77. 55 . . . .. . f: L \ _ .\ .. ./ x. .\ /. A ..\ ../... / ./. 220N424 /. 5 ..II- |\ ../...V. . » /.. ..\ u .. J ..7 V / n A o. ta. o. \s {Ill/ .oeo-svuoostoa. fl.- \ .. ... \ ”2064230: / .. \.. . > 4 .... 2.6.. ._ zm z GU & chm. . 2198.6 6 6sz hddam 8.262.102: oz<.mm_mmzopDo meOhm 0.. >9. 56 Actually, the number of firms in relation to the size of the market, as well as the capital investment required and the pressure to increase efficiency, make it very un- attractive for new firms to get into the feed mill business. Types of Feed Produced and Sources of Feed Ingredi- ,§n§§. All the feed manufacturers under consideration serv- ice livestock and dairy producers, as well as poultry pro- ducers. Therefore, they manufacture many different pro- ducts. Table III-12 illustrates production of feed by sub- sectors for selected years during the period 1950 - 1970. It also serves to show the impact on feed production caused by the extraordinary growth of the poultry industry and the recent upward trend of the hog industry. Production of poultry feed in Venezuela has increased from 4,500 tons in 1950 to 451,000 tons in 1970; increasing from 26.5 percent of total feed production in 1950 to 69.8 percent in 1965, dropping then to 67.0 percent in 1970 because of the sig- nificant growth in hog feed production during the last five years. Feed ingredients are obtained from national and foreign sources in a prOportion which varies according to the item as follows: fish flour, 1/12 national, 11/12 imported; cereals and grains, 2/10 national, 8/10 imported. Fish flour is mainly imported from Peru, while cereals and grains are from the United States. Prices of feed ingredients depend upon the volume and .mOdmmH empocacm .oHcmsocQ nosme ooHpmHempmm oHamss< .mflao a nezuaon9w< op ofiampmHsHa .chsNOQOS "some dopmazoamo messed ooo.N u EOE H \m c.00H o.ooH c.00H o.ooH o.eoH Heaoa 6.0 w.o H4411. m4N!» -..:n escape o.ae e.ac m.ce H.ae 6.8N aneHsOH e.Hm e.mH m.m H.H m.H mom e.oH H.8H b.mm n.a: H.eb oHpeso meeazmommm .m H.meh a.mme m.mmH mhmm. mmmw games a“: N.N o N m.a n.a mLESpo o.Hme e. smm e. bmH n.6m n.a ananom m.meH n. me 0. 6H n.a m.o 60m H.ms b. as m. as c.mm e.HH cHnnoo mNmA. mama. QWNN wwmm. mwma. :dMINmQSm rMmzoa mo mcnmmdozev onBobmomm Q 2H .mmoeommmpm mm .eoHeoeooma omen NHIHHH mqmde 58 the season or time when the purchase is made. Although this condition allows some fluctuation in feed costs, savings are not shared directly with farmers because feed prices remain constant year around. Feed prices are regulated by the government and, so far, modifications have been authorized only because of significant changes either in the foreign- national ratio of feed ingredients or in the price of for- eign raw material. The last change in feed prices was in 1971 due to government measures aimed at the substitution of national production of grains for imports. The former are more expensive than the latter; therefore, the change in feed price was upward. Feed Delgvery qnd Credit Practices. Charges for de- livery of feed vary with volume delivered, distances from mill to farms, and form in which feed is delivered - bagged or in bulk. Delivery charges and prices are higher for bagged feed than for feed delivered in bulk. Finally, the practice of picking up feed at mills is very common; how— ever, it doesn't account for a high prOportion of total production. Sales by feed mills to broiler growers can be classi- fied into those for cash and those under short-term and long-term credit arrangements. The first allows for a dis- count from the list price, while the second and the third depend upon the terms of the agreement. The most common short-term financing agreements practiced in Venezuela are: 59 1. Open account. Under this plan the grower buys feed, chicks, medicine, and other items from the feed mill on "Open account” and pays for them when broilers are marketed. The grower is reSponsible for payment of the ac- count. 2. Labor contract plus bonus based on feed conversion. This is a very recent plan. Under this plan, growers are paid for their labor on a guaranteed basis per broiler per week, plus a bonus based on feed conversion. The feed mill supplies all feed, chicks, medicine, and other items, and growers supply the house, equipment and labor required for growing broilers. 3. Price guaranteed under share contract. This is another recently develOped contract. Under this plan the feed mill furnishes the feed, chicks, medicine, and other items to the grower, charging them to the grower's account. The grower provides the house, equipment, and the labor necessary to grow the chicks, and he is guaranteed a Speci- fied price at market time. When the price is higher than the guaranteed price, the difference is shared by grower and contractor on the 90-10 basis (90% to the grower and 10% to the contractor). Feed Price Variations. Feed prices are regulated by the government and do not change during the year. Feed mills have also arrived at a tacit agreement dealing with dis- counts. Therefore, although the foregoing agreement is 60 sometimes disregarded, competition among feed mills is based upon product quality and financial and technical assistance. Since 1958, the price of feed has increased several times because of ingredients prices, as shown in Table III-13. The reason for the last change was already ex- plained. TABLE III-13 CHANGES IN BROILER FEED PRICES 1958 - 1971 Date Price S/bagél Index 1971 = 100 02—01-58 5.78 75.3 02-15-64 6.39 83.2 03-01-65 6.59 85.8 05-15-71 7.68 100.0 -§/1 bag = 88 pounds Source: Private sector (unpublished data). Final Consideratigns This Chapter was presented in order to show the structural highlights of three stages of the Venezuelan broiler industry: feed mills, hatching egg supply farms, and hatcheries. The data shown correspond to all the availa- ‘ble information obtained from government agencies and pri- 'vate sectors. Although the data are not the best, they have 61 been very helpful and clear enough to achieve our goal. Therefore, it is possible to conclude that: 1. All three stages of the Venezuelan broiler indus- try are highly concentrated because of the limited market for broilers and economies of scale in production. 2. All the stages are vertically integrated with the feed mill usually being the channel captain. 3. Feed mills Operate in an oligOpolist market, in which financial and technical assistance are the strategic factors of competition. 4. Hatcheries are linked to hatching-egg supply farms either by contract or direct Operation. They work together toward improved egg quality. Hatcheries are associated with other stages of the channel by ownership or contract, fre- quently the feed mill. CHAPTER IV FACTORS AFFECTING SUPPLY: PRODUCTION INTRODUCTION Broiler production practices have changed since the end of World War II because of the intensive research activ- ity devoted to develOping new technology and improving ef- fiency in the poultry industry. The major achievements that have influenced broiler production have been: (1) the develOpment of new broiler strains with better meat quality, (2) the decrease in flock disease risks due to an improve- ment in control, (3) the increase in efficiency of feed utilization, (4) the reduction in handling because of inp creased mechanization, and (5) the reduction in housing space needed per broiler. These achievements have influ- enced the growth and develOpment of the broiler industry in all the countries in which it exists, mainly because they have made it possible to shorten the broiler growing period, reduce labor and other costs per pound of broiler, and in- crease the scale of growing operations. The foregoing gains and their effects on the structure of the broiler industry in develOped countries and Venezuela are considered and dis- cussed throughout the chapter. 62 63 Broiler Production_;p.Deve;Oped Countrigg Changes in broiler production have been similar in most develOped countries. Therefore, although information may be obtained from several countries, data from the United States have been selected to illustrate this section. Production of broilers in the United States increased from 513 million birds in 1949 to a number close to 3 bil- lion in 1970. During the same period, broiler prices and costs were reduced by more than 50 percent. Along with this reduction in prices and costs have come technological advances, which have: 1. Shortened the broiler growing period from 12 to 13 weeks in 1949 to 8 or 9 weeks in 1970. 2. Increased efficiency in feed utilization by re- ducing the feed required per pound of live broiler from about 3.5 pounds in 1949 to somewhat around 2.2 pounds in 1970. 3. Saved in labor time because of innovations in the arrangements for automatic feeding, shorter growing periods, 1 and larger flocks. Barton A. Westerlund indicated that poultry growing productivity almost doubled between 1944 and 1Barton A. Westerlund, "Broiler Market Prospects for the Independent Processor, with Special Reference to Ar- kansas,“ Little Rock, University of Arkansas, 1963. pp. 29 and 91. 64 1950, while productivity per man-hour in the whole poultry enterprise increased 136 percent from the 1947-1949 average to 1960. During the same period, the output per man in the red meat industry increased only 14 percent. 4. Increased the flock size handled by each farmer. The size of broiler flock handled at one time by a farmer has changed from a few hundred in the mid-30's, to a size between 7,000 and 10,000 birds in the early post-war years, to a flock size ranging from 20,000 to 30,000 chickens at the present time. Actually, further gains in production efficiency are expected, but it seems very improbable that these gains will be of the same magnitude as those achieved in the period from 1949 ~ 1970. All these changes have affected the structure of the production stage of the broiler industry. The main effects have been concentration of production in certain areas, de- crease in the number of farms, and increase in the number of birds per farm. Production is mostly concentrated in the southern states. According to the 1964 census of agricul- ture? States declined from 42.2 thousand in 1959 to 35.1 thousand the number of farms producing broilers in the United in 1964. On the other hand, the size of broiler farms 2Fred L. Faber and Ruth J. Irwin, "The Chicken Broiler Industry: Structure, Practices, and Costs," USDA, Mktg. Res. Bpt. 930. 1970, p. 7. 65 increased in such a way that 43 percent of the output came from farms producing 100,000 birds or more per year, 23 per- cent from farms producing 60,000 to 99,999 birds, and 23 percent from farms producing 30,000 to 59,999 birds. Of course, these figures have changed since 1964, so that fewer and larger farms exist today. Two other production factors should also be indicated. First, the value of production has been increasing as a re- sult of substantial increases in pounds produced, although average prices received by growers have had a downward trend. Second, a great percentage, 90 to 95 percent, of all commercial broilers produced in the United States at the present time is grown either under contract with or directly by integrated firms. Some Facts about Prices and Production A very interesting aSpect of understanding the develOp- ment of the actual structure of the American broiler indus- try is the analysis of the relationship between prices and production. To achieve this purpose two sets of data are presented and discussed in Figures IV-l and IV-2. Figure IV-1 shows prices of live broilers in Detroit and the number of chick placements in seven commercial broiler areas in the United States during the years 1950 and 1951. This figure, as well as the analysis of it, are based upon a paper written CENTS PER POUND LIVE WEIGHT 66 FIGURE IV-l PRICES OF LIVE BROILERS IN DETROIT AND THE NUMBER OF CHICK PLACEMENTS IN 7 COMMERCIAL BROILER AREAS IN THE UNITED STATES '38- 233:9 I .3 4~ : . .‘I /./:| ['1 IIIIIIgh _ ,301 --;I [3105 ’0 (:3lPlocem- , w II we ,/ .26. /.-i:'_':| /_§__.rg_-5I I»: I . /;}-j:' (1.212}: I: I I I .. 9.0 '2 2‘ /-.°-'-'”'. / CHICK /' I I I /.’ (I PLACEMENTS /.‘-- I I I _ 30 I8- l5: : [I /." I I E /5;. I /--._,, . I I : .26 | 44 5,3. : :Plocemelht I I . ; ' l I I I I I I I I, . ' I I I I I I ”6.0 ' I . I . I I ' ~55 I2 oaks: :IIWeeks' gum, lIOWaeI-II j‘ 0’1 I I I '17 r l f I II I L" ijijj r f0 l I I 1 Jan Mar May Jul Sept Nov Jan Mar May Jul Sept Nov l950 I95I SOURCE HE. LARZELERE= SOME FACTS ABOUT BROILER PRICES MICHIGAN FARM ECONOMICS for DECEMBER I95I MILLIONS OF CHICKS PLACED PER WEEK 67 FIGURE IV-Z BROILER CHICKS PLACEMENTS AND THE NINE-CITY WEIGHTED WHOLESALE AVERAGE PRICES OF READY- TO-COOK BROILERS IN THE U.S.A. (l966-I969) 32- 301 28‘ 26- 24- 22% PRICE, CENTS PER POUND I I I i l I I 1 I; I I I I I I _-——--u-— JAN TIIWTIIII l966 ‘3’ IITTITTTTIT I967 DEC IIIIIIIIUTT I968 YEARS DEC TTT—Tl [Tll11 l969 SOURCE=u.s.D_A., POULTRY AND EGG SITUATION-SELECTED STATISTICS PLACEMENT, MILLION OF CHICKS PER MONTH 68 by Henry Larzere in 1951? Figure IV-Z shows the nine-city weighted average prices of ready-to-cook broilers and the number of broiler chicks hatched in the United States, ac- cording to data published by the USDA? Figure IV-l illustrates: (1) the effect of chick placements upon the prices of broilers 11 to 12 weeks later, and (2) the effect of broiler prices upon later placements during the 1950-1951 period. As can be observed, in both years the highest price periods were reached in March, 11 to 12 weeks after relative low rates of chicks placements. This length of time coincided with the broiler growing peri- od of the early fifties; therefore, it meant that the growing period was the restraining factor for a more exact relationship between placements and prices. Further analy- sis of the figure seems to indicate the existence of two kinds of low price periods: (1) first, those that were influenced by the relatively high rate of placements 10 to 12 weeks earlier, such as the last weeks of April and June in 1950 or the second week of June and the last week of August in 1951; and (2) second, the low price periods that took place during the last months and the first weeks of each year, which were due to a seasonal tendency of de- mand. On the other hand, a similar relationship may also 3Henry E. Larzere, “Some Facts about Broiler Prices,” Michigan Farm Economics, 1951. USDA, Poultry and Egg Situation, Selected Statistics. 69 be found as a consequence of the effect of broiler prices upon later placements. Finally, it is also possible to observe that in the period under consideration the rate of chick placements changed according to the rate of broiler prices, so that increasing rates of placements frequently followed rising broiler prices, and falling prices were followed by decreasing rate of placements. The situation observed in the early fifties became worse later, mainly because of a disorderly eXpansion in fa- cilities and capacity. This unstable performance, together with the continuous decline in price and the need for firms in other stages of production to Operate at high capacity levels, encouraged adjustments between outputs and inputs of firms in successive stages and led to vertical integration. The effects of vertical integration on the price-production relationship are shown in Figure IV-2.~ From the figure it is possible to observe that the highest price periods for the four years under consideration were reached in the third quarter of each year. This is due to a seasonal demand, which usually reached its peak during summer and declined to its minimum in the last quarter of the year. Figure IV—2 indicates that more broilers can be marketed in July than in December at the same price. The industry only partially ad- Justs production to meet these changes in market demand. This accounts for high prices in July with a high rate of marketings, and low prices in December with a low rate of 7O marketings. Prices do not seem to affect production to the degree that they did in the early fifties, but now other factors in the channel are also taken into consideration. First of all, decision centers have been reduced in number and moved from the farm toward integrators. As a result, decisions are now considered a function of the whole integrated sys- tem rather than a function of an individual stage, because integrators are primarily interested in the overall eco- nomic performance. This means that they take into account the gain and loss trade-off among the different stages of the system, so that production is reduced according to the relationship between the expected losses from production and the expected losses they would cause for all the other stages. Therefore, although production still reacts to changes in price, the response time has changed from 11 to 12 weeks in the early fifties to a lot longer period at the present time; thus, short-run variations are reduced. Broiler Productiongin Venezuela Broiler production has changed significantly in many respects during the past 20 years in Venezuela. Improve- ments in breeding, feeding, and disease control have in- creased production efficiency. Mass production techniques are being applied in such a way that the resulting economies 71 of scale have led to a reduction in the number of flocks. However, there is a long way to go and more drastic changes are expected in the coming years. Number. Size. and Location of Farms According to data published by the Ministry of Agri- culture and Animal Husbandry? the total number of poultry farms in Venezuela declined from 1,755 in 1961 to 1,102 in 1970. This implies a reduction of more than 37 percent, most of which occurred on the small farms. In 1970, the number of farms raising broilers was estimated at 500. Of this number, 52 were reported as mixed farms because they were also producing eggs. Table IV-l shows the number, size, and location of broiler farms, by states. As can be observed, more than 52 percent of the total number of broil- er farms (262) reported flocks smaller than 10,000 birds at one time, while only 29 farms (something near 6 percent) had flocks larger than 50,000 broilers. Among the latter, 22 farms were indicated by the private sector to be holding flocks larger than 100,000 chickens. As a result of the size distribution, it is obvious that the output of small farms constitutes a substantial part of the total output. 5Venezuela, Ministerio de Agricultura y Cria, "Encuesta Avicola Nacional 1970.” 72 oH.Q.ommH HomoHomz mH00H>< mpmososm .mapo m waspHSOHsm< mu onopmHQHm .macswm:m> "momsom mmpmpm HmapSmo* O O H“ N mg I r0fJOOO¢b~CNNNMiHN3HH CDO\ v-IN Q mHHSN msommmw oHHHnsnB mmwnome mLoSm mmmsmzusom mummmmm m>m3z mmmmsoz Gdfimhwm* mchmm mama ooHsmso nooamm mmcmmoo onopmmmo* mm>fiaom mmsfipmm mzmmm<* cased HSMmpmoms¢ Hmmmnmm opflmpmHom CI) .3 H \O H H WKVONAIIreedwWVUNQHN:rFuvr4UM#v4rHD H ooooHIHoQW ooom mmpmum can» mmoq mamHHomm do monssz CH oNHm ommfi I .... 7 .nmeeam wm .mzmdm mquomm mo onedooq QR¢.mNHm .mmmzzz ale mqmde 73 On the other hand, analysis of the farm location indi- cates that production is primarily concentrated in the Central states (Miranda, Aragua, Carabobo, and Distrito Fe- deral). The number of farms in these states is 258. Of this number, 17 have flocks of 50,000 and over, while 73 farms reported flocks ranging from 20,001 to 50,000 broil- ers. This means that 90 of the 128 farms having flocks of 20,001 and over are located in the Central states of the country. The other zones with a somewhat high concentra- tion are Zulia, in the West, and Anzoategui, in the East. Location of broiler farms in Venezuela is illustrated in Figure IV-3. As can be noted, the zones of high produc- tion density coincide with the zones where feed mills, hatching-egg supply flocks, and hatcheries are concentrated. Further analysis of Table IV-l seems to indicate a size gap between the so-called familial farms and farms of broil- er enterprises. In the case of the familial farms the growing of broilers is frequently a part-time Operation and therefore flock size is relatively small. Output In 1950, 1.5 million broilers were raised in Venezuela. By 1961, production increased to 26.7 million birds and by 1970, to 58.9 million birds. A rapid rate of growth oc- curred during the fifties and early sixties. In recent years, the absolute number of broiler produced has increased, 71+ H .\ 1 ...H. .. x. \ ..\ / .. I J /. m _ ._ o m w . ....7...\..\...(.../ . /. ..\. I .. c . 2.. .... w m 3 a 4 Q / \- '00 ‘I \0 es 0 0‘ Q 0 ‘Q ‘‘‘‘‘‘ >00 ... \ ..\ ‘0 ‘0' I on \ \ ’ U 0". I0 \‘ a ‘\ I 0| . .\.. ......r.... 3. ..:.... . . “‘0‘ u. p .. . quEqm .mncqzq . ........... 438:6qu . 8.530 . ....... .. I. ' 'l Dill . O .\ p D O O <53 ...m Z. dubs—M >m.m2m. mgr. Z 2&4... MS thmmmmdmm 5.2.9”. 104w 75 but the rate of growth has shown an unstable performance. This means that the rate of growth has been fluctuating in such a way that it either increases or decreases from one year to another. This instability in the rate of growth trend is mainly due to the effects of frequent price vari- ations on production. Table IV-2 is presented to illus- trate the evolution of broiler production in Venezuela. Production Practiges Two production methods are practiced in Venezuela. The first is known as the weekly method, which consists of growing lots of different ages so that growers can have broilers ready to market each week. This method is primes rily practiced by those growers who Operate their own small processing plants. The second production method is the well-known all in—all out practice. The need for reducing costs and increasing efficiency has lately favored the latter, but the former production method is still widely practiced. The broiler growing period in Venezuela is usually nine weeks. The live-weight at the end of this period is somewhere around 3.5 pounds. When a lot is marketed, two weeks are frequently allowed for housing cleaning up and disinfecting. However, some other factors usually affect this decision. The main reasons either to shorten or lengthen this two-week period are price and price 76 TAQLE IV-Z BROILER PRODUCTION AND PRODUCTION RATE OF GROWTH C VENEZUELA 1961 - 1970 Production Rate of Growth Year Millions of Broilers Percent 1961 26.7 7.5 1962 28.7 11.5 1963 32.0 64 24.7 19 39.9 0.3-‘3/ 1965 40.0 7.0 1966 42.8 11.4 1967 47.7 5.5 1968 50.3 5.8 1969 53.2 10.5 1970 58.8 é/This is a particular case due to an increase in feed prices Source: Venezuela, Ministerio de Agricultura y Cria, Anuario Estadistico AgrOpecuario 1970. 77 expectation. For example, growers usually react to high prices by shortening the period allowed before placing chicks and, if possible, increasing the number of chicks placed. On the other hand, low price Often bring on the Opposite effect and sometimes also some growers are un- willing to sell their production, and broilers may eventu- ally be reared to an age of 11 or 12 weeks. This complex set of action and reaction thus far has been the main factor leading toward the unstable performance that today characterizes the Venezuelan broiler industry. Labor efficiency and feed conversion vary in Venezuela according to flock size. In general, efficient use Of labor has been achieved in the larger farms through the use of labor-saving equipment. Management practices are also better in large farms. As a result of these economies of scale, large farms show lower production costs than do small flock growers. Feed conversion in Venezuela has been improved as shown in Figure IV-4. This figure was elaborated from data pro- vided by a feed mill company, and it refers mainly to an average obtained in a sample farm rather than an average of the overall production. Therefore, the overall average should be somewhat higher than that shown in Figure IV~4. According to a study made in 1966? small farms showed an 6Juan Mindiola, "La Estructura de la Produccion Nacio- nal de Pollos de Engorde" Caracas, Ministerio de Agricultu- ra y Cria, 1966. 78 XEONI NOISHEANOC) OOI =|16| 3.8 85:223 moaomm 2.42.5 “momsom mm ohm. mom. 0mm. mom. mmm _ b,u _ _ r._ _ _ _ _ _ _ _, T r 09. on L as l IoON oc_.L . 1 ; .w 1 mm_1 100» 00.1 1 marl ler ooml {09¢ mNN _hm_lnmm_ dqmstzm> z. 20_wmm>zoo 0mm... mun-0mm VIZ mmDoE 00.0 831088 3N"! :iO ONflOd 83d 033;! :JO SCINflOd 79 average feed conversion rate of 2.54. However, recent inp formation given by private sectors indicates that conver- sion in large farms ranges from 2.18 to 2.22 and it fluctu- ates between 2.26 to 2.28 in small farms. The author's own feeling is that there is a downward bias in these estimates, at least in the information concerning small farms, and that real average conversion could well be nearly 2.40 pounds of feed per pound of live broiler. The annual number of lots reared by growers varies among areas. Unpublished data compiled by private sectors indicate that in the Central and West regions an average of 4.2 broiler lots is raised by growers, while this number goes up to 5.0 lots in the East region. These differences will be discussed later, in the analysis of marketing practices. Broiler Sale Practices A long time ago, a substantial part Of broiler produc- tion was marketed alive; this practice has been changing and today broilers are mainly marketed in a ready-tO-cook plus form. According to sale practices, growers can be classified in three categories: those who have their production under contract, those who process their own production, and those who are independent and may deal with different processing plants. The first sell their broilers according to contract 80 specifications; the second Operate small, integrated firms, in which sales of live-broilers do not really occur; and the third usually have some kind of verbal agreement with a processing plant, but eventually they could deal with other processors and usually do. Broilers are usually bought by agents of processors at the farm, but on the basis of pounds of live-broilers weighed at the plant. Transportation costs are seldom paid by growers, but when they are responsible for transporting their own broilers, a price higher than the market price is guaranteed. Production Costs Although much research has been conducted in Venezuela to investigate different production cost levels, the results have not been published because they are considered by the firms as confidential information.' Nevertheless, it is known that costs vary among growers, being lower for large farms. Table IV-3 shows estimated costs of rearing broilers in Venezuela from 1965 to 1971. These costs were estimated by the author, based on feed conversion, feed and chick prices, and further information Obtained from the private sector. The feed conversion data taken into consideration were those shown in Figure IV-4. Therefore, the figures calculated are closely related to production costs in large farms. It is .LOpocm cum>HLQ exp scam BosHmeo sofiumesomca cognmsm cam .mmOHmd gowns dam coma .sofimsc>soo coma cog: comma mmpmsflpmm m.sozus< .\M SH pocofipsms pmoo exp hog madeM Hamsm>o mm mm BQSOQ mod H.mu mcfimp\m .Hmpadmo mnaxmos so pmoacpmfl was .soHpmHomaomc .popma do mpmoo mesaosw no: mmoe pH\m i [INN 1 ill. 81 H.3N o.mm maH.N we.m NH.o om.o H:.N ma.o HamH m.mm 5.0m omo.m mm.m mH.o om.o mm.m 05.0 oamH m.mm m.om omo.m mm.m NH.o Hm.o mm.m oa.o mmmH m.mm e.Hm mHH.N mm.m mH.o Hm.o mm.m om.o mmmH m.mm m.HN mmH.m m:.m mH.o Hm.o mm.m mm.o ammH H.:m o.mm maH.N m:.m eH.o mm.o am.m mm.o ommH n.am N.NN oom.m mm.m 0H.o mm.o mm.m mm.o mmmH cH\a caxu mmwmm coHHosmxmm hmHHosm\mm poHHosm\wm hoHHonm\wm mmeosmwmm hams Iqaaoa :Hmpoauczm .ocm.hopm3 mmcHoHeom eomm onno \Q \m .Hms. . & .hmppHH «umpmmzm> 2H mmmHHomm mszemm mo memo. amaezHamm muaH mamas 82 also necessary to indicate that costs of labor, depreci- ation, and interest on working capital included in these estimations were Obtained from confidential reports. They have estimated this overall figure at ¢ 2.08 per pound. Analysis of Table IV-3 indicates that feed and broiler chicks accounted for more than 82 percent of the total pro- duction cost in 1971. - feed 63 percent and chicks 19 per- cent, - while cost of labor, depreciation, and interest on working capital was estimated at only 8.7 percent of the total cost. This is reasonable because of the low labor cost. Prices Received by Growers and Production Costs Prices received by growers vary during the year and among regions. Table IV-4 shows annual average prices by states. Although the data are presented in terms of boli- vars per kilogram, an estimate of the figures in terms Of U.S. cents per pound can easily be obtained by multiplying each figure by 10. Thus, Bs. 2.47 per kilogram is approxi- mately 24.7 U.S. cents per pound. Analysis of this table shows that annual average prices in Central states are usually lower than prices in other regions. This situation can be explained by the broiler production density of the region, flock sizes, lower costs, and competition among suppliers. On the other hand, it is known that prices fluctuate widely during the year. Thus, 83 000 .0 .000H ofimmzomdomm< ooflpmfinwpmm oHamss< .0090 0 00500500000 00 OHLOpmfisfla .mHOSNO:O> "mopsom QHQGHHMEQ #000 N $3» mwpwpm Hafiufimofim H0.0 00.0 00.0 H0.0 0000000 HmcoHpmz 00.0 00.0 00.0 00.0 0HH00 00.0 00.0 00.0 00.0 000000» 00.0 00.0 00.0 H0.0 0HH00000 00.0 00.0 00.0 00.0 thgome 0.: 00.0 00.0 00.0 .mmosm 00.0 00.0 00.0 00.0 0000000000 0.: 00.0 00.0 00.0 0000000 00.0 00.0 00.0 00.0 \000200H0 00.0 00.0 H0.0 00.0 000000 00.0 00.0 00.0 00.0 0000 00. 0H.0 00.0 00.0 00H0000 0H.0 00.0 00.0 00.0 sooHam 00.0 00.0 0H.0 00.0 0000000 00.0 00.0 00.0 00.0 \000000000 00.0 00.0 H0.0 00.0 00>Hflom 00.0 00.0 00.0 HH.0 0000000 0H.0 00.0 00.0 00.0 \0000000 00.0 00.0 no.0 00.0 : 09304 00.0 0H.0 00.0 00.0 0000000000 00.H 00.0 00.0 00.0 \mH000000 cpngmHo 000H 000H 000H NO0H A0003 000H u 000H ¢_ ._ MDNmHmb x dle mamde H .000000 00 . 000000 00 000H0000 monm .00000000 0000 84 growers' income depends upon the particular prices for the moment at which the sale of broilers takes place. Table IV-S is used to show some figures relating to the margins between production costs and prices per pound of live-broiler in Venezuela. It has been elaborated by taking into consideration national average prices and data on cost presented in Table IV-3, but using an average feed conversion value of 2.4. Of course, Table IV-5 should be used very carefully because it has been elaborated on the basis of many assumptions. TABLE IN'-5 MARGINS BETWEEN PRODUCTION COSTS AND PRICES PER POUND OF LIVE-BROILER IN VENEZUELA 1965 - 1970 Value in ¢/lb Year Priceg/ CostE/ Margin 1965 29.7 25.3 4.4 1966 29.7 25.2 4.5 1967 28.4 25.1 3.3 1968 27.7 24.8 2.9 1969 28.2 24.1 4.1 1970 27.4 24.1 3.3 'g/Annual average according to official publications. Q/Calculated from Table IV—3, but using a feed conversion value of 2.4. Elaborated From: Venezuela, Ministerio de Agricultura y Cria, Anuario Estadistico AgrOpecuario, Selected Issues, and information obtained from private sources. 85 Table IV-5 illustrates that margins between broiler production costs and prices have a general decreasing trend. In 1969, average prices went up, while cost was reduced as a consequence of a decrease in chick prices. As a result, margins increased in relation to other years. However, since then a decreasing trend has continued. In general, hen meat commands a higher price than broiler meat. This price difference has been maintained throughout the years, mainly because of consumer prefer- ences for this kind of poultry meat to create a pOpular chunky soup called "sancocho" and also because of relative- ly low hen supply. Finally, it should be mentioned that at the present time there is a national poultry fund cre- ated by the Venezuelan National Poultry Federation, and 7 other institutions which guarantees to growers a minimum price of 25.3 U.S. cents per pound of live-broiler. As can be observed, this price is higher than the cost calculated for 1970 in Table IV-S. This means that practically all growers can make profits on each lot; thus, inefficient Operations are being fostered or maintained. A further dis- cussion of this tOpic is presented in Chapter VII. Some Facts about Prices and Production Figure IV-S illustrates the relationship between broil- er prices and production. The figure was elaborated by 7See Chapter VII, p. 149, 86 FIGURE IV-S BROILER PRICES RECEIVED BY GROWERS AND NUMBER OF CHICKS SOLD BY A SAMPLE HATCHERY IN TI-E CENTRAL REGION OF VENEZUELA Ba per Kg, Thousan of Chicks Liv. Weight Sold per Week 3d3_ HIGH _ I — PRICE 1 . I5 250-- .il PRICE§___ E} _ [If-l ,st 1533' /’.3"33I ...- ,I ..:.. I31 1 LOW [5253' " /"""'3:‘I . 0c: l-‘If'zl rsoo 6:: t_-;- I /;.;:I l;- I .50 /.-;:.::;| /,f..3:l /.-:;3I , If: / I '--".I I: HIGHCHC,-',.a ',". l‘ ‘ [5} 01 SMIT'.- I .3? I F400 I.oo- /':'.:-'3 .l-‘I I I I I .' . I I I I}??? 'I I I I I LovLIIEoIIcIK I l I I I SA I I CHICKS-SOLD I I I I I l I I I I I l II2 Weeks I I I3 Weeks I I2WeeksI Iowa. 000 I I I I I I I I I I I r I I I I T I I I I I I I I I I I I I r r AUG OCT DEC FEB APR JUN AUG OCT EC FEB APR JUN AUG I969 I970 l97I YEARS SOUR CE I PRIVATE SECTOR (Unpublished Data) 87 plotting the weekly data for broiler prices received by growers and number of chicks sold by a sample hatchery in the Central region during the period from August 1969 to August 1971. Analysis of this figure reveals that high prices usu- ally occurred 10 to 12 weeks after a relatively low rate of placements. Likewise, low prices took place 10 to 12 weeks after a relatively high rate of placement. This means that chick placements have an effect upon broiler prices 10 to 12 weeks later; thus, period of time coincides with the growing period plus the time which elapses between marketing a broiler flock and starting to grow another. On the other hand, it is also possible to observe that high prices fre- quently fostered a high rate of placements, while low prices had the Opposite effect. As a result, the rate of chick placements changed according to the rate of broiler prices, so that an increasing rate of placements usually followed rising broiler prices and a decreasing rate of placements followed declining broiler prices. An exception to that trend was observed in 1971 from May to August; nevertheless that exception was due to a New Castle epidemic. Comparison of the results of the analysis of this figure with those obtained from Figure IV-l indicates that the Ve- nezuelan broiler industry shows a price-production relation- ship similar to that which the United States broiler indus- try had during the early fifties. This is mainly due to 88 lack of coordination between the production stage and all other stages of the broiler industry. Long-Run Production Costs and Implications Future output will be produced with average costs at least as low as the best present knowledge indicates is likely to be achieved. Since feed conversion rates below 2.0 have already been achieved in the United States, it is reasonable to expect a conversion rate of at least 2.0 in the future in Venezuela. It seems likely that the scale of Operation and manage- ment quality are two areas which will experience changes contributing to reduced costs. So far, broiler production in Venezuela has been characterized by a small scale of Op- eration, lack Of technical knowledge, poor management, and growers' lack of financial resources. This situation will change in the future, mainly because of the need for coordi- nation between stages which will make growers follow pro- grams established and supervised by the marketing channel captain - the integrator. On the other hand, a reduction Of margins between broiler production costs and prices will also occur in Spite of the actual practice of the National Poultry Fund of guar- anteeing to growers a minimum price per kilogram Of live- broiler. The reason is very simple: such a practice stimu- lates a disorderly expansion of the industry and reduces the 89 incentives to improve efficiency. Therefore, it seems likely that a change in this policy will occur, and the price-cost squeeze will induce the least efficient producers to adjust their production costs or leave the business. Furthermore, during such a period, short-run prices may fluctuate widely and at times go considerably below the long-run cost projections before some Of the marginal pro- ducers are eliminated. This eXpectation is not new. It has already been noted in the Central market, in which price has at times been as low as 16.2 cents per pound (See Figure Iv-5). Elnal Considerations This chapter contained a discussion Of the effects Of new technology on the production stage Of the broiler indus- try in develOped countries and Venezuela. As indicated throughout the discussion: 1. Broiler production in Venezuela shows an uneven growth and develOpment as far as farm size and use Of avail- able technology is concerned. 2. The Venezuelan broiler industry shows a price-pro- duction relationship similar to that which the United States broiler industry had during the early fifties. That is, chick placements have an effect upon broiler prices 10 to 12 weeks later, and prices influence later placements. 9O 3. Price decline and scale economies are expected to lead this stage to a greater concentration. 4. Since many growers Operate their own processing plants, the aforementioned increase in concentration will also affect the processing structure. The structure and practices of the processing stage is discussed next in Chapter V. FACTORS AFFECTING SUPPLY: POULTRY PAD” SING The develOpment of mass production methods in poultry processing has been possible due to social innovations that occurred prior to World War II. Home refrigerators, super- market retailing, ice-pack shipping, and rapid truck trans- portation all have combined to (1) make possible the processing Of broilers in the production areas, rural zones, with low cost labor and (2) reduce the weight loss in transporting live-birds. Decreasing prices and increasing competition have made processors intensify their interest in more efficient processing methods. This has led toward greater concentra- because of en- 0; tion of processing into fewer plants, mainl hancement of efficienc through fuller use 0; alant ca acity Q V (II and substantial economies Of scal Poultry processing is among the most importan factors affecting the broiler industry. Processors share a great deal of responsibility for the form and quality of the pro- duct which reaches consumers. Therefore, it is important for them to be aware of consumers' needs and desires in order to satisfy consumer throu gh processing innovations. 91 92 Actually, processing is the stage of the Venezuelan broiler industry which shows the lowest degree Of develOp- ment. Therefore, analysis Of this stage and its comparison with processing practices in develOped countries will be worthwhile in evaluating industry performance and providing a basis for a prOposal for improving market performance and coordination in the Venezuelan broiler industry. Poultry Processing in Developed Countries Analysis of the evolution of poultry processing in de- velOped countries shows that: 1. There has been a tendency to change processing plant locations from urban to rural areas; in other words, to change plant locations from centers of consumption to production centers. This has allowed a reduction in labor and transportation costs, as well as in live-broiler weight loss. ... .:.... ,..,..‘I ....I. .LO. '0 -1 .'. 0.1 wt CCH-SCIlOI'Ec- (I) 2. There has been a long-run CI tion Of broiler processing in fewer plants ”no firms. Greater firm concentration is expected in the future as a result of further acquisitions and mergers. 3. Initially, broilers were marketed live and later in the New York dressed form (only blood and feathers re- moved). At present, broilers reach consumers either in ready-to-cook form or as part of further-processed products. 93 Nevertheless, the largest part of broiler production is processed as ready-tO-cook birds and sold out up or whole. Actually, the latter form accounts for the largest prOpor- tion of production. 4. Substantial economies of scale have been found in assembling and processing broilers. The Optimum plant size is different for each situation, and depends upon the com- bined costs Of assembling, processing, and distributing. 5. Fuller use of capacity has been necessary to mini- mize overhead costs. Therefore, processors have made some kind of arrangement with growers or have gone into growing activities themselves - integration, to insure a somewhat regular supply the year around. 6. Government inSpection is normally performed in processing plants. In the United States, federal health inSpection for poultry entering into interstate commerce is compulsory. As a result, some broilers are condemned. The main causes of condemnation are diseases or infections such as leukosis, septicemia, and air sacuiitis, and those re- lated to handling and processing of broilers such as bruises, contamination, and overscalding. 7. Processors give special attention to plant sanita- tion and quality control programs -- the former because government inspectors can shut down the plant if sanitary requirements are not met; and the latter because such pro- grams reduce Spoilage losses during storing and marketing 94 and provide a quality product which appeals to consumers. 8. Processors' selling prices have shown a downward trend due to the decline in live-broiler prices1 and the de- crease in processing costs resulting from larger and more efficient plants. The latter is also the moat important factor in narrowing processors' marketing margins. 9. Finally, today's processing plants are active ele- ments Of the total marketing strategy because they have created an extremely perishable product which must be dis- posed of within a short time. As stated in earlier chapters vertical integration has reduced the number Of decision makers and shifted decision centers from farms to integra- tors. The main Objective Of integrators has been to in- crease their overall business and, at the same time, main- tain a balanced Operation of hatchery, feed mills, grow-out facilities, and processing plan s; therefore, decision centers have been located as close as possible to consumers - the processing plants. They provide the feedback that gives the guidelines for the eatablishment or modification of production planning and marketing Strategies. 1Actually, the Open market price for live-broilers is practically non-existent and in May 1971, for example, the USDA stopped reporting live-broiler prices in the United States. 95 Poultrngrocessing in Venezuela The Venezuelan broiler industry is characterized by the presence of many growers who have extended their activi- ties through processing and marketing. Since they process their own production, their processing plants can be de- scribed as very small facilities in which lack of adequate equipment and technical knowledge makes it difficult to ob- tain a fair final product. Although there seems to be a trend or a force leading toward concentration in fewer and larger processing plants, the impact of this leading force has not yet been significant. Number, Size, and Location of Processing Plants Table V-l was elaborated from data provided by confi- dential sources in Venezuela. It illustrates the number, size distribution, and location of poultry processing plants by states in Venezuela in October of i9,1. analysis of this table shows that only eight of the 103 processing plants in Venezuela have capacity enough to process more than 1,000 broilers per hour. Among the others, 65 have been reported to have a capacity which ranges between 10 and 200 birds per hour. Of this number, 24 were indicated to have a ca- pacity ranging between 10 and 50 birds per hour. Comparison between the total number of broiler farms reported by the Ministry of Agriculture and Animal Husbandry and the number 96 mod N ha H N ll 0 ll W I H I.- m I NH . m I N. .l m .l 0 ll +~ |l NH - m I. N H m. I- m— n! 'I.-inl.. it'll- '15,! Ill 01H! «H .3 mi l3 IH H ! 4“... neeaw. NOON seep whoa OOONIHoofi oooflufios ma 3 H lv-l INHmlq—q INIHN oomlaom "I. ....I'l.i§"l. 1“"; ‘0--- .Hmecoofimcoo “oopdom 1n \0 'U‘MNINOdU‘mOHNdm [mot—400i QI' OONIOH mac: mmm QOHm zH MBHo madam msommmw oHHfimspB mpfixome emmSMSpLom mpsmomm m>csz mucosa; compo: msmq oofimmso cooamm monoroo oponmpmo pm>fiaom mamma< HSMmpmomc< Hammond Opfigpmfio H’I‘.' I'll!" “It! «gm eszmmoomm smeapom mo eoHeaooq one .mNHm .mmmaez HI> MdmdB 97 of processing plants reported by this confidential source establishes the fact that there are as few as five farms for every processing plant. These figures confirm the statement that many growers process their own production, and illustrates the critical situation with which the Vene- zuelan broiler industry is confronted in this stage. Figure V-1 and V-Z illustrates the location of proc- essing plants in Venezuela. Analysis of Figure V-Z reveals that six of the eight biggest plants are located in Central states, while the other two are in Zulia in the East, and Anzoategui in the West. This indicates that broiler proc- essing, as well as production, is concentrated in these areas . Average Capacity and Rate of Use of Processing_Plants Table V-2 is presented to show the average capacity and rate of use of processing plants by states in Venezuela in October of 1971. This table was also extended from informa— tion provided by confidential sources. The information comprises data on location, capacity, and the average weekly number of broilers processed in each processing plant. Analysis of this table reveals that: 1. The average plant capacity in Venezuela is 351 birds per hour, and the overall rate of utilization of plant capacity in October was as low as 56.4 percent. 2. 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