The Relationship between Contracting and Livestock Waste Pollution

The policy discussions about the potential linkages between contracting and livestock wasteproblems have been focused on two sets of issues. One set relates to the emergence of livestockwaste as a major environmental problem that requires urgent regulatory intervention. Implicit inthis debate is the notion that animal waste related environmental problems have been caused or exacerbatedby the organizational structure of the livestock industry, notably its high degree of verticalintegration via production contracts with independent farmers. Another set of issues relates tothe design of regulatory policies that could be implemented given the existing organizational structuresof various livestock industries. As far as the emergence of animal waste as a major environmental problem is considered, thecentral objective of this paper is to try to answer the question of whether contracting worsens livestockwaste management problems, how, and to what degree? The evidence about the potentiallinkages between contracting and animal waste management problems presented in the paper fitsinto four categories. First, contrary to the widely held belief that contracting leads to larger scaleproduction (more animals per operation) and thus larger volumes of waste per operation, the existingliterature does not support the hypothesis that the contract livestock producers tend to be largerthen the independent farmers. Second, farmers tend to apply livestock manure in excess of theamount that would require just substitution of the chemical fertilizer because by applying manureon any given field they not only receive the nutrient benefits of that application but also save on thetransportation costs relative to applying the same manure on more distant fields. This result showsthat the use of manure can be expected to worsen nutrient runoff and leaching from croplands regardlessof whether the livestock producer is a contract operator or an independent farmer. Third,contract production results in high concentration of livestock production facilities in a few geographicareas. However, there is also a tendency for the independent livestock producers to concentratein certain geographical areas due to significant agglomeration economies. Fourth, given thefact that monitoring the nutrient content of feed and manure is costly and imperfect and each partycannot observe the effort exerted by the other party, the net benefits (cost) of nutrient applicationmay fail to get incorporated into the payment schedule of a production contract. Therefore, thequestion of the division of responsibilities for providing inputs in livestock production and the resultantpayment schemes used to settle the contracts become important for purposes of optimal contractdesign. When it comes to designing an appropriate regulatory regime, the paper focuses on the questionof how to apportion the burden of regulation among the contracting parties in a socially optimalway. The conclusions can be summarized as follows. First, in light of substantial multi-taskingproblems, the regulation toward some form of a shared responsibility between the integrators andgrowers for manure disposal may render the currently used relative performance piece rate remunerationschemes obsolete. It is conceivable that rather then switching to fixed wage contracts as amethod of rewarding their growers, integrator companies may gradually change their organizationstructure towards more company owned farms. Such an important shift in the industry structureaway from contracting may have dire implications for local rural communities in many parts of thecountry. Especially strong impact could be felt in the Southeast where many small family farmsheavily depend on the supplemental income from contract poultry operations. Second, the incidenceof anticipated increases in environmental compliance cost will depend on the market power1 Department of Agricultural and Resource Economics, North Carolina State University, Raleigh, NC 27695-8109.136 The Relationship between Contracting and Livestock Waste Pollutionof the integrator on the market for growers. In markets with absolute monopsony power of the integrator,the increased cost of environmental regulation will always be borne by the integrator regardlessof the initial design. If the market for growers services is such that growers are actually earningpositive rents, then the incidence of costs depends on the distribution of bargaining power betweenparties as well as the presence of other regulatory and legal requirements governing the specificationof the contract form. Finally, the anticipated move toward shared responsibility for accidentalwaste spills between the integrator and growers may or may not be welfare enhancing, dependingon the relative bargaining power of the integrator on the market for growers. In geographical areaswhere the competition for growers is fairly fierce, making integrators liable for environmentaldamages caused by the growers may not be theoretically justifiable. On the other hand, if the integratoris the only game in town and the probability of growers defecting to another integrator islow, making integrators liable for environmental damages caused by the growers may be sociallyoptimal.