INCENTIVE, PERFORMANCE AND THE CHOICE OF STRATEGY IN BROILER CONTRACT FARMING: A CASE STUDY IN YOGYAKARTA

Abstract

Broiler farming has been considered as a risky agribusiness because of its systemic
production risk caused by weather fluctuations; strain of chicks; feed quality, etc. as well as due to inputs and outputs prices fluctuations. Under such situation, contract system has been playing an important role to develop broiler farming not only in Indonesia but also in other countries. Although contract farming has been proven as an effective mode to organize poultry industry. some controversial issues regarding factors affect the performance of contract and the choice of strategy between a poultry company as integrator and broiler farmers as growers still arise. A common contract in broiler farming is that growers exchange control over production and marketing management decisions for a guaranteed price, while integrator bears risk due to changes in relative prices of inputs and outputs. Non-labor inputs such as
day old chicks (DOC), feed, OVK (medication, vaccine and other chemical inputs) and technical services are fully controlled by the integrator; and that of the labor input becomes the grower’s responsibility. When growers enter the contract, however, they have to provide a significant amount of investment on broiler houses and other facilities (fixed factors). Integrator may implement several type of contract such as tournament, fixed perfonnance standard and profit sharing; and provide incentive and/or compensation to improve the performance of growers. The contract is usually a short term contract based on flock and in a certain period. The contract is renewed regularly depending on market condition.

Inputs and outputs prices, and the structure of payment of the growers are declared
explicitly in the contract between integrator and growers; but quantity and quality of inputs are not. Under short term contract in which integrator can learn about the ability of growers, integrator may discriminate growers by differing quantity and/or quality of inputs to growers. The integrator may deliver inputs level in efficient amount from his side and then provide an incentive to growers for improving efforts and performance of contract. Another way, integrator may handicap high quality growers with more flocks or may discriminate quality of inputs to the growers. As investigated in Leemonchai and Vukina (2005), two possible strategies may be practiced by the integrator namely: (1) career concem strategy (high performance grower assigned high quality of inputs, low performance grower assigned low quality of inputs); and (2) Ratchet strategy (high perfomiance grower assigned low quality of inputs, low performance grower assigned high quality of inputs).