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Research Article
 

A Comparative Study Between Returns to Technology and Scale of Broiler Production in Peninsular Malaysia



Ilmas Abdurofi, Mohd Mansor Ismail and Abu Hassan Md Isa
 
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ABSTRACT

Background and Objectives: The economic analysis of broiler production under various systems of production and scales of operation are considered in this study. In particular, the study aimed to describe the net return of broiler industry based on number of broiler production and its associated technological application. Materials and Methods: A sample of 310 farmers was drawn in Peninsular Malaysia based on stratified sampling technique; with system of production (technology) and scale of production as strata. The production-returns analysis technique was used to estimate costs of broiler production and net returns under both tax-paying and tax-exemption scenarios. The analyses in this study have repeatedly demonstrated the power of economy of scale in many spheres. Results: The findings showed that the medium and large scale farms under open system to be better compared to its peers in the closed system in terms of total output, low mortality rate, low feed conversion rate, low variable cost per bird and high net returns per bird. However, the closed system is more favorable in terms market weight of broilers. Generally, the small scale farmers across both farming systems produced with marginal net returns but others have better magnitude of net returns. Conclusion: It may be concluded that current technology in the broiler industry did not affect net returns much as did the scale of production.

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  How to cite this article:

Ilmas Abdurofi, Mohd Mansor Ismail and Abu Hassan Md Isa, 2018. A Comparative Study Between Returns to Technology and Scale of Broiler Production in Peninsular Malaysia. Journal of Applied Sciences, 18: 109-115.

DOI: 10.3923/jas.2018.109.115

URL: https://scialert.net/abstract/?doi=jas.2018.109.115
 
Received: March 06, 2018; Accepted: September 26, 2018; Published: October 30, 2018


Copyright: © 2018. This is an open access article distributed under the terms of the creative commons attribution License, which permits unrestricted use, distribution and reproduction in any medium, provided the original author and source are credited.

INTRODUCTION

The Malaysian poultry industry has undergone a transformation over the last decade. Currently, Malaysia is exporting live birds and processed poultry products to Singapore and some Middle East countries. As a major producer of poultry in the Asia Pacific region, the country is self-sufficient. According to Department of Veterinary Services (DVS)1, self-sufficiency level in Malaysia reached at 104.85% in 2016 (Table 1). Although self-sufficiency level is relatively low to previous years, its performances still stable and poultry meat production remains one of the government’s agenda for ensuring food security in the context of reducing food trade deficit where Malaysia plans to gradually stop relying on imports of food products and focuses on increasing local food production. In Malaysia, chicken meat sold in the markets can be categorized into four types, namely: Ordinary/regular chicken meat, village chicken, old layer chicken and organic chicken. This study focused on regular chicken meat as the regular chicken meat sales is among the highest in Malaysia while the others are mere complements.

Malaysia is the third largest producer of chicken meat in Asia, after Thailand and Indonesia. Malaysia produced 1,460 Mt of chicken meat2 in 2015. This mass production is supported by 2403 farms in the West Malaysia and 569 operators in the East Malaysia1,3. According to DVS1, broiler breeders in Malaysia produce approximately 1.8 million day-old-chicks (DOC) every day. Majority (1,692,000) of the daily live chicken production is intended for the local market and the rest of about 108,000 for export to other countries.

As the population of Malaysia grows, the demand for energy and protein in their daily diets will also increase, but along the increase in population, cost of living is also rising. Chicken has become a major source of animal protein and it is gaining importance in the Malaysian diet, compared to beef, mutton and pork. This is mainly owing to cheaper prices of chicken meat compared to other meat as sources of protein (Fig. 1). The main influence on broiler prices is feed costs which constitute roughly 70% of the total cost of production. Feed cost is indeed a major constraint to potential small scale producers in terms of allocation of investment in the production.

Chicken feed is the most important input in livestock production, especially if it relates to the cost of production of broilers. Chickens need feeds containing protein content and energy density to ensure optimum growth. The cost of feeds for chickens reared commercially may reach up to 70% of production costs4. In poultry, providing quality food at a low price is an important pre-requisite in the process of production of broiler chickens. Therefore, the changes in the price of feeds or main ingredients of feed may alter the structure of chicken production5. In Malaysia, a report issued by the Federation of Livestock Farmer’s association3 also noted that chicken feed is a major cost in the production of broiler chickens. Two main inputs record more than 90% of the overall cost of production, which are day’s-old-chick (DOC) and chicken feeds. Furthermore, the cost of chicken feed is more than half of the overall cost6. Even some other sources of literature claim a higher percentage of the cost of feeds for broiler production.

Table 1: Self-Sufficiency of poultry meat products in Malaysia (%), 2008-2016
Sources: DVS1

Fig. 1: Price of local meat source in Malaysia from 2006-2015
  Source: DVS1

Thus, the price of feeds plays a major role in determining the levels of broiler output, its production costs and also the market price of chicken. Therefore, the costs of broiler feed formulation should put as a priority in order to sustain lucrative business. In many articles the tax-exemption scenario is always linked to a government incentive7.

The two systems of broiler production abound in Malaysia which are open and closed system. The open system is the dominant system that is practiced by majority of farms owing to its low initial capital requirement relative to the closed system that is highly capital intensive. Moreover, small and medium enterprise of broiler farms constitutes as a high proportion, while the farms rely on the large farming or integrators in supplying full-grown in the production system. Therefore, the objective of the study presents net return analysis based on the current high feed cost regime for both closed and open systems under small, medium and large scale and in both tax-paying and tax-exemption scenarios.

MATERIALS AND METHODS

The study was conducted in 9 states of Peninsular Malaysia namely: Johor, Malacca, Negeri Sembilan, Selangor, Pahang, Kelantan, Perak, Penang and Kedah. In terms of both demand and production of broiler, Peninsular Malaysia is unparalleled relative to the East Malaysia, hence selection of the former as study area is well justified. In order to facilitate clearly the distinction in economic return between scale of production, the study analyzed broiler returns under three distinct scales. The distinction in technological adoption for broiler production is another factor in determining the level and returns to broiler production.

Thus, a stratified sampling technique was used with system of production (close and open) and scale of production (small, medium and large) as strata (Table 2). Broiler production was scaled into 3 scales as 1-30,000, 30,001-125,000 and above 125,000 birds as small, medium and large scale, respectively. The study used both primary and secondary means of data collection. The primary data involved administering questionnaires to the respondents to elicit data via personal interview, while data from texts, journals and government reports were the major sources of secondary data. Since outsiders are not allowed to enter broiler farms, the interview was 100% done by the DVS personnel. The data has been taken in 2015 and solely used 1 year period of data observation.

The analytical techniques of this research was centralized on costing analysis, where the basic components of input (fixed, variable and depreciation cost) and the output (revenue or return) are elucidated. The economic analysis as helpful in acquiring the relationship among fixed costs, variable costs and net returns8.

Table 2: Number of samples based on states, technology and scale
Total 310 Total 310

The technique also provides beneficial outcomes to define net returns from all outputs and computes the volume of production at a given price necessary to cover all costs. In this study, the variable cost and net return pattern were evaluated explicitly in terms of both per average farm and per bird basis. Furthermore, the calculation of feed conversion ratio (FCR) was computed to take into consideration the level of ingredients in feed consumption. Feed Conversion Ratio equation is expressed as follows:

RESULTS AND DISCUSSION

Production description: Results in Table 3 have shown that the open system under large scale as producing the highest broiler for the cycle under consideration. Except for the small scale broiler, the medium and large scale productions have shown higher production under the open system relative to the closed system. This is not surprising, since the closed system is supposedly an organized system; stock limitations are strictly adhered to contrary to the open system where overstocking likely occurs.

Results also showed the open system consistently produced with higher DOC price relative to their peers in the closed system. Except in small scale, broiler production has shown higher mortality in medium and large scale closed system of production relative to its peers in the open system. However, a priori expectation was that the closed system should show lower mortality since it is better organized and more environmentally friendly than the open system. Relative to its peers in the closed system, the open system have shown better feed conversion rate under the medium and large scale with the exception of small scale. The lower value of FCR indicated that feed cost would be considerably less9. Ironically, relative to its peers in the open system, the average market weight of broiler in the closed system have shown better weight gain in large scale but in different under both small and medium scales of production.

Table 3: Production costs description for close and open systems
Source : Survey data (2015)

Table 4: Capital investment pattern for close and open systems
Source : Survey data (2015)

Capital investment pattern on different scale and technology of broiler farms: Capital investments refers to the funds invested on permanent assets whose contribution spans over many years in the broiler farm. Table 4 illustrated the differences in the types of broiler production which is based on scale and technological usage. In terms of total investment, it showed direct proportionality with broiler stock in their initial investment and owing to its requirements, the closed system in general displays higher investments relative its open counterpart. The high initial capital sometimes can be a barrier to entry to new investors. The results showed building a broiler house accounts for 65% of total investments but the cost is less under the open system, particularly its small scale sub-set that operates on small sized-buildings.

After the assets, working capital is the next essential item of business process to ensure the adequacy of firm’s capital in paying its current production obligations. Working capital affects the firm’s revenue and profitablity10. In the context of working capital, the highest is recorded in large farms, which indicates that the cash availability is sufficient to fulfill company’s payables and results into more stable and profitable business.

Cost pattern on different scale and technology of broiler farms: The list of total costs in broiler production are presented in Table 5. The total cost includes fixed and variable cost, as only the cost of electricity/diesel is categorized as fixed cost during the operation. The results showed that the primary cost is reflected in expenses on feeds in both systems and across all scales of production. However, the findings showed almost similar from the previous studies4,11,12 that the high cost in broiler production is represented by feeding proportion. In terms of cost per kg, the open system under small scale showed higher costs relative to its peers as RM 4.26, while the large scale under open system has demonstrated lower cost per kg at RM 3.41, it assumed that in order to produce 1 kg of chicken, it costs about RM 3.41.

Net returns from different scale and technology of broiler farms for tax paying enterprises: The net return of broiler production in Table 6 has adopted the procedure of calculating net cash flow method, where depreciation cost and tax obligation are imposed to obtain the absolute value of net return. Then, rate of return is calculated without total investments in order to avoid estimation bias13.

Table 5: Total cost pattern for close and open systems
Source : Survey data (2015)

Table 6: Net return to broiler farms for tax paying firms
Net Cash flow equals depreciation plus earning after tax, Net profit per kg equals net cash flow divided by total kilogram sold per year, Net profit per chicken equals net cash flow divided by total chicken sold per year, EBT: Earnings before tax and EAT: Earnings after tax, USD1: RM4.22 (11 October 2017), Source : Survey Data (2015)

Furthermore the use of initial investment focused on evaluating the long run business plan or capital budgeting techniques. Therefore, the calculation of net profit in this study did not include the initial investment but it was represented as depreciation expenses. Since depreciation expense was a non-cash charge, it was added back to earnings after tax to obtain net cash flow.

The finding from Table 6 revealed that the best categories in terms of net returns in decreasing order of magnitude are: Large scale (open), large scale (closed), medium scale (open), medium scale (closed), small scale (closed) and small scale (open). However, small scale farmers in both categories produce with marginal profits of RM 0.55 and 0.35/bird, respectively. The implication is if this scenario persists, it may not permit sustainable operation particularly in the long run, while these small-scale farmers could be better off to join contract farming offered by many broiler integrators.

Net returns from different scale and technology of broiler farms for tax exempt firms: Table 7 showed the net return of broiler farms under tax exemption scenario. In a business, paying tax after obtaining a gross return per year is a common obligation. This condition ordinarily occurs in a company which has been registered officially. Nevertheless, the tax responsibility sometimes overburdens the company’s return, particularly to a small business category.

Table 7: Net return to broiler farms for tax exempt firms
Net profit per kg equals net cash flow divided by total kilogram sold per year, Net profit per chicken equals net cash flow divided by total chicken sold per year, USD1: RM4.22 (11 October 2017), Source : Survey Data (2015)

Furthermore, in order to boost the agriculture sector, Malaysian government introduced partial exemption from income tax payment and recently imposed GST (the good and service tax) at zero rate to the industry or company which involved in producing agricultural products. Therefore, the study as well illustrated how the profit of broiler industry under tax exemption scenario behaves. Relative to tax-paying scenario, the tax-exemption scenario portrays all categories of farms to enjoy increase in net return. But the increase in net return is more beneficial to the large scale farms relative to other scale of production. For instance, while the net return per kg increased by 30 cent in large scale farms, the impact is just 1 cent in small scale farms. However, in order to be granted with this incentive, these firms must get prior approval from the government. Net profit per chicken was higher in open system (medium and large scale) relative to their peers.

CONCLUSION

The result showed that large and medium scale farms under open system was better as compared to their peers in closed system. Evidence abound that the small scale producers both in open and closed systems produce with marginal net profit per bird even under tax exemption scenario. The fact that feed cost accounts high cost of production is quite worrisome. Hence, more research in developing cheaper alternative source of feeds from local raw materials needs to be developed in order to improve net returns.

SIGNIFICANCE STATEMENT

This study focuses on describing the cost and return of broiler farming in different technology and scale. This study will assist farm management, researcher and policy maker to attain potential farm in adapting close system, open system, small farm, medium farm and large farm in Malaysia. Hence, the study represents an informative figure of lucrative comparison in broiler farming under different coop system and business scale.

ACKNOWLEDGMENT

This study was funded by the ministry of Education (MOE), Malaysia via Research Grant (No: 5526015). Authors are highly appreciate.

REFERENCES
1:  DVS., 2017. Statistics. Department of Veterinary Services. http://www.dvs.gov.my/statistik.

2:  Index Mundi, 2015. Broiler meat (poultry) production by country in 1000 MT. http://www.indexmundi.com/agriculture/?commodity=broiler-meat&graph=production.

3:  Federation of Livestock Farmer’s Association of Malaysia, 2015. Industry Info. http://www.flfam.org.my/index.php/industry-info.

4:  Ravindran, V., 2013. Poultry feed availability and nutrition in developing countries: Main ingredients used in poultry feed formulations. Food and Agriculture Organization of the United Nations. Poultry Development Review. http://www.fao.org/3/a-al705e.pdf.

5:  Elsedig, E.A.A., M.I. Mohd and M.A. Fatimah, 2015. Assessing the competitiveness and comparative advantage of broiler production in Johor using policy analysis matrix. Int. Food Res. J., 22: 116-121.

6:  Shaikh, A.S. and Y.C. Zala, 2011. Production performance and economic appraisal of broiler farms in Anand district of Gujarat. Agric. Econ. Res. Rev., 24: 317-323.
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7:  Sara, R.R., M.M. Ismail, N.H. Kamarulzaman and Z.A. Mohamed, 2014. The impact of government incentives on financial viability of selected aquaculture species in Malaysia. Int. Food Res. J., 21: 1451-1456.
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8:  Gutierrez, P.H. and N.L. Dalsted, 2012. Break-even method of investment analysis. Farm and Ranch Series Economics. Colorado State University, Fact Sheet No. 3.759. http://extension.colostate.edu/docs/pubs/farmmgt/03759.pdf.

9:  Samarakoon, S.M.R. and K. Samarasinghe, 2012. Strategies to improve the cost effectiveness of broiler production. Trop. Agric. Res., 23: 338-346.
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10:  Wieczorek-Kosmala, M., A. Dos, J. Blach and M. Gorczynska, 2016. Working capital management and liquidity reserves: The context of risk retention. J. Econ. Manage., 23: 5-20.
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11:  Abdurofi, I., M.M. Ismail, H.A.W. Kamal and B.H. Gabdo, 2016. Economic analysis of broiler production in peninsular Malaysia. Int. Food Res. J., 24: 761-766.
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