1. Objectives
2. Executive Summary of the Project
3. Options to Manage the Crisis Fallout
4. Disease Control Mechanism and Financial Assistance
5. Rebuilding and Resettling Sub-standard Farms

 

Appendix

• Consensus Building
• The Concept of the National Swine Producers’ Council (NSPC) and Proposed Framework for its Operation
• Guidelines for Establishing New Pig Farming Areas (PFAs)
• Waste Management and Pig Health Management in New PFAs
• Costing and Funding Requirements
• The Economic Rationale of Pig Farming For Malaysia

PART I :  Concept

1. Objectives
The Nipah Virus Encephalitis Crisis has resulted in tremendous social distress and economic losses for the country. It is object of the Sunflower Project to provide a solution to

1. provide assistance to the affected farmers and families to solve current financial difficulties rebuild their means of livelihood and prevent any social problems.
2. assures a safe and competitive source of pork supply for Malaysian consumers, thereby assures food security.
3. to find ways to overcome the problems and challenges posed by the pig farming industry.

Existing Problems and Challenges of Pig Farming Industry

1. Substandard farms continued to present environmental problems.
2. Movement of animals between farms and to abattoirs are raising sensitivities among different communities.
3. Farms closed to residential areas and key infrastructure such as the KLIA are posing environmental problems and negative effects to other sectors such as Tourism.
4. JE/Nipah virus outbreak heightened the problem of zoonotic diseases, and pose public health hazard.

Economic Impact of the Nipah Virus Outbreak

1. Death of 100-odd farm workers and farmers, butchers and workers related to pig farming industry.
2. Culling of 1,000,000 animals at cost of RM200, total RM200 million losses.
3. Destroyed infrastructure
4. Loss of employment for some 5,000 people

Consequences and Implications:

1. Self sufficiency of pork falls to 74% (compared to the former 133%) because production now falls to 2 million porkers  per year
2. Import of pork, likely to result in more expensive meat source.
3. The investment in pig farming infrastructure in the affected farms totalling RM 500 million will lie idle.
4. Loss of foreign revenue of RM450 million and loss of output of RM600 million worth of pigs annually.

2. An Executive Summary of The Sunflower Project

Objective: To reorganize and modernize the pig farming industry in line with the PFA policy laid down by the government and to ensure self sufficiency in pork production beginning with managing the fall-out of the Nipah Encephalitis Crisis to minimize social and economic problem for the country.

Assumptions: The Federal Government will enforce its PFA policies and sought cooperation from State Governments to provide land and long tenure license for pig farming.

The NSPC Mechanism: Setting up of the National Swine Producers Council, to oversee and manage the transformation of the industry.

1. NSPC is a management council comprises representatives from the government, pig farmers and the pork consumers.
2. It will be created with a Stature of Parliament or equivalent in order to have the power to carry out some tough reforms. All consultants including experts from Denmark and the United States recommended the importance of having an Act of Parliament to give effective power to the NSPC.
3. NSPC is a joint management council. A tripartite council, consisting of government and the private sector is unprecedented in this country, but in view of the uniqueness of the crisis and the circumstances, without enforcement powers, it can not accomplish its objectives. NSPC is NOT a private sector council, but a JOINT council between the government and the private sector.
4. In order to ensure the balance of interest, between the public,  consumers, government and the farmers, it is proposed that the bylaws of NSCP will provide that all decisions will be taken on a consensus basis.

1. NSPC takes out a loan of $180 million from a consortium of non Bumiputra and foreign banks with the backing of Bank Negara under A Special Food For Fund program at 4% interest for 10 years. This scheme has taken care of the religious and political sensitivity of the country.
2. NSPC will pay the difference from the government's financial assistance of RM50 per pig destroyed and the farmers' request of RM200 to the affected farmers in the following manners:
1. $50 in cash (total RM60 million) so that farmers can pay off their debts and have a thicker cushion for disaster relief.
2. $100 in shares in a new company to be formed for these affected farmers, called Integrated Swine Farming Berhad (ISFB) to redevelop the industry. To do a 200,000 pigs integrated farm, a capital of RM171 million is required. All these affected farmers can band together to make one integrated farm.
3. The affected farmers will become contract farmers under ISFB, much like the broiler in the poultry situation in the country today.
4. Any farmer who does not wish to remain in  pig farming can sell their shares back to ISFB or its shareholders after a waiting period. A waiting period is imposed to enable farmers to make a decision after the Virus infection situation stabilizes. In effect, because of the oversupply situation in the country and more efficient farming methods, the number of farmers will be reduced. This way, the affected farmers can still participate in the business as shareholders.
3. Repayment of loan: By law, all pig farms must be members of NSPC and are legally obligated to follow guidelines and directives issued by NSPC. The NSPC will be vested with power to collect a levy per porker. It is proposed that RM10 will be collected. At 2 million pigs' annual production, RM20 million will be collected to repay the loan. Once virus infection situation stabilizes the pig population can be built up again. The pre-crisis pig population was 2.44 million.
4. In order to facilitate the collection of levies, the abattoirs in the country will be reorganized, phasing out those operated by the local council and illegal slaughtering. With abattoir insitu of integrated farms, there will only be a need for fewer abattoirs to cater for the 2 million pigs produced by farms NOT affected by the Nipah Virus.
5. While the Department of Veterinary Services continues to supervise the present abattoirs, NSPC will explore the setting up of new abattoirs to cater to the needed capacity give rise by the closure of illegal slaughtering. NSPC  may privatize its management for efficiency purposes while it concentrates on  the smooth collection of the levy.
6. NSPC will guide and manage the supply condition in the country, and set price guidelines. At some future date, NSPC will undertake deeper marketing and distribution reforms to help optimize farmers’ income and oversee the reforms towards greater efficiency in the distribution and marketing chain.

Private Investors: Corporate and/or foreign investments are welcome to participate in the reorganization. For a total of 1 million pigs, a total investment of RM857 million will be needed. Because of the capital-intensity of modern pig farming, this reorganization will see the entry of big corporate interest, local as well as foreign, if the government policy allows it.

Program of Reorganization:
Phase Ia: Upgrade farms insitu:

1. Those farms that have land for insitu upgrade must comply with veterinary and environmental standards (see Appendix E for details) do so within the next 36 months.
2. It is estimated that a total of RM60 million of additional investment is required for these upgrades. This investment can be sourced by way of private equity or soft loan from the Malaysian banking system.

1. For those farms that must be closed, they are to be resettled in a new area. Long tenure license and conversion of land use for pig farming must be provided for this purpose.
2. Preliminary survey shows that suitable land (see Appendix E , Table 2) can be found in Province Wellesly, Perak, Selangor,Pahang, Johor, Negeri Sembilan and Melaka.
3. New land areas required will be around 600 hectares.
4. Phase Ib: Resettling of sub-standard farms will need a total of RM322 million.* RM120 million will come from ISFB, additional funding will be sourced from the farmers in the farms to be resettled, failing which open invitation for equity participation will be made.

1. With Phase I a and 1b, the total SPP of the country will be 1.4 million which will produce 2.2 million porkers annually.
2. Malaysia has a domestic demand of between 2.7 million porkers at 30 kg per capital per year. This means we are short of 500,000 head annually for domestic needs. Therefore the pig population needs an increase of 320,000 heads, which requires an investment of RM275 million.
3. Private equity will be welcome with license given for such integrated farms.

1. To produce 1 million porker for export demand existed prior to the Nipah Crisis, we need an SPP of 650,000. This would need investment of RM553 million around 1,300 hectares of land.
2. Private equity will be welcome with license given for such integrated farms.

1. Implementing further organization, rebuilding and marketing reforms
2. Production regulation
3. Collect levy, money to be managed by a separate investment house
4. Oversee award of tender to operators of abattoirs outside the PFAs.
5. Disease surveillance
6. R & D for the pig farming industry
7. Education and training of producers. It is proposed that NSPC certified a training quota, which will be made as a condition for the renewal of contract farming license.
8. Export promotion.

1. The Mode of Decision making for the NSPC must reflect balance of the interest of all parties concerned. Decisions regarding reforms to meet pollution standards and disease control as they affect all Malaysians must be in line with government guidelines. The same goes for supply regulation, charging of the checkoff (or levy), disease control and enforcement of veterinary and food safety standards as these affect consumers.
2. Other decision relating to specific production practices that affect the pig farmers, but not the general population to be taken on a majority vote.
3. The power of NSPC should exceed that of the State associations. In fact, if the industry shrinks in terms of the number of States where pigs are produced and covers a smaller geographic area, then movement to a national organization, without State organizations works more effectively.

1. Its work to be supported by a full time executive team, which will carry out the decisions and guidelines, set by the Council. An Executive Director who is an expert in pig farming economics and state of the art production and marketing will head it
2. All council members will be paid an honorarium by NSPC, but report to their respective representative bodies (DVS, ACCCIM or  FLFAM)

An Alternative Solution:  The Free Market Option
While the Nipah virus situation stabilizes, the pig farming industry in Malaysia will experience a rebound. In line with the government's objective of a modern pig farming industry, the following scenario could happen:

1. If no more humanitarian aid is forthcoming, the inadequate financial relief to the affected farmers in Negeri Sembilan and Perak will cause these farmers to default on their bank liabilities and debts to feed meal, equipment, pharmaceutical suppliers. This will lead to a tightening of credit for remaining pig farmers and other livestock producers. The chain effect of default will cause increase NPLs in the Malaysian banking system.

 
Possible Solution: The Government can award farming franchise to a consortium or a number of firms on condition that they provide the RM180 million in financial relief (buy-out) to the farmers affected by the Nipah Virus Tragedy. These corporations could then get the license to develop integrated farms for 1 million SPP to generate an annual porker supply of 1.5 million head.

The franchise fees (say RM180 million) to build 1 million SPP. So each integrated farm of 200,000 will have to invest a franchise fee of RM 36 million each. The affected farmers who surrendered their animals can be helped by this franchise fees from this consortium of private investors. Farmers can be paid RM50 in cash and RM100 in shares in the new company, making up a total of RM150, the shortfall of the financial assistance provided by the government and the amount the farmers requested. The shares must have a guarantee buy-back period and price.

Disadvantage of this option is that the affected farmers can only become contract farmers, with no shareholding in the integrated farms, and the majority of the country's pork supply to be in the hands of a handful of suppliers, an oligopoly is formed without a guiding council with statutory powers over them.

Advantage: No stature of parliament needed, and the management of the industry and the financial burden will be privatized.
 

2. In the interim period, uncertainty will prevail and the affected pig farmers will need to find alternative employment. It is estimated that at least some 8,000 people will need employment as a result of this shakeout.
3. All the affected pig farmers in the Negeri Sembilan and Perak, if chose to remain in pig farming, they will become contract farmers, such as like the contract farmers in the broiler situation when new integrated farms are being built when the market takes its own evolutionary cause.
4. All the substandard farms that can not meet standards and no investment pump in to upgrade will be closed, causing more unemployment and distress.
5. Corporations with the capital and expertise will enter the pig farming industry, and they may employ contract-farming method. This will provide employment for the pig farmers.
6. An oligopoly situation arises. Without a regulatory council, unmanaged growth could lead to over supply, which could lead to slump in prices, causing financial crisis to the farms.
7. Without a standby fund, the industry will not be equipped to compensate farmers in the event of a new virus outbreak, repeating the same tragedy of the 1998/8 Nipah Virus Tragedy, although bigger corporations may be able to withstand the shock better.

Conclusion:
The pig farming industry in Malaysia will evolve towards fewer numbers of farms and because of the capital intensity of pig farming, and because of Malaysia's unique social condition which makes small farms unsuitable, bigger corporate players may prevail. NSPC will assist in bringing the smaller farmers and co-opt them to work in collaboration with the bigger corporate players.  NSPC, in addition will spearhead, converge the various streams of interests and provide the leadership for this consolidation exercise.  The final destination of Sunflower and its alternative are the same. The only difference between a transformation spearheaded by the Sunflower Project's NSPC is to create the teamwork mechanism right from the start, and to let the market, instead of private investors pay for the large franchise fees.

There are strong interests from big corporations, both local and foreign to help us rebuild.  These offers reflect the confidence investors have in the pig farming industry, and are welcomed.  We think the opportunity in front of us is to realize a VISION, and to do that, the support of all is needed. We need will and leadership from all sides, the Sunflower Project will be a preferred solution, even it involves more government participation in the beginning and LOTS of hardwork and consensus building.

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OPTION I:
The Humanitarian Approach to help the victims:

1. The Humanitarian fund raised by the Chinese community $24 million
2. Treasury's Humanitarian Fund  $50 million
3. Allocation of RM60 million for disease control, fogging and vaccination.

1. The government  still needs resources to assist the affected farmers to find alternative employment, restore the destroyed infrastructure and help them repay debts, bank loans and other liabilities.
2. Avoid credit contraction to affect other livestock sectors. Downstream suppliers such as feed mill, equipment and drug and pharmaceutical companies will need to write off losses, and contract credit for existing pig and other livestock farmers.
3. Prevent social problems, crime or suicide by desperate farmers and workers.
4. Help the 100 disease families to rebuild their livelihood.
5. Affected pig farmers can not honor their bank and credit liabilities, they will default and thereby causing Non performing loans (NPLs) of banks to increase.
6. Affected farmers who are in distraught may present social problems to society. Loss of faith with the authorities for not able to provide adequate and prompt disaster relief, especially for those whose animals may be innocently culled in the emergency to protect public health.

OPTION II:
The Sunflower Project submitted by FLFAM

1. The self-help relief plan recommended by FLFAM can not solve all the problems. It can not immediately make good the total losses sustained by the Outbreak tragedy.
2. Adoption of the Sunflower Project, takes the burden of additional financial assistance away from the Government, and making it the responsibility of the industry and Community.
3. The government gives the responsibility of funding the financial relief by giving statutory power to NSPC to collect a levy to repay the loan taken from Malaysian banks, whereby the funds are used to relief the system of bad debts, and rebuilding.
4. Farmers get financial relief, creditors and banks get repaid, smaller contraction of credit, and farmers are given hope of a possible chance of rebuilding.
5. The measures suggested also provide an opportunity to reorganize and modernize the industry to the benefit of all races and all parties.
6. Although the task may take as long as ten years to accomplish. This may be timely to support the government's effort of reorganization through PFAs.
7. The Stage II market reform in the sunflower Project also address the problems of uncertainty in prices, meat inspection,  supply regulation in order to ensure safety and  maximum efficiency for the industry.
8. NSPC will be a first step towards setting up an industry fund for prevention of future disease and serves as a platform for research and development, including finding vaccines for Nipah and other pig diseases.
9. The sunflower provides for everyone to have a role in the industry; the Government to safeguard the interest of the public, the community and private investors to provide further funding and support to accelerate the modernization and the pig farmers to oversee their own interest.
10. It allows the small farmers to become contract farmers as well as shareholders of a large company, which on their own will be beyond their means.
11. Big corporation with interest and resources, both private and foreign, are welcome into the rebuilding exercise. A total of 7 license for integrated farms will be given out in this reorganization exercise.
12. The complete reorganization of the industry puts an end to the many controversy and sensitivities associated with pig farming in Malaysia.

OPTION III:
Private Investors

1. Invite big corporations to spear head the reorganization, privatize the pig farming industry. This option has merit in that the bigger corporate players can bring financial resources, more sophisticated production systems and higher standards of veterinary and health practices to the industry.
2. If pig farming is to be taken up by large corporations, they can be asked to shoulder burden of providing financial relief to the affected farmers and bear the cost of the reorganization.
3. If big players enter the market, it is good for the country as their operation practices are sophisticated, their capital adequate and their management professional.
4. Affected farmers will also be resettled into contract farmers for the big corporate players, and consumers will get their steady supply of pork.
5. Should the investors be charged an entrance or franchise fees for entering the industry?  Yes. Since the Nipah Virus tragedy has effectively shrank market supply, it is likened to a "buy-out" situation, as the government need to shoulder millions in disaster relief to those affected. The tragedy has created a profitable situation for the remaining and new players, given the demand condition for pork, profit is almost certain and fast. (Each porker can produce RM50 profit for the efficient producer at pre-crisis prices). A shortage of one million pigs for domestic market, and a demand of another million for Singapore, means RM100 million profit per year for the potential investors. It is reasonable to ask a franchise fee to be attached to the licenses.
6. A total of 7 licenses for  PFAs with 200,000 SPP each can be given out for resettling and rebuilding. The franchise fee is estimated to be RM180 million or RM36 million per farm.

Possible Questions:

1. Why only new players are shouldering the burden, and would they put up this amount upfront? Those remaining farmers get to carry on with better prices and spare the need to help their fellow farmers who suffered.
2. The only disadvantage of this option is perhaps without a guiding council, the industry will lack a central regulating body, and consumers may be at the mercy of this oligopoly if they decide to work together to fix prices. Our knowledge of the industry led us to firmly believe that there is a still a strong need for strict regulation in the short and medium term.
3. Alternatively, they could also be competing with each other leading to price undercutting, unhealthy competition and over supply, thereby reduce the efficiency of resources devoted to the sector.

4. Disease Control Mechanism  and the Provision for Financial Assistance

The devastating episode of the Nipah Virus Encephalitis crisis exposed the un-preparedness of the industry in disease control.  It is proposed that the Government help the industry develop a self-help and self-regulatory mechanism to deal with such eventualities.  This mechanism, the proposed NATIONAL SWINE PRODUCERS’ COUNCIL (NSPC) will be in the form of an industry regulatory agency, vested with full enforcement powers, similar to what POLA is for the Oil Palm Industry.

Among other things, NSPC will

• Assure a fair market compensation to ensure farmers cooperate with virus inspection, surrendered animals for culling and STOP all unauthorized movement of animals.
• Also be the vehicle to administer the compensation and oversee the reorganization of the pig farming industry.
• Be supported by the Government, providing a start up fund.  This fund will be needed to make up for the shortfall of the farmers for compensation and what the government has provided for disease control, (RM200 less  RM50 = RM150)

 

A.	For the affected areas 900,000 pigs @ RM150	135 million
B.	Provision for culling of 300,000 pigs @ RM150 in the areas if tested  positive	45 million
	Total	180 million

• The final quantum to be decided after accessing the state of the situation.
• This start up fund will be organized by the Government’s Central Bank through a consortium of local Malaysian banks. The loan will be for RM180 million for 10 years for 4% interest.
• As each affected farmers who surrendered their animals for culling will receive a total compensation of RM150 from NSPC, NSPC will first issue a cash assistance of RM50 per pig as a first disbursement from the fund.  The balance of RM100 will be kept with NSPC for rebuilding purpose (total RM120 million), and within a specified period, farmers can decide to continue with pig farming in the new PFA or opt out for good.  For those who decide to opt out, he or she will withdraw the full amount of the RM100 per pig with interest.

Proposal for Repayment
The pig farming industry undertakes the responsibility of repayment through the collection of a levy by the NSPC.  NSPC will impose a levy on each porker ready for market and chilled pork imported into the country. Based on past production level adjusted for the reduction in supply, an annual production of 2 million porkers, at RM10 levy will generate some RM20 million. To make up for the shortfall of supply of pork in the country (Malaysian domestic markets need some 3 million porkers, an additional 80,000 tons of chilled pork may need to be imported, at a similar levy of RM10 per porker, or  0.125 per kg; an additional tariff of RM10 million is possible.

The repayment for RM180 million for 10 years at 4% is 22 million per year.

5. Rebuilding and Resettling Sub-standard Farms

The total animals culled in the present disease outbreak exercise may total up to 1.2million where its existing land and infrastructure could not be reused.  Land for this rebuilding must be provided for to enable rebuilding to take place at the appropriate time.

Standing Pig Population (SPP) raised under sub-standard conditions must be upgraded within a specified period where insitu improvements are possible.  For others, they will be closed and new location found to resettle the farmers through contract farming.  The government supports this reorganization by helping to grant license to PFA in new locations.  The industry will acquire the land from the respective state governments.

The status of the remaining SPP Population (1998 figures) in unaffected areas

Counting the pigs culled in Negeri Sembilan and Perak, and making provision for 300,000 pigs that might have to be culled in the nationwide blood tests, a total of 1.2 million herd need to be rebuilt.

Land Required for Resettlement and Rebuilding
To resettle some of the sub-standard farms into new areas and to rebuild the farms that were destroyed (and not allowed to continue operation in the previous farming areas) probably around 7 to 10 PFAs’ areas shall be needed to cater for the 1.5 million SPP. 

For such PFAs’, an area of around 20 sq metre per SPP shall be needed, i.e. at a rate of 500 SPP per hectare. In the planning of PFA, the pig sheds, the feed stores and the homestead of the farmers occupy around 6.0 sq metre per SPP, the other land areas is devoted for infrastructure, central facilities, waste management, including the disposal of solid sludge in situ within the PFA land and the buffer areas. 

Thus, the land requirement is estimated to be around:

Resettlement of 300,000 SPP of substandard farms	600 hectares
Re-establishment of farms (destroyed) to have 1.2 million SPP	2,400 hectares
Total new land area needed	3,000 hectares

If a “zero discharge” waste management system is to be adopted, a land area of 30 sq metre per SPP is needed. Then around 4,500 hectare of land will be required to resettle some existing farms and rebuild the “destroyed portion”of the swine industry.  The extra land area is utilised primarily for waste management and storage of the waste water and sludge.
 

Propose that the Government approve around 7 to 10 PFAs, each with 150,000 to 200,000 SPP.

Organization
Propose a public holding company, Integrated Swine Farming Bhd (ISFB) be set up and owned by the farmers and community groups.  ISFB will acquire the land required and develop the integrated farms.  These farms will have industry standard operating facilities and managed by a team of professionals.  ISFB will provide the following services to support farmers:

1. supply of piglets through its breeder farms
2. veterinary and animal health and care services and expertise
3. pollution inspection and maintenance functions
4. financial and accounting services
5. education and farming training courses

* Pig farmers who wish to rebuild their business will do so through the PFAs.  The funds will come from their compensation to be held back for the rebuilding purposes.

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