Agriculture Reference
In-Depth Information
resources and micro-climates) is likely to prevent
that industry from becoming as concentrated as
agribusiness industries; thus the current imbal-
ance in the bargaining positions of commodity
sellers and buyers is expected to get worse in the
future. The structural changes leading to con-
centration, in turn, are likely to change the con-
duct of commodity markets such that the
economic performance of the two industries
will be affected, with the agribusiness industry
expected to benefit at the expense of the produc-
tion industry.
One of the ways this change in commodity
market conduct is manifesting itself is through
the increasing use of production and marketing
contracts between agribusiness firms and farm-
ers or ranchers. The trend of increasing con-
tracting was slow to start, but has become more
important over the last decade. The overall share
of agricultural production value under con-
tract in the US has increased from 12% in 1969
to 39% in 2003 (MacDonald and Korb, 2006).
Production and marketing contracts are two
methods of vertical coordination. Thus, it has
long been hypothesized that the use of these
contracts, especially production contracts, is
an indicator of industrialization in agriculture
(e.g. Mighell and Jones, 1963; Drabenstott, 1995;
Ahearn
et al
., 2005).
'Vertical coordination refers to the syn-
chronization of successive stages of production
and marketing, with respect to quantity, quality,
and timing of product flows' (Martinez, 2002).
A production contract offers more control to a
contractor than does a marketing contract, but
both types of contracts offer only partial control
compared with complete vertical integration
achieved through common ownership of pro-
duction and marketing activities at successive
stages of the supply chain. A processor firm
seeking complete control may prefer vertical
integration over the partial control of contracts,
ceteris paribus
. However, farmers and ranchers
prefer to be independent operators (Key, 2005)
ideally selling their commodities in spot markets,
such as auctions. Producers do not like selling
in uncertain spot markets, but they prefer com-
petitive spot markets to imperfectly competitive
markets in which they are at a disadvantage
relative to the buyers they face. Thus, the actual
distribution of production being sold in spot
markets versus through contracts may indicate
(among other factors) the relative market power
of market participants.
Contracts formed between agricultural pro-
ducers and processors replace traditional spot
markets for all parties involved. According to
results from the USDA's Agricultural Resource
and Management Survey (ARMS), contract use
is expanding in the USA. The total share of pro-
duction value under contract has increased from
28.9% in 1991 to 39.1% in 2003. However,
there are two different categories of agricultural
contracts.
Under marketing contracts, prices, quanti-
ties and delivery schedules are agreed upon
before crops are harvested or livestock are deliv-
ered. Agricultural producers own their com-
modities throughout the entire stage of
production and therefore they retain control
over management decisions, including those
related to inputs used in production. Katchova
and Miranda (2004) found that 'personal and
farm characteristics mostly affect the adoption
decision rather than the quantity, frequency,
and contract type decisions'. Marketing con-
tracts cover a greater share of crop production
than livestock production, with 29.7% of total
crop production value under marketing con-
tracting compared with 13.7% of livestock pro-
duction value in 2003. For all commodities
produced in the USA, the total share of production
value under marketing contracts has been about
21% since 1994 (MacDonald and Korb, 2006).
Under production contracts, the commod-
ity buyer sets specific input specifications and
typically provides inputs such as veterinary
services, feed and young animals in the case of
livestock. In some cases, the buyer owns the
commodity being produced from the beginning
of the contract period and has managerial
control over the production process. In all cases,
the producer provides technical and mana-
gerial inputs plus all labour and physical facili-
ties needed to create the specified output.
Additionally, the producer's payment is not
agreed upon prior to the harvest/delivery but
rather is determined at the end of the arrange-
ment and is based on quantity and the degree to
which the final product meets the buyer's speci-
fications. Production contracts are much more
prevalent among livestock commodities than
they are among crops. In 2003, only 1.1% of total
crop production value was under production
