Agriculture Reference
In-Depth Information
contracting and the direction of causality in
that contracting (Key and McBride, 2003).
Due largely to the location-specific nature
of agricultural production, the food manufac-
turing sector is likely to consolidate faster than
the commodity production sector. That is what
happened in the UK (Duranton and Overman,
2005). However, concentration in the US manu-
facturing industry is not the primary determi-
nant of the pattern of production contracting,
particularly when considering the current
trends in producer concentration. Clearly, many
factors are significant, as noted below.
Key (2004) examined the supply side of
agribusiness by evaluating the relationship
between the scale of production and contracting.
The scale of production, as measured by changes
in the size and output of the largest farms by
sector, was found to be directly correlated with
the prevalence of contracting. Explanations
offered by Key (2004) for this correlation
included the usual stories of grower risk aver-
sion and contractor transaction costs, as well as
newer theoretical justifications such as asset
specificity.
Finally, another possible determinant of
contracting is the growth of production con-
tracting itself. Recent research suggests that
farmers in some commodity markets are turning
to contracting out of necessity due to the incom-
plete markets created by other market partici-
pants' decision to contract (Young and Burke,
2001). Roberts and Key (2005) demonstrated
that in some markets, farmers who choose to
engage in production contracts could impose
negative externalities on other farmers in the
form of increased search and transaction costs.
The farmers facing the externalities are induced
to enter into contracts, which they would not
have done otherwise, because contracts may
represent the only available access to a buyer.
This finding is consistent with the idea that spot
markets have 'tipping points' at which a market
is thinned enough to induce all remaining par-
ticipants to enter into contracts (MacDonald
et al
., 2004b).
It is clear from the literature that questions
still remain as to the primary determinants of
production contracting in agriculture. Also,
much is yet unknown regarding the effects of
contracting on producers, agribusiness and con-
sumers. Yet, it is understood that contracting
has played a large role in improving product
consistency and traceability throughout the
stages of food production (MacDonald
et al
.,
2004b). Furthermore, research has shown that
contracting has a positive effect on farm produc-
tivity (Ahearn
et al
., 2002; Key and McBride,
2003; Morrison
et al
., 2004). There remain con-
cerns over the effects on producers who enter
into contracts against their best interests
(Roberts and Key, 2005), and the managerial
control imposed on producers by the processors
with whom they contract (Farm Foundation,
2004). However, much of the rise in production
contracting has occurred in just the past decade,
suggesting that it may take years for the large-
scale effects of production contracting to become
evident in empirical analyses across a wide
range of commodities.
Farm-level Analysis
Several hypotheses about the influence of pro-
duction contracting on the size, structure and
financial position of production operations are
tested here using farm-level survey data.
Producers who have production contracts are
compared with those who remain independent.
Based on the literature (e.g. Key, 2004; Morrison
et al
., 2004; Roberts and Key, 2005), it is hypoth-
esized that producers entering into production
contracts are likely to be larger than independ-
ents, significantly less diversified in terms of
commodities produced, and facing increased
risk, relative to the risk exposure of independ-
ents. Independent-sample
t-
tests of these and
related hypotheses are conducted for a cross-
section of commodities. Using pooled farm-level
data from the USDA's Agricultural Resource
Management Survey for the years 1996-2004
(USDA/ERS, 2004) gives a total of 95,517
observations.
The share of total sales under production
contract varies greatly among commodities in
the USA. Fourteen major US commodities for
which adequate data were available are exam-
ined and it is found that a continuum exists with
regards to production contracting, ranging from
virtually all production being under contract for
broilers to no production contracting in the case
of tobacco. Also, previous research has found
significant differences between firms that enter
