Agriculture Reference
In-Depth Information
independent hog producers. Thus, the structural
change that has led to increased production con-
tracting has not significantly improved contrac-
tors' income, compared with independent
operators, but it may have increased their expo-
sure to income risk. Therefore, hog production
contractors may be worse off financially, on
average. This raises the interesting question: do
hog producers accept contracts because they
think the productivity improvements found by
Key and McBride (2003) will lead to improved
profitability, or do they generally consent to the
contract because they do not have the bargain-
ing power to resist the demands of their buyers,
as implied by Davis and Gillespie (2007)?
majority of output in some markets (MacDonald
and Korb, 2006). These differences across com-
modity types were apparent in the analysis here
and raise questions for future research.
Looking to the future, the results of this
preliminary study indicate that production
contracting is likely to continue expanding to
cover a higher share of total output for many
commodities. This is an incentive for producers
to form cooperatives or to use some other type
of collective selling arrangements. However,
cooperatives, bargaining associations and
other selling arrangements employ a type of
production contract with supplier-members.
Therefore, all trends indicate it may be increas-
ingly difficult for producers to maintain their
independence in the industrialized agriculture
of America's future.
Implications of the
Contracting Results
Blending Animal Agriculture and
Agribusiness for Success
The preliminary empirical results here gener-
ally show that production contracts lead to pro-
duction specialization, which, in turn, may
reduce off-farm income opportunities, both of
which can increase the income risk of produc-
ers. This is an important observation because it
contradicts one of the main arguments used to
justify production contracting. Proponents of
contracting and much of the theoretical litera-
ture have said that producers can use contracts
to reduce risk, which is true. For the small cross-
section of commodities evaluated here, the real-
ity is that contractors have higher sales totals
and higher income variance than do independ-
ent producers, but not necessarily higher
income levels, on average.
It has been argued in the literature that
buyer bargaining power increases with industri-
alization and that the potential for industrializa-
tion is influenced by a commodity's physical
attributes (e.g. Sheldon, 1996). In particular, it
has been well established that livestock process-
ing industries have scale economies that encour-
age continued industrialization and that the
resulting industry concentration of the last few
decades has facilitated increased use of produc-
tion contracts in those markets (Drabenstott,
1995; Morrison Paul, 1999, 2000, 2001; Key,
2004; Ahearn
et al
., 2005; Bhuyan, 2005;
MacDonald and Korb, 2006). In crop industries,
however, production contracting is rare in most
markets, although marketing contracts cover a
Thus far, this chapter has presented a picture
that is bright for the US agribusiness sector, but
bleak for the agricultural production sector.
However, this is not the end of the story. Both
sectors can survive in the future if industry par-
ticipants take a slightly different perspective
when viewing those in the other sector. It is
argued in this section that blending US agricul-
ture and agribusiness may be essential for suc-
cess in the future (especially for the production
sector) but, if accomplished, the resulting agri-
food industry will play the leading role in the
global market. In doing so, the new industry can
create a truly 'economically sustainable agricul-
ture' in America, whereas none exists currently
without policy interventions.
To begin, the concept of 'blending' agricul-
tural production and agribusiness is described.
A blended industry, in the simplest sense, is one
in which all participants understand and appre-
ciate their mutual dependence on all other par-
ticipants. No matter what form of vertical
governance is used to blend firms into a coordi-
nated system, the key point is that everyone in
the system knows that it will fail without the
contributions of each participant. Thus, every-
one knows that their economic rewards depend
in part on the performance of others in the
system.
