Agriculture Reference
In-Depth Information
9
Farm Organization and Vertical Control
9.1
Introduction
This chapter explains why farming has remained dominated by small, family-based firms,
and why and when the family farm has been occasionally supplanted by large factory-
style corporations.
1
We continue to modify our basic model to examine the trade-off
between moral hazard incentives and gains from specialization, and we focus on two
dimensions of farm organization: the choice of farm ownership and the extent of farm
control over successive stages of production. We focus on these two dimensions of firm
organization because farms have been and continue to be organized around a well-defined
set of production stages.
2
In chapter 8 we noted that nature plays more than a random role in farm production—
namely, a systematic role that restricts the farming production process. In this chapter we
analyze this role much more explicitly. Seasonality is the main feature that distinguishes
farm organization from industrial organization. Agricultural economists have long recog-
nized this point.
3
Indeed, Holmes (1928) stresses seasonality in discussing the reason for
the resilience of the family farm:
The most fundamental one (reason) is the peculiar seasonal nature of agricultural production and the
consequent lack of continuous operations. Almost every line of endeavor on the farm must depend
either upon the swing of the seasons or upon the periodic nature of some biological process. There
are seed times and harvest times with their specific tasks which, in the main, are of short duration.
There is also the case of livestock at the different stages of their development. In no case can a man
be put to a single specific task and be kept at it uninterruptedly for a month or a year as is true in the
factory. (Pp. 40-41)
Until now, however, agricultural economists have not often connected their insights re-
garding seasonal production stages, crop cycles, task specialization, and random events to
modern theories of the firm. In this chapter we merge these two traditions and incorporate
seasonal forces into a model of farm organization.
Nature is incorporated into our model in two different ways: through random shocks
to farm output and through seasonal forces such as the length of production stages and
the frequency of crop cycles. As always, random production shocks from nature generate
opportunities for moral hazard and help explain the dominance of family farms. Second,
seasonal parameters (cycles, stages, and so on) limit gains from specialization and create
timeliness costs between stages of production. Expanding the size or extent of the farm—
by contracting with partners or with firms in adjacent stages—entails increases in moral
hazard costs, but expanding the firm has the potential to generate gains from specialization,
which, in agriculture, can be severely limited by seasonal factors.
