Abstract
The industrialization of agriculture is associated with tighter supply chains where vertical coordination between farmers and processors is facilitated by the use of agricultural contracts. An overview is provided on the recent trends in the use and structure of agricultural contracts followed by an examination of how the competition among processors may affect agricultural contracts. Many reasons exist for using agricultural contracts, including improved risk management and reduced transaction cost. On the other hand, the growing use of agricultural contracts and processor concentration raises concerns that processors may exercise market power, for example by offering lower contract prices in absence of local competition. Previous studies using the new empirical industrial organization models show that processing industries are not perfectly competitive but the price distortions are very small. The focus here is on examining price competition from a farmer’s instead of an industry’s point of view. Recent studies using farm-level data that show that the absence of other contractors or spot markets in producers’ areas does not lead to statistically significant price differences in agricultural contracts for most commodities. These findings provide evidence that most agricultural processors do not exercise market power by reducing prices when other local buyers are not available. Therefore, the recent trends of industrialization and increased vertical coordination in agriculture are likely occurring for reasons other than processors exercising market power.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
References
Ahearn, M.C., P. Korb, and D. Banker. 2005. The industrialization and contracting of agriculture. Journal of Agricultural and Applied Economics 37: 347–364.
Allen, D.W., and D. Lueck. 1995. Risk preferences and the economics of contracts. American Economic Review: Papers and Proceedings 85: 447–451.
Allen, D.W., and D. Lueck. 1998. The nature of the farm. Journal of Law and Economics 66: 343–386.
Davis, C.G., and J.M. Gillespie. 2007. Factors affecting the selection of business arrangements by U.S. hog farmers. Review of Agricultural Economics 29: 331–348.
Goodwin, B.K., and T.C. Schroeder. 1994. Human capital, producer education programs, and the adoption of forward-pricing methods. American Journal of Agricultural Economics 76: 936–947.
Harwood, J., R. Heifner, K. Coble, J. Perry, and A. Somwaru. 1999. Managing risk in farming: Concepts, research, and analysis. Agricultural economic report 774. Washington, DC: Economic Research Service, U.S. Department of Agriculture.
Hueth, B., E. Ligon, and C. Dimitri. 2007. Agricultural contracts: Data and research needs. American Journal of Agricultural Economics 89: 1276–1281.
Katchova, A.L. 2010a. Agricultural contracts and alternative marketing options: A matching analysis. Journal of Agricultural and Applied Economics 42: 1–6.
Katchova, A.L. 2010b. Agricultural cooperatives and contract price competitiveness. Journal of Cooperatives 24: 2–12.
Katchova, A.L., and M.J. Miranda. 2004. Two-step econometric estimation of farm characteristics affecting marketing contract decisions. American Journal of Agricultural Economics 86: 88–102.
Key, N. 2004. Agricultural contracting and the scale of production. Agricultural and Resource Economics Review 33: 255–271.
Key, N. 2005. How much do farmers value their independence? Agricultural Economics 22: 117–126.
MacDonald, J., and P. Korb. 2011. Agricultural contracting update: Contracts in 2008. Economic information bulletin no. 72. Washington, DC: Economic Research Service, U.S. Department of Agriculture.
MacDonald, J., J. Perry, M. Ahearn, D. Banker, W. Chambers, C. Dimitri, N. Key, K. Nelson, and L. Southard. 2004. Contracts, markets, and prices: Organizing the production and use of agricultural commodities. Agricultural economic report number 837. Washington, DC: Economic Research Service, U.S. Department of Agriculture.
Musser, W.N., G.F. Patrick, and D.T. Eckman. 1996. Risk and grain marketing behavior of large-scale farmers. Review of Agricultural Economics 18: 65–77.
Paulson, N.D., A.L. Katchova, and S.H. Lence. 2010. An empirical analysis of the determinants of marketing contract structures for corn and soybeans. Journal of Agricultural and Food Industrial Organization 8(4): 1–23.
Sartwelle, J., D. O’Brien, W. Tierney Jr., and T. Eggers. 2000. The effect of personal and farm characteristics upon grain marketing practices. Journal of Agricultural and Applied Economics 32: 95–111.
Sexton, R.J. 2000. Industrialization and consolidation in the U.S. Food Sector: Implication for competition and welfare. American Journal of Agricultural Economics 82: 1087–1104.
Sykuta, M.E., and M.L. Cook. 2001. A new institutional economics approach to contracts and cooperatives. American Journal of Agricultural Economics 83: 1273–1279.
Wang, W., and E.C. Jaenicke. 2006. Simulating the impacts of contract supplies in a spot market-contract market equilibrium. American Journal of Agricultural Economics 88: 1062–1077.
Ward, C. 2005. Beef Packers’ captive supplies: An upward trend? A pricing edge? Choices 20: 167–171.
Williamson, O. 1985. The economic institutions of capitalism. New York: The Free Press.
Xia, T., and R.J. Sexton. 2004. The competitive implications of top-of-the-market and related contract-pricing clauses. American Journal of Agricultural Economics 86: 124–138.
Zhang, M., and R.J. Sexton. 2000. Captive supplies and the cash market price: A spatial markets approach. Journal of Agricultural and Resource Economics 25: 88–108.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2013 Springer Science+Business Media Dordrecht.
About this chapter
Cite this chapter
Katchova, A.L. (2013). Agricultural Contracting and Agrifood Competition. In: James, Jr., H. (eds) The Ethics and Economics of Agrifood Competition. The International Library of Environmental, Agricultural and Food Ethics, vol 20. Springer, Dordrecht. https://doi.org/10.1007/978-94-007-6274-9_9
Download citation
DOI: https://doi.org/10.1007/978-94-007-6274-9_9
Published:
Publisher Name: Springer, Dordrecht
Print ISBN: 978-94-007-6273-2
Online ISBN: 978-94-007-6274-9
eBook Packages: Humanities, Social Sciences and LawPhilosophy and Religion (R0)