Vertical Coordination and Contract Farming
Rehber
large number of individual farm units and spatial
dimension of the agriculture which consists of scattered
firms structure over a large area have been the major
factors for the dominance of long and short-term
production contracts (Olson 1985).
Other main distinctive characteristics of agricultural
products and markets could be identified as follows:
• Agricultural products are often bulky and/or
perishable, causing shipping cost to be high, restricting
mobility and limiting access to only those buyers located
close to the production site,
• Processors need highly specialized agricultural
products and other inputs can not normally be
substituted for a given agricultural product.
• Farmers are specialized to the supply of particular
commodities through extensive investment in sunk
assets. This represents exit barriers for farmers and cause
the raw product supply to be inelastic (Rogers and
Sexton ,1994 p. 1143)
Along with a variety of related problems such as
delays in delivery or payment, quality deterioration, etc.,
contract farming generally also has some disadvantages
or problems as a production system. One of the
economic factors favoring the increasing use of
production contracts is the need to realize efficiencies
through risk management, but contract farming creates
its own risk, as well as reducing other risks. For the
producer, the failure of producing to contract standards
will result in loss of the contract’s premium prices. Other
risks include the non-renewal or termination of
contracts, perhaps for non-economic reasons. On the
processor side, the main risks are the failure to have a
constant supply, or losing timely receipt of desired
quality and quantity of product, loss of technological
advantage, and liability to the producers or third parties
(Kelley 1994).
The farmer loses his independence to some extent
contingent on contract conditions. That means the
farmer's management function is transferred to another
person. It is arguable that, a skilled farmer get worse
under a contract than if he takes his chance in an open
market.
It is a fact that contracting is a negotiation between
unequal, economically powerful agro-business and
rather weaker farmers. But farmers can cooperate to gain
bargaining power to ensure fair contract terms.
Finally, if the integrator has gained a monopsony
position, he could abuse his position to violate contract
provisions in his favor. That means when alternative
marketing opportunities are closed out and an overly
integrated firm or sector may beat down the terms of the
contract. Of course this is not a desirable consequence
for improving agricultural marketing.
2.3.4. Content of Contract
A fair contract should contain reciprocal obligations
with a balance between the rewards and the risks
accruing to each party. A production contract should at
least contain the provisions presented below:
• Define the parties.
• Specify type and the quality of the produce.
• State the quantity of the produce.
• State clearly the responsibilities of both parties
concerning production and marketing practices.
• Indicate the manner, including timing , of delivery or
collection.
• Determine the price (specific or formula) or other
consideration and indicate the effects of variations in
quality, quantity or manner of delivery and also specify
the manner and timing of payment. Price is frequently
left variable in contracts. Fixed or negotiated prices are
more frequently used in one to three year contracts. If
the majority of transactions in a commodity are priced
through such negotiations, the fixed price becomes the
market price. Sometimes contract prices are established
by a scale or formula that relates the contract price to
various economic indicators (Buccola and French 1981).
• Indicate the duration of the contract and the way in
which it may be terminated and/or renewed. Contracts
for processing vegetables and field crops are mostly
signed on an annual basis. Fruit contracts tend to span
more than one year (Buccola 1980).
• Appoint an arbitrator or indicate how disputes are to
be resolved.
• Signature clause.
3. General Structure of Food Industry and Contract
Farming in Turkey and in the USA
3.1.General Structure of Food Industry and Contract
Farming in Turkey
3.1.1. General Overview
Since the foundation of Turkish Republic in 1923
Turkey has been a country in transition from an
agricultural economy to an industrial economy.
Although considerable progress has been achieved,
fundamental problems still exist in agriculture and in the
food sector when compared to developed countries. The
share of agriculture in national income and export value
have been decreasing and were 13.37%7 and 11.45%
respectively in 1996 (Anonymous 1998). Shares of rural
population and active labor force employed in
agriculture were about 35% and 45% respectively in
7 Forestry, fishery, and food industries were not included.
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