Vertical Coordination and Contract Farming
Rehber
firms.
Another significant problem for processors in the
situation of disputes, relates to the fact that the contract
itself has no meaning. Going through the court created
long delays in order to solve disagreements and disputes
between producers and processors. That is why the need
for arbitration or a conciliation system is clear.
The processors who do not have any contractual
relationship stated they have used contract farming in the
past, but no longer do so because they could easily
purchase raw material in domestic open or foreign
markets. Thirty three percent of them indicated that they
could use this system if they needed it.
3.2. General Structure of Food Processing Industry and
Contract Farming in the USA
3.2.1. General Overview
The U.S. food system from farm to consumer can be
characterized as a capital-intensive and vertically
coordinated system through ownership, contracts and
other vertical ties. The other main feature of the U.S.
food system is a trend toward larger and fewer firms at
every stage of food system from farming to retailing.
From the general economic indicators point of view,
agriculture is the one of smaller industries, producing
2% of national output and directly employing about 2%
of the labor force in 1995. But, agriculture indirectly
accounts for much more employment and contributes to
national gross domestic product (GNP) through other
industries such as manufacturing, processing,
wholesaling, and retail trade. If we consider all
contributions, agriculture is responsible for providing
15.8% of the total employment and 14% of the nation’s
GNP (Cramer et al. 1997).
There were 2.1 millions farms in the U.S. with an
average 469 acres farm size, in 1995 down from five
million farms in 1954. Numbers do not reflect the real
concentration. It is argued that most of the nation’s food
and fibers is produced on about 600,000 full-time
commercial farms (Hamilton 1994a). Most of the farms
are still characterized as family farms. In 1992,
individual proprietorships or family farms accounted for
more than 85% of all farms, partnerships accounted for
10%, corporations 4%, and others (estates and trust) less
than 1% (Cramer et al 1997). Although a few percent of
all farms are incorporated, corporations own 12% of all
land and market 22% of the total value of all farm crops
(Suits 1995).
Today, almost 90% of farm products reach
consumers after having some handling and processing.
Within food processing industries, the most dynamic
branch was fresh and processed red meat industry. The
meat packing and processing industry evolved quickly
into a highly integrated, capital-intensive industry. By
1899 the meat industry accounted for 26% of
manufacturing sector sales. Similarly, factory processing
of butter and cheese may have begun as early as 1840s
(Connor and Schiek 1997). By the turn of the century,
about one-forth of butter and 90% of all cheese was
factory made. Canning of sea food as well as fruits and
vegetables began in the US around 1820.
Two of today’s best known canned food companies
were both established in 1869. Grain milling grew
relatively slowly, by 1899 it ranked a distant second
among the food industries with 20% of the total sales.
The U.S. beet sugar industry was also established
about 1869. Animal feed industry was first recorded
during this period as by products of grain milling. Until
the soybean industry was established in the 1920s, the
animal feed industry depended on fish meal as the
principal protein sources.
Until the 1850s, nearly all companies were
organized as partnerships or proprietorships. In the early
1890s, a massive merger movement began in the U.S.
Food processing companies played prominent roles in
this industrial restructuring (Connor and Schiek 1997).
The “Beef Trust” was one of the best known and
most successful companies to develop control over its
market through market-sharing arrangements and
extensive vertical integration. One of the best
documented history of this period was the “Sugar Trust”
and it was reorganized under the name “ American Sugar
Refining Company “ (Amstar) in 1891. At the beginning
the Trust was not successful, but in 1893 Amstar and
other sugar refineries adopted the basing point pricing
system that has persisted to this day.
During the first quarter of the twentieth century,
development of the food processing sector grew about
150%. This was slower than the growth rate of the entire
manufacturing sector. During this period, the share of
the food sector in manufacturing was approximately
22% and remained relatively stable until the late 1940s.
The number of the food processing plants continued
to increase to a peak of about 65,000 in 1920. A great
decrease in the number of plants has been observed until
1987. The Census of 1992 showed that the number of
the plants remained almost constant at 20,000 since the
previous census in 1987 (Table 3.2). The greatest
decrease was observed during the periods of 1965-1970
and 1979-1989 mainly through merger, acquisition and
vertical integration (Connor and Schiek 1997).
Concentration of the firms is a reality in the U.S.
Food industry. The total sales of the nation’s top 20 food
and beverage manufacturers rose 32% between 1992 and
1997. In 1997, these companies accounted for 52% of
the industry-wide sales, higher than their 46.5% share in
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