The name is absent

Vertical Coordination and Contract Farming

1992. The total share of the top four firms is 20.3% in
1997 (Anonymous 1999a).

In the U.S., Government intervenes in the
agricultural market through several market mechanisms.
The U.S. farm price support was initiated in the early
1930s and despite several modifications in detail,
general structure was not changed. There are four types
of market intervention mechanisms; price support,
restriction of supply, credit programs and subsidies
(Suits 1995).

Since the 1930s, marketing orders have an important
role in the marketing of agricultural products using
classified pricing schemes, quality and quantity
restrictions, and output restrictions orders. Marketing
orders cover many markets: Production of tree nuts,
dried fruits, hops, tart cherries. olives, and cranberries is
covered by Federal Marketing orders. About 65% of the
U.S. milk is federally regulated and 80% is regulated
under federal or state laws (Carlton and Perloff 1980 ).

Marketing orders enable producers to organize
marketing boards which are given powers to control the
production and marketing commodities. It has been
stated that, marketing boards are the only unregulated
legal monopolies permitted in the U.S. (Suits 1995). The
boards could limit production and regulate prices by
restricting the quality and the volume of the products
and by assigning quotas to individual producers.

Future markets are used to facilitate many
agricultural products in the U.S. since mid-1800s such as
Minneapolis Grain Exchange and The Chicago Board of
Trade. The main purpose of these exchanges is to
provide a place in which the activities of buyer and
sellers determine the prices of commodities. At these
exchanges, traders buy and sell futures contracts as
physical commodities (Cramer et al. 1997). Of course
there is some close relationship between contract
production and the futures market. On one hand the
rapid growth in contract farming has encouraged futures
trading in other commodities. For example, contract
farming in broilers has led to an increase in futures
trading in corn, soybeans and soybeans products On the
other hand futures markets generate considerable
information as price quotes permeate the whole market
(Lethould 1976).

Cooperatives have a major role in the U.S. food
system. The latest available data shows that there were
2,173 marketing and 1,496 supply cooperatives (the
numbers were 5,727 and 3,222 in 1960 respectively).
Farmer cooperatives are important for producers,
marketing about 31% of the agricultural products and
providing 29% of the major inputs such as fertilizer,
feed. seed etc⁹. In 1997, farm cooperatives share ($10.15
billion) was nearly 9% of the total agriculture sector net
value-added ($92.8 billion). Marketing cooperatives
accounted for nearly 68% of cooperatives gross and net
value added, farm supply 28% and related service
cooperatives 4% (Kraenzle and Cummins 1999).

Among the marketing cooperatives, bargaining
cooperatives are special for U.S. agriculture. This type of
cooperative is also important for the contract production
because of their main function in determination of trade
terms between producers and processor. The most
frequent trade terms that are bargained for by bargaining
cooperatives are price, time of payment, quality
provision, rights and responsibilities related with
production (Marion 1986). In the USA, in many
agricultural bargaining cooperatives have become an
integral part of the marketing system of certain
agricultural commodities (Marcus and Frederick 1994).

In 1992, there were 29 active fruit and vegetables
bargaining associations representing 36 commodity
groups (Iskow and Sexton 1992). Inability to increase
membership, managing supply and controlling non-
member free riders are among the main problems facing
bargaining associations.

There is considerable support for cooperative group
actions in agriculture through laws in the USA. The
Capper-Volstead Act of 1922, Cooperative Marketing
Act of 1926, Agricultural Marketing Agreements Act of
1937 and Agricultural Fair Practices Act of 1967 have
provided some arrangements to advance group actions in
the marketplace (Torgerson 1998).

3.2.2. Vertical Coordination and Contract Farming in the
USA.

Almost one-third of the total value of production on
U.S. farms is produced under contractual arrangement.
While contracting has been significant and growing
since 1960s, farmers have used contracts to produce or
market agricultural commodities since early the 1900s.
Changes in the number of the farms involved in vertical
coordination between 1970-1990 can be seen from Table
3.3. According to the 1993 Farm Costs and Return
Surveys (FCRS), 32% of the total value of agricultural
production was produced under contract arrangements
(Perry et al. 1996). Between 1991 and 1997, the share of
commodities produced under marketing contracts
increased from 16% to 22% of the total U.S. value of

⁹ Cooperative aggregate market share in the United States
measured at the farm gate is roughly 30%. The share is
significant moreover, across several industry groups, including
dairy 77%, cotton 36%, grain and soybeans 36%, fruit and
vegetables 20%, and livestock 11% (Sexton 1990, p. 709).

Food Marketing Policy Center Research Report #52

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