The name is absent

Vertical Coordination and Contract Farming

production (Perry et al.1997). There are generally two
types of contracts: marketing and production contracts.

Marketing contracts: Refers to verbal or written
agreements between a contractor and a grower that sets a
price-or pricing system- and an outlet for the commodity
before harvest or before the commodity is ready to be
marketed. This type of contract can take many forms:
• Forward sales of a growing crop, where the contract
provides for later delivery and establishes a price or
contains provisions for setting a price latter.

• Price setting after delivery based on a formula that
considers grade and yield.

• Pre-harvest pooling arrangements, where the amount
received is determined by the net pool receipts for the
quantity sold.

Production contracts: These contracts specify
detailed production practices, input supplied by the
contractor, quality and quantity of a particular
commodity, and set a price or pricing mechanism.

In the U.S. agriculture, farmers can be contractors.
As in the outgrowers schemes, big farmers, often, in
animal production acting as contractors. The farmer as a
contractor, can specialize in one of the stage of
production, and pay another producer to either provide
young animals or finish the production of commodity.

Marketing contracts are often used for crop
production. In 1993, almost 40% of the value of all fruit
and vegetables were produced under marketing
contracts. The percentage of other crops produced under
marketing contracts were sugar beets (82%), cotton
(33%), soybeans (9.4%) and corn (8%).

Production contracts are more likely used for
livestock production. Poultry and poultry products
produced under production contracts accounted for over
50% of the total value. On the other hand, 33% of the
value of production hogs and 14% of the cattle were
covered by production contracts (Banker and Perry
1999).

The contractor usually stipulates grading standards
along with terms for compensating the grower. More
commonly, in California and Washington, the amount
paid to the grower is negotiated through a bargaining
association that represent several producers.

Despite the availability of several legislative
arrangements which are directly or indirectly affecting
production contracts, there is no specific regulation
directly related by contract farming at federal level.
Many states have considered legislative proposal, but
only Minnesota, Wisconsin and Kansas have enacted
new laws on the subject (Hamilton 1994b). In 1990,
Minnesota enacted legislation to protect growers.
Among other stipulations, the law requires notice before
termination, the right to cure, and reimbursement for
investments in the case of premature termination. This
law has become a model for other legislative proposals.
In 1993, Wisconsin passed legislation that allows a
grower a 72-hour grace period to cancel a contract. It
also requires integrators to specify in writing all
conditions that might cause deductions in payments to
growers (Levin-Solomons, 1999). Processors often
oppose such legislation. For instance it was reported
that, legislation to protect poultry growers in Alabama in
1994 failed after a $90,000 lobbying campaign by
processors who claimed that the law would undermine
the broiler industry in that state (Hamilton 1994b).

Enforcement of lien is an important legal issue to
protect farmers. During a production failure resulting in
losses to creditors or in the case of bankruptcy, the lien
secures the amount to be paid for the product by the
processor to the grower or producer. For instance,
California enacted a producer’s lien statute to protect
farmers (Peterson and Peck, 1997). Unlike California,
Oregon has two separate producer liens. The
Agricultural Producer Lien covers fruit, berries,
vegetables or meat animals and The Grain Producers
Lien covers grains (Watson, 1997).

Vertical coordination structure and contracting in
some of the important sub-sectors from the contract
production and backward integration viewpoints are
analyzed in detail below.

3.2.2.1. Broiler Industry.

After World War II, the broiler industry grew into
one of the most integrated of the U.S. agricultural
industries. Today integrators produce nearly all broilers
under contract with growers. Broiler production nearly
tripled between 1940 and 1945 despite poor feed quality
and heavy disease losses (Martinez 1999). The high
volume of military demand actively encouraged
production in newly emerging commercial production
areas (Goodhau and Rausser 1999). Besides this
incentive, following the war, adoption of technological
advance in genetics, disease control, nutrition and
material handling have accelerated development of
industry. These innovations increased the size of the
production unit. During the early stage of broiler
industry, growers would buy feed from a dealer, chicks
from a hatchery, and other supplies from another dealer
selling to the processors who offered the highest price.
Along with the high capital requirements of new
technologies, fluctuation in the live broiler prices left the
broiler growers in financial difficulties.

Large feed companies recognized the potential of
broiler industry and established production contract with
growers. The first recorded broiler contract was signed
in 1933 (Martinez 1999).

Food Marketing Policy Center Research Report #52

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