Vertical Coordination and Contract Farming
Rehber
variability for 36-70% of the contract growers (Martin
1997).
Historically, production contracts have existed in
three different categories of the pork production system,
and recently two additional categories of contracts have
emerged. Of these categories, the most common contract
is for the finishing phase (Martin 1999). Despite
different types of contracts changing from region to
region, widely used payment methods for the finishing
contracts were presented by Martin (1999) as follows:
i. Payment per pound of gain + Potential bonus;
Grower payment = $0.05 x (Pound gained) + feed
conversion bonus + mortality bonus.
ii. Payment per hog marketed + Potential bonus;
Grower payment = $10.00 x (head marketed) + feed
conversion bonus + mortality bonus.
iii. Payment per square foot or per pig space; Grower
payment = $4.00 x (Square feet available in barn) + any
potential bonuses or, Grower payment = $32.00 per pig
space per year + any potential bonus.
Bonuses and performance incentives are important
for both parties involved in the contract. In general, a
bonus is determined for a low feed conversion ratio and
a low mortality rate. For instance, if a standard feed
conversion ratio in the contract is 3.2, but the producer
achieve a 2.9 feed conversion, the grower would receive
a $1.50 bonus (50 cents for each 1/10 point difference)
on each animal marketed. For the mortality rate, a 2%
death loss standard frequently appears in contracts
(Martin 1999). Recently manure management also
became an important factor in contract arrangement.
Production contracts give the responsibility to
growers for providing facilities, labor utilities, waste
disposal, land, and water. Contractors provide feed,
livestock, veterinary care and medication, managerial
support, and marketing. The contractor bears all market
risk and keeps any residual profit or losses (Zering 1998;
Swinton and Martin 1997).
Pork producers are rather well organized. The
principal organization is The National Pork Producers
Council (NPPC) which is a producer organization that
claims a membership of 85,000 producers in 44
affiliated state associations. The NPPC is governed by a
board of directors elected by delegated who are elected
by producers (members) in each state association.
Another nation-wide organization is National Pork
Board which is an independent body of 15 members
appointed by the Secretary of Agriculture. Members are
producers from at least 12 states and or importers
(Schrader 1998).
In the past, the role of cooperatives has been small
while their share of feed supplied to hog producers may
be as high as 45% in some areas (Schrader 1998). More
recently, Farmland Industries has attained about 6%
share of hogs slaughtered and other cooperatives have
actively increased their shares. New cooperatives have
been formed to supply feeder pigs for producers. Some
corn producers have formed hog production cooperatives
as a means to market corn. In addition, group marketing,
especially by smaller producers, is increasing (Schrader
1998).
3.2.2.3. Dairy Industry
Milk marketing in the U.S. is regulated by Federal
Milk Marketing Orders. Marketing orders classify milk
by ultimate use by consumers. For example, Class I is
milk for fluid consumption. Milk orders specify
minimum prices that buyers must pay for milk used in
each class. Federal order prices are minimums only.
Market conditions can often lead to prices above Federal
order minimums. Milk orders also specify rules for
distributing milk (Anonymous 1999b).
The dairy sector of the U.S. has been exception
among the other agricultural sector in that producers
cooperatives have an important role in milk marketing
and processing. According to1997 data, dairy
cooperatives received or bargained for 83% of all milk
sold by farmers. Ninety eight percent of the total amount
of milk received by the cooperatives came directly from
member-producers, the remaining 2% came from non-
members or non-cooperatives firms. Between 1992 and
1997, the number of dairy cooperatives decreased from
265 to 226 while the number of bargaining cooperatives
increased from 135 to 138 (Table 4.4) (Ling 1999).
Dairy cooperatives can be classified into three
categories based on their function in the marketing
channel (Ling and Liebrand 1998).
i. Bargaining cooperatives: These cooperatives operate
as bargaining associations. Government administered
milk prices serve as a floor and the starting price in the
bargaining process. Milk payment is usually pooled. In
1997 there were 138 pure marketing cooperatives, 44
cooperatives which have receiving stations were also
acting as bargaining cooperatives (Table 3.4).
ii. Bargaining-balancing cooperatives: These
cooperatives bargain for milk prices and also
manufacture the surplus into commodity dairy products
for supply balancing.
iii. Others include undifferentiated hard product
manufacturing, niche marketing, fluid processing and
diversified dairy cooperatives.
The experience of dairy cooperatives can be useful
for other agricultural industries facing pressure of
vertical integration.
Food Marketing Policy Center Research Report #52
25