The name is absent

Vertical Coordination and Contract Farming

3.2.2.4. Vegetable Processing

Vegetables for processing are mostly produced
under contracts. The only exemption are those perennials
crops such as asparagus and some potatoes which are
produced for both processing and fresh market (Marion
1986). In 1993, 11,700 farms reported at least one crop
production contract. Nearly half of these farms had
contracts that involved processed vegetables (Perry et al.
1996).

In general, a crop production contract indicates
which inputs will be provided by the contractor, limited
in most cases to seed and custom services such as
harvesting and hauling. The amount to be produced is
specified with detailed requirements regarding
production practices such as chemical and fertilizer
applications. Sometimes, the contracts’ quality
provisions can be very detailed and strictly enforced.
Many contracts include provisions requiring the grower
to use only pesticides that approved by contractor. The
contractor generally stipulates grading standards along
with terms of compensation the grower. According to a
Farm Costs and Returns Survey (FCRS), contractors
provided seed to nearly 80% of the farms with a single
production contract. The share of the farms getting
special hauling services was 70% and the percentage of
the chemical provided was reported as 60% (Perry et al.
1977).

For payment purposes they often use fixed price,
applying premiums or discounts based on the quality of
the crop. Vegetable producers are generally well
organized under a bargaining cooperative (Hamilton
1994b). In most cases, the association does not assume
title to the vegetables.

Vegetable contracts involve either guaranteed
shipments in pounds per week are based on acres of
production. Another special feature of vegetable
contracting is the application of “passed acres” in which
the integrator has the right not to harvest or accept all the
crops raised under the contract. One of the most
common reason for this application is the crop raised is
larger than the quantity the processor can handle
(Hamilton 1994b).

In order to get detailed information about contractual
relationships at the field and farm level between
producers and the first handler of the fruit and vegetables
(processors or wholesalers), the findings of a research
done by Hueth are summarized (Hueth 1999). The
contract between producers and integrators is generally a
detailed written agreement that sets forth specific plans
concerning when and how particular crop should be
grown. However, sometime coordination might also
realized with an informal mechanism through repeated
interaction. Even when a contract takes a written form,
there may still be a number of provisions which are only
implicitly understood by both parties. It was determined
that the coordination mechanisms used to arrange
contracts vary considerably across commodities.
Commodity attributes, local tradition, technology, and
government regulation were identified as important
factors which potentially affect the type of coordination
and content of the contracts.

Hueth (1999) mentioned the proprietary nature of
the contracts. He stated that “even if it is possible to
obtain an example of a written contract (some integrators
actually prohibit growers from sharing their contracts
with anyone but the grower’s lawyer), the explicit terms
of contracts reflected in formal documents are only part
of the story” .

According to a survey of processed and fresh market
commodities (15 fruits and vegetables), input control
was provided through selection of seed variety, and
plants, fertilizer, pesticides, labor, and financial support.
Monitoring is carried out by fieldmen who provide
technical information and communication in addition to
controlling grower’s behavior. Monitoring efficiency
were evaluated by the median of annual field visits per
grower for each commodity which was varied between 1
and 100 annual visits. The different bases were used for
the quality measurement. In ten of the commodities,
some form of in-house quality measurement was used; in
eleven commodities, government sponsored services;
and in five commodities, some form of third-party
services were used. In almost all of the contracts,
residual claimancy were used.

There is a difference in emphasis given on quality
measurement between processing and fresh market
integrators. All of the interviewed processors have been
using detailed measurement of quality to adjust grower
payment, while fresh market integrators have been rarely
adjusting the grower’s payment (Hueth 1999).

3.2.2.5. Beet-sugar Industry

Since the beginning of the U.S. beet sugar industry
in 1879, sugar beets have always been grown under a
contract. In 1995, there were 9 companies processing
beet sugar and three of them are grower owned
cooperatives. American Crystal Sugar Company (ACS)
was incorporated in 1899 as American Beet Sugar
Company. In 1971, the company cut 20% of the
contracted beet acreage in some states and closed some
processing plants in different states (Balbach 1998). The
differences between the farmers’ interest and decisions
of the company has created conflicts. Red River Valley
Sugar Beet Growers Association decided to buy
American Crystal and form a cooperative. The growers
who supply sugar beet to the company became the

Food Marketing Policy Center Research Report #52

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