Vertical Coordination and Contract Farming
Rehber
owner. Despite the decline in the sugar-beet production
in the several western states, American Crystal Sugar’s
acreage increased from 165,000 acres in 1972 to 400,000
acres in 1992.
In the first sugar-beet contracts written in the U.S.,
payment was based on tonnage of beets delivered and
sugar content. Major changes in contracts were made
during WW I. The price of refined sugar rose more than
75% when price controls were removed. Sugar beet
growers wanted to share this sugar price increase.
Payment scales were changed to sugar content and the
market price of sugar base, and ACS changed the
payment system and added the average net selling price
base instead of a fixed price per ton. This system is still
used by the traditional owner-investment companies. In
the 1970s, the cooperative processors made another
change in beet contracts. They developed extractable
sugar contents. This contract is based on the actual
amount of recoverable sugar per ton of beets. A new
system was developed to measure the amount of
recoverable sugar by measuring the sugar loss to
molasses. The amount of sugar lost in the molasses by
product is measured as a percentage of total sugar
content. The pounds of sugar recoverable from a ton of
beets is calculated by subtracting the percentage sugar
loss to molasses from the percentage sugar content. For
example, beets with a 17.57% sugar content and a
1.495% sugar loss to molasses yield 312.5 pounds
recoverable sugar per ton of beets.
(0.1757-0.01495) x 2000 pounds per ton = 321.5
pounds per ton.
According to Balbach (1998), this new system only
used by cooperative processors, provides an efficiency
through decreasing production costs for refined sugar,
sugar loss to molasses and increasing the extraction rate
and also sugar produced per ton of beet sliced.
Two types of contracts are used by other non-
cooperative companies. The eastern contract and the
western sliding-scale contract. In the eastern contract,
growers and processors share revenues and costs at a
fixed ratio. Growers receive 53.1% of the gross sales of
sugar and by-products less 53.1% of the marketing costs.
Growers are responsible 53.1% of the sugar losses that
occur in storage. All of the production costs belong to
growers. Also, there are incentives based on the impurity
level. In the western contract, the payment per ton of
beets depends on the average net return per 100 pounds
of sugar received by the processing company and the
individual sugar contents of a grower’s beets. The
extraction rate is fixed.
3.3. A Comparative Analysis
Naturally, there are big differences between Turkish
and U.S. agricultural production and farming structure.
Turkish agriculture can be characterized as a sector in
transition from a traditional structure to an industrialized
sector. The agricultural structure in the USA is
completely industrialized. Agriculture share both in the
population and GNP is approximately 2% in the USA,
these figures are about 35% and 13% respectively in
Turkey.
In Turkey, there are more than 4 million farms
having increasing tendency in number. The average farm
size is 5 ha. In the U.S. the number of farms is only 2.1
million having a decreasing trend in number with 189.5
ha average size.
The Turkish food industry began to develop only after
establishment of the Turkish Republic in 1923.
Inevitably, establishment of the food industry was
initiated by the State as in other sectors through
establishment of State Economic Enterprises (SEEs).
This came as a result of the “ etatism” which was one of
the main principles of Turkish Development Movement.
Originally, the SEEs were supposed to operate with a
high degree of autonomy and to survive for profits as a
private entrepreneurship. After about eighty years the
SEEs are still running as State Enterprises which are
subject to privatization in recent two decades.
The lion’s share of the food is still consumed in an
unprocessed form as household production in Turkey.
The processed food share of the supply is estimated at
10-20% of food consumption. There is a dual structure
in the food industry. There are plants that are large in
size, more modern in technology, and sometimes
integrated with international companies which are
oriented mainly for export. However, a considerable
share of the food handling is realized by small and
medium size processing units which have rather
backward technologies. According the recent data there
are 25,388 firms in the industry but only 1,350 of them
have rather large capacity which have more than 10
employees.
In the USA, the food sector began a structural
transformation during the late 1800s from one that
served demand for predominantly unprocessed foods
toward a more concentrated one, handling increasing
amounts of processed foods that reached 90% of total
food consumption today. The growth in importance of
very large, capital intensive, and diversified food
manufacturing firms has been the result of the need to
achieve economies of scale in mass production and
distribution as well as control over new food processing
technologies. In 1992, there were 20,000 food
processing plants in the USA, of which 44.9% have 20
Food Marketing Policy Center Research Report #52
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