Vertical Coordination and Contract Farming
Rehber
to make a contractual relationship which is working
toward their mutual benefit. Otherwise, this cooperation
will be a source of dispute and dissatisfaction.
In contract farming systems, the individual producer
has had the most reason to feel weakness in his lack of
market power. However, the history of agriculture
demonstrates that growers have been seldom rewarded
appropriately in the market place due to weakness in
their position as farm entrepreneurs compared with other
participants in the food industry. That is why it is
important for producers to act in an organized manner.
As Anderson (1994) stated: “Recognition gained by
organized groups is better as opposed to the lack of
recognition accorded to unorganized farm producers,”
organizing a bargaining cooperative among farmers
makes them rather powerful in a contracted relationship
(Scheid 1991; Moore 1994).
Local bargaining organizations can be organized on
the regional or national level. In practice, negotiation is
an arguable problem under such organization.
Collaboration and negotiation between farmers and
processors might be better carried out in a decentralized
way i.e. at the local level. A nation wide farmer and food
industry organization could act as an administrative
organism. It could retain a role as arbitrator and
guarantee the application of private agreements.
Experimentation, development of reference, and
agricultural techniques would probably remain the
responsibility of the central body.
Such an organization also can allow collaboration
with the integrators’ organization. The producers and
processors could act together. For example California
Tomato Growers Association needed to take a more
active role in controlling imports. This led to the
formation of National Association of Growers and
Processors for Fair Trade (Marcus and Frederick 1994).
This trade group was an alliance between growers and
leading tomato processors that was successful in
initiating a negotiation between U.S. and Israel. In
general, a common action between producers and
processors' organizations can be realized to impose
regulation on imports and in some aspects; market
development, political action, and adjustments to
consumer demand.
In contractual arrangements, the role of the
integrator firm is so important by determining the most
of the production and marketing practices and measures.
Therefore the efficiency of the firms’ activities directly
affects the efficiency of contract farming. The first step
in successful implementation is establishing of a sound
organizational body. Contracts could vary from
company to company, but all must have a special unit
which is dealing with all contractual issues and is
equipped with necessary personnel and equipment. Also
its relationship to the other functions of the firm must be
determined clearly (Brown et al. 1994).
The role of government is an another important
factor for successful application of contract farming. The
first function of state authority might be legislative
arrangement. In agriculture, with a tremendous variety of
production enterprises, it is not possible to establish all
encompassed contract models which has strict rules.
Instead, governments could establish a framework for a
contract, and enact regulations to solve disputes and/or
take part in arbitration to some extent. Beneficial tax
treatment, exemption from antitrust status, selective
interest rate (below the market rate), and free technical
assistance through extension services could be listed
among the Government’s policies favorable to
cooperatives.
The direct role of government in the contractual
mechanism, agricultural support and intervention
policies aimed at improving contract farming can be
effective and functional. In the USA, for example, some
product marketing orders reinforce the bargaining
strength of farmers. In the European Union, according to
the Commission Regulation, the production aid system is
based on contracts between producers and processors and
the particulars to be included in the contracts for the
purposes of the aid system should be specified
(Anonymous 1984).
Tax policy is an another aspect which must be
considered to promote contract farming. Contract
farming can be considered a way of record keeping
systems. Farmers are presently reluctant to involve in
such arrangements for fear that they may pay more taxes
especially in countries where book keeping is not
compulsory for the family farms. Therefore adopting a
tax policy which facilities the situation could be
recommended.
On one hand, specialization to produce a single
product through contract farming has increased the
profitability level. On the other hand it will increase the risk
farmers face. Agricultural crop insurance policies could be
a considerable way to promote risks reduction for both
farmers and processors.
Ineffective extension and training policies of the
governments could be improved through contract
farming. Credit policies in agriculture also could be
realized by contractual arrangements. For example it is
possible to consider the contract itself as collateral. Such
activities linked with the contractual relationship could
be rather effective.
An independent organization to resolve disputes
between firms and farmers, which are the major causes
for failure in contract farming is recommended. Solving
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