Vertical Coordination and Contract Farming
Rehber
sophisticated ideas such as environmentally sound,
sustainable agriculture, and standards and regulations
related to environment and health safety are the
initiatives behind the fast growing close vertical
coordination and contract farming.
The reduction in producer’s and integrator’s risks
are replaced by other risks and problems related to the
implementation of contracts. Integrators can force
changes in operation at will since there is no contract
provisions to prevent such changes. For instance, broiler
growers often complain that these changes are
sometimes are excessively expensive but they have no
choice since they already have large sunk investments.
In Turkey, the group approach and extra debt receipts for
inputs provided by integrators create problems for the
producers. Generally, contracts are prepared by the
integrators and often the language is used that is not
easily understandable by the producers. The contract is
generally in written form, but the explicit terms of
contracts reflected in the documents are only part of the
story. That is, some of the provisions are implicitly used
by the integrators. Other more common claims of the
producers include contract termination, manipulation of
quality, quantity or cost of inputs, and mis-evaluation of
production performance. Some of the contractual
relationships create new legal arguments. For instance,
in poultry production, contracts do not involve sale of
commodities. Instead they create other forms of legal
relationships as service contracts. That means contract
growers are not the owner of the product, but are
compensated for their land, building, labor and some
small part of the production cost.
For integrators, the inability of producers to meet the
technical requirements of contracts, quality problems,
disputes related to payment and other contract terms, and
ex-post contract negotiation are primary concerns and
sources of risk.
Some conditions can outweigh the advantages of
contract farming. In contractual arrangements, the role of
the integrator firm is so important as it determines
contract terms (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 a sound organizational body in the
contractor firms. Contracts could vary from company to
company, but all of them must have a special unit
dealing with all contractual issues equipped with
necessary personnel and equipment. Also, its
relationship to the other functions of the firm must be
determined clearly.
It is recommended that there should be an
independent organization to resolve disputes between
firms and farmers, which are the major causes for failure
in contract farming. Solving disagreements and disputes
between producers and processors created long delays
while going to court. Thus, an arbitration and/or a
reconciliation system would be useful by involving
government and non-governmental representatives.
One of the clear findings of the case studies for
Turkey and the USA is that the fewer and larger
processors have created a monopsonistic, anti-
competitive market structure. Having title of the
product's (broiler industry) market information and
production know-how as well as large market shares
strengthened their position in the market against farmers.
If we assume that packers or processors are closer to
retailers and consumers, they have better market
information than producers, this gives them bargaining
power. In such structures the individual farmer is in a
weak position at the bargaining table.
Antitrust oversight and related legislation may be
seen as the first attempt to cope with the anti-
competitive effects created by processors (integrators).
The necessity of such attempts are not deniable, but it is
a fact that it is not possible to control and regulate
economic systems in every case.
One possible alternative for farmers is to forge
alliances among producers and to establish processing
and marketing cooperatives as in Turkey and the USA.
These directly assure access to available markets and
enhance net returns. Availability of producer
cooperatives in the market as an alternative also creates a
countervailing power when facing the corporate
monopsonistic behavior. It was observed in beet-sugar
industries both in Turkey and the USA that vertical
integration of some processing companies by growers
had real efficiency consequences.
Another significant way of strengthening farmer’s
bargaining power is the establishment of bargaining
cooperatives as in the USA. Organizing a bargaining
cooperative among farmers make them rather powerful
in contractual relationships. Such an organization could
also give an opportunity to collaborate 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. This attempt was successful in imposing
regulation on imports and in other aspects, such as
market development, political action, and making
adjustments to consumer demand.
While the role of the government is an important
factor for successful implementation, it is not possible to
establish a comprehensive contract model via legislation
Food Marketing Policy Center Research Report #52
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