Vertical Coordination and Contract Farming
Rehber
settlement projects (Ghee and Doral 1992). It’s use in
developing countries such as Turkey has been
significantly increasing.
In the industrialized food system, the impersonal
structure of the free market mechanism is replaced by an
organized and controlled personal relationship varying
from short term contractual arrangements to complete
vertical integration. These methods of vertical
coordination of the advanced agro-food structure have
many advantages, but are subject to some inherent
implementation problems.
Related problems can be considered in two main
groups. First, complicated structural relationships
between the different stages in a vertical channel and the
actors in the channel require theoretical analysis. The
second group deals with practical issues. Which
conditions are needed for each type of coordination?
When and to what extent do such conditions occur? Who
will have the control of these coordinated systems? And
how will the benefits and risks of such a linkage be
shared among the participants ? These questions must be
answered. From the farmers’ point of view, reduced
independence and lack of market position in the more
concentrated raw commodities markets are problems that
require feasible, practical and fair solutions.
In this study, first, I review current vertical
coordination theories focusing on the theoretical
background of contract farming. Principle reasons for
contracting, advantages and failures of a contractual
relationship as well as different types of contract
production are examined in the light of integration
(coordination) theory.
Second, I will investigate the practical application of
contract farming to point out related problems and
required conditions for successful implementation based
on comparative analysis of experiences in Turkey and
the USA. The first is a developing country which has a
promising food industry and the second has a developed
industry which has a heavily industrialized food system.
The general structure of the food industry and
experiences of contract farming in the USA are
investigated based on the available publications and
empirical research. The general structure of the food
industry and contract farming in Turkey are studied
based not only on available publications and studies but
also the empirical data obtained by field survey. This
field survey was conducted in a region where the main
food processing plants are located. In that survey 25
firms and 91 growers were interviewed. In addition, 25
examples of production contract were examined. A
breakdown of the 25 firms by sub-sector is as follows:
Vegetable oil, 2; frozen food,1; canning and tomato
paste, 13; dairy, 4; olive processing, 2; beet-sugar, 1;
hop processing, 1; other, 1.
Finally, development of a contract farming model is
proposed.
This study has five chapters. Chapter one serves as
an introduction. Chapter 2 presents a short review of
integration, vertical coordination concepts, vertical
coordination theories and contract farming. The general
overview of food industries and rather detailed
information about contract farming both in Turkey and
the USA are presented in chapter 3. A comparative
evaluation of findings about the general structure of food
industries and contract farming implementations in
Turkey and the USA are also given in chapter 3. Before
the conclusion and suggestions in chapter 5, a contract
farming model is presented in Chapter 4.
2. Theoretical Background of Vertical Coordination
and Contract Farming
2.1. Integration and Vertical Coordination
Primitive agriculture was a fully integrated system.
In subsistence agriculture, vertical integration is nearly
complete since most of the production resources and
production decisions are in the same hand (Penn 1958).
One family would collect seed, sow, and reap a crop,
rear and fatten an animal, and themselves consume the
produce after reserving seed or breeding stock for the
following year. The evolution from subsistence farming
to present market oriented agricultural system has been
marked by a gradual disintegration of functions.
Specialization is one of the distinguishing features of
today’s commercialized agriculture.
Agriculture as a production industry is closely
related to marketing activities which transform,
transport, and transfer food and fiber to the consumer.
Additionally agriculture is served by a large number of
industries which are supplying farm inputs.
Nowadays, coordination and/or integration between
farms and the others firms in the industry in different
dimensions is a reality. In other words, in advanced
agriculture, there is a strong tendency toward close
vertical coordination.
Integration means bringing together two or more
parts into one. There are three basic kinds of integration.
Vertical integration occurs when a firm combines
activities unlike those it currently performs which are
related to them in the sequence of marketing and
production activities. Such integration could be
illustrated by the meat packer who decides to reach both
backward, toward the producer by operating his own
livestock buying points in the countryside, and forward,
toward the consumer by operating his own meat
wholesaling firm (Kilmer 1986). A rather detailed
Food Marketing Policy Center Research Report #52