| 来源类型 | Report |
| 规范类型 | 报告 |
| Agricultural contracts and competition policies | |
| Tomislav Vukina; Xiaoyong Zheng | |
| 发表日期 | 2018-06-05 |
| 出版年 | 2018 |
| 语种 | 英语 |
| 摘要 | Key Points Two main versions of contracts that we observe in the modern agriculture in the US are some form of marketing and production contracts, sometimes jointly referred to as the alternative marketing arrangements (AMAs). AMAs benefit not only farmers and packers by eliminating marketing timing and capacity underutilization risks but also consumers because they provide consumers with better-quality meat products. In this report, we formulate the following set of policy recommendations regarding the AMAs: Do not ban AMAs, protect the spot market, improve mandatory price reports, leave the tournament settlement of broiler contracts intact, and support the 2012 Grain Inspection, Packers and Stockyards Administration rule regarding additional capital investment requirement and provisions regarding the breach of contract and suspension of delivery of animals. Read the full PDF. Executive Summary The objective of this paper is to provide insights and policy directions on the market-competition ramifications of agricultural contracts, also known as alternative marketing arrangements (AMAs). The value share of agricultural production under contracts stands around 35 percent. The use of contracts in agriculture varies significantly across commodities. Contracting is less common in major field crops and leans more heavily toward specialty crops, hogs, and poultry. There are also significant variations in the types of contracts used. The use of marketing contracts favors crops against livestock, whereas the share of production contracts is almost entirely exhausted by livestock production. The main difference between marketing and production contracts is the ownership and control of production factors. In marketing contracts, all critical farm-level production factors are owned and controlled by the farmer. In production contracts, farm-level production factors are shared between a farmer and a contractor, and the contract specifies production practices that a farmer has to adhere to. In this study, the spotlight is entirely on livestock contracts, where competition issues are more pronounced. In the livestock industries, both farmers and packers face nontrivial risks in their production and marketing activities. AMAs provide farmers and packers a way to attenuate these risks. The reduction in various risks with the use of AMAs increases farmer welfare significantly. Farmers who use AMAs are found to be more risk averse than those who rely on the spot market, and welfare increases for these risk-averse farmers when risks are reduced or eliminated. AMAs also benefit the packers in the sense that organizing the procurement of livestock through multiple channels mitigates risks and information asymmetry problems. AMAs benefit consumers as well. An important advantage of AMAs is that through contracts packers are able to incentivize producers to produce better-quality livestock or the kind of livestock that consumers prefer. Although AMAs bring many of the benefits, there are also concerns about AMAs. Due to the rising popularity of AMAs, the spot market has become thin. Also, it has been shown that AMAs depress spot market price. Finally, AMAs tend to benefit farmers with large operations more than their smaller counterparts. Because of these concerns, there were a series of legislative attempts to ban the use of AMAs or certain features of various AMAs when various farm bills were negotiated. In addition, a series of concerns have been raised over the years that are specific to production contracts and in particular to those used by the poultry industry. The most serious attempt of the federal government to regulate livestock production contracts is the Grain Inspection, Packers and Stockyards Administration (GIPSA) 2010 proposal to amend the Packers and Stockyards Act (P&S Act) under the 2008 Farm Bill. Probably the most controversial proposal was to significantly regulate using tournaments in settling poultry contracts. Most of the original proposals were dropped or modified. Those that remained were provisions regarding the suspension of delivery of animals, rules about the additional capital investment criteria, provisions regarding the breach of contract, and provisions regarding arbitration. The proposed regulation to truncate tournament payments such that penalties for below-average performance are no longer allowed was among the provisions not included in document, but future imposition of such a rule is still considered. Regarding the regulation of tournaments, we argue that integrators could significantly mitigate potential welfare losses due to tournament truncation by adjusting the contract parameters. Overall, the proposed truncation policy would not significantly increase growers’ incomes, and some producers could end up worse off than before the regulation. Next, whether it should be a requirement that a contract grower makes additional capital investments into the production facility under contract constitutes an unfair practice in violation of the P&S Act is a legitimate concern. The results seem to support the hypothesis that the increase in asset specificity (additional capital investment requirements) causes a fall in grower compensation rates and that greater integrator concentration results in a small but economically meaningful reduction in grower compensation. Finally, provisions regarding the suspension of delivery of animals and provisions regarding the breach of contract are both related to the issue of contract length. Research results show potential benefits of long-term contracting relative to short-term contracts, but mandating the livestock production contracts to be explicitly long term without requiring that the contract specifies the minimum number of batches or flocks per year that the grower will receive is meaningless. However, requiring that the contracts specify the exact number of batches per year would be too intrusive because it would interfere with the integrators’ supply response capabilities and could actually lead to more abrupt contract terminations and expensive litigations. Given these arguments, we feel comfortable formulating the following set of policy recommendations regarding AMAs in general and production contracts in particular: Do not ban AMAs. AMAs bring numerous benefits to consumers, packers, and some farmers while hurting other farmers. Overall, the gains by those who benefit far outweigh the losses by those who lose. Protect the spot marketNew regulations should be developed to closely monitor the competition conditions in the spot market and prevent further consolidation. Improve Livestock Mandatory Reporting (LMR). New regulations should be developed to amend the LMR Act of 1999 to require AMS to publish more detailed statistics such as standard deviation, skewness, and kurtosis of the prices for each marketing channel. Leave tournaments as the dominant mode of settling broiler contracts intact. They have been in use for more than half a century with great success. Support the GIPSA rule on the additional capital investment requirements as a sensible (albeit indirect) approach to dealing with the problem of integrators’ market power on the market for contract grower services. The relationship between the market structure (competition) and the problem of holdup needs to be more carefully studied before proposing more drastic policy interventions. Explicit regulation of contract duration and the number of batches or flocks per year is difficult to justify. Therefore, the existing GIPSA 2012 provisions regarding the suspension of delivery of animals and provisions regarding the breach of contract seem to be adequate. Introduction Aside from land-tenure contracts of traditional agrarian economies types, two main versions of contracts that we observe in the modern agriculture in the US are some form of marketing and production contracts, sometimes jointly referred to as the alternative marketing arrangements (AMAs).1 Both of those span the space between markets and hierarchies reserved for the so-called hybrid organizations. As established by a large literature on the trade-off among organizational forms, the leading characteristics of these alignment processes is the degree of asset specificity combined with uncertainty. The main insight permeating this literature is that problems of coordination, combined with risk of opportunism and reinforced by uncertainty, are always pushing in the direction of more centralization.2 The framework proposed by Oliver Williamson,3 which correlates asset specificity with transaction costs to explain the trade-offs among markets, hybrids, and hierarchies (firms), can be used to explain the emergence of contracting in agriculture. As seen from Figure 1, the simple model considers three broad modes of organization: spot (cash) markets, hybrids, and vertically integrated firms. The horizontal axis indicates the degree of intensity of coordination, also interpreted as the degree of asset specificity, whereas the vertical axis measures the cost of governance (transactions) associated with implementation of various modes of organization. Uncertainty could be introduced explicitly into the model, but here it is tacitly subsumed under the effect it has in relation to asset specificity. All three cost curves are positively sloped, indicating that governance cost increases as the centralization of coordination or asset specificity increases. Under standard assumptions, rational economic agents will seek an arrangement that keeps them on the lower envelope of transactions or governance costs indicated by the orange thick line. As seen from the chart, hybrids (marketing and production contracts) present the dominant mode of organization of business activities in the K1 and K2 zone in which parties remain legally autonomous and keep control over significant parts of their decision rights while sharing assets that they coordinate via these hybrid arrangements. As will be shown later, this simple stylized model is particularly helpful for illustrating impacts of changes in public policy. According to James MacDonald and Penni Korb, contract use in agriculture has spread widely since 1969, when the Census of Agriculture first asked about contract use.4 In 1969, 5 percent of farms used contracts, which covered 11 percent of the total value of agricultural production. These numbers increased to 10 percent of farms covering 28 percent of production in 1991 and to 13 percent of farms and 33 percent of production in 1996. The number of farms with contracts peaked in 1996 and later declined because of the redefinition of farms, which allowed more small entities to be defined as farms. Because only 0.3 percent of farms with sales below $10,000 used contracts in 2013, their expansion in the total farm population reduced the share of all farms with contracts. In contrast, the share of agricultural production under contracts continued to grow slowly and unevenly until 2011, when 40 percent of the value of production was covered by contracts. Then, in 2013 the share of agricultural production under contracts fell sharply to 35 percent. The main reason for this drop is attributable to changes in relative prices, which led to a substantial increase in the share of crops (especially corn, soybeans, and wheat) in total value of production. With less contracting in crops (again, especially in corn, soybeans, and wheat), the increase in the share of crops in the overall value of production reduced the share of production covered by contracts. As already hinted above, the use of contracts in agriculture varies significantly across commodities. Contracting is less common in major field crops than in other segments of agriculture. Based on MacDonald,5 contracts covered less than a fifth of the total value of corn (17 percent), soybeans (19 percent), and wheat (13 percent) production in 2013, but farms that used contracts placed 49, 60, and 61 percent of their corn, soybeans, and wheat production under contracts, respectively. Contract production leans more heavily toward specialty crops, hogs, and poultry. For example, contracts accounted for 84 percent of the value of all poultry production in 2013. However, contracts accounted for 100 percent of the value of poultry production on farms that used contracts. The same numbers are 74 percent and 98 percent for hogs and 32 percent and 92 percent for cattle. In peanuts and tobacco, contract use expanded sharply after the elimination of the federal marketing quota programs in the early 2000s. In tobacco, contracts covered virtually all production by 2008, compared to about 25 percent in 2000. In peanuts, contracts covered 60–80 percent of production after 2004 compared to 25–45 percent in the 1996–2002 period. In addition to variations in contract production across commodities, we also observe significant variations in the types of contracts used. In 2008, all contracts’ share in total value of agricultural production was 38.5 percent, of which 21.7 percent belonged to marketing contracts and 16.8 percent to production contracts. The use of marketing contracts favored crops (14.9 percent) against livestock (6.9 percent), whereas the share of production contracts was almost entirely exhausted by livestock production (16.3 percent), with only 0.5 percent belonging to crops.6 The main difference between marketing and production contracts is the ownership and control of production factors, which creates the need for different compensation schemes. In marketing contracts, all critical farm-level production factors are owned and controlled by the farmer. Marketing contract represents an agreement (between a farmer and a buyer) that specifies a price or a pricing formula, a delivery outlet, and a quantity to be delivered. Typically, the pricing formula will have some bonus structure that incentivizes the farmer to supply some desired quality attributes. In production contracts, farm-level production factors are shared between a farmer and a contractor, and the contract specifies production (husbandry) practices that a farmer has to adhere to. The compensation schedule is a fee that would typically consist of a piece rate and some type of bonus structure that incentivizes the farmer to produce the commodity efficiently. In general, neither input nor output prices enter the farmer’s compensation formula. Because the objective of this paper is to provide insights and policy directions on the market competition ramifications of agricultural contracts, we will focus entirely on livestock contracts, where competition issues are more pronounced. The existing literature7 has shown that producers of the largest field crops move in and out of their contracts easily and that they combine contracts with other marketing channels freely. Moreover, producers typically rely on multiple contracts with different contractors, whereas various storage options and changes in cropping patterns provide them with further marketing flexibilities. Except perhaps for specialty crops, buyer concentration and resulting market power does not play an important role. On the other hand, production contracts, predominantly present in livestock production (poultry and hogs), commit contract growers more closely to specific integrators and for longer periods of time. In addition, that significant economies of scale in processing limit the number of viable integrators in one geographic area together with the fact that live animals cannot easily travel long distances raises the competition issues to the forefront of policy debates. The rest of the paper is structured in a way that organizes the material by the type of controversial features surrounding different AMAs. First, in the next section, we discuss controversies surrounding the AMAs in general and the legislative attempts to ban them. Then, we discuss issues pertaining only to the production contracts. The final section concludes with our specific policy recommendations. Read the full report. Notes |
| 主题 | American Boondoggle ; Economics |
| 标签 | Agricultural Policy in Disarray Series ; Agriculture policy ; american boondoggle: 2018 farm bill ; competition ; farm bill |
| URL | https://www.aei.org/research-products/report/agricultural-contracts-and-competition-policies/ |
| 来源智库 | American Enterprise Institute (United States) |
| 资源类型 | 智库出版物 |
| 条目标识符 | http://119.78.100.153/handle/2XGU8XDN/206562 |
| 推荐引用方式 GB/T 7714 | Tomislav Vukina,Xiaoyong Zheng. Agricultural contracts and competition policies. 2018. |
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| Agricultural-Contrac（2452KB） | 智库出版物 | 限制开放 | CC BY-NC-SA | 浏览 | ||
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