Agricultural Contracting and Agrifood Competition

The industrialization of agriculture is associated with tighter supply chains where vertical coordination between farmers and processors is facilitated by the use of agricultural contracts. An overview is provided on the recent trends in the use and structure of agricultural contracts followed by an examination of how the competition among processors may affect agricultural contracts. Many reasons exist for using agricultural contracts, including improved risk management and reduced transaction cost. On the other hand, the growing use of agricultural contracts and processor concentration raises concerns that processors may exercise market power, for example by offering lower contract prices in absence of local competition. Previous studies using the new empirical industrial organization models show that processing industries are not perfectly competitive but the price distortions are very small. The focus here is on examining price competition from a farmer’s instead of an industry’s point of view. Recent studies using farm-level data that show that the absence of other contractors or spot markets in producers’ areas does not lead to statistically significant price differences in agricultural contracts for most commodities. These findings provide evidence that most agricultural processors do not exercise market power by reducing prices when other local buyers are not available. Therefore, the recent trends of industrialization and increased vertical coordination in agriculture are likely occurring for reasons other than processors exercising market power.