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Contracts, Markets, and Prices: Organizing the Production and Use of Agricultural Commodities

81 Pages Posted: 12 Jul 2005  

James M. MacDonald

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS)

Janet Perry

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS)

Mary Clare Ahearn

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS)

David Banker

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS)

William Chambers

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS)

Carolyn Dimitri

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS)

Nigel Key

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS)

Kenneth E. Nelson

affiliation not provided to SSRN

Leland W. Southard

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2004

Abstract

Production and marketing contracts govern 36 percent of the value of U.S. agricultural production, up from 12 percent in 1969. Contracts are now the primary method of handling sales of many livestock commodities, including milk, hogs, and broilers, and of major crops such as sugar beets, fruit, and processing tomatoes. Use of contracts is closely related to farm size; farms with $1 million or more in sales have nearly half their production under contract. For producers, contracting can reduce income risks of price and production variability, ensure market access, and provide higher returns for providing differentiated farm products. For processors and other buyers, vertical coordination through contracting is a way to ensure the flow of products and to obtain differentiated products, ensure traceability for health concerns, and guarantee certain methods of production. The traditional spot market - though it still governs nearly 60 percent of the value of agricultural production - has difficulty providing accurate price signals for products geared to new consumer demands, like produce raised and certified as organic or for identity-preserved crops modified for special attributes. We are likely to see a continuing shift to more explicit forms of vertical coordination, through contracts and processor ownership, as a means to ensure more consistent product quantity and quality.

Keywords: Contracting, marketing contracts, production contracts, vertical

Suggested Citation

MacDonald, James M. and Perry, Janet and Ahearn, Mary Clare and Banker, David and Chambers, William and Dimitri, Carolyn and Key, Nigel and Nelson, Kenneth E. and Southard, Leland W., Contracts, Markets, and Prices: Organizing the Production and Use of Agricultural Commodities (November 2004). USDA-ERS Agricultural Economic Report No. 837. Available at SSRN: https://ssrn.com/abstract=754986 or http://dx.doi.org/10.2139/ssrn.754986

James M. MacDonald (Contact Author)

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS) ( email )

355 E Street, SW
Washington, DC 20024-3221
United States
(202) 694-5610 (Phone)

Janet Perry

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS) ( email )

355 E Street, SW
Washington, DC 20024-3221
United States
202-694-5152 (Phone)

Mary Ahearn

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS) ( email )

355 E Street, SW
Washington, DC 20024-3221
United States
202-694-5583 (Phone)
202-694-5774 (Fax)

HOME PAGE: http://www.ers.usda.gov/AboutERS/Bios/view.asp?ID=mahearn

David Banker

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS) ( email )

355 E Street, SW
Washington, DC 20024-3221
United States

William Chambers

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS)

355 E Street, SW
Washington, DC 20024-3221
United States

Carolyn Dimitri

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS) ( email )

355 E Street, SW
Washington, DC 20024-3221
United States

Nigel Key

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS) ( email )

355 E Street, SW
Washington, DC 20024-3221
United States
(202) 694-5567 (Phone)

Kenneth E. Nelson

affiliation not provided to SSRN

Leland W. Southard

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS) ( email )

355 E Street, SW
Washington, DC 20024-3221
United States

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