Are Farmers Trapped in Hold-Up Relationships? The Case of Dairy Farmers and Feed Suppliers

Agricultural production is a widely discussed issue in the context of the imbalance of bargaining power between individual links in the food chain and the difficult position of farmers in relation to their contractors. This article attempts to explain, in the light of the Transaction Cost Theory (TCT), the nature and causes of the imbalance of bargaining power that can lead to the emergence of hold-up relationships in the agricultural sector. In order to narrow the broad scope of the analysis, the theoretical discussion is illustrated with an empirical example of backward vertical relationships between farmers and suppliers of inputs (feed). The article seeks the determinants of long-term and stable relationships between farmers and feed suppliers and whether they can be partially explained by the imbalance of bargaining power, causing the entrapment (lock-in) of farmers in specific monopolistic relationships with their contractors. Overall, the results of the analysis do not support the assumption that farmers experience a large imbalance of bargaining power in relation to their suppliers and are locked in a specific monopolistic hold-up relationship. Despite the lack of a written contract between farmers and their suppliers, their relations are based on unwritten, mutually enforceable terms. The parties generally respect the agreed rules and do not violate them ex post in order to benefit from quasi-rents from the lock-in effect. In the case at hand, written supply agreements could increase transaction costs, limit the freedom to switch suppliers and reduce the farmer's bargaining power vis-à-vis the feed producer by adding additional interdependence.