The Efficiency of Contractual Arrangements in Private Agricultural Product Markets

Co-operatives provide a vehicle for the vertical integration of production andprocessing in agriculture. The producers provide capital for and control theprocessing entity so that their interests are aligned. Returns to producers bundle together the commodity price and the return from the capital invested in processing. Many of the agricultural product markets in New Zealand operate within this cooperative structure and in the case of the dairy industry it has been required by statute. The forestry wine and processed vegetable industries are notable exceptions in that these industries use contracts between producers and processors as an alternative to vertical integration via co-operatives.In this paper we use examples of contracts between producers and processors in the forestry wine and processed vegetable markets to consider the extent to which contracts may provide efficient vehicles for the alignment of interests between producers and processors in agricultural markets. We consider the ways in which these contracts: Minimise transaction costs; Use incentive mechanisms and monitoring to limit opportunism; Allocate risk; Facilitate investment in specific assets; and Allocate property rights.We assess the implications of the annual crop cycles and perishability of grapes and vegetables with the longer crop cycles of forestry. We conclude that contracts appear to be viable alternatives to co-operative structures and that this is true even in the market for perishable agricultural products.