Industrialization
The increasing use of contracting
and vertical integration in the food and fiber system is commonly
identified with the industrialization of agriculture. In part,
industrialization arose as processors began to produce food products
rather than food commodities. Processors need a steady supply
of farm products of known quality and specifications to process.
Contracting and vertical integration help provide these farm products,
thereby reducing processor risk.
Contracting can also reduce marketing and production risks for
producers. Because marketing contracts set a price in advance
for output, they reduce marketing risk. Since production contractors
own the commodity produced, make most of the production decisions,
and supply most inputs, they assume a substantial part of the risk
associated with production, as well as risks associated with marketing.
The actual distribution of risk, of course, depends on the terms
and conditions of the contract and the bargaining strength of the
farmer and the contractor.
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