Trends in Agricultural Contracts

Contracts are widely used to govern the production and marketing of agricultural commodities. They can be an es sential tool for managing risks; contracts provide incentives for farmers to invest in specialized equipment and skills and to produce products with desirable attributes; and they can allow processors to realize economies of scale and throughput in production, thus realizing lower costs. These are all offered as attributes of contracts when compared to one alternative, a spot market. Compared to another alternative—vertical integration—contract production retains greater profit incentives for grower effort, on-farm diversi fication, and the use of localized knowledge. Measuring Contract Production in Agriculture The U.S. Department of Agriculture’s (USDA) Agricultur al Resource Management Survey (ARMS), is a widely used source of data on contracts. The ARMS, which is jointly administered by the Economic Research Service (ERS) and the National Agricultural Statistics Service (NASS), is a comprehensive multi-purpose annual survey of farms. It features a large sample, selected anew each year, designed to be representative of all farms in the 48 contiguous states. The multi-purpose nature of the ARMS affects the way contract agriculture data are collected. ERS reports summary statistics on contracting on the agency website and in a series of reports (MacDonald and Korb, 2011). Contract production complicates data collection of farm finances. Contract growers often bear only part of production expenses, while contractors may reimburse growers for some expenses and may provide growers with some inputs. Similarly, contract growers may own fewer assets, per dollar of production, because contractors own some of the assets. Contract growers may receive only part of the market value of a commodity in fees, with contractors receiving the rest. Contract growers may also produce specialty varieties of commodities, with different revenue and expense profiles. For all of those reasons, the survey questionnaire breaks out contract production. See Box for more information on how the ARMS collects information on agricultural contracts.