—Lancaster Farming, Saturday, November 4, 1972
8
Contract Operations Seen Increasing Slowly
Contract production and
vertical integration , sometimes
touted as the wave of the future in
U S. farming, aren’t increasing
as fast as has been supposed,
according to USDA production
and marketing specialists.
The Economic Research
Service estimates the proportion
under various forms of con
tracting and vertical integration
increased from 19 to 22 percent
between 1960 and 1970—a gam of
only 3 percentage points.
The extent of contract
production increased from 15 to
17 percent and vertical in
tegration from about 4 to 5 per
cent.
The growth was limited
because many commodities were
not much affected and because
increases in some commodities
were partly offset by decreases in
others For example, increases in
contracting in cotton and
vegetables were counterbalanced
by decreases m citrus and in dry
beans and peas group
Contracting
Contract production m farming
is a fairly inclusive term that
includes the various buy-sell
agreements that farmers enter
into with dealers or processors or
other businessmen before un
dertaking the production of a
commodity
These agreements can be
either loose arrangements
spelling out only minimum prices
and production levels . or they
can be highly specific contracts
setting down tight quality and
cost controls.
A couple of examples •
—Gram production contracts,
while not extensive in either the
food or feed gram sectors, tend to
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emphasize improved practices
and quality controls. They rarely
provide supplies or financing but
they often guarantee premium
prices to farmers who can
produce consistently high-quality
products. Breakfast food com
panies, for instance, sometimes
contract for certain qualities of j
grain for cereals. !
Also, producers of special
strains of grain, high lysine corn,
and malting barley often enter
into “forward contracts” with
processors. This way, the far
mers of such specialized com
modities are guaranteed a
market before they commit their
valuable production resources.
—ln broiler production, where
contracting is extensive, the
contracting firm often is a
processor or a feed mill that
supplies production inputs such
as chicks, feed, and medicine
along with some financing. The
farmer contributes his labor,
buildings, and managerial ex
pertise.
The contracting firm generally
exercises a good deal of control
over broiler production costs and
quality over broiler production
costs and quality so that it can be
assured of a steady supply of
birds at a consistently low price.
The farmer, meanwhile, can
count on a minimum payment for
his resources—plus he usually
gets a bonus for efficient feed
conversion rates or other savings
for the contractor
Production contracts figure far
more prominently in livestock
enterprises than in crop farming.
Reason • Livestock products tend
to be more perishable and are
subject to quality variations
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which may require closer
coordination.
Most commodities with im
portant elements of contracting
have had these elements for quite
some time.
For instance, fluid milk
production has long been
organized under contract
arrangements either through
cooperatives or directly with
indendent milk producers.
The dramatic expansion of
contracting in the broiler in
dustry was essentially complete
by 1960—though there was a
spillover effect on egg and turkey
production in the 1960’5. Con
tracting for the latter two items
grew during the decade—the
result of combining technological
developments in breeding,
feeding, and disease control with
the economic strategies proven
successful by broilermen.
Contracting gains in the fed
cattle industry during 1960-1970
centered around the rapid in
crease in large commerical
feedlots and the associated gain
in custom feeding.
In crop farming contracting
has long been extensive in both
the production of sugarbeets and
vegetables for processing. For
both commodities processors
need an assured supply to
operate their expensive equip
ment efficiently. At the same
time producers of both crops
need guaranteed markets—in the
case of sugarbeets because there
are no alternative outlets, in the
case of vegetables because the
crop is highly perishable.
A notable drop in contracting
occurred during the 1960’s in
production of dry beans and peas.
Back in 1960 production con
tracts were very much in vogue
for these two commodities—
especially when the crops were
newly introduced in an area. The
contracts generally contained
quality provisions and called for
improved practices.
However, as growers learned
the culture these features were
no longer necessary and by 1970
contract production of dry beans
and peas was no longer common.
In contrast, contracting in
cotton production was markedly
higher in 1970 than a decade
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earlier—the result of a short
supply situation.
Cotton contracts in 1970 were
usually initiated by merchants,
shippers, ginners, sometimes
even mills themselves in an at
tempt to make sure of meeting
business commitments. (Ac
tually the 11-percent share of the
crop contracted for in 1970 had
swelled to 32 percent by August 1,
1972 as the tight supply situation
persists.)
Vertical integration
Vertical integration means
tying two or more production and
marketing steps together within
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a single firm for the purpose of
lowering costs and boosting
operation efficiency. At present
the extent of vertical integration
is about the same for both crop
and livestock production
limited.
Thus far the sugarcane in
dustry has experienced the
greatest move toward vertical
integration—with about 60
percent of the crop in Hawaii
grown under an intricate system
of„ plantation farming and
milling, with cooperative refining
and marketing, including
unionized labor.
On the Mainland about a third
(Continued On Page 9)