Vertical Coordination of Agriculture in...farming-dependent rural communities because they often are disproportionately troubled by depopulation, underemployment, and stagnant income

Council for Agricultural Science and TechnologyPrinted in the United States of America

Cover design by Lynn Ekblad, Different Angles, Ames, IowaCover photograph by Scott Bauer, Agricultural Research Service,

U.S. Department of Agriculture, Beltsville, Maryland.Small farm near Ames, Iowa.

ISBN 1-887383-19-0ISSN 0194-408804 03 02 01 4 3 2 1

Library of Congress Cataloging in Publication Data

Vertical coordination of agriculture in farming-dependent areas.p. cm. -- (Task force report, ISSN 0194-4088 ; no. 137)Includes bibliographical references.1. Agricultural industries-Vertical integration-United States. 2. Rural industries-United States. 3. Agriculture and state-United States. I. Council for AgriculturalScience and Technology. II. Task force report (Council for Agricultural Science andTechnology) ; no. 137.

HD9005 .V47 2001338.1'0973-dc21 00-064410

CIP

Vertical Coordination of Agriculture inFarming-Dependent Areas

Council for Agricultural Science and Technology

Task Force Report No. 137 March 2001

Luther G. Tweeten (Cochair), Department of Agricultural, Environmental, and Development Economics, TheOhio State University, Columbus

Cornelia B. Flora (Cochair), North Central Regional Center for Rural Development, Iowa State University,Ames

Task Force Members

ii

Reviewers

Patricia Allen, Center for Agroecology and Sustainable Food Systems, University of California, Santa Cruz

Michael D. Boehlje, Department of Agricultural Economics, Purdue University, West Lafayette, Indiana

Leonard S. Bull, Department of Animal Science, North Carolina State University, Raleigh

Frederick H. Buttel, Department of Rural Sociology, University of Wisconsin, Madison

Michael L. Cook, Department of Agricultural Economics, University of Missouri, Columbia

Mark Drabenstott, Federal Reserve Bank of Kansas City, Missouri

Steven L. Fales, Department of Agronomy, Pennsylvania State University, University Park

Linda Lobao, Rural Sociology Program, Department of Human and Community Resource Development, OhioState University, Columbus

Contents

Interpretive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1The Changing Structure of U.S. Agriculture, 1Effects of Change, 1Public Policy Responses, 2

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3The Changing Structure of U.S. Agriculture, 3Electronic Commerce, 5Effects of Change, 5Public Policy Responses, 6

1 Introduction, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Forces Pressing for Closer Food-Value Chain Coordination, 9 Specific Qualities in Production, 9 Supply-Chain Efficiencies, 10 Intellectual Property, 11 Risk Management, 11 Food Safety and Quality, 12 Information Availability, 12 Transaction Costs, 12 Cluster Configuration, 12Concluding Comments, 13

2 Alternative Food-Value Chains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Independent Private Firms Coordinated by Market Prices, 14Cooperatives, 16Administered/Negotiated Vertical Coordination, 17 Marketing Contracts, 18 Production Contracts, 18 Vertical Integration/Integrated Ownership, 20Electronic Commerce, 21Comments, 23

3 Economic Impact of Vertical Coordination on Communities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Resource Demands, 24Firm Size and Income, 25The Environment, 27Distribution of Employment Among and Within Firms, 27Location of Ownership and Management, 28

4 Public Policy Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Appendix A: Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Literature Cited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

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Figures

S.1. A livestock feeding operation in the Great Plains, 3

S.2. Aerial photograph of farming community and transportation routes in Ohio, 3

S.3. Soybeans being harvested, 3

S.4. Aerial view of many small farms in the midwestern United States, 4

S.5. Baby piglet, 4

S.6. Baby chicks, 5

S.7. Turkey production facility, 5

1.1. In her laboratory, plant physiologist Katrina Cornish checks seedlings produced for use in experimentsto improve guayule plants. The experimental, allergen-free latex products shown were made from gu-ayule, 9

1.2. Small-fruit geneticist Stan Hokanson displays several elite wild strawberries collected by collaborators.The small, highly aromatic berries (left) are from plants collected in Alberta, Canada. The larger berriesare from a type collected in Alaska that may prove to be cold hardy, 10

2.1. Agriculture Research Service entomologist Brad Higbee explains the benefits of areawide insect pestsuppression to Jerry Wattman, manager of this apple orchard near West Parker Heights, Washington,15

2.2. Technician Jeff Nichols collects a water sample from the Walnut Creek watershed in Ames, Iowa. Sam-ples are collected weekly from this area and surrounding watersheds to study the effects farming prac-tices have on water quality, 20

3.1. Multigenerational family farm operation, 25

3.2. Example of abandoned small farm barn, 27

4.1. At Florida A&M University, landscape design and management student Johnnene Addison helps sortaquatic insects to be used in biological monitoring of water quality, 29

4.2. To measure nitrogen runoff in the Pacific northwest, plant physiologist Steve Griffith collects water sam-ples from a monitor well inside the riparian zone near the Calapooya River, 30

4.3. A small dairy farm in western Maryland. The U.S. Department of Agriculture defines "small farms" asthose averaging $50,000 in gross sales annually—which net, on average, around $23,159, 31

4.4. ARS lab technician Debra Williams and Kennedy high school student Sean Gros label cotton bolls foridentification, 32

iv

v

Tables

2.1. Cooperatives' share of farm supplies purchased and products marketed, 16

2.2 Nonprice vertical coordination as percent of commodity output, 18

3.1 Comparison of farm receipts and of farm numbers between livestock intensive Mercer County andcash-grain intensive Van Wert County, Ohio, 1998, 26

Foreword

Following a recommendation by the CAST NationalConcerns Committee, the CAST Board of Directorsauthorized preparation of a report on vertical coordi-nation of agriculture in farming-dependent areas ofthe United States.

Drs. Luther G. Tweeten, The Ohio State Universi-ty, Columbus, and Cornelia B. Flora, North CentralRegional Center for Rural Development, Iowa StateUniversity, Ames, served as cochairs and authors ofthe report. A highly qualified group of scientistsserved as reviewers of the document. The authors andreviewers include individuals with expertise in agri-cultural economics, agroecology, agronomy, animalscience, human resources, monetary policy, rural so-ciology, and sustainable food systems.

The authors prepared an initial draft of the report,which was reviewed by the credited reviewers. Theauthors revised all subsequent drafts, and the authorsand credited reviewers reviewed the proofs. TheCAST Executive and Editorial and Publications com-mittees reviewed the document. The CAST staff pro-vided editorial and structural suggestions and pub-lished the report. The authors are responsible for thereport's scientific content.

On behalf of CAST, we thank the cochairs and re-viewers who gave of their time and expertise to pre-pare this report as a contribution by the scientific com-munity to public understanding of the issue. We alsothank the employers of the scientists, who made thetime of these individuals available at no cost to CAST.

CAST thanks all members who made additional con-tributions to assist in the preparation of this docu-ment. The members of CAST deserve special recog-nition because the unrestricted contributions theyhave made in support of CAST also have financed thepreparation and publication of this report.

This report is being distributed widely including tomembers of Congress, the White House, the U.S. De-partment of Agriculture, the Congressional ResearchService, the Food and Drug Administration, the En-vironmental Protection Agency, the Agency for Inter-national Development, the Office of Science and Tech-nology Policy, and the Office of Management andBudget, and to media personnel and institutionalmembers of CAST. Individual members of CAST mayreceive a complimentary copy upon request for a $3.00postage and handling fee. The report may be repro-duced in its entirety without permission. If copied inany manner, credit to the authors and to CAST wouldbe appreciated.

Harold D. CoblePresident

Richard E. StuckeyExecutive Vice President

Linda M. ChimentiManaging Scientific Editor

vi

1

Interpretive Summary

This report analyzes how vertical coordination canchange the face of rural communities in farming-de-pendent areas. It examines (1) the various forces driv-ing the forms of vertical coordination, (2) their evolu-tions and their effects on agriculture and ruralcommunities, and (3) policy options to help rural com-munities cope with change. The focus of the report isfarming-dependent rural communities because theyoften are disproportionately troubled by depopulation,underemployment, and stagnant income.

The Changing Structure of U.S.Agriculture

Vertical coordination refers to the means used tosynchronize vertical stages of the food value-chain.Recently, food value-chains have become more close-ly integrated as means (1) to lower costs by improv-ing productivity, (2) to improve and to ensure qualitythroughout the chain, (3) to control risks associatedwith markets and food safety, and (4) to enhance re-sponsiveness to demand.

Tomorrow’s tightly coordinated agriculture will becharacterized by a hub, spoke, and wedge configura-tion. A livestock-processing plant at the hub will bein close proximity to livestock-feeding operations sup-plied feed by mills drawing grain and oilseed throughtransportation and communication spokes delineat-ing crop production “wedges” covering large areas.The nation’s landscape will include few clusters.Farms in the periphery (wedges) will require less andless labor and other local inputs and thus will providediminishing social and economic support for their ownlocal rural communities.

The emerging food and agricultural sector will relyincreasingly on negotiated/administered forms of ver-tical coordination. Principal forms will include mar-keting contracts, production contracts, and integrat-ed ownership. Negotiated before delivery orproduction, marketing contracts typically specify theprice (or a formula for price) to be paid by the buyer.Arrangements for production contracts differ greatlybut, typically, the contractor furnishes baby pigs or

chicks, feed, veterinary supplies, and organizationalmanagement, e.g., appropriate practices, and levelsand schedules of placement. Under integrated own-ership, a firm owns and operates in both crop and/orlivestock production and farm input supply or foodprocessing.

Consolidation is defined here as the coming togeth-er of firms producing the same thing. Consolidationresults in economies of size and market power. Verti-cal integration is related to, but can exist indepen-dently from, consolidated firms.

Information technology supplemented by e-com-merce in conjunction with contracting offers the prom-ise of realizing economies of size to produce and tomarket at low cost-per-unit while dispersing economicactivity among firms in the clusters described previ-ously. Timely information exchange, enhanced byelectronic communication, facilitates responsivenessof integrated value chains.

Electronic commerce also will influence farming-dependent rural communities. Yet while local ruralcommunities with the help of federal and state gov-ernments likely will endeavor to close the rural “dig-ital divide,” at best rural communities will be onlycatching up with the technology already available toboth urban and suburban communities. Ultimately,market cost efficiencies brought about by e-commercewill come partly at the expense of rural communities.

Effects of Change

Tighter coordination of links in the marketingchain produces efficiency that, when spread throughthe industry, ultimately decreases the firm’s commod-ity supply price. All else being equal, industrywideproductivity gains decrease aggregate employmentand other economic activities in rural communities.Although production contracts have decreased farm-labor in aggregate, they have created new opportuni-ties for many workers on small farms in the South andin other parts of the country. Many lenders are morewilling to lend to construct production facilities for alow-income producer with a multiyear production con-

tract than to an independent producer perenniallysubject to market volatility. Thus, for many farmingdependent areas of the nation, the most promisingoption for job and income expansion is through pro-duction contracts, which need not imply megafarms,factory farms, or environmental degradation.

Public Policy Responses

• Costs of odor-, waste-, and pest-control need to becharged to the producing units and not to theirneighbors or to other “downstream” parties.

• Allowing operators to choose whichever form ofvertical coordination they find advantageous butrelying on the public sector to establish and to en-force environmental standards raises real nation-al income while holding down food and fiber coststo consumers.

• There can be no universal formula; each commu-nity or other entity must decide which developmentstrategy to use. State and federal governments canassist in this decision-making process by establish-ing environmental ground rules and regulationsand by providing information.

• Research, resident instruction, and extension ed-ucation can be valuable when designed to improvetechnology, information systems, risk manage-ment, and marketing tools that will help familyfarmers and owners of small rural firms.

• Labeling backed by proper standards and enforce-ment can serve a useful purpose. For example, con-

sumers who prefer free-range chickens or eggs pro-duced by independent firms “vote” by purchasingthe labeled product at a price eliciting the appro-priate supply. Providing education and technicalassistance to private sector certifiers can enhanceniche market options.

• Firms will tend to go to counties, states, and coun-tries with the weakest environmental standards.Thus, some national standards may be appropri-ate. State-level regulations may differ due to dif-ferences in population density and aridity.

• A county option is sometimes useful where environ-mental regulations need to differ appropriatelyamong local areas.

• The United States must continue to promote com-petition through antitrust and other measures,including enforcing existing antitrust laws.

• Many rural communities will find it advantageousto use their resources to help inhabitants increasetheir options. Local, state, and federal governmentsshould build human capital for alternative oppor-tunities locally or elsewhere through investment inschools, adult education, and skill building.

• Promote market transparency, competition, andefficiency by releasing terms of contracts to thepublic. Such information not only can improvedecisions of growers and contractors, but also al-lows for collective action where individuals sharedisadvantageous terms and provides a data baseto research issues of market structure, conduct, andperformance.

2 Vertical Coordination of Agriculture in Farming-Dependent Areas

Executive Summary

3

This report analyzes how vertical coordination canchange the face of rural communities in farming- de-pendent areas. It examines (1) the various forces driv-ing the forms of vertical coordination, (2) their evolu-tions and their effects on agriculture and ruralcommunities, and (3) policy options to help rural com-munities cope with change. The focus of the report isfarming-dependent rural communities because theyoften are disproportionately troubled by depopulation,underemployment, and stagnant income.

The Changing Structure of U.S.Agriculture

Vertical coordination refers to the means used tosynchronize vertical stages of the food value-chain.Recently, food value-chains have become more close-ly integrated as means (1) to lower costs by improv-ing economic efficiency, (2) to improve and to ensurequality throughout the chain, (3) to control risks as-sociated with markets and food safety, and (4) to en-hance a company’s ability to respond to demand.

Traditionally, American agriculture was character-ized by diversified crop/livestock family-farms, eachof which looked much like the next farm, over broad

Figure S-1. A livestock feeding operation in the Great Plains.Photograph by Brian Prechtel, Agricultural ResearchService, U.S. Department of Agriculture, Beltsville,Maryland.

Figure S-2. Aerial photograph of farming community and trans-portation routes in Ohio. Photograph courtesy ofOhio State University Section of Communicationsand Technology, Columbus, Ohio.

Figure S-3. Soybeans being harvested. Photograph courtesy ofOhio State University Section of Communicationsand Technology, Columbus, Ohio.

areas of the nation. Tomorrow’s tightly coordinatedagriculture may be characterized more by a hub,spoke, and wedge configuration. For example, a largelivestock-processing plant at the hub will be in closeproximity to livestock-feeding operations (Figure S-1) supplied feed by mills drawing grain and oilseedthrough transportation (Figure S-2) and communica-tion spokes delineating crop production “wedges” (Fig-ure S-3) covering large areas. The nation’s landscape


will include few clusters. Farms in the periphery(wedges) (Figure S-4) will require less and less laborand other local inputs per unit of output and thus willprovide diminishing social and economic support fortheir own local rural communities.

The hub, spoke, and wedge system is unlikely tobe coordinated mainly by traditional small, family-firms operating independently in markets at the var-ious stages of the food value-chain. The emerging foodand agricultural sector will rely increasingly on ne-gotiated/administered forms of vertical coordinationto get the right ingredient at the right time to the rightplace at the right price to meet the demands of evermore affluent and more demanding consumers. Prin-cipal forms of vertical coordination include market-ing contracts, production contracts, and integratedownership. These can be structured as cooperatives,investor-owned firms, or hybrids of individuals, coop-eratives, and investor-owned firms.

Marketing contracts have been used widely for de-cades in fruit, vegetable, and dairy marketing orders.Negotiated before delivery or production, these con-tracts typically specify the price (or a formula forprice) to be paid by the buyer. Commodity ownershipusually remains with the producer until the productis delivered to the buyer, who is, often, a processor.Most production and marketing decisions before de-livery are made by producers.

Production contracts have been used widely forbroilers since the 1950s, and their use in recent yearshas expanded rapidly in swine production. Arrange-ments differ greatly but, typically, the contractor fur-nishes baby pigs (Figure S-5) or chicks (Figure S-6),feed, veterinary supplies, and organizational manage-ment, e.g., appropriate practices, and levels and

schedules of placement. The grower or the producerdoes not own the animals but supplies equipment,buildings, labor, and day-to-day management for afee-per-animal plus an incentive bonus or penalty.

Under integrated ownership, another form of ver-tical coordination, a firm owns and operates in bothcrop and/or livestock production and farm input sup-ply or food processing. Integrated ownership is espe-cially prominent in the production of eggs, turkeys(Figure S-7), and some fresh fruits and vegetables.

Farming-dependent communities in the GreatPlains, where they are especially prevalent, have astrong environmental advantage as hubs for animalagriculture by virtue of low rainfall rates and sparsepopulations. But this will simply contribute to the ex-isting hub and spoke pattern. New clusters willevolve. Vertical coordination will provide alternativesfor some communities and farm households outsidesuch clusters.

Different forms of vertical coordination have differ-ent economic and social effects on communities, how-ever. Marketing contracts tend not to displace re-sources from farms and small rural-communities butat the same time do not provide the economies of sizeor returns for explicit bundles of characteristics es-sential to the revitalization of local communities.Integrated ownership provides economies of size andscope but also has the potential to displace resourcesfrom traditional farms and rural communities be-cause production units tend to be very large, and own-ership and control may reside in distant metropoli-tan centers. A farming-dependent rural communitymay not be able to assemble locally the necessaryventure capital, management, and other headquar-ters services for production units. Production con-

Figure S-4. Aerial view of many small farms in the midwesternUnited States. Photograph courtesy of Ohio StateUniversity Section of Communications and Technol-ogy, Columbus, Ohio.

Figure S-5. Baby piglet. Photo by Scott Bauer, Agricultural Re-search Service, U.S. Department of Agriculture,Beltsville, Maryland.

Executive Summary 5

tracts offer the promise of economies of size but withless threat to small farms and communities than in-tegrated ownership poses.

Electronic Commerce

Electronic commerce, or e-commerce (market buy-ing and selling transactions through the Internet), anemerging means for coordinating vertical links in thefood value-chain, also will influence farming-depen-dent rural communities. E-commerce could make anyrural community the site for the headquarters of anefficient global firm. By bringing together large num-bers of buyers and sellers over a very extensive andeven global area, e-commerce promises a highly com-petitive and efficient market.

Disadvantages could outweigh advantages of e-commerce for rural farm communities, however.Rural communities have lagged in their access to thebroadband fiber optics facilitating e-commerce. Whilelocal rural communities with the help of federal andstate governments likely will strive to close the rural“digital divide,” at best rural communities will be onlycatching up with the technology already available toboth urban and suburban communities. But informa-tion technology will not necessarily help small com-

munities and small firms more than urban areas andlarge firms, which are already highly connected. Ru-ral communities cannot afford to neglect telecommu-nications, even though it will be a challenge to catchup with urban areas.

And catching up will not necessarily be enough.Decreasing transaction costs and increasing compe-tition in farm input and product markets meanshrinking marketing margins. This in turn meansdecreasing the number of intermediaries, many ofwhom are located in rural communities and serve lo-cal markets. In short, efficiencies in decreasing mar-ket costs will come partly at the expense of existingfirms in rural communities.

Information technology supplemented by e-com-merce in conjunction with contracting offers the prom-ise of realizing economies of size to produce and tomarket at low cost-per-unit while dispersing economicactivity among firms in the clusters described previ-ously. Modern production contract efficiencies oftencan be enhanced by spreading production and process-ing activities among communities of different sizes.

Effects of Change

Production contracts and integrated ownership of-ten can increase information flow and responsiveness,save inputs, improve productivity, and enhance totalprofits. Tighter coordination of links in the market-ing chain decreases the firm’s commodity supply priceby reducing transaction costs. All else being equal,industrywide productivity gains decrease aggregateemployment and other economic activities in ruralcommunities.

Figure S-6. Baby chicks. Photo by Keith Weller, AgriculturalResearch Service, U.S. Department of Agriculture,Beltsville, Maryland.

Figure S-7. Turkey production facility. Photo by Scott Bauer,Agricultural Research Service, U.S. Department ofAgriculture, Beltsville, Maryland.


Although production contracts have decreasedfarm labor in aggregate, they have created new op-portunities for many workers on small farms in theSouth and in other parts of the country. Many lend-ers are more willing to lend to construct productionfacilities for a low-income producer with a multiyearproduction contract than to an independent produc-er perennially subject to market volatility. Thus, formany farming dependent areas of the nation, the mostpromising option for job and income expansion isthrough production contracts. A comparison of twocounties in Ohio (see text) illustrates how productioncontracts can help small-acreage family-farms staycompetitive. The example illustrates how productioncontracts need not imply megafarms, factory farms,or environmental degradation. Production contract-ing can combine the economies of size needed to com-pete in modern agriculture with the social advantag-es of family-size farms.

The form of vertical coordination influences therural community through the number of workers, theconditions of work, and the degrees of specialization,skill, and income of each worker. Vertically coordi-nated systems require a variety of workers, rangingfrom highly trained engineers and scientists to un-skilled laborers. Compared with independent fami-ly-farms, firms under integrated ownership and pro-duction contracts tend to employ individuals skilledin compiling, managing, analyzing, maintaining, andapplying the results of information technology.

Public Policy Responses

With the farming-dependent communities especial-ly prevalent in the Great Plains being in a unique po-sition to become agricultural hubs, at issue are theappropriate public-policy responses.

• Of the many available policy options, a first criti-cal component is to internalize externalities con-sistent with the characteristics of farms and theneeds of communities. In other words, costs ofodor-, waste-, and pest-control need to becharged to the producing units and not totheir neighbors or to other “downstream”parties. Control measures and requirements canbe tailored to circumstances and will depend onwhether enterprises are small or large, areassparsely or densely settled, and regions warm andhumid or cool and dry. Appropriate policies entaila mix of national regulation and/or taxes and sub-sides, along with local options to internalize exter-

nalities while protecting property rights.• As a general rule, allowing operators to choose

whichever form of vertical coordination theyfind advantageous but relying on the publicsector to establish and to enforce environ-mental standards raises real national incomewhile holding down food and fiber costs toconsumers. Low cost, sustainable practices havebeen shown to greatly reduce environmental im-pacts of hog and beef production. But when a pol-icy speeds substitution of capital for labor, it willresult in displacement of family farms and, hence,will erode the social and economic bases of manyfarming-dependent rural communities. Vertical co-ordination can move entrepreneurship from ruralcommunities to urban places, along with the gainsand losses that attend risk-taking.

• There can be no universal formula; each commu-nity or other entity must decide which developmentstrategy to use. State and federal governmentscan assist in this decision-making process byestablishing environmental ground rules andregulations and by providing information.The Cooperative Extension Service can help com-munities assemble information for the public andorganize it to make sound decisions. The federal/state extension service and other state and localorganizations can (1) promote entrepreneurshipand innovation, e.g., with business incubators; (2)encourage farmer/producer groups, e.g., coopera-tives, to operate in food-supply chains; (3) facilitateapplication of knowledge to producing, processing,and distributing food and other products as meansof decreasing costs and increasing responsivenessto consumers and other end users; and (4) improvecommunity members' understanding of their eco-nomic and social assets as the basis for their op-tions in terms of business expansion, retention, andacquisition. These strategies, which can helptransform rural communities, are sometimes mosteffectively carried out not only through alliancesof farmers but also through alliances of communi-ties to achieve economic and political influencealong with efficient information-flow.

• Another public-policy option is the supportof research, resident instruction, and exten-sion education that are designed to improvetechnology, information systems, risk man-agement, and marketing tools that will helpfamily farmers and owners of small ruralfirms, who together constitute the economic baseof rural farm communities. An example is devel-opment of improved waste-, odor-, and pest-control

Executive Summary 7

technologies suited to family farms.• If the political process deems that aspects of verti-

cal coordination in agriculture are inappropriate insome instances, another useful policy option islabeling backed by proper standards and en-forcement. For example, consumers who preferfree-range chickens or eggs produced by indepen-dent firms “vote” by purchasing the labeled prod-uct at a price eliciting the appropriate supply.

• Although regulations are unavoidable, questionsremain regarding the proper jurisdictional level forregulation and control. For practices deemed un-acceptable to the nation, labeling and local or stateoptions alone will not suffice. Firms will tend togo to counties, states, and countries with theweakest environmental standards. Thus,some national standards may be appropriate.State-level regulations may differ due to differencesin population density and aridity. A state proscrib-ing contract production may deny many local fam-ily-farmers the production contract operations thathave sustained their farms.

• A county option is sometimes useful whereenvironmental regulations need to differ ap-propriately among local areas. People in a lo-cal jurisdiction can vote whether to accept or to re-ject a proposed economic activity. For instance,communities with dense populations or sensitiveenvironments (or noses) may be unsuitable forlarge livestock-operations. Whereas a local optionallows communities to express their choices, locallivestock-operations seek safeguards against arbi-trary and capricious populist judgments.

• The strategy proposed herein of letting marketswork after internalizing externalities presumesworkable competition in markets. It is essentialthat the United States continue to promotecompetition in the food industry through an-titrust and other measures.

• Relatively few rural communities can become fu-

ture livestock production and processing hubs gen-erating substantial local employment and income.Many communities either will be unable to competefor the privilege or will decline it in favor of pre-serving their environments and heritages. Ofcourse, rural residents would like more control overtheir own destinies. Using their own initiative,with the help of the Cooperative Extension Serviceand other agencies, communities can influenceoutcomes and generate alternative employment.But many rural communities will find it ad-vantageous to use their resources to help in-habitants increase their options to maintainand improve their quality of life. Human re-source investments can improve living standardswhether rural residents remain in their local com-munities or migrate elsewhere.

• Education and technical assistance to make smallfood processors ISO 2000 compliant will increasethe diversity of value chains in rural areas. Train-ing in appropriate record keeping among farm en-terprises and small businesses will facilitate theirability to negotiate contracts.

• Invest in leadership development through cooper-ative extension and nonprofit organizations so thatrural communities can make better decisions inhow they invest their collective resources.

• The public sector can help to ensure that contractterms are transparent (language understandableand terms of contract publicly available).

• The public sector needs to offer mediation and tech-nical assistance to help individuals or groups offarmers gain recourse if the contract terms are bro-ken.

• Markets work best where buyers and sellers are in-formed. Terms of production contracts can be madeavailable to the public so that growers and contrac-tors will possess similar information. Informationis a public good, hence proper gathering of this in-formation requires a government role.


This report analyzes how the synchronization ofvertical stages of a production/marketing system, aprocess known as vertical coordination (Martinez1999, p. iv), may change the face of rural communi-ties in farming-dependent areas in the United States.It examines (1) the impetuses behind the variousforms of vertical coordination — their evolutions andimpacts on agriculture generally and rural commu-nities specifically and (2) potential policies that mayenhance the options of rural communities. Becausethey often are beset by depopulation, underemploy-ment, and stagnant income1, farming-dependent ru-ral communities, which are especially prominent inthe Great Plains, are the focus of this report. Verti-cal coordination in agriculture will affect these com-munities substantially but will have less of an effecton rural communities with nonagricultural economicbases.

Traditionally, means of coordination have beenopen-market pricing among private firms operatingindependently in the areas of farm input supply, farmproduction, and food processing and marketing. In-creasingly, however, operators hoping to achieve clos-er coordination between production input suppliers“upstream” and consumers “downstream”2 are turn-ing to contracting or owning links in the food produc-

1 Introduction

8

tion and marketing chain. Drabenstott (1999, p. 69)notes that new “supply chains redraw the rural eco-nomic landscape” and “point to a strikingly differentfuture for parts of rural America.” Among the changeshe foresees are production concentration in fewer plac-es, input sourcing farther from production, and “com-munities that choose to remain tied to commodities[having] fewer farms, banks, and other businesses”to sustain them. Rural communities will be chal-lenged to provide the economic bases needed to sup-port infrastructure and public services.

Evolving over time through interactions amongbuyers and sellers, more-integrated food-value chainsare a means (1) to improve economic efficiencythrough refinements of input-flow scheduling andresource utilization; (2) to improve management andquality control throughout the chain; (3) to decrease

1On the whole, nonmetropolitan counties (counties excludingmetropolitan counties, which contain 50,000 or more residents inaddition to surrounding commuting counties) are maintaining ifnot increasing in population. Nearly 75% of the 2,304 counties clas-sified as nonmetropolitan in 1993 gained population between 1990and 1996 (Johnson and Beal 1999). Counties classified as nonmet-ropolitan increased in population 5.9% from 1990 to 1996, just be-hind the 6.9% population gain in metropolitan counties during thesame period. Nonmetropolitan areas underwent a net inflow of 1.83million people, or a 3.6% rate of population growth, a net migrationrate twice that of metropolitan areas (Johnson and Beal 1999, p. 4).

Nonmetropolitan migration and population gains were small-est in the Great Plains and the Mississippi Delta — regions whoseeconomic bases are agricultural. Nonmetropolitan areas near met-ropolitan areas experienced the most rapid growth. Nonmetro pop-ulation growth increasingly is tied to net immigration rather thanthe natural increase. Thus, the economic, social, and environmen-tal conditions in nonmetro areas that attract residents will heavi-ly influence future growth.

2Vertical coordination is not synonymous with consolidation.Consolidation, or horizontal integration, occurs when firms produc-ing the same thing at the same stage of the food marketing chainjoin, usually through mergers or acquisitions. Consolidation wasextensive at the end of the 1990s in all industries, from automo-biles and oil to food processing and marketing. In production agri-culture, for example, consolidation has been especially evident inthe increasing number of farmers buying or renting real estate fromeach other. Although often associated with consolidation, verticalcoordination, by allowing communities to achieve economies of size(or advantageous relationships of production cost/unit with firmsize) and economies of scope (or advantageous relationships of pro-duction with output as the number of activities or enterprises with-in the firm increases) may in fact serve as an alternative toconsolidation in certain rural communities.

This report focuses on vertical coordination, but vertical and hor-izontal integration in tandem can decrease redundancies andachieve economies of size and scope by increasing efficiencies re-lated to size, ceteris paribus (Azzam 1999). Consolidation also canincrease the market power of consolidating firms at the expense offood producers, consumers, and taxpayers. A number of studiesindicate that increasing concentration in the marketing sector has,on balance, decreased marketing margins — with most savingspassed to consumers (Azzam 1999; Persaud 2000). Consolidationmeans fewer potential sources of inputs and fewer potential mar-kets for products. For example, in a highly consolidated market,vegetable growers can no longer sell directly to local supermarkets,for central purchasing makes such growers “inefficient” partnersfor the supermarket chain even if not necessarily for individualstores.

Introduction 9

risks, especially those associated with food safety andcontamination, through identity preservation (or iden-tification of sources of ingredients in a product allalong its production and marketing chain, as is some-times necessary, for instance, in the trace back ofpathogenic organisms); (4) to improve the ability ofagricultural industries to respond rapidly to changesin consumer demand for certain food attributes (Boe-hlje, Hofing, and Schroeder 1999); (5) to increase thetwo-way flow of communication as to attributes de-sired and constraints to producing them; and, ofcourse, (6) to increase earnings through market con-trol. New forms of vertical coordination among stag-es of the food production marketing chain are de-signed to respond to consumers, or, roughly, to anyeconomic entity beyond the farm gate — not to re-spond to rural communities or producers.

Vertical coordination is itself the product of pow-erful forces currently reshaping both food and nonfood

industries (Boehlje 1996; Thu and Durrenberger1998). These forces include advances in science andtechnology, human ingenuity, education, globaliza-tion policies (such as export subsidies and loweredtrade barriers), research, and the inexpensive capi-tal accompanying economic expansion (Figure 1.1).Moreover, these forces are favored by market-placerules and regulations. In earlier decades, mechani-cal (tractors, combines), chemical (fertilizers, pesti-cides), genetic (hybrid seeds), and transportation(roads, vehicles) technologies were introduced as re-sults of these forces, thereby increasing productivityand transforming the structures of food systems andrural communities. By being implemented widely andby encouraging production of a few crops and animals,technologies transformed traditional farms and theircommunities. Coordination came about largelythrough market allocation of undifferentiated prod-ucts. As information flows have increased throughchanges in technology and organization and productshave become more user-specific, it has become possi-ble and profitable to enhance, through ownership orcontract, the vertical coordination of food-valuechains.

Forces Pressing for Closer Food-Value Chain Coordination

The forces motivating closer coordination amongstages of the food chain will now be addressed in de-tail. These forces arise among both producers andconsumers.

Specific Qualities in ProductionIn many instances, the traditional system of inde-

pendent family-farmers and processors responding toprices established in wholesale and retail markets hasproved insufficiently cost competitive, timely, andresponsive to consumers. The postindustrial forcesof knowledge creation, information technology, com-petition, and affluence are revolutionizing ruralAmerica as more information is potentially availableto producers and firms about technology and the de-mands of specific end users(Tweeten and Zulauf1998). Ever-more affluent consumers world-wide aredemanding foods tailored to their needs and desires.Previously, specialized designer foods3, or foods spe-

Figure 1.1. In her laboratory, plant physiologist Katrina Cornishchecks seedlings produced for use in experimentsto improve guayule plants. The experimental, aller-gen-free latex products shown were made from gu-ayule. Photo by Jack Dykinga, Agricultural ResearchService, U.S. Department of Agriculture, Beltsville,Maryland.

3Designer foods present a bundle of characteristics, includingwho grows them and how they are grown.


cially produced and prepared to meet the specificneeds of individual consumers or groups of consum-ers, were processed and sold in ethnic neighborhoods,gourmet retail outlets, or health-food stores; but nowconsumers all over the country expect to be able topurchase rare and specialized products (Figure 1.2).Consumers may demand a low-fat, high-protein,nutritionally complete nonbioengineered food, andfood providers are ever better equipped technolog-ically to respond to these needs. Universal prod-uct codes and computers track what consumers arebuying; this information is relayed quickly up-stream in the food-marketing chain so that foodproviders and processors can respond to demand.Yet farmers and rural communities in spot marketsituations often receive too little information that

could trigger adaptive strategies.Modern forms of vertical coordination featuring

administered or negotiated arrangements (or economicand other terms of a production or marketing contractnegotiated between the commodity grower/producer,and the integrator/contractor) coupled with improvedmeans of communication and transportation allowfarming-dependent communities far from populationcenters to respond rapidly to changes in demand. Forinstance, carcasses of meat traditionally were sent bypackers to retail stores that cut, trimmed, and pack-aged the meat for consumers. Increasingly, howev-er, the packer provides case-ready, prepackagedcuts. This shifts a considerable workforce from su-permarkets to processing plants — an increasingnumber of which are or could be in farming-depen-dent rural areas.

Supply-Chain EfficienciesEfforts continue to improve coordination of the food

chain — from input suppliers to producers, processors,and marketers — and to increase food-system abili-ties to meet more exacting food demand. Applying theexact amount of fertilizer, seed, and irrigation waterto produce the precise soybean variety desired by thespecific processor requires modern technology andattention to detail if profit and consumer satisfactionare to be ensured. Many firms are finding that trans-action costs of coordinating production by means ofprecision application of inputs upstream to fulfill theexacting needs of ever-more-affluent consumersdownstream are decreased through production con-tracts and integrated ownership. Under the latter, onefirm owns and operates crop and/or livestock produc-tion in at least one stage of the food production chainin addition to input supply or food processing andmarketing. It also depends on ability to isolate itsproduct to preserve characteristics and quality whileavoiding contamination of products of other produc-ers throughout the food chain. Such identity preser-vation can be expensive and management-intensiveif managed well, and even more expensive if misman-aged, as in the case of StarLink corn.

Successful two-way flows of information are alsoevident in the new forms of direct marketing, wherediscussion and negotiation allow the producers to al-ter what they produce, and they produce in responseto the preferences of specific consumers. In such cas-es, trust substitutes for contacts. Since face- to-faceinteractions are not always possible or desired, con-tracts can substitute for personal feedback. Spot mar-ket attempts at feedback have met with limited suc-

Figure 1.2. Small-fruit geneticist Stan Hokanson displays sev-eral elite wild strawberries collected by collabora-tors. The small, highly aromatic berries (left) are fromplants collected in Alberta, Canada. The larger ber-ries are from a type collected in Alaska that mayprove to be cold hardy. Photo by Scott Bauer, Agri-cultural Research Service, U.S. Department of Agri-culture, Beltsville, Maryland.

Introduction 11

cess due to problems of coordination and timeliness.Hog producers had relatively open access to pro-

duction technology, genetics, and slaughter facilitiesthrough the 1980s (Ginder 1998). The emergence ofsystems based on uniform genetics, phased feeding,all in/all out occupancy, and integration or forwardcontracting of the animal on the one hand limits ac-cess and on the other hand cuts transaction costs(Ginder 1998).

Intellectual PropertyIn an agricultural and food system now dominat-

ed by knowledge creation and dissemination (seeTweeten and Zulauf 1998), development costs of tech-nological breakthroughs in information systems andbioengineering often are staggering; increasingly,these costs are originating in the private sector and,thus, an increasing portion of agricultural technolo-gy is proprietary. Firms supplying technologies areeager to control them closely, for, once created, tech-nologies have relatively low marginal-costs of dissem-ination. Extremely high fixed-costs relative to vari-able-costs place a premium on market size — that is,on the ability to spread fixed costs over a large out-put in order to decrease total cost/unit. Yet, designerfoods are aimed at segmented, not mass, markets. Be-cause new technologies often can be reproduced eas-ily and then used by competing firms, a successfulfirm controls access to its technologies sufficiently toensure that the millions (or billions) of dollars need-ed to support new research can be generated alongwith stockholder dividends. The ability of a firm toprofit from knowledge creation to an extent that willsupport future product development often depends onits being a business large enough to sell enough, at ahigh enough price, of an already developed productor service.

Achieving economies of size and investing in devel-opment by contractually sharing technology with oth-er firms can be successful business strategies. Fur-thermore, given the increasing importance of rightsof intellectual property, or patents, copyrights, andrights to information, it may be easier and less expen-sive for a firm to buy or to merge with a companyowning a sought-after deoxyribonucleic acid processthan to attempt to obtain all required licenses.

Risk ManagementAnother major impetus behind closer vertical co-

ordination is risk management, which can be achievedin several ways. Tighter coordination, including bet-

ter information flow, between stages of production candecrease risks associated with product quality, quan-tity, and variety. The highly competitive food indus-try limits the profits and the market shares of firmsunable to respond to changing consumer demand.Food-chain shocks occur that might have been avoid-ed or diminished with improved coordination.

Commodity cycles featuring high (low) returns infarm production are often attended by low (high) re-turns in processing and marketing — hence, thestream of returns over all links over time is less vari-able than that over individual firms operating inde-pendently.4 A crucial risk-related consideration isthat consolidation and size tend to be accompanied bydeep financial pockets, that is, by access to extensivefinancing. All else being equal, a firm with extensiveaccess to capital will survive competition better thana firm with limited access will. In producing a genet-ically enhanced new crop, a farmer may, for example,choose to contract with a deep-pocketed agribusinessfirm that is better able than he or she to cope withthe risk of consumers’ rejecting the product. And be-cause the management of such a firm is likely to beaware of consumer concerns, it may redirect farmersinto less controversial means of production, as Mc-Donalds recently did its potato producers by declin-ing to buy genetically modified potatoes.

Consolidation affects the ability of small produc-ers to respond to shifting demand by entering or leav-ing markets. Large, modern livestock-production fa-cilities tend to have higher overhead costs (forfacilities and equipment) than operating costs (forlabor and feed). In hog production, large buildingsmust be kept full in order to minimize cost/unit. Thisstrategy works best when production is at or nearcapacity. Low variable-cost/unit keeps large opera-tions producing at low product prices; hence, the bur-den of adjusting supply to weak demand falls heavilyon small producers. Vertical coordination of large-scale producers leaves small-scale, independentproducers as residual suppliers selling in cashmarkets. If the barriers to trade and capital flowcontinue to fall, many nonintegrated producerswho do not use forward markets could be left sell-ing, at prices greatly influenced by wide fluctua-tions in the world market, undifferentiated com-modities in thin markets, or markets with fewbuyers or sellers.

4Administered/negotiated coordination among vertical links inthe food-value chain does not necessarily avoid industry-wide stra-tegic risk attending price and quantity fluctuation due to move-ments in aggregate supply and demand balances for food.


The institutions of undifferentiated markets, suchas grain elevators and sales barns, tend to be commu-nity based. These institutions once defined manyagriculturally dependent rural communities. Verticalcoordination provides better flow of information fromproducer to end user — and removes these local linksin the value chain. Entrepreneurs in some small com-munities have responded through establishing tight-ly linked value chains, which require constant ex-change of information (Flora et al. 2000). Thesecoordinated value chains do not necessarily bypasslocal institutions, but they will not be the traditionalinstitutions.

Food Safety and QualityConsumers quickly change purchasing behavior in

response to perceived threats to food safety. Conse-quently, an outbreak of illness from foodborne patho-gens can devastate a firm’s finances. Carefully han-dling and processing food so as to lower pathogeniccontamination requires strict quality-control facilitat-ed by hazard analysis and critical control point pro-cesses, identity preservation, and sensitive-productirradiation, especially when food travels long distanc-es or is held for long periods in storage or on the shelf.While large, closely linked operations often can per-form at the lowest cost/unit the essential task of en-suring quality by controlling the environment at ev-ery stage of the production-marketing process, oncesystems are in place, well-coordinated smaller units,in which pathogens are less likely to be spread, canmore easily maintain quality. To a degree, therefore,vertical coordination through contracts with widelydispersed growers can overcome the scale advantag-es of a few large, consolidated production facilitiesunder a single ownership.

Product identity preservation and precision inputapplication require careful monitoring. A processormay wish to trace the source of a pathogen, or a con-sumer may wish for proof that he/she is receiving theorganic, nongenetically modified, range-fed productspecified. A challenge, especially for many farming-dependent rural communities, is how to be competi-tive in the food-value chain by responding to demandwhile using the latest technologies and managementsystems to ensure quality.

Information AvailabilityTraditionally, local dealers knew best and could

respond best to the habits and the needs of local cus-tomers. But because markets have become global,such an information system no longer suffices. So-

phisticated new information systems using universalproduct codes and computers are able to link specificcustomers to past purchases. In New Zealand, eachpiece of meat is given an edible brand to increasetraceability to a specific animal. These data usuallyare shared among all parts of the input chain (except,perhaps, with the farmer), thereby allowing custompackaging of inputs assembled from corporate head-quarters.

Transaction CostsConsiderable direct and indirect costs are incurred

to coordinate production and marketing among stag-es of the food chain. Direct transaction costs are in-curred in negotiating, signing, and administering con-tracts and in bargaining over prices and other termsof sale. Indirect transaction costs accrue from failureto achieve efficient coordination. At issue is whatkinds of vertical coordination minimize transactioncosts. Currently, markets tend to make that decision:the business arrangement with the lowest cost sur-vives and multiplies.5

Cluster ConfigurationTraditional U.S. agriculture was characterized by

diversified, crop/livestock family-farms, and eachfarm looked much like the next, over broad areas ofthe nation. Tomorrow’s tightly coordinated agricul-ture will be characterized more by a hub, spokes, andwedge configuration. That is, a livestock processingplant, or “hub,” will be in close proximity to livestockfeeding operations supplied feed by mills drawinggrain through the transportation and communication“spokes” delimiting a production “wedge,” which canconstitute a large, often distant area. Farms in thewedges will require less labor or other local inputs/unit of output than the same farms require now andthus will provide diminishing social and economic

5Farmer-controlled value chains can utilize trust to becomemore competitive. Blabach (1998) compared increase in efficiencyover time in two sugar beet factories. The investor-owned firm andthe cooperative began with the same production of sugar per tonof sugar beet. Both paid by weight. The cooperative added bonus-es for quality with specific feedback to each producer on the qual-ity of each load of beets. The producers then sought informationto utilize to improve beet quality. Productivity at the cooperativeincreased dramatically, while that of the investor-owned firm re-mained static. The investor- owned processor attempted to addincentives for quality. But productivity remained flat. The bettergrowers did not believe the information on quality delivered by thefirm. The reason trust existed is because of the transparency ofthe relationship. Such transparency can be cultivated in privatefirms as well–and can be ignored by cooperatives.

Introduction 13

support for local rural communities.Clusters could be quite few, as evident from a state-

ment by Benjamin (1997):

The standards set by the target hog producersnow suggest that some 50 producers could ac-count for all the hogs needed in the UnitedStates. Moreover, the standards set by new,state-of-the-art packing plants suggest that few-er than 12 plants could process the country’shogs.

In the competitions for hubs in the most dynamicareas of agriculture, i.e., value-added poultry, beef,and hog-feeding, the farming-dependent rural com-munities especially prominent in the Great Plainshave a strong environmental advantage by virtueof low rainfall and sparse populations. Yet meatprocessing and feed growing are water intensive;and, ultimately, ground water availability in theserural communities may not be able to support thenew intensive food processing and production in-frastructure just described. More-limited opportu-nities to compete in niche/specialty crop productionwill exist for the Great Plains, as well.

Concluding CommentsThe preceding list indicates substantive benefits

from effective vertical linkages in the food-valuechain, along which new forms of vertical linkagessuch as contracting are likely to increase in num-ber. As modern vertical linkages emerge, tradition-al linkages, often prominent in rural farming com-munities, may disappear. New linkages such asthose for high-oil corn may require on-farm stor-age and trucking to facilitate “just-in-time” deliv-ery to the processing plant and thus may bypassthe local elevator as intermediary. Food, alongwith inputs ensuring quality, may be provided byprocessors located in other communities. As a re-sult, traditional local linkages may be further at-tenuated. As demand for identity preservation andsegregation increases and as processing and pro-duction wedges appear in rural communities, manyof the firms designed to serve the markets of earli-er decades may disappear. In other communities,new firms and organizations may emerge to providethe coordination required of ever-more-complex food-value chains. Promising opportunities therefore ex-ist in farming-dependent rural communities.


Food production and marketing system institutionsare quite diverse and range from traditional, privatefamily-farms, to cooperatives, to vertically integrat-ed ownership arrangements, e.g., Buckeye Egg Farmor Seaboard Corporation. Each system exhibitsunique efficiencies in food production and marketingor in coordinating among food-chain links, and eachhas a unique effect on rural communities. This sec-tion addresses the advantages and disadvantages ofseveral options.

Independent Private FirmsCoordinated by Market Prices

In the United States, production agriculture tra-ditionally has been characterized by family farms ofa modest size (by nonfarm, firm standards) and bynumerous supply and marketing firms. This systemhas served the nation well by providing plentiful, rea-sonably priced, high-quality food. At the same time,small-business firms have been the backbone of ru-ral communities. The impressive productivity recordof individual private farmers and agribusiness firms— supplemented by public inputs in terms of educa-tion, research, information, and infrastructure — iswell documented (Figure 2.1).

Family farms and small agribusiness firms havebeen receptive to new technology. Local firms haveclose ties with and are nourished by local communi-ties. Independent, middle-class family operationspreserve the cultural heritage of the community, pro-vide a social and economic base and, in turn, are ap-preciated by local residents.

But in recent decades, traditional, small family-farms or small businesses coordinated by marketshave been at a competitive disadvantage and havehad difficulty sustaining rural farm communitieswhile providing the local entrepreneurial, technical,and communication skills, as well as the workforce,financing, and transportation resources, needed tosupport an industry competing in a global market-place.6 Compared with large farms, small farms makeless use of innovations such as computers, carcass-

2 Alternative Food-Value Chains

14

merit marketing, futures and options marketing, stor-ing and injecting animal waste, and conservation till-age (Tweeten 1995; Tweeten, Harmon, and Feng1999). Few traditional farms are large enough to re-alize economies of size, i.e., to produce at the lowestcost/unit or gain bulk marketing and purchasing ad-vantages (U.S. Department of Agriculture 1999a., Ta-ble 1; for economies of size, see Tweeten 1989, Ch. 4).

Farming-dependent rural communities, which tendto be distant from urban centers, frequently face bleakprospects for generating nonfarm jobs essential to sus-tain the livelihoods of small-farm families requiringoff-farm income for survival. Outlaw (1998) conclud-ed, based on a review of 16 industries, that the majordeterminants of location were accessibility to indus-try infrastructure (water, industrial sites), population(markets, labor), transportation (commercial airports,railroads, and highways), and business environment(high-income areas receptive to business). Of the sixmost important factors, only the presence of a com-munity-development group and the provision of anindustrial site could be controlled by local communi-ties; these factors, however, were overshadowed byothers. The presence of a community-development

6Many rural communities suffer from, along with other prob-lems, equity capital shortcomings curtailing economic prospects ina postindustrial economy. Moncrief (See Drabenstott and Meeker1999, p. 79) noted the success of the much-heralded Kentucky High-land Corporation (KHIC), which has helped start up numeroussmall plants in eastern Kentucky. A trait shared by KHIC and bymany venture capitalists is that they earn lower rates of return —typically, 8 to 12% annually — than more urban-oriented venturecapital funds, which earn 35% or more (Drabenstott and Meeker1999, p. 79). Duncan (See Drabenstott and Meeker 1999, p. 80)noted that rural businesspeople often do not want someone elseowning part of their businesses, telling them how to run their busi-nesses, or cashing out the businesses once they are successful. Yetbecause these are precisely the goals of equity investors, rural de-velopment and business development are at cross purposes. Somecommunities, however, have found that outside investors provideimportant new sources of information that is as important as theircapital for business success. Others have stressed the “double bot-tom line” to keep local investment capital in rural areas. This ap-proach encourages investors to enhance both social capital andfinancial capital in a particular place or region to enhance the qual-ity of life.

Alternative Food-Value Chains 15

group may have been important because it signaledto existing or prospective firms that they would beappreciated in the community. Outlaw (1998) noted,however, that “financial assistance and tax incentiveshave not been found to be quantitatively importantin determining development in rural areas” (p. 40) andobserved that industrial parks in rural areas havebeen overbuilt. As firms expand, they may leave ru-ral areas to be nearer larger labor and other inputmarkets, or product markets found mainly in metro-politan areas.

Narrow profit-margins pressure firms to grow inassets, output, and labor income to remain competi-tive with firms in other industries. One of the rea-sons that many small farms and agribusiness firmsin farming-dependent areas find themselves with in-adequate resources to realize economies of size is thatthey rely on family capital rather than on public eq-uity, or venture capital, which is more available inmore-populous locations.

Additionally, operators of family businesses oftenare chosen for reasons besides their abilities to take

calculated risks or their technological or managerialexpertise. Farm operators raised on farms have, his-torically, enjoyed advantages from on-the-job train-ing and from detailed knowledge of local resource sys-tems both natural and social. But today’s efficient,large, risky, managerially intensive, and technologi-cally advanced operations demand operators andowners suited by training and temperament to copewith uncertainties and complex managerial tasks.Financing problems, and especially cash flow to ser-vice debt and to maintain living standards, frequent-ly overwhelm family operations that must be refi-nanced each generation.

Small independent operations frequently lack mar-ket power to countervail the power of firms fromwhich they purchase inputs and to which they selloutputs. Small farms and agribusiness firms may bepoorly positioned to initiate the strategic alliancesthat are increasingly vital to business success. Ruralcommunities often do not provide the institutionalbase for the formation of such alliances. Strengthenedintellectual property rights result in more resources’being devoted to intellectual property management,e.g., to creating and licensing technology and to form-ing strategic alliances. Sporleder (1999) argues thatrivalries within agriculture and the global food sys-tem will shift away from tangible assets such as landand machinery and toward intangible assets such asknowledge, brand loyalty, worker skills, and mana-gerial capabilities. With rivalry centered on intangi-ble assets, value-creating networks will emerge. Thesearch for complementarities is evident in, for in-stance, the alliances and mergers among genetic en-gineering, seed, and chemical firms. Alternative foodchains also are based on intangible assets, includingrelationships among farmers, specialty processors,and specific consumer groups.

This discussion, in light of conclusions from the pre-vious section, has provided compelling evidence thata smaller share of farm products for processing andmarketing will be supplied in bulk form at currentmarket prices to agribusiness firms. Agribusinessfirms will seek closer integration of the food chainfrom seed to supermarket and will prefer to work withlarger farm operators so as to minimize transactioncosts.

Certain small, private farms and family-operatedagribusinesses have found linkages to consumersthrough niche/specialty organic food and farmers’markets. And the need to isolate the designer prod-ucts of GMOs from bulk commodities and non-GMOscould offer opportunities for small firms to produce,to store, and to market products. But, as with organ-

Figure 2.1. Agriculture Research Service entomologist BradHigbee (left) explains the benefits of areawide insectpest suppression to Jerry Wattman, manager of thisapple orchard near West Parker Heights, Washing-ton. Photo by Scott Bauer, Agricultural ResearchService, U.S. Department of Agriculture, Beltsville,Maryland.


ic foods, farmers’ markets, and niche opportunitiesgenerally, favorable economic outcomes will attractcompetition, thereby driving down returns on resourc-es. Many small firms are labor intensive in an econ-omy favoring capital-intensive activities facilitatinglow-cost production. After many firms have time toenter an emerging industry in response to high re-turns, large-scale commercialization follows, drivingreturns down. Thus, the trend is to larger-scale, pri-vate companies, whether family- or publicly-owned.Recognizing this situation, many members of farm-ing-dependent rural communities will look to con-tracting or to other means of realizing the economiesof large firms while preserving family farms. The al-ternative is constant — and risky — innovation.

CooperativesCooperatives offer another means of preserving the

vitality of farming-dependent rural communities in anage calling for tight vertical linkages along the food-value chain. The patron-owned cooperative move-ment began in 1810, when dairy producers in Con-necticut banded together to churn and to marketbutter cooperatively (Taylor 1953, p. 472). Over near-ly two centuries, cooperatives have become a vitalcomponent of the U.S. agricultural and rural land-scape. Today, approximately one-third of farm com-modities are marketed through cooperatives. A like pro-portion of farm inputs are supplied by cooperatives(Table 2.1). Nearly 90% of milk and related dairy prod-ucts and approximately 40% of grains, soybeans, andcotton are marketed cooperatively. Approximately one-fifth of fruits and vegetables are marketed by coopera-tives. Forty-five percent of fertilizer, lime, and petro-leum products are supplied to farmers by cooperatives.

Most agricultural cooperatives are producer coop-eratives owned by farmer patrons. A dividend is re-bated to each patron from surplus earnings of the co-operative in proportion to his or her input purchasesor product sales. Ordinarily, each patron, regardlessof his or her volume of business with the cooperative,casts one vote for its board of directors.

The shares shown in Table 2.1 are first-handler,farm gate transactions. Although cooperatives areless well-represented at the processing and the retail-ing levels, mergers (Merio 1998) will increase the co-operative’s role in adding value to food (Miller 1999).Certain large cooperatives are active in almost everymajor type of agribusiness activity: supplying inputs,exporting, processing, contracting for the market, con-tracting for production, and integrating ownership.

Cooperatives provide competition and a yardstick of

performance for investor-owned companies. They helpensure that neither producers nor rural communitieswill be exploited by private agribusinesses, whetherindependents or vertically integrated private firms.

The Capper-Volstead Act of 1922 — also known asthe “Magna Carta” of cooperatives — exempted coop-eratives from the antitrust provisions of the Shermanand Clayton Acts and placed with the more-sympa-thetic Secretary of Agriculture instead of with theFederal Trade Commission and the U.S. Departmentof Justice the jurisdiction over and the oversight ofpricing by cooperatives.

But even with antitrust advantages, cooperativeshave been unable to control commodity supplies so asto raise farming industry prices. Cooperatives havesuccessfully pursued more modest goals by more mod-est means, however; and some are achieving econo-mies of size by enlarging operations through growthand consolidation. Many large operations are ownedby other cooperatives instead of directly by farmerpatrons.

And, like private firms, cooperatives are merging.For example, two farmer-owned cooperatives in Ohiomerged to form the Countrymark Cooperative in1985. Countrymark subsequently merged with Mich-igan and Indiana cooperatives. In the late 1990s, themerged cooperative became part of the Land O’ LakesCooperative, whose operations range from input sup-ply to retail food sales. Also in the late 1990s, the gi-ant cooperative Farmland Industries explored a merg-

Table 2.1. Cooperatives’ share of farm supplies purchased andproducts marketed, 1973, 1983, and 1997 (adaptedfrom Kraenzie [1998, pp. 5–6] and Wissman [1985, pp.18–19])

Share of market (%)

Item 1973 1983 1997

MarketingAll farm products 23 30 31Milk and dairy products 76 77 87Grain and soybeans 29 38 42Cotton and products 21 31 38Fruits, vegetables, and products 23 19 19Dry beans and peas 23 18 NALivestock and wool 9 11 12Poultry and eggs 7 8 NA

Supplies purchasedAll major farm supplies 23 27 30Fertilizer and lime 36 38 45Petroleum and products 38 38 45Farm chemicals 19 35 34Feed 18 19 23Seed 17 14 10

NA = Not available.


er with the Cenex Harvest States cooperative, itselfthe product of mergers. The proposed merger wouldhave formed one of the largest agricultural coopera-tives in the world (Merio 1998, p. 20), but the votefailed narrowly. It may win acceptance yet. To date,the mergers increase consolidation in bulk commodi-ties, but do not necessarily increase vertical integra-tion of designer foods.

In the effort to coordinate the food-value chain andto compete successfully in global markets, coopera-tives confront issues of size and scope similar to thoseconfronted by private firms. Because small coopera-tives are owned mainly by local patrons and thus con-trol and profits remain largely in the community,small cooperatives can give members a sense of in-volvement, control over firm decisions, and confidencethat they are not being exploited. By creating jobs,income, and a tax base to support community servic-es, cooperatives can help unite citizens to work for abetter community. Small cooperatives can serve nichemarkets that more profit-driven firms bypass. Spe-cialty grains or soybeans, for example, need to be iso-lated from conventional varieties, and small cooper-atives sometimes are in a better position to performthis process than large firms that handle only bulkcommodities in large storage and transport systemsare. In many communities, the market is so small thatonly one firm, e.g., a local elevator, can supply feed andchemical (e.g., fertilizer and pesticide) inputs and mar-ket farm commodities at low cost/unit. Such naturalmonopolies often are best served by cooperatives.

Producers’ fears of exploitation by private firms areless justified than in former times, for several reasons.Transportation and communication have improved,giving producers a broader knowledge of markets else-where, along with the paved roads and large trucks(often owned by producers) needed to deliver commod-ities to distant markets. Today’s complex private andcooperative markets compete over a wide geographicarea; and so opportunities for exploitation by any onefirm are diminished unless there are only a few firmsnationwide.

Small patron-owned cooperatives, like small pri-vate-firms, have difficulty competing in the globaleconomy.7 Cooperatives governed by boards chosenby patrons to serve patrons may not respond to con-sumers rapidly enough to survive and to prosper.Compared with private firms able to offer stock op-tions, cooperatives are disadvantaged in the compe-tition for top managers. Moreover, cooperatives lackaccess to the venture capital available to many pri-vate firms.

The trend among cooperatives and private firms is

toward expansion and consolidation, in order to real-ize economies of scale, to underwrite research, to de-crease coordination cost/unit, and otherwise to remaincompetitive. Woeste’s (1998) historical legal analy-sis suggests that as cooperatives increasingly gainedspecial legal privileges enhancing their competitive-ness relative to that of private corporations, they si-multaneously became more and more like those cor-porations. To be sure, alliances now are commonbetween private firms and cooperatives. Certain largecooperatives serving at several levels of the food-val-ue chain, including those cooperatives contractingwith farmers, are owned mostly by other cooperativesand behave much like private conglomerates. Theyalso are treated, legally, much like nonfamily corpo-rations — for example, Amendment E in South Da-kota allows local cooperatives and family corporations,but not large cooperatives such as Cenex HarvestStates, which is owned by other cooperatives, to ownor to operate farms in the state.

The conclusion is that small cooperatives can pre-serve jobs and income and serve the needs of certainfarm communities. Certain small cooperatives havesuccessfully pursued niche production and marketing,often in local markets. Yet local cooperatives respon-sive to rural community needs have difficulty compet-ing in today’s global markets, whereas giant cooper-atives dealing vertically, from seed to supermarketstages of the food chain, are nearly indistinguishablein their behavior from private firms. Such drawbackssuggest that although cooperatives will continue to beone of the vehicles for improving the well-being ofresidents of rural farm communities, they will notlikely be the principal one.

Administered/Negotiated VerticalCoordination

Administered or negotiated vertical coordination,here referred to simply as vertical coordination, is

7Local initiatives to form cooperatives, to create jobs, and to addvalue to crops and to livestock remain strong even as consolida-tion is decreasing the number of cooperatives. Numerous commu-nity groups have formed small business incubators to generate localjobs and income, often through farm product value-added process-ing and marketing. Examples include the Kearney Area Produc-ers Association in Kearney, Nebraska; the Alliance for theTwenty-First Century in Manhattan, Kansas; and the Producer’sAlliance of Illinois, the latter sponsored by the Illinois Farm Bu-reau (Miller 1999, p. 18). The National Pork Producers Council isserving as a catalyst to organize, as a way of maintaining marketsfor independent swine producers, a national producer-owned co-operative for slaughtering, processing, and marketing pork.


rapidly displacing the markets that traditionally setprices at each stage of the food chain. Under verticalcoordination, a firm coordinates production and mar-keting over two or more stages of the food chain bymeans of marketing contracts, production contracts,or integrated ownership/operations, as will be de-scribed. Vertical coordination can be achieved by co-operatives, sole proprietorships, partnerships, corpo-rations, or local or distant firms and in its variousforms may affect farm structure and rural communi-ties in several important ways.

Marketing ContractsFor decades, marketing contracts have been used

widely in fruit, vegetable, and dairy marketing orders(See Table 2.2). Negotiated before delivery or produc-tion, contracts typically specify grade and price (orformula for price).8 Commodity ownership usuallyremains with the producer until the product is deliv-

ered to the buyer, who is usually a processor. Al-though certain contracts specify time, volume, andpricing formula for payment on delivery of product byproducers to processors, most production and market-ing decisions before delivery are made by producers.

By means of forward pricing, which decreases vari-ations in prices and outputs, marketing contracts canbenefit producers and consumers. Forward pricingallows producers to combine inputs with comparativeefficiency to produce output. Because contracts do notordinarily control industry production, they do notraise long-run prices to producers or consumers al-though they do tend to decrease short-term marketinstability. Overall, the effect of marketing contractson rural communities is small.

Production ContractsSince the 1950s, production contracts have been

Table 2.2. Nonprice vertical coordination as percent of commodity output: production and marketing contracts, e.g., contracts an dmarketing orders, and vertical integration, e.g., integrated ownership/operation of input supply or product marketing andfarm production by one firm, U.S., 1970 and 1990 (adapted from Drury and Tweeten, 1995, p. 20. Original data fromEconomic Research Service, USDA)

Production and marketing Vertical integrationcontracts (ownership/operation) Total

Commodity 1970 1990 1970 1990 1970 1990

LivestockBroilers 92 92 7 8 99 100Turkeys 60 65 12 28 72 93Hatching eggs 70 70 30 30 100 100Market eggs 35 43 20 50 55 93Mfg. grade milk 25 25 1 1 26 26Fluid grade milk 95 95 0 0 95 95Hogs 1 18 1 3 2 21Fed cattle 18 12 7 4 25 16Sheep/lamb 7 7 12 33 19 40

Field CropsFood grains 2 7 1 1 3 8Feed grains 1 7 1 1 2 8Cotton 11 12 1 1 12 13

Specialty CropsProcessed vegetables 85 83 10 15 95 98Fresh vegetables 21 25 30 40 51 65Potatoes 45 55 25 40 70 95Citrus 55 65 30 35 85 100Other fruit 20 40 20 25 40 65

8For example, the formula may be based on the futures’ mar-ket or on a specific premium above the spot, or cash, market; alter-natively, well in advance of product delivery to market, a price maybe negotiated by buyers and sellers.

9Production and marketing contracts may be complementary.A firm providing contracts to farm producers also may have mar-keting contracts with feed suppliers and food processors and mayspecify a formula for pricing of feed inputs used by producers andby livestock delivered by producers.


used widely for broilers; in recent years, their use hasexpanded rapidly for swine (see Table 2.2).9 Arrange-ments differ widely (Martinez 1999), but the contrac-tor typically furnishes baby pigs or chicks, feed, vet-erinary supplies, and organizational management,e.g., appropriate practices, and number and timing ofplacements. The grower or producer does not own theanimals but supplies equipment, buildings, labor, andday-to-day management for a fee/animal and an in-centive bonus or penalty.10

Advantages to growers under production contractsinclude decreased operating cost and risk, coupledwith improved breeding and feed rations. Contrac-tors may advise growers on the latest managementpractices and technology for production and environ-mental protection and may guarantee a market.Many contracts are up to ten years in length and guar-antee a minimum number of animal placements overthat period if production standards are met. In thisway, producers and lenders have assurances at handif they need to obtain financing to construct facilitiesor to buy equipment. Advantages to contractors in-clude (1) economies of size and market power in pur-chasing inputs and selling products; (2) production ofstandardized products at the time, quality, and quan-tity specified by processors; (3) diminished capitalrequirements; (4) opportunity to extend innovativemanagement over a large output; and (5) low fixed-costs for buildings and other overhead items, so thatproduction can be altered at relatively low expense.

But production contracts also have disadvantagesfor growers/producers. The “down side” of a fixed re-turn protecting a producer from a market price dropis not being able to reap gains from a market pricerise. Once growers have constructed buildings andpurchased equipment, they need a steady source ofincome to service debt and to decrease overhead cost/unit of output. Thus, contractors gain bargainingpower once grower facilities are in place, for growersmay be willing to produce at a lower fee/animal tokeep facilities occupied and to pay overhead.

Surveys provide mixed evidence of grower/produc-er/feeder dissatisfaction with contract enterprises(Heffernan 1984; Ilvento and Watson 1997).11 Eventhose studies finding that growers have negative re-actions to production contracts have reported gener-ally favorable economic benefits of these contracts.

Reviewing results from a Louisiana broiler productionstudy in 1969 and a follow-up study in 1981, Hef-fernan (1984) concluded that growers under contractshad done quite well financially and that their num-bers in the study area had doubled. Most new grow-ers would not have been attracted to contracts if re-turns had been unfavorable or if contractors hadearned reputations for contracting renewals on unfa-vorable terms. Studies of grower response to broilercontract design suggest that in some cases the con-tracts favor the integrators over the growers. How-ever, with more information flow and negotiation,more mutually optimal solutions could be reached(Vukina and Foster 1998; Timmons and Gates 1986).

Poultry (Ilvento and Watson 1997) and swine(Tweeten, Harmon, and Feng 1999) producers underproduction contracts indicated general satisfactionwith this arrangement. Nearly three-fourths of poul-try growers surveyed in the Delmarva Peninsula inthe 1990s indicated satisfaction with “my business asa poultry grower,” and a similar proportion was sat-isfied with “my relationship with my present compa-ny” (Ilvento and Watson 1997, p. 7). Only half therespondents were satisfied with the income they re-ceived from poultry, however; and many expressed adesire for better communication, longer contracts, andearlier notice of termination by contractors.

The Ilvento-Watson results need to be kept in per-spective. A survey of Ohio swine producers in late1998–early 1999 revealed that only 4% of contractproducers — compared with 63% of independent pro-ducers — were dissatisfied with the economic payofffrom their enterprises (Tweeten, Harmon, and Feng1999)12. Sixty-three percent of contract producersreported no favoritism to new or to established pro-ducers, and 74% of contract producers said that theybelieved they could find another contractor if neces-sary. In Ohio, larger independent and contract pro-ducers were much more likely to use computers, keepswine records, sell on a carcass-merit basis, storemanure, and inject manure — all efficient manage-ment practices (Tweeten, Harmon, and Feng 1999) —than smaller independents were.

10The structure of contract farming differs greatly across en-terprises. In cattle, for example, a custom feedlot feeder (a contractproducer under contracts negotiated and perhaps renewed annu-ally who finishes feeder calves) is supplied and paid by ranchersor other owners.

11States have adopted measures to protect contract producers.Minnesota, for example, requires contractors to compensate pro-ducers if a contract is terminated before a building constructed forcontract production is depreciated. The constitutionality of themeasure remains in doubt. Certain states also require public dis-closure of prices paid for livestock by producers. Nationally, effortsare underway to make contract terms more transparent in word-ing and publicly available.

12The results might have been different in a time of higher hog pric-es.


Additional empirical data regarding growers’ andcontractors’ attitudes, problems, and opportunitiesare needed. Information would be helpful from a widerange of contracts and arrangements for various com-modities, regions, and firms. A critical issue may bethe opportunity to change from one contractor to an-other. Consolidation in the meat industry may de-crease producer satisfaction with contract growing.

Vertical Integration/Integrated OwnershipMartinez (1999) defines vertical integration as “co-

ordination of two or more stages in the food chainunder common ownership via management directive.”Vertical integration may involve one firm’s operatinga business spanning two or more links in the foodmarketing chain but leasing some or all facilities. Themajor form of vertical integration is integrated own-

ership, whereby a firm owns and operates crop and/or livestock production in addition to input supply orfood processing. In 1990, integrated ownership wasespecially prominent in eggs, turkeys, and fresh pro-duce such as potatoes and fruit (Table 2.2). The trendhas been toward integrated ownership as with Buck-eye Egg Farm, which owns and operates feed millsand which supplies pullets to its egg-laying opera-tions. Although it sells most of its eggs to supermar-kets that subsequently sell them under private labels,Buckeye also sells eggs under its own brand. Its Ohioinventory was projected at 15 million hens for the year2000.

Vertical integration has many variants. For exam-ple, some firms supply feed, produce and process an-imals, and sell under their own brand names whilecontracting with growers and/or purchasing in openmarkets the remainder of animals needed for theirown processing plants.

In summary, integrated ownership offers econom-ic advantages, including the highest possible degreeof control one firm can achieve over the vertical stag-es of the food-value chain. Certain integrated own-ership operators think that food safety is enhancedthrough identity preservation. And financial risks aredecreased when stages of the food chain are combinedto smooth profit over commodity cycles. Some inte-grated ownership firms seek competitive advantagesover rivals by maintaining an operation large enoughto reap payoffs from its intellectual property withoutreleasing patents, copyrights, or secret innovations toother firms, which could conceivably steal them.13

Compared with typical operations of independent,local family-farms, integrated ownership operationsas well as production contract operations are able todraw management, labor, and debt and equity capi-tal from larger markets outside the local community.For local communities, advantages of such operationsare that they face less risk; draw on a larger pool ofentrepreneurial, technological, and managerial skills;and share employment in growing segments of agri-culture. Integrated firms often employ laborers who

13With well-functioning markets, the general rule is that bene-fits of innovation and productivity gains go to society, mostly byway of consumers. Competitive market producers receive extra re-wards for innovation in the short run but their rewards are onlysufficient for them to retain resources in the sector, given time foradjustments of resources to the highest paying use. Thus, largeintegrated ownership firms may invest more in research and de-velopment than small competitive firms do because integratedfirms can capture more of the revenue from innovation. Profits frominnovations depend not only on selecting the right technology ororganizational relationship, but on implementing it in a timelyfashion.

Figure 2.2. Technician Jeff Nichols collects a water sample fromthe Walnut Creek watershed in Ames, Iowa. Samplesare collected weekly from this area and surround-ing watersheds to study the effects farming prac-tices have on water quality. Photo by Keith Weller,Agricultural Research Service, U.S. Department ofAgriculture, Beltsville, Maryland.


do not have the resources to operate farms or the skillsto be employed as remuneratively elsewhere. Butwith concentration to gain market power and consol-idation to gain economies of size, fewer firms withfewer plants are available to locate in rural or urbancommunities (Kim et al. 2001).

If entities are to operate at multiple market-levelswith efficiently sized plants at each level, capital andmanagerial requirements are high. Efficiency can bedefined as units produced per dollar of fixed costs,units produced per unit of variable costs, or units pro-duced by the two combined. In its quest to be of suf-ficient size, a firm can find itself to be (1) too small torealize low costs and remain competitive if it reliesmainly on internal financing or (2) too dependent onfunding and management from outside sources. Butcapital and managerial requirements may be dimin-ished and made manageable by developing productioncontracts with other firms in the marketing chain orby obtaining, for example, for a packing plant, inputsfrom independent markets.

Integrated ownership firms have other disadvan-tages. Profits and top salaries may go to owners andmanagers in distant communities. Thus, decisionsregarding plant closings, mergers, sales, and the likemay be made by individuals outside the local commu-nity who are less sensitive than local citizens to theneeds and customs of the community.

All large livestock- or poultry-operations, whetherunder production contract or integrated or privateownership, pose major waste-disposal problems (Fig-ure 2.2). Without superior management, insect, odor,and water-quality problems can be overwhelming andwill be especially transparent because large opera-tions invite intensive public scrutiny.

Another disadvantage of integrated ownership(vertical integration) is that it provides less marketpower than does horizontal integration for a giveninvestment of capital. For a given investment, verti-cal integration usually imparts less market powerthan does horizontal integration (consolidation),which raises market share. Large livestock opera-tions usually are consolidated and vertically integrat-ed. A firm’s market power, or power to influence pricesand wages, tends to rise with its market share. Ofparticular concern to farmers and rural communitiesis the situation where there is only one buyer, whothen has the leeway to set prices. A higher marketshare makes for a more inelastic demand for productso that restraint on output disproportionally raisesprices and profits. Firms vertically integrated overseveral stages of the marketing chain may have lim-ited market shares or power. Less market power for

firms sometimes is advantageous for farmers, work-ers, communities, and /or society, as the competitionand free flow of information enhances efficiency out-side the firm.

Electronic CommerceBecause it is a recent development cutting across

issues of private versus cooperative and price versusnegotiated coordination, electronic commerce, or e-commerce, that is, the buying and selling of productsover the Internet, is discussed last in this section oninstitutions involved in the coordination of verticallinks in the food value-chain. At issue is how e-com-merce will influence farming-dependent rural commu-nities, especially through vertical coordination.

E-commerce makes any rural community the po-tential site for the headquarters of an efficient globalfirm. By bringing together large numbers of buyersand sellers over a very extensive, even global, area,e-commerce promises a highly competitive and effi-cient market. To date, e-commerce has featured salesmostly between businesses; but it has the potentialto feature sales between consumers or between busi-nesses and consumers. E-commerce can help bothintegrated and independent firms in rural communi-ties buy and sell more competitively among them-selves and with firms outside their own communities.Thus, e-commerce could extend to local independentfirms the advantages of purchasing in the large mar-ket heretofore available primarily to large and/or in-tegrated firms and of receiving more informationabout the particular characteristics desired by specificend-users.

E-commerce extends to commerce the low commu-nication costs made possible by computer and infor-mation technologies. Farming is tied by high trans-portation costs to the location of natural resources, butother industries and many farm services are compar-atively footloose. Thus, the underemployed in farm-ing-dependent areas will find opportunities to tele-commute and in other ways to transact e-commercewith both urban and rural residents. Earnings cansupplement farm income.

Together with continuing improvements in trans-portation, e-commerce promises to diminish furtherthe “frictions of space” that have isolated rural farmcommunities. Local monopolies will be less feasible,and rural residents may feel more confident of buy-ing and selling in what they consider fair, competi-tive markets with little potential for exploitation. Inshort, e-commerce allows an enterprising individualor firm in any “connected” rural farm community ac-cess to a global market.


For rural farm communities, however, the advan-tages of e-commerce may ultimately be outweighed byits disadvantages. Rural communities have lagged intheir accessibility to the broadband fiber optic tech-nology facilitating e-commerce.14 New wireless tech-nologies provide a less expensive alternative for broadband access but require local investment and are stillmore expensive than urban fiber optic connections.

Even increased connectivity will not maintainMain Street businesses as they are today. Decreas-ing transaction costs and increasing competition infarm input and product markets means lower mar-keting margins and thus fewer intermediary buyersand sellers to serve local markets. Many of those in-termediaries are now located in rural communities.Efficiencies in containing market costs will come part-ly at the expense of traditional businesses in ruralcommunities.

E-commerce may be the contemporary equivalentof the Sears Roebuck catalogue, which was introducedin 1889. The impact of the catalogue along with im-proved transportation and free rural postal deliverywas to bring competitively priced goods to rural house-holds — a system that often resulted in financial loss-es to local merchants. E-commerce certainly will of-fer a larger bazaar of goods and services to consumersand businesses than the Sears catalogue or even Wal-Mart ever did. It is likely to displace a considerablenumber of existing local businesses although somelocal showrooms and warehouses will be needed tomake available goods and services that cannot be dig-itized. The deeper impact of e-commerce is likely tobe the loss of sales tax revenue on which many ruralcommunities directly or indirectly depend.

Many local farm and other firms serve local mar-kets, extracting a price advantage by virtue of the hightransportation costs and other marketing costs in-curred in bringing in competing products from distantmarkets. E-commerce and information technologywill diminish the power of such local monopolies; thischange will benefit consumers but not necessarily lo-cal producers or the retail bases of rural communities.Main Streets as a result will shift from the provisionof goods to the provision of services, with lower grosssales but the possibility of higher local retention of the

sales dollar.E-commerce has other drawbacks in the revitaliza-

tion of rural communities and the replacement of ag-ricultural vertical coordination through contracts andownership. Farm commodities and most farm inputsare bulky and high-touch and cannot be shipped overfiber optic channels. High-touch means that qualityand management must be appraised at least in partthrough hands-on, face-to-face contact. For example,it is not unusual for representatives of contractors tovisit contract producers personally each week to re-view conditions and to propose herd health and man-agement improvements. Such contacts cannot be re-placed by e-commerce.

Vertical coordination that is negotiated/adminis-tered through contracts and ownership and that hasevolved to bring the right product at the right cost tothe right customer at the right time may face compe-tition from e-commerce, for both vertical coordinationand e-commerce are means of improving communica-tion and lowering transaction costs. But e-commercerequires specialized skills in setting up “virtual stores”in merchandising, finance, inventory control, delivery,and customer service. E-commerce also requires sub-stantial infrastructure, as has been noted. Infrastruc-ture and specialized skills give rise to economies ofsize that are often realized more easily by contractorsor by firms with integrated ownership than by inde-pendent family-farms or agribusiness firms in farm-ing-dependent communities. It may come as no sur-prise that an early major initiative in agriculturale-commerce, http://www.rooster.com, is a joint ven-ture of large firms — Cargill, DuPont, and the coop-erative Cenex Harvest States. Whether that venturewill succeed and if so to what extent are yet unknown.

Independent family farms lacking formal ties toinput suppliers and output processors would seem toespecially benefit from Internet markets for inputssuch as feeder calves and pigs, and marketing of fin-ished products to processors. But electronic market-ing technologies are not new for either animal or cot-ton production. Though heavily promoted, electronicmarkets have had limited success, in part because ofthe difficulties surrounding judgment of input or out-put quality. E-commerce may fare no better. Ofcourse, improved grading and other means providedby the public sector to facilitate distance tradingmight help markets function more efficiently. Certi-fication, by the private sector or public sector, is animportant part of effective e-commerce.

Information technology and e-commerce will notnecessarily improve the competitive advantage ofrural, farm communities in a global market-place

14Rural America seems on the wrong side of a digital divide, orthe gap between those who have and do not have modern digitaltechnology. Trujillo (See Drabenstott and Meeker 1999, p. 93) notedthat 82% of urban residents have access to the Internet, comparedwith only 31% of rural residents. Trujillo observed that the cur-rent communication regulatory framework may prevent a bridg-ing of that divide.


unless accompanied by free flow of information andcertification institutions to ensure information accu-racy. In the past, improvements in communicationhave generally not made rural communities morecompetitive. Because of the economies of size neces-sary for success in e-commerce, this new technologyis more likely to enhance than to inhibit the advan-tages of firms of large size and scope. In other words,vertically coordinated and larger independent firmsare likely to receive a greater boost from e-commercein rural, farm communities than small family-firmsare.

CommentsRegrettably, timely data are unavailable with

which to update Table 2.2. Recent data for certainenterprises suggest that the use of contracts contin-ues to expand. Approximately 42% of swine are pro-duced under production contracts and 57% of swinewere sold under marketing contracts in 1997(Lawrence, Grimes, and Hayenga 1999, Tables 10–13).

Despite continued growth in vertical coordination,

pluralistic marketing systems will dominate tomor-row’s agriculture, which likely will reflect (1) coexist-ence of traditional competitive mass markets settingspot prices on relatively homogenous commodities; (2)multi-attribute product and minor niche-productmarkets selling under forward prices established be-tween either a single buyer and seller in advance ofproduction or tied to the prices of a central market,e.g., Chicago, at time of delivery contract; (3) produc-ers under production contracts negotiated before pro-duction is initiated, paid a fee to raise crops or live-stock for the owner; and (4) marketing contractsnegotiated, before production begins, between produc-ers or contractors on the one hand and processors onthe other. This list is incomplete. The important pointis that market system diversity will offer farming-dependent communities unprecedented flexibility intailoring arrangements to meet emerging market re-quirements at the lowest cost to consumers while of-fering efficient producers a fair return on investmentover the long run although not every year. Publicprovision for information, grades, standards, contractenforcement, and competition will enhance marketefficiency.


This section will bring together information fromprevious sections and elsewhere to illustrate how ver-tical coordination affects the economy of rural com-munities by influencing

1. resource demands to produce food and fiber,2. firm size and income,3. distribution of employment among and within

firms, and4. location of ownership and management decisions.

Discussion will be limited to vertical coordination infarm and agribusiness industries.

Resource DemandsEconomies of size characterize most agricultural

and rural firms and drive the trend to fewer, largerfirms in rural areas (Hallam 1993). Economies of sizedepend on firm activities, however. Even given theactivity clustering already described, efficiencies of-ten can be enhanced by spreading production andprocessing activities among communities of varioussizes. With the aid of modern information and com-munication technologies, close coordination can beachieved among, for example, swine firm units, byfeaturing larger-scale breeding-birthing units at onerural site, a large-scale nursery unit at another ruralsite, smaller finishing units at dispersed rural sites,and an administration and packing facility in an ur-ban site.

Such a scenario has two implications for rural com-munities. First, newer forms of vertical coordinationoften save inputs, increase productivity, and enhanceprofits. Tighter coordination of links in the market-ing chain conserves inputs and decreases supply price.Most farm and food products face inelastic demandin the short and the intermediate runs; hence, quan-tity increases less than price decreases, so that re-ceipts and total input use fall as quantity suppliedrises.15 All else being equal, such industry-wide pro-ductivity gains decrease aggregate employment andother economic activities in rural communities.

The forms of vertical coordination have unique ef-

3 Economic Impact of Vertical Coordination onCommunities

24

fects on employment. Marketing contracts probablydisplace few resources from farms and small ruralcommunities. Integrated ownership, especially, hasthe potential to displace resources from farms andrural communities because production units tend tobe large and because ownership and control may re-side in distant metropolitan centers. A farming-de-pendent rural community may be unable to assem-ble locally the venture capital and the managementand other headquarters services required.

It has been noted already that although a “cluster”structure in poultry and livestock feeding and process-ing will offer immense opportunities to add value inagriculture, few rural communities will benefit fromsuch a restructuring because there will be few clus-ters. Communities that are successful in developingor attracting processing facilities and independent orcontract growers will tend to prosper more than com-munities that are not. Vertically coordinated firmsmay be sole proprietorships, partnerships, corpora-tions, or cooperatives; key are the level, the economicand environmental sustainability, and the type ofactivity generated. Some communities may generateactivity through local entrepreneurs or cooperatives;others, by attracting firms from elsewhere.

Might contract farming be undesirable for ruralcommunities because contract producers tend to belarge and to crowd out smaller farmers? The answeris complex. Value of crop and livestock production onthe average U.S. production contract farm averaged$406,017 in 1993, or five times that on the averageU.S. farm (U.S. Department of Agriculture 1996). Inthe absence of substantial off-farm income, the aver-age U.S. farm, producing $72,938 in crops and live-stock, was too small to achieve economies of size or tosupport a farm family. Because many farming-depen-dent counties do not have access to off-farm income,

15Most nonhobby farms in the farm and food systems are at-tempting to increase profits or to cut losses. Early innovators of-ten reap profits, but later adopters often suffer losses. Profits ofsuccessful innovation are decreased over time as output expands,competition intensifies, and product prices fall. Thus, over time,benefits of innovation accrue mainly to consumers.

Economic Impact of Vertical Coordination on Communities 25

Figure 3.1. Multigenerational family farm operation. Photo-graph courtesy of Ohio State University Section ofCommunications and Technology, Columbus, Ohio.

the increased average size of contract producers wasnot necessarily undesirable.

An important related point is that efficiencies pro-vided by technologies used as a result of contractscreate substantial production value from family-farmsized resources. For example, one hour (hr) of labor/day can service a 1,000-hog house finishing 2.5 gen-erations, or 2,500 hogs/year (yr). At 8 hr/day, plusseasonal help, one worker can provide labor for up toeight 1,000-head units, thus finishing 20,000 hogs/yr.16 At 225 pounds/hog and $40/hundredweight,gross value of one worker’s production is $1.8 million.A typical contract producer payment for finishing20,000 hogs is $240,000 plus bonuses. Thus grossreceipts and payments are large as measured by cap-ital/labor requirements, but the operation is the sizeof a traditional family farm.

Respondents in an Ohio study were much moreconcerned about megafarms than about contract pro-duction as threats to family farms (Tweeten, Harmon,and Feng 1999). Most farms using production and/ormarketing contracts are not megafarms, but familyfarms whose labor is provided mainly by the opera-tor and his or her family (Figure 3.1). Although broilerproduction, as measured by gross sales, is especiallyconcentrated on large farms, Perry and colleagues(1999) concluded that “broiler operations more close-ly resemble small to midsized farms in the incomegenerated.” In 1995, the average U.S. farm produc-ing poultry and eggs operated 134 acres (a.) comparedwith 400 a. for the average U.S. farm (Perry, Banker,

and Green 1999). Household income of the averagepoultry-farm operator, who was younger and less ed-ucated than the average operatorand who inhabiteda region with fewer economic opportunities, averaged79% of U.S. household income (Perry, Banker, andGreen 1999). Hard evidence is needed with which toanalyze whether production contracts detracted fromthe economic vitality of rural communities by shift-ing production to other locales.

On average, vertically integrated ownership farmsare probably larger than other farms. Compared withsmall farms with an equivalent composite productionvalue, a large farm tends to buy a smaller share ofconsumption and production inputs in nearby smalltowns (Chism and Levins 1994; Henderson, Tweeten,and Schreiner 1989). To achieve market economies,industrialized farms buy and sell in large volumes andoften require specialized inputs and sell specializedoutputs to markets in larger communities. Hence,even without decreased aggregate input purchases,an agricultural structure consisting primarily of larg-er farms would buy and sell less in local, small, ruraltowns than the current, more mixed structure does.

Less-efficient smaller operations producing today’soutput by means of traditional technologies requiremany more inputs of labor and other resources, manyof which come from local communities. It is, there-fore, tempting to conclude that small traditional live-stock operations best serve rural communities. Theproblem is that small, inefficient producers cannotcompete effectively and thus will struggle to remainin production. Hence, the option facing rural commu-nities is not (1) large numbers of small livestock farmspurchasing inputs locally versus (2) few farms hav-ing greater sales and purchasing more competitivelyand thus less in local communities. The first optionis unlikely to be a viable alternative.

It should be recalled, as well, that communities cansacrifice public services and future growth by subsi-dizing job creation heavily.

Firm Size and IncomeMajor forces of change in rural farm communities

include improved communication and transportation,e.g., motor vehicles and roads. These, in turn, dependon cheap fossil fuel. As transportation and commu-nication costs/unit have fallen, rural residents haveelected to travel to and to shop in vicinities offering awider selection of goods at lower prices, and workershave chosen to travel to sometimes-distant employ-ment offering more attractive wages, benefits, andworking conditions. Thus, the economic structure of

16An operation of this size is included for the purpose of illus-tration but could have serious waste disposal problems. It is, there-fore, sometimes desirable to combine other sources of income withincome from fewer hog houses.


rural communities would have changed in the absenceof vertical coordination and other evolutions in farmstructure.

Modes of vertical coordination such as contractproduction and integrated ownership have been as-sociated closely with growth of the broiler industry inthe South, cattle feeding on the Great Plains, and hogproduction in North Carolina. Meanwhile, small-scale livestock-feeding enterprises on family farmsproducing feed in the Corn Belt are becoming a thingof the past. But although production contracts andintegrated ownership have hastened the growth infarm size and have influenced the geographic locationof farm activities, these newer forms of vertical coor-dination, per se, do not cause farms to become large.Integrators, however, have found the transactioncosts in writing a contract for a large or small amountis the same, encouraging fewer contracts with largerproducers per contract.

Although production contracts have decreasedfarm labor in aggregate, they also have created newopportunities for many workers on small farms in theSouth and in other parts of the country. Many lend-ers are more willing to lend to a low-income producerwho has a multiyear production contract and whowishes to construct production facilities than to a larg-er independent producer perennially subject to mar-ket volatility.

A comparison of two counties in Ohio illustrateshow production contracts can help make small-acre-age family farms viable. Mercer County, Ohio is char-acterized by a large number of vertically integratedproduction contract enterprises for swine, turkeys,broilers, and laying hens. Van Wert County, whichborders Mercer County, is mainly a cash-grain areaof independent producers. Area and quality of agri-cultural lands are similar, as were crop receipts from

the two counties in 1998 (Ohio Agricultural StatisticsService 1999). But livestock receipts and total agri-cultural receipts differed sharply, as noted in Table3.1.

With only 10% less land in farms, Van Wert Coun-ty had 37% fewer farms than Mercer County. Mer-cer County farms numbered 1,460 and averaged 189a./farm. Van Wert County farms numbered 830 andaveraged 302 a./farm.

Contract-intensive Mercer County farm receiptsaveraging $202,740 were much nearer the receiptsnecessary to constitute an economic unit (defined asan operation large enough to support a farm familyand realize economies of size essential to low, compet-itive production costs) than Van Wert farm receiptsaveraging $108,193 were. Farm receipts averaged$1,072/a. in contract-intensive Mercer County, butonly $358/a. — or two-thirds less — in cash-crop in-tensive Van Wert County.

Net receipts and payments from farming averaged$53,629/farm in livestock-intensive Mercer Countyand $49,926/farm in crop-intensive Van Wert countyin 1997. Data were unavailable regarding the off-farm income of farm households, but with 46.2% ofMercer County farm operators compared with 35.4%of Van Wert County operators working at least 200days off farm, addition of off-farm income likely wouldwiden the income advantage of Mercer County overVan Wert County farm households.

In short, production contracting can combine theeconomies of size essential to compete in modern ag-riculture with the social advantages of family-sizefarms. Because of the numerous forces for changeaffecting Mercer and Van Wert counties, differencesin community economic activity and associated socialvitality cannot be identified using statistically reliablemultivariate measures of economic activity beyond

Table 3.1. Comparison of farm receipts and of farm numbers between livestock intensive Mercer County and cash-grain intensive Va nWert County, Ohio, 1998 (adapted from Ohio Agricultural Statistics Service, 1999, pp. 115, 129; U.S. Department of Agricul-ture, 1999b)

Mercer County Van Wert CountyCharacteristics (Livestock intensive, contract intensive agriculture) (Crop intensive, cash intensive agriculture)

Area (acres of land in farms) 276,000 251,000Acres per farm 189 302Number of farms 1,460 830Crop receipts ($ mil) 67.7 77.3Livestock receipts ($ mil) 228.3 12.5Total receipts ($ mil) 296.0 89.8Total receipts per farm ($) 202,740 108,193Net farm receipts, govt pmts,

farm related income per farm, 1997 ($) 53,629 49,926Share of farm operators working 200 or

more days off farm, 1997 (%) 46.2 35.4

Economic Impact of Vertical Coordination on Communities 27

the farm gate. Input-output analysis (See Sporleder1997, p. 9) indicates, however, this rule of thumb:each farm job adds another job in local communitiesand another in the state outside the local communi-ties. Similarly, each $1,000 of farm income adds an-other $1,000 to local communities and another $1,000to the state outside the local communities, for a totalmultiplier of nearly 3.0 (See Sporleder 1997, p. 9).Those benefiting are local merchants of consumergoods, of farm input supplies, and of food transporta-tion, processing, and storage. Resulting higher taxrevenues can better support educational and otherlocal services. Other estimates of area economic im-pacts of livestock operations are found in Thornsbury,Kambhampaty, and Kenyon (1999), DiPietre andWatson (1994), and North Central Regional Centerfor Rural Development (1998).

The choice facing rural communities seems not tobe whether to maintain the status quo or to acceptmore modern methods of production. Those who electto maintain the status quo find themselves inevita-bly losing market share (Figure 3.2). The productioncontract operations invigorating family farms andlocal communities in areas like Mercer County, Ohiohave detracted from the social and economic vitality

Large, concentrated animal-feeding operations cangenerate flies, odors, and other externalities (or diver-gences between private and social costs/benefits) thatdecrease land values near production facilities. AMichigan study by Abeles-Allison and Connor (1990)estimated that house values decreased $0.43 for eachadditional hog within a five-mile radius. The studyprobably overestimated the loss in real estate valuebecause home sale observations were recorded onlynear hog farms having received multiple complaints.Palmquist, Roka, and Vukina (1995) estimated, basedon 237 home sales in 1992 and 1993 in North Caroli-na, that housing values were decreased 7.9% one-halfmile away, and 3.5% two miles away from a new2,400-head swine-finishing facility. But because hogfacilities provide a market for local feed producers, alow-cost source of soil nutrients from swine waste (ex-cept when the waste must be transported long dis-tances because of high animal/cropland ratios), andemployment generating income and demand for hous-ing, farmland values locally and housing values atgreater distances from swine facilitates may rise.

If they create environmental problems, newly de-veloped or arrived agribusinesses may undermine acommunity’s opportunities to expand its economicbase. Market incentives bring about efficient socialand economic outcomes only if the environmentalproblems of waste disposal, odor, pests, and waterquality are addressed effectively.

Environmental standards appropriate to the Unit-ed States need to be reflected in national regulationsso that states inappropriately lowering standards donot gain an unfair advantage in the competition togenerate increased economic activity. Often the mosteffective approach to environmental policy is to setoverall standards, allowing firms flexibility in meet-ing them.17 It should not be forgotten that standardsmust be tailored to different regions and must be en-forced to be effective.

Distribution of EmploymentAmong and Within Firms

Through numbers of workers and their specializa-tions, skills, and incomes, the form of vertical coordi-nation influences rural communities. Large, integrat-ed-ownership farms efficiently using vertically

Figure 3.2. Example of abandoned small-farm barn. Photo-graph courtesy of Ohio State University Section ofCommunications and Technology, Columbus, Ohio.

of rural communities in other areas by lowering com-modity prices for all producers, including those whochange nothing.

The EnvironmentContract production continues to give rise to con-

troversy over issues such as the legal provisions inproduction contracts and the effects of such produc-tion on real estate values and the environment.

17Negotiable, tradable emissions permits have been used withsuccess in the case of sulfur dioxide, for example. Such permitsallow overall industry emission quotas to be met by decreasing emis-sions most among those firms with the lowest costs/unit of control.


coordinated systems may require a variety of work-ers, ranging from highly trained engineers and scien-tists to unskilled laborers. Compared with indepen-dent family-farms, integrated ownership andproduction contract firms tend to employ individualsspecialized and skilled in compiling, managing, ana-lyzing, maintaining, and applying results of informa-tion technology. Information systems often substitutefor unskilled labor, but the number of unskilled la-borers on large farms is greater than that of skilledlaborers because the more complex components of lo-cal jobs may be performed by computers or by skilledworkers at distant locations. In contrast, the opera-tor of an independent family-farm is more likely toneed diversified skills and to spend time on a rangeof activities — from analyzing computer data to clean-ing hog pens.

At least since the Goldschmidt (1946) study of Arv-in and Dinuba, California, debate has raged over themerits of a community’s having an economic base ofmiddle-class family farms or a base of larger farmsnecessitating a highly differentiated set of skilledworkers and reflecting a variety of ownership arrange-ments. It seems that although economically and so-cially vibrant rural communities often contain mid-sized, middle-class family-farms, a one-size farmpolicy has drawbacks. Writing in 1984, Tweeten (p.53) made this observation:

Moderate-size farms are consistent with thewell-being of rural communities because middle-class families support churches, schools, clubs, andcommercial businesses. Although optimal size offarm, if there is one, varies widely and no one sizefits all conditions, the size of the farm consistentwith increased well-being of society, as best mea-sured with our crude tools, is neither a small nora very large farm but rather is a moderate-sizefamily operation.

Not all persons possess the human and materi-al resources to be family farmers; some must be-gin as hired laborers, renters, and part-time own-er-operators. The well-being of society is enhancedwhen people with off-farm incomes are able to ex-ercise their preferences to operate a small farm forconsumptive purposes — at least if they are not

subsidized to do so. There is much value in a het-erogenous economy that keeps options and oppor-tunities open to all classes as individuals and so-ciety strive to improve human and materialresources. Because each family and farming situ-ation is unique, it is not clear that public policycould do a good job in determining which farmsshould be restrained in growth to benefit society.

Not everyone can be a midsized, middle-class farmoperator, because a great deal of capital, managerialskill, and technical expertise is required for the posi-tion. Less-qualified individuals may prefer hourly orsalaried employment on a farm, and hired workershave greater employment opportunities on largerfarms; on the largest of these, working conditions ev-idently are most favorable. Hurley, Kliebenstein, andOrazem (1999) reported, based on a 1995 mail surveyof U.S. pork producers (1,538, or 17%, of the 9,000questionnaires were returned), that “salaries are alsohighest in the largest firms, with 42% of employeesearning over $30,000 annually. Only 12.9% of theemployees in the smallest firms earn salaries above$30,000.” The authors concluded that “on average,larger farms provide more-generous benefit packag-es and work conditions, suggesting that larger firmsmay also enjoy returns to scale in the provision ofbenefits and investments in workplace safety.”

Location of Ownership andManagement

The rise of vertically-integrated conglomeratesundertaking operations from seed development tofood processing and marketing moves ownership andcontrol far from local family-firms, and often to urbancenters. Equity capital markets in New York City andelsewhere are likely to be tapped for financing. Thus,firm management and financial success or failure arelikely to take place far from rural communities. Like-wise, the farmer under a production contract shiftsmany managerial, marketing, and financial decisions,along with many of the effects of attendant successesand failures, to the contractor.

Public Policy Options 29

Boehlje, Hofing, and Schroeder (1999, p. 1) predictthat agriculture in the twenty-first century will like-ly “. . . be characterized by (1) adoption of manufac-turing processes in production as well as processing;(2) a systems or food supply chain approach to pro-duction and distribution; (3) negotiated coordinationreplacing market coordination of the system; (4) amore important role for information, knowledge, andother soft assets (in contrast to hard assets of machin-ery, equipment, and facilities) in decreasing cost andincreasing responsiveness; and (5) increasing consol-idation at all levels, raising issues of market powerand control.”

Technological and economic forces are moving ag-riculture and rural industries toward production con-tracts and integrated ownership, both of which are,on the whole, less supportive of businesses in farm-ing-dependent rural communities. Few rural commu-nities in the United States can be the livestock pro-duction and processing hubs that have been predictedto generate substantial local employment and incomein the coming century. Most communities either can-not compete successfully for such a leading role orrespectfully decline the honor in favor of preservingtheir environments and cultural heritages.

Production contracts do not necessarily implymegafarms, factory farms, or environmental degra-dation. If properly managed, vertical coordinationthrough contracting, as illustrated by the data fromMercer County, Ohio, is a means of achieving criticaleconomies of size in production and marketing whilepermitting family-size farms to perform those func-tions that can be decentralized efficiently.

Because they offer the benefits of low rainfall andopen spaces — characteristics that will mitigate, forinstance, waste management problems arising fromintensive animal production, and because they offerunderutilized labor and institutions — characteristicsthat will support job growth, a few farming-dependentcommunities especially prevalent in the Great Plainsare in a unique position to seize the opportunity tobecome agricultural hubs. At issue are appropriatepublic policy responses to agriculture’s changingstructure, which depend in part on the socioeconom-

4 Public Policy Options

29

ic costs and benefits of these changes.A principal policy option is to allow companies to

use the form of vertical coordination they find mostadvantageous but to rely on the public sector to es-tablish and to enforce environmental standards andto encourage competition. Such an approach to poli-cy would raise real national income while holdingdown food and fiber costs.

In general, technological and economic forces forchange can be expected to improve the well-being of

Figure 4.1. At Florida A&M University, landscape design andmanagement student Johnnene Addison helps sortaquatic insects to be used in biological monitoringof water quality. Photo by Keith Weller, AgriculturalResearch Service, U.S. Department of Agriculture,Beltsville, Maryland.


society if the incremental social benefits exceed theincremental social costs of that change, where socialcosts or benefits accrue to society, and private costsor benefits accrue to firms or to individuals party to atransaction. In agriculture, externalities are likelyto arise from soil erosion; water degradation fromchemicals; odors and flies from livestock production;slow-moving vehicles on highways; and pesticidespray drift occurring downwind of the originatingfarm (Figures 4.1 and 4.2). Employee health impair-ments caused by working conditions and neither paidfor in wages or health premiums nor corrected by em-ployers are also externalities.

The federal government has passed the Clean AirAct and the Clean Water Act and has established

But if all social costs and benefits were included,would large farms continue to display greater efficien-cies and to displace other farms? Although data arenot available, Martin and Zering (1997, p. 20) haveconcluded that small farms would be more disadvan-taged than large farms if environmental regulationswere enforced rigorously, for “economies of size resultin a greater cost/head of regulatory compliance forsmaller operations — consequently, the movement toregulate large farms seems to accelerate the rate ofchange [to fewer and larger livestock and poultryfarms].” Boehlje, Hofing, and Schroeder (1999) ar-rived at a similar conclusion: “As in most other in-dustries,” they write, “most environmental regulationwill likely increase costs, and smaller scale units willfind compliance with environmental rules both diffi-cult and higher cost compared to larger scale units.”

A disadvantage of leaving markets alone whileusing the public sector to provide public goods is thatthis strategy speeds substitution of capital for laborand causes displacement of family farms, therebyeroding the social and economic bases of many farm-ing-dependent rural communities. The public mustdecide how important preserving small family-farmsand rural community social and economic vitality isin comparison with lowering food costs for consum-ers or enhancing international competitiveness.

Many communities will seek to attract contrac-tors or integrated owners from elsewhere. It maybe useful here to view vertical coordination meta-phorically, as the institution of marriage. Althoughthe institution (vertical coordination) is basicallysound, not every prospective spouse (outside firm)will have the potential for a sound marriage withthe community. Some integrated owner-contrac-tors are “footloose” (will go to another communityoffering greater tax concessions), are “poor house-keepers” (will bring odors, flies, water pollution),are “poor providers” (will pay low wages), or “de-crease local social control” (will increase crimerates) (see North Central Regional Center for Ru-ral Development 1998). No single formula worksfor all; each community or other entity must decidewhich strategy to follow. State and federal govern-ments can assist in this decision-making processby establishing ground rules and regulations re-garding the environment and by providing informa-tion. The Cooperative Extension Service can helpcommunities assemble information and developprocedures for making sound decisions.

Several questions arising in the pursuit of thiskey policy goal of “internalizing externalities” willnow be addressed.

Figure 4.2. To measure nitrogen runoff in the Pacific Northwest,plant physiologist Steve Griffith collects watersamples from a monitor well inside the riparian zonenear the Calapooya River. Photo by Brian Prechtel,Agricultural Research Service, U.S. Department ofAgriculture, Beltsville, Maryland.

agencies such as the U.S. Food and Drug Administra-tion, the U.S. Occupational Safety and Health Admin-istration, and the U.S. Environmental ProtectionAgency to correct externalities by bringing privatecosts (benefits) in line with social costs (benefits). Byaligning incremental private costs (benefits) with so-cial costs (benefits), such efforts have had mixed suc-cess in internalizing externalities. In the case of con-centrated animal-feeding operations, public agenciesoften have required larger livestock-farms to submitenvironmental plans and to obtain approval beforebeginning operation. These operations are subject toperiodic inspections for compliance. Failure to followproper practices, or a breakdown such as a waste la-goon spill, can result in sanctions, including fines.

The market responds to private costs and benefits.


1. Is preserving rural communities an exter-nality the markets do not or cannot address?Is it appropriate to use federal tax dollars or reg-ulations to preserve rural communities lackingviable economic bases? The public has sometimesintervened to preserve historic sites that are notsound investments for the private sector. In oth-er instances, the public cost has been judged toogreat to justify preserving a historic but noneco-nomically viable site. With few exceptions, thepublic has not intervened to save towns with out-moded bases in the lumber, oil, mining, or mili-tary industry. For instance, although communi-ties have lobbied actively to keep redundantmilitary bases open, efficiency considerationssometimes have prevailed in time, and bases havebeen closed. However, public investments helpedto smooth the transition.

2. Is a public policy to influence vertical coor-dination an effective means of preservingrural communities — if such preservation isthe goal? Analysts such as Carlin and Saupe(1993) and Lobao (1990) have concluded that ru-ral communities influence farm structure morethan farm structure influences rural communi-ties. Small family-farms with crop and livestocksales below $100,000/year dominate farm demo-graphics (Figure 4.3); such households obtain in-come largely from off-farm sources. Creating non-farm jobs in rural communities may be more costeffective, therefore, than adjusting vertical coor-dination incentives to preserve small family-farms and local jobs. Whatever the policy out-

come, residents are likely to travel to larger townsand cities, not to local rural communities, to domore and more of their shopping.

3. Is the preferred goal to create jobs in ruralAmerica or to improve the well-being of ru-ral people wherever they may, eventually,reside? To what degree is it cost-effective forsociety to maintain a rural option? Rural commu-nities on the whole are growing. But should ev-ery rural community grow? Is the public cost ofmaintaining the population and the income ofsome rural farming-communities so great thatthese communities should be encouraged to un-dergo a graceful decline in population? Who paysthose costs? Do they offset the public costs of ur-ban sprawl? Public outlays for better schools andhealth care may provide more options for ruralresidents than rural-prosperity programs promot-ing vertical integration of agriculture or attract-ing nonfarm and industry jobs. Certain ruralcommunities are so distant from markets and solacking a diversified, skilled labor force and infra-structure, e.g., a major airport, medical facilities,financing, and transportation, that payoffs fromcostly and perhaps unsuccessful efforts to directjobs there are likely to be low.

Understandably, residents of rural communi-ties would like to feel that they have control overtheir own destinies. By using initiative and byseeking the assistance of the Cooperative Exten-sion Service and other agencies, communities canhelp shape their own futures (Figure 4.4). Not-withstanding, many rural communities will find

Figure 4.3. A small dairy farm in western Maryland. The U.S.Department of Agriculture defines "small farms" asthose averaging $50,000 in gross sales annually—which net, on average, around $23,159. Photo byScott Bauer, Agricultural Research Service, U.S.Department of Agriculture, Beltsville, Maryland.

Figure 4.4. ARS lab technician Debra Williams and Kennedyhigh school student Sean Gros label cotton bolls foridentification. Photo by Scott Bauer, AgriculturalResearch Service, U.S. Department of Agriculture,Beltsville, Maryland.


it more advantageous to maximize their person-al alternative through education, organization,and skill building.

4. What are the appropriate roles for regu-lations and markets? Livestock operation ex-ternalities such as water, air, and soil qualitydegradation can be dealt with, for example, byrequiring setbacks from populated areas andproperly treating water discharge. Preventingwaste from seeping into ground water aquifersand prohibiting the spread of waste on frozenfields and the field deposit of waste nutrientsabove levels unusable by plants prevents excessnitrogen and phosphate runoff into streamsand lakes. Sometimes, however, the social costof correcting exceeds the social costs of ignor-ing externalities. To use international exam-ples, government attempts to correct external-ities by dictating an “optimal” firm size oftenhave created farms that are, in terms of effi-ciency, too small, e.g., those in East Asia, or toolarge, e.g., those in the former Soviet Union.

Markets work best in a supportive institu-tional environment. One regulatory concern isthe lack of transparency in production con-tracts. The terms of these contracts can bemade comprehensible, and information promot-ing competition and fair treatment of contractgrowers can be made public.

Another issue is the use of public regulationversus public financial incentives to encourageprotection of the environment when markets donot. Agriculture has a long tradition of publicfinancial inducements to promote conservationof soil, for example. The public also has elect-ed to subsidize environmental measures onsmall farms, as under the Environmental Qual-ity Improvement Program (See also Innes1999). These incentives, however, still reward“bad actions” by subsidizing means to controlundesirable emissions, instead of rewarding“good actions” (low emissions) with “green pay-ments.” Green payments is the term applied topayments for the production of such environ-ment goods and services such as clean water,clean air, biodiversity, and carbon sequestra-tion.

If the political process deems that certainaspects of vertical coordination in agricultureare inappropriate, an alternative to regulatingfirms is product labeling backed by standard-ization and enforcement (see Council of Agri-cultural Science and Technology 1994). Con-

sumers who prefer to purchase free-rangechickens, or eggs produced by independent op-erators can “vote” by purchasing the labeledproduct at a price bringing forth the optimalsupply.

5. What is the proper jurisdictional level forregulation and control? Labeling and localor state options will not suffice for practicesdeemed unacceptable on a national level.Firms will tend to go to the communities, coun-ties, and states with the weakest environmen-tal standards. For example, a state that makesswine operations above a certain size illegalwill see swine operations move elsewhere andthus may find itself with very few swine oper-ations because small operations usually cannotmake a profit. A state that proscribes contractproduction may deny many local family-farm-ers the production contract operations thathave sustained their farms. These are empiri-cal questions and the data to date are mixed.Thus, practices deemed widely unacceptableneed to be identified and regulations estab-lished on the national level.

National environmental rules do not ac-count for differences in population density andclimates among states. Thus, national environ-mental rules need to have sufficient flexibilityto be tailored to the unique circumstances ofindividual states and communities.

To enhance the vitality of farming-depen-dent rural communities, the federal/state ex-tension service and other state and local orga-nizations can (1) promote entrepreneurshipand innovation, e.g., business incubators; (2)encourage farmer-producer groups, e.g., coop-eratives, to operate in food-supply chains; (3)facilitate application of knowledge to produc-tion, processing, and distributing, as a meansof decreasing costs and increasing responsive-ness; and (4) increase resident understandingof economic and social strengths and weakness-es, e.g., business expansion, retention, and ac-quisition options. These strategies, all of whichcan help transform rural communities, aresometimes best carried out not only through al-liances of farmers but also through alliances ofcommunities to achieve economic and politicalinfluence along with efficient information flow.

A county option sometimes is useful whenenvironmental regulations must differ amonglocal areas. People in a local jurisdiction canvote whether to accept or to reject a proposed


economic activity. Communities with densepopulations or sensitive environments (or nos-es) may be unsuitable for large livestock oper-ations. Whereas a local option, or a local citi-zens’ vote to accept or to reject a proposal,allows communities to express their choices,local livestock operators rightly fear capriciouspopulist judgments. Without proper legal pro-tection, established farmers who have beengood citizens and have invested heavily in safe-guards for workers and proper waste disposaland odor control measures may be required toshut down their operations. To avoid this typeof injustice, communities may choose to applya local option solely to new operations.

6. What is the role of public versus privateresearch in vertical coordination? Privatefirms are performing more research in partbecause they have the resources to do so andin part because they face increasing pressureto be competitive and to contain costs whileaddressing externalities. Public research willbe especially helpful to smaller firms. Mea-sures to address externalities and to dispose ofanimal waste properly are detailed in Integrat-ed Animal Waste Management (Council forAgricultural Science and Technology 1996).Perhaps the most intractable externality isodor. Through public and private research,technologies such as building manure pits orcovered lagoons, using additives, composting,and converting animal waste to solids before in-jecting it into farm fields have been developedto address this last issue. Raising animals insmaller, more scattered production units canalso reduce odor and the noxious gases it rep-resents.

Innovative technologies and negotiable dis-charge permits can decrease environmentalregulation costs materially. Much public re-search is being conducted to decrease the ex-ternalities associated with large, confined-an-imal operations; when these externalities aredealt with effectively, one of the main advan-tages of smaller operations will disappear.Nonetheless, the public and farmers of all typesand sizes can benefit immensely from morepublic and private research developing technol-ogy that cost-effectively improves animal wel-fare and water quality while addressing suchenvironmental problems as odors and flies.

7. If externalities are internalized, will thetrend to production contracts and vertical

integration be stopped or slowed? The an-swer is probably “no,” but this likelihood doesnot detract from the need for a national policy(1) augmenting existing taxes, subsidies, andregulations, when worthwhile, to internalizeexternalities; that is, using taxes, subsidies, orother means to bring private costs (benefits) atthe margin in line with social costs (benefits)to society, and then (2) allowing the market todecide which size and type of economic unitswill thrive and expand.

8. Is there healthy competition in markets?If not, the proposed public policy of lettingmarkets work after internalizing externalitiescannot achieve its end. Although there is noevidence that farmers are exploited systemat-ically by agribusiness and although there ismuch evidence that food and fiber markets arereasonably free, it is essential, nonetheless,that the United States continue to promotecompetition through antitrust and other mea-sures (Tweeten 1989, Ch. 8). Increasing con-centration (horizontal integration) in all sectorsof the economy has a more negative impact onrural communities in negotiating power thanvertical coordination.

Public and private decision-making can beenhanced by greater transparency of informa-tion in integrated markets. For example, termsof production contracts can be made publiclyavailable. Data therefrom promotes symmetryof information between growers and contrac-tors and thereby promotes greater competitionand economic efficiency. It also provides a database to research issues of market structure,conduct, and performance.

Many dimensions of the impact on ruralcommunities and farms of fewer and larger ver-tically coordinated agribusiness firms cannotbe predicted. Of course, predatory and exclu-sionary anticompetitive conduct by firms is un-acceptable and must be addressed by regulato-ry agencies. But precise rules for judging thecompetitive merits of mergers and acquisitionsare difficult to describe a priori. Fewer andlarger firms may increase well-being of societyby realizing economies of size or may decreasewell-being by exercising market power. Fewerand larger firms can bring fewer (or more)plants to rural communities and can bring low-er (or higher) prices to food producers and con-sumers. Continuing in-depth study of marketstructure, conduct, and performance is neces-


sary, but designing regulatory responses forany particular merger or acquisition requirescase-by-case analysis.

Whatever the number of firms at the na-tional level, many local communities will beunable to provide economic opportunity formore than one contractor operating locally atminimal cost while being nationally and inter-nationally competitive. Such so-called "natu-ral monopolies" will be addressed by contracttransparency (enabling comparisons of contractterms to those of contractors elsewhere), theformation of cooperatives, long-term contract

arrangements, improved transportation bygrowers to markets elsewhere, and by humanresource investments so that resources can findthe best opportunities locally or elsewhere.

It should be noted that excessive marketpower in farm input supply and product mar-keting firms will not cause low returns to farmlabor and capital resources if those resourcesremain as mobile as they are today, and thatimproved agribusiness competition and effi-ciency may not mean an increase in farms ormore-prosperous rural communities.

35

Appendix A: Glossary

Administered/negotiated arrangement. Economic and otherterms of a production or marketing contract are negotiated be-tween the commodity grower/producer and the integrator/con-tractor rather than established in cash market.

Consolidation. Horizontal integration, or the process wherebyfirms producing the same thing at the same stage of the foodmarketing chain join through mergers or acquisitions.

Custom feedlot feeder. The contract producer under contractsnegotiated and perhaps renewed annually, who finishes ani-mals.

Designer foods. Foods specially produced and prepared to meetthe specific demands of individual consumers or groups of con-sumers. They represent a bundle of specific qualities.

Digital divide. The gap between those who have and those whodo not have modern digital technology.

E-commerce. The buying and selling of products over the Inter-net.

Economies of scope. Advantageous relationships of cost/unit ofproduction with output as the number of activities or enter-prises within the firm increases.

Economies of size. Advantageous relationships of cost/unit of pro-duction with firm size (number of units produced). If unit costsrise as size of firm expands, diseconomies of size prevail.

Externality. A divergence between private and social costs/ben-efits.

Green payments. Payments for the production of such environ-ment goods and services such as clean water, clean air, biodi-versity, and carbon sequestration.

High-touch inputs. Quality and management must be appraisedat least in part through hands-on, face-to-face contact.

Identity preservation. Maintaining the ability to identify thesources of ingredients in a product all along its production andmarketing chain. Facilitates trace back to pathogenic andother sources.

Integrated ownership. The major form of vertical integration,whereby a firm owns and operates, in addition to input sup-ply or food processing and marketing, crop and/or livestockproduction in at least one stage of the food production chain.

Intellectual property. Patents, copyrights, rights to information.Internalize externalities. To use taxes, subsides, or other means

to bring private costs (benefits) at the margin in line with so-cial costs (benefits) to society.

Local option. Local citizens vote to accept or to reject a proposal.Market power. Ability of a firm or other entity to influence pric-

es and wages in the market.Metropolitan counties. Counties containing 50,000 or more res-

idents in addition to surrounding commuting counties.Nonmetropolitan counties. Counties excluding metropolitan

counties.Nonprice vertical coordination. Production and distribution

of a good or service through administered or negotiated allo-cation rather than through price allocation.

Spot market. Cash market.Thin markets. Markets with few buyers or sellers.Vertical coordination. Synchronization of the vertical stages of

a production/marketing system.Vertical integration. “Coordination of two or more stages in the

food-chain under common ownership via management direc-tive” (Martinez 1999, p. iv.).


36

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38

Index

A

Administered/negotiated vertical coordination, 11, 17-20, 35Affluence, 9Agribusiness firms, 14, 27Agricultural cooperatives, 16Agriculture, changing structure of United States, 1, 3-5Alliance for the Twenty-First Century, 17nAlternative food-value chains, 14-23

administered/negotiated vertical coordination in, 11, 17-20, 35cooperatives in, 16-17electronic commerce in, 1, 5, 21independent private firms coordinated by market prices in, 14-16

Antitrust measures, 2

B

Bioengineering, 11Broiler production, 25Buckeye Egg Farm, 14, 20

C

Capper-Volstead Act (1922), 16Cargill, 22Cenex Harvest States, 16, 17, 22Change, effects of, 1-2, 5-6Clayton Act, 16Clean Air Act, 30Clean Water Act, 30Cluster configuration, 12Cluster structure, 24Commodity cycles, 11Commodity ownership, 4, 18Communities, economic impact of vertical coordination on, 24-28

distribution of employment among and within firms, 27-28environment, 27firm size and income, 25-27location of ownership and management, 28resource demands, 24-25

Competition, 11, 33-34increasing, 5promotion of, 2

Computers, use of, by independent contractors, 19Consolidation, 1, 8n, 35

in the meat industry, 20Contract farming, 19n, 24-25

grower/producer/feeder dissatisfaction with, 19Contracts

marketing, 1, 4, 18multiyear production, 1, 6production, 1-2, 4, 5-7, 18-19, 26-27, 29, 32

Cooperative Extension Service, 6, 7, 30, 31

Cooperatives, 16-17, 24agricultural, 16patron-owned, 16producer, 16

Copyrights, 11, 20Corporations, 17Countrymark Cooperative, 16County option, 2, 7, 32Custom feedlot feeder, 19, 35

D

Designer foods, 9-10, 17, 35Digital divide, 5, 22n, 35Direct transaction costs, 12Distribution of employment among and within firms, 24, 27-28Diversified crop/livestock family-farms, 3, 12DuPont, 22

E

Economic impact of vertical coordination on communities, 24-28distribution of employment among and within firms, 27-28environment, 27firm size and income, 25-27location of ownership and management, 28resource demands, 24-25

Economic unit, 26, 33Economies of scale, 17Economies of scope, 4, 8n, 35Economies of size, 4, 8n, 11, 14, 19, 20, 24, 30, 35Efficiency, 21Egg production, 20, 25Electronic commerce (E-commerce), 5, 35influence on farming dependent rural communities, 1, 21-23Employee health impairments, 30Employment, distribution of, among and within firms, 27-28Environment, 27, 32Environmental degradation, 2, 6, 29Environmental Protection Agency (EPA), 30Environmental Quality Improvement Program, 32Environmental standards, 2, 7, 29Externalities, 27, 30, 31, 33, 35

correcting, 30internalizing, 6, 30, 33, 35livestock operation as, 32

F

Factory farms, 2, 6Family farms, 14, 25, 26, 28, 30

independent, 6, 9Farming-dependent rural communities, 4-5, 8, 14, 24

electronic commerce in, 1, 21-22

Index 39

enhancing vitality of, 32-33underemployment in, 21

Federal Trade Commission (FTC), 16Firms

distribution of employment among and within, 27-28size and income, 25-27

Food and Drug Administration (FDA), 30Food chains, alternative, 15Food-chain shocks, 11Food-marketing chain, 10Food safety, 12, 20Food value chains, 1, 3

administered/negotiated vertical coordination, 17-21alternative, 14-23cooperatives as, 16-17electronic commerce, 21-22forces pressing for closer coordination in, 9-12independent private firms coordinated by market prices, 14-16integration of, 1, 8-9vertical coordination of, 1

Forward pricing, 18

G

Global economy, competing in, 17Green payments, 32, 35

H

High-touch inputs, 22, 35Hog production, 11, 27Horizontal integration, 8, 21, 33, 35Hub, spokes, and wedge configuration, 1, 3-4, 12

I

Identity preservation, 9, 12, 20, 35food safety and, 20

Independent family farms, 6Independent private firms coordinated by market prices, 14-16Indirect transaction costs, 12Information availability, 12Information technology, 1, 5, 6, 9, 22improvement in, 9Innovative technologies, 33Input-output analysis, 27Integrated food-value chains, 8-9Integrated ownership, 1, 4, 10, 20-21, 24, 35. See also Vertical in-

tegrationdisadvantages of, 21economic advantages of, 20

Intellectual property, 11, 15, 20, 35Internalizing externalities, 6, 7, 30, 33, 35

J

Justice, U.S. Department of, 16Just-in-time delivery, 13

K

Kearney Area Producers Association, 17nKentucky Highland Corporation (KHIC), 14nKnowledge creation and dissemination, 9, 10

L

Labeling, 7, 32Land O'Lakes Cooperative, 16Large-scale producers, vertical coordination of, 11Livestock operation externalities, 32Livestock production, 11, 20, 27Local option, 33, 35Location of ownership and management, 28

M

Management, location of, 28Market cost efficiencies, 1Market economies, achieving, 25Market incentives, 27Marketing chain, coordination of links in, 1, 5, 24Marketing contracts, 1, 4, 18Market power, 21, 35Market prices, independent private firms coordinated by, 14-16Markets, healthy competition in, 33McDonalds, 11Meat industry, consolidation of, 19Megafarms, 2, 6, 25Mergers, 16Metropolitan counties, 8n, 35Migration, 8

N

National environmental rules, 32National Pork Producers Council, 17nNegotiable, tradable emissions permits, 27nNegotiable discharge permits, 33Niche markets, 17Nonhobby farms, 24nNonmetropolitan counties, 8n, 35Nonprice vertical coordination, 35

O

Occupational Safety and Health Administration (OSHA), 30Open-market pricing, 8Ownership, location of, 28

P

Partnerships, 24Patents, 20Patron-owned cooperative movement, 16Poultry producers, 19, 21, 25Pricing

forward, 18open-market, 8

Private costs, 30Producer cooperatives, 16Producer's Alliance of Illinois, 17nProduct identity preservation and precision, 12Production, specific qualities in, 9-10Production contracts, 4, 5-6, 18-19, 26-27, 29

economies of size and, 26-27in farming-dependent areas, 1-2lack of transparency in, 32


Public equity, 15Public financial incentives, use of public regulation versus, 32Public policy options, 2, 6-7, 29-34Public regulation, use of, versus public financial incentives, 32

R

Resource demands, 24-25Risk management, 11Rural communities

advantages of e-commerce for, 5creating jobs in, 31farming-dependent, 1, 4-5, 8, 14, 24, 32-33impact of vertical coordination on, 1, 24-28preserving, 31

Rural digital divide, 1, 5, 22n, 35

S

Seaboard Corporation, 14Sears Roebuck catalogue, 22Sherman Act, 16Social costs, 30Sole proprietorships, 24Spot market, 10, 35State-level regulations, 2Strategic alliances, 15Supply-chain efficiencies, 10Swine production, 19, 22, 27

T

Thin markets, 11, 35Transaction costs, 12

decreasing, 5direct, 12indirect, 12

Transparency, lack of, in production contracts, 32

U

United States, changing structure of agriculture in, 3-5Universal product codes, 10, 12

V

Value-creating networks, 15Venture capital, 15Vertical coordination, 1, 3, 8-9, 35

administered/negotiated, 10, 17-21, 35contract production as, 18-19different forms of, 4-5economic impact of, on communities, 24-28distribution of employment among and within firms, 27-28environment, 27firm size and income, 25-27location of ownership and management, 28resource demands, 24-25effects on employment, 24integrated ownership in, 1, 4, 10, 20, 35of large-scale producers, 11marketing contracts in, 1, 4, 18modern forms of, 10modes of, 26public policy in influencing, 31risk management and, 11role of public versus private research in, 33

Vertical integration, 20-21, 35. See also Integrated ownershipsize of farms under, 25variants of, 20

Vertically integrated ownership farms, size of, 25

W

Waste lagoon spill, 30

Documents

Vertical Coordination of Agriculture in...farming-dependent rural communities because they often are disproportionately troubled by depopulation, underemployment, and stagnant income