Agricultural contracts: data and research needs.

2. Why are so few contracts formalized, and are more formal arrangements superior? Presumably, lawyers and other sources of "advice" for farmers might suggest that using a written contract is advisable. Is it?

3. Although the farm is often treated as an autonomous decision-making unit, first-level handlers are clearly involved to some extent in the decisions that farmers make. What purpose does this involvement serve? Monitoring, exercise of authority, and provision of information are all candidates.

4. How does one measure market power or price discrimination in a contractual relationship? Variation in contract terms across individual growers seems necessary but not sufficient.

5. Contracts are often used to securitize debt in financing new farm-level capital. What is the economic rationale for tying marketing and lending activities?

Study of these questions and finding research-based answers requires original thinking and specialized data collection. Incentives are in place for individual researchers to undertake efforts aimed at answering these questions. Data approaches likely will involve some combination of surveys (of growers, firms, lenders, and of the lawyers who serve contracting parties) and of case-study type research, which yields detailed information about specific contractual relationships. There are also a number of regional research groups among members of Land Grant universities where study of contracts and organizations might reasonably have a place, though perhaps there is need for a separate organization to encourage stronger links among interested university and government researchers. Whatever efforts emerge, all would benefit from better descriptive data on the form that contracts take, and how form varies within and across sectors.

Conclusions

Data on the incidence and structure of agricultural contracts are scarce. No doubt this is because contracts govern business relationships, and the information they contain sometimes has strategic value. Contracts are difficult to "measure" even with full cooperation of contracting parties. The written content of contracts can be complex and, to the extent that there are implicit elements of a "contract," may only partially describe the rights and obligations of the relevant parties. Of the empirical research that has been conducted to date, most has relied on idiosyncratic success that individual researchers have had in negotiating access to the private business of firms. In some cases, this has been access to individual contracts, while in other cases access has included contracts plus compensation and production outcomes. Some researchers have surveyed either farmers or firms to obtain cross-sectional evidence on variation in contract characteristics. Data of this sort only crudely summarizes contracts, but is useful because it allows greater coverage of the research population. Finally, USDA ARMS and agricultural census data report on the incidence of "marketing" and "production" contracts.

Although collecting data from individual firms or surveying contracting parties is a difficult task, there is no viable alternative for learning about the nature and importance of contracting in agriculture. We have questioned the value of the production/marketing contract typology that the USDA uses. Rather than ask grower-respondents to classify their contractual relationship into one of two categories, it would be more informative to ask a few specific questions about the contracts they use. We suggest that there may also be value in gradual accumulation of sectoral "clearinghouses," where the organizational structure of commodity sectors--including the nature and incidence of alternative contracting practices--is described and summarized. Summary information of responses to questions about specific contract characteristics, together with sectoral descriptions of how production and marketing are organized, would provide general information that individual researchers (or research groups) can use to launch investigations on more specific topics as the need or interest arises.

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(1) The series are different because one is based on quantity and the other on value, and because the definition of what defines a "contract" is different across the studies. Mighell et al. (1963) focus exclusively on production contracts, while MacDonald et al. (2004) report on both production and marketing contracts.

(2) Additionally, there has been little or no increase (possibly even a decrease) in the extent of "vertical integration," or of food processing firms participating directly in farm production. Mighell and Jones (1963) report that 3.9% of farm production occurred in such firms in 1960, while MacDonald et al. (2004) report a reduction in this number from 3.0 to 1.9% between 1978 and 2002.

(3) The primary goal of ARMS, which is to develop farm business, farm sector, and farm household financial data, drives the design of the sample design (a broad-based and heterogeneous set of farms) and the form of the questions. Specifically, the changes in livestock and poultry industries noted above--in which most expenses were borne by non-farm integrators who provided inputs to contract growers, and who then removed the mature chickens or hogs from the farm for sale or processing--created challenges for estimating sectoral expense and revenue flows.

(4) Section E, Farm Income, 2005 USDA ARMS "core" mail survey. Complete documentation can be found at http:// www.ers.usda.gov/Data/ARMS/. More detailed cost-and-return and commodity-specific enumerated surveys are also administered where enumerators are trained to help respondents distinguish between production and marketing contracts.

(5) The USDA ARMS cost-and-return and commodity-specific enumerated surveys ask a number of questions regarding contract attributes (USDA 2006). Within the context of the commodities this survey covers, this is potentially useful data. Unlike the data reported below, however, it is contractees rather than contractors, who are sampled. Either respondent is potentially relevant, depending on the question one is trying to answer. In some cases, it may even be necessary to collect information from both populations.

The authors are Associate Professors in the Departments of Agricultural and Applied Economics, University of Madison-Wisconsin and the Department of Agricultural and Natural Resource Economics at the University of California, Berkeley, and Research Scientist in the Economic Research Service of the U.S. Department of Agriculture.

The views expressed herein are those of the authors and do not necessarily reflect the views or polices of the U.S. Department of Agriculture.

This article was presented in a principal paper session at the AAEA annual meeting (Portland, OR, July 2007). The articles in these sessions are not subjected to the journal's standard refereeing process.