Nigel D. Key

The Social Performance and Distributional Consequences of Contract Farming: An Equilibrium Analysis of the Arachide de Bouche Program in Senegal

Abstract This paper is an empirical analysis of the impact of a contract-farming program in Senegal. We examine the access of poorer community members to contracts and the effect of the program on the income of participants. The program performs very well on both counts: participants and nonparticipants are indistinguishable by wealth measures and farmers increase their income substantially by participating in the program. We attribute the former to the programs mobilization of local information through its use of village intermediaries, permitting the substitution of social collateral for physical collateral and making the program more accessible to the poor.

Contracts, Markets, and Prices: Organizing the Production and Use of Agricultural Commodities

Production and marketing contracts govern 36 percent of the value of U.S. agricultural production, up from 12 percent in 1969. Contracts are now the primary method of handling sales of many livestock commodities, including milk, hogs, and broilers, and of major crops such as sugar beets, fruit, and processing tomatoes. Use of contracts is closely related to farm size; farms with

Economic and Structural Relationships in U.S. Hog Production

1 million or more in sales have nearly half their production under contract. For producers, contracting can reduce income risks of price and production variability, ensure market access, and provide higher returns for differentiated farm products. For processors and other buyers, vertical coordination through contracting is a way to ensure the flow of products and to obtain differentiated products, ensure traceability for health concerns, and guarantee certain methods of production. The traditional spot market-though it still governs nearly 60 percent of the value of agricultural production- has difficulty providing accurate price signals for products geared to new consumer demands (such as produce raised and certified as organic or identity-preserved crops modified for special attributes). We are likely to see a continuing shift to more explicit forms of vertical coordination, through contracts and processor ownership, as a means to ensure more consistent product quantity and quality.

The Changing Economics of U.S. Hog Production

Rapid change in the size and ownership structure of U.S. hog production has created new and varied challenges for the industry. This report describes an industry becoming increasingly concentrated among fewer and larger farms, and becoming more economically efficient. These changes have not come without problems. The increasing market control and power concentrated among packers and large hog operations, and the manure management problem posed by an increasing concentration of hog manure on fewer operations, are paramount concerns. Addressing these concerns through regulations would likely impose economic costs that could be passed on to consumers. In addition, the relative mobility of the hog industry means that regulations could result in significant changes in the location of hog production facilities, with ripple effects in local economies. Balancing environmental and economic interests will challenge policymakers dealing with the implications of structural change in U.S. hog production.

How much Do Decoupled Payments Affect Production? An Instrumental Variable Approach with Panel Data

The increasing size and specialization of hog operations reflect structural change in U.S. swine production during the past 15 years. The number of farms with hogs has declined by over 70 percent, as hog enterprises have grown larger. Large operations that specialize in a single phase of production have replaced farrow-to-finish operations that performed all phases of production. The use of production contracts has increased. Operations producing under contract are larger than independent operations and are more likely to specialize in a single phase of production. These structural changes have coincided with substantial gains in efficiency for hog farms and lower production costs. Most of these productivity gains are attributable to increases in the scale of production and technological innovation. Productivity gains likely contributed to a 30-percent reduction in the price of hogs at the farm gate.

Decomposition of Total Factor Productivity Change in the U.S. Hog Industry

Agricultural support payments that cause no or minimal production distortions are exempt from World Trade Organization restrictions. If and how much decoupled payments, such as direct payments in the U.S., affect agricultural production remains an open empirical question with implications for policy. We use multiple years of the Census of Agriculture to estimate the aggregate supply response to changes in direct payments. To identify an exogenous source of variation in payments we exploit a provision of the 2002 Farm Act that departed from previous policy by making oilseeds eligible for direct payments, thus increasing payments to areas that historically produced more oilseeds. Using a sample of ZIP codes that accounts for more than eighty percent of the national value of production of program crops, our instrumental variable estimates, in contrast to OLS estimates, suggest that changes in payments over the period 2002 to 2007 had little effect on aggregate production.

Agricultural Contracting and the Scale of Production

The U.S. hog industry has experienced dramatic structural changes and rapid increases in farm productivity. A stochastic frontier analysis is used to measure hog enterprise total factor productivity (TFP) growth between 1992 and 2004 and to decompose this growth into technical change and changes in technical efficiency, scale efficiency, and allocative efficiency. Productivity gains over the 12-year period are found to be explained almost entirely by technical progress and by improvements in scale efficiency. Differences in TFP growth rates in the Southeast and Heartland regions were found to be explained primarily by differences in farm size growth rates.

Mitigating methane emissions from livestock: a global analysis of sectoral policies

This study presents evidence that contracting is positively associated with the scale of production for six major U.S. agricultural commodities. Specifically, contract producers tend to operate at a larger scale than do independent producers, and the likelihood of an operation contracting increases with its scale. This relationship is strongest in the cattle and hog sectors, where it persists even among large commercial operations. Six theoretical explanations for the observed correlation between scale and contracting are proposed, including imperfect capital markets, contractor transaction costs, input leverage, grower risk aversion, asset specificity, and technological change. Information from five annual national surveys is used to examine the validity of three of the proposed mechanisms.

Potential Effects of Climate Change on the Productivity of U.S. Dairies

Methane emissions from livestock enteric fermentation and manure management represent about 40% of total anthropogenic greenhouse gas emissions from the agriculture sector and are projected to increase substantially in the coming decades, with most of the growth occurring in non-Annex 1 countries. To mitigate livestock methane, incentive policies based on producer-level emissions are generally not feasible because of high administrative costs and producer transaction costs. In contrast, incentive policies based on sectoral emissions are likely administratively feasible, even in developing countries. This study uses an economic model of global agriculture to estimate the effects of two sectoral mitigation policies: a carbon tax and an emissions trading scheme based on average national methane emissions per unit of commodity. The analysis shows how the composition and location of livestock production and emissions change in response to the policies. Results illustrate the importance of global mitigation efforts: when policies are limited to Annex 1 countries, increased methane emissions in non-Annex 1 countries offset approximately two-thirds of Annex 1 emissions reductions. While non-Annex 1 countries face substantial disincentives to enacting domestic carbon taxes, developing countries could benefit from participating in a global sectoral emissions trading scheme. We illustrate one scheme in which non-Annex 1 countries collectively earn USD 2.4 billion annually from methane emission permit sales when methane is priced at USD 30/t CO2-eq.

Losing Under Contract: Transaction-Cost Externalities and Spot Market Disintegration

Climate change could affect the costs and returns of livestock production by altering the thermal environment of animals thereby affecting animal health, reproduction, and the efficiency by which livestock convert feed into retained products (especially meat and milk). In the United States, concentrated livestock operations are located in a variety of climatic regions, suggesting that the industry could adapt to future changes in temperature and weather patterns resulting from global warming. However, this adaption could be costly. We use nationally representative data on dairy producers coupled with finely-scaled climate data to empirically examine how producers’ costs, returns, and production systems vary across U.S. regions as a function of the local climate.