Progress 07/01/02 to 06/30/07
Outputs
OUTPUTS: Following up on 2006 activities, 2007 saw the completion of a study on the use of contracts by Pennsylvania-based food processors to by agricultural ingredients. This project is described in more detail in last's year's progress report. Also in 2007, new activities under this project involved the analysis of a dataset generated by a population survey of certified organic processors, wholesalers, and brokers - collectively called certified organic handlers. This research can be divided into two focus areas. One research area addresses the question of a certified organic handler's choices to procure ingredients or market products locally, regionally, nationally, or internationally. A second area addresses the question of a handler's use of private contracts to procure certified organic ingredients. Two other specific outputs, in the form of working papers, are in progress. These working papers are described in the next section. While this project terminated at the end of June
2007, work on both outputs will continue after that date under the jurisdiction of a new Hatch project.
PARTICIPANTS: The Principal Investigator on this project is Edward Jaenicke. At Penn State, one Ph.D. graduate student has contributed to these efforts. That student is currently on leave from Penn State. Also, at Penn State, Jaenicke collaborated with Tim Kelsey and Martin Shields (now at Colorado State University). More relevant is the participation of the U.S. Department of Agriculture's Economic Research Service (ERS) on this project. More specifically, ERS's Carolyn Dimitri, Ph.D., provided data obtained from a national survey of organic food processors.
TARGET AUDIENCES: The target audience for this project has been peers at other land grant institutions and analysts covering the agricultural and food industries.
Impacts
The first working paper focuses on the regional scope of a firm's market. We model the likelihood of being a local, regional, national or international marketer or procurer of organic products as a function of firm characteristics such as a firm's total sales and use of private contracts for procurement, among other factors. After estimating separate multinomial logit models, we find that firms that use procurement contracts are more likely to procure locally than nationally, but no more likely to market locally than nationally. We also find that firms with higher gross sales are less likely to procure locally or market locally. Finally, we find that firms with a higher percentage of sales devoted to organic products are more likely to market locally than nationally, but this factor has little to no impact on procurement location choice. The second working paper investigates the use of private contracts between certified organic food processors and farmers. We model
the use of procurement contracts by certified organic handlers in a two step process where, in step one, a firm decides whether to use contracts to procure organic ingredients and, in step two, the firm decides on the amount of inputs bought under contract. Both of these two-step decisions depend on firm-level characteristics. However, this dependency is allowed operate separately. After jointly estimating these separate decisions, a sample of our results shows some unexpected contrasts. For example, a firm's prior experience with a supply shortage increases the likelihood it will contract, but decrease the amount procured under contract. Also, the amount of a firm's gross sales increases the likelihood it will contract but has no significant impact on the amount it will procure under contract.
Publications
- Jaenicke, E.C., M. Shields, and T. W. Kelsey. 2007. Food Processors' Use of Contracts to Purchase Agricultural Inputs: Evidence from a Pennsylvania Survey. Agricultural and Resource Economics Review 36:213-229.
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Progress 01/01/06 to 12/31/06
Outputs
Progress in 2006 focused on several areas: (1) The first area of progress focused on the design of livestock contracts and the implications of their use on the market prices and process profits. In the broiler sector, two manuscripts were revised that investigate the efficient design economic incentives in broiler contracts. In the hog sector, one manuscript was revised that investigates the co-existence of a contract market and a cash market in an equilibrium setting. (2) The second area of progress focused on characterizing the use of contracts by Pennsylvania food processors. Using data from a survey, research describes the types of processing firms that used contracts to purchase agricultural inputs directly from farmers and models firm-level factors that affect the likelihood of contract use. (3) The third area of progress focused on investigating decisions by supermarkets to offer a fresh irradiated ground beef product. Specific aspects of decisions under
investigation include market timing and issues of whether a supermarket takes a leadership or follower position. (4) And finally, contracting analysis methods were applied to theoretical models of nonpoint source pollution abatement in agriculture. More specifically, models of point source - nonpoint source pollution trading were expanded to include bilateral contracts between point sources and agricultural nonpoint pollution sources.
Impacts
(1) In the broiler sector, research shows that (i) processors' profits can improve by offering two contracts designed to self-select growers of low and high ability, and (ii) relative-performance contracts like those currently used by the industry are found to maximize grower profits even when contracting is repeated over multiple periods. In the hog sector, research shows that increased use of contracts can create additional demand in the cash market, thereby raising cash market prices. (2) Using data from a Pennsylvania survey, we investigate firm-level characteristics that make a food processor more or less likely to buy agricultural inputs though contracts. We find that over 20 percent of Pennsylvania processors use contracts, and over 44 percent of agricultural inputs (based on value) are purchased under contract. We also identify firm-level factors that make a firm more likely to use contracts at all, and what factors lead a processor who does contract to use
them more intensively.
Publications
- Wang, Y. and Jaenicke, E.C. 2006. Simulating the Impacts of Contract Supplies in a Spot Market-Contract Market Equilibrium Setting. American Journal of Agricultural Economics 88:1062-1077.
- Jaenicke, E.C., Jensen, K., Harrison, W., and Jakus, P. 2006. Follow the Leader: Follower Behavior in Supermarket Adoption of Fresh Irradiated Ground Beef. Agribusiness: An International Journal 22: 547-568.
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Progress 01/01/05 to 12/31/05
Outputs
Progress in 2005 focused on refinements to several theoretical economic models related to important issues concerning contracts between agricultural producers and food processors. Papers based on these models were presented at the 2005 annual meetings for American Agricultural Economics Association and the European Association of Agricultural Economics. In total, four papers on contracting are under review at agricultural economics journals. Progress in 2005 was also made on analyzing strategic decisions of supermarkets. In particular, data from a survey of supermarket store managers was analyzed to find how stores decided to offer or not offer irradiated ground beef, a new product only recently allowed by the U.S. Department of Agriculture and the Food and Drug Administration. A paper reflecting this analysis was presented at three conferences in 2005.
Impacts
Private contracts are one of several strategic devises used to coordinate production and marketing decisions, especially those centered on quality. The primary impact from my contracting models will be better understanding of how to improve this coordination. The irradiation of fresh and frozen ground beef was authorized to reduce the incidence of food-borne pathogens. However, adoption of the use of this technology has been slow: at the height of adoption, only a bit over 10 percent of U.S. supermarkets offered an irradiated ground beef product. The impact of my research on supermarket decision making helps us understand why store adoption of this product lagged. More generally, this research helps explains why some supermarkets are leaders in new product adoption while others are followers.
Publications
- No publications reported this period
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Progress 01/01/04 to 12/31/04
Outputs
The year 2004 saw the development of several theoretical economic models related to important issues concerning contracts between agricultural producers and food processors. One model mimics the interplay between the cash market and contract market when equilibrium conditions of supply and demand implicitly link the two markets. This model is particularly useful to analyze the hog or cattle markets, where both cash and contract markets co-exist in equilibrium. A second model investigates long-term dynamic issues in contracting. This second model is well suited for analyzing contracts in the poultry industry where the same processor repeatedly contracts with growers. The model examines the conditions favoring contracts that base incentive pay on how will a grower performs compared to the group average. A third model looks the issue of whether contract growers are best pooled collectively into a single group or separated into multiple groups based on ability levels. The
model is able to show that an offering of multiple contracts that separate growers can improve the profitability of processors and the joint welfare of growers and processors.
Impacts
Private contracts are one of several strategic devises used to coordinate production and marketing decisions, especially those centered on quality. The potential benefits from establishing efficient buyer-seller relationships, other inter-firm partnerships, and/or optimal contracts have generally not been estimated. The primary impact from this study will be better understanding of how to improve the economic efficiency of these relationships. A secondary impact will be improved estimates of impacts of increased levels of contracting in sectors where contacting is just now emerging.
Publications
- Wang, Y. 2004. Three Essays in Agricultural Contracting: Incorporating Market Equilibrium and Dynamics into Principal-Agent Models. Ph.D. Dissertation. The Pennsylvania State University, University Park, PA. 250 pp.
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Progress 01/01/03 to 12/31/03
Outputs
In 2003, progress has been made on several fronts: first, investigating the impact of the increase of privately contracted farm output (often called captive supplies) on the performance of a potentially thin cash market; second, comparing the efficiency of two types of contracts in a dynamic, multiperiod setting; third, understanding how the reputation of growers may affect the performance of contracts; and lastly, investigating how and why contract forms have evolved over time. On each of these areas, a theoretical model consistent with the historical account has been developed to investigate how market parameters impact performance and efficiency of supply contracts.
Impacts
Private contracts are one of several strategic devises used to coordinate production and marketing decisions, especially those centered on quality. The potential benefits from establishing efficient buyer-seller relationships, other inter-firm partnerships, and/or optimal contracts have generally not been estimated. The primary impact from this study will be better understanding of how to improve the economic efficiency of these relationships. A secondary impact will be improved estimates of impacts of increased levels of contracting in sectors where contacting is just now emerging.
Publications
- No publications reported this period
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Progress 01/01/02 to 12/31/02
Outputs
This study is being implemented on two fronts, one investigating contract design from the standpoint of economic theory and the other investigating how agribusinesses are using supply contracts. Theoretical investigations have begun to focus on cases where a food processor (a principal) is contracting with many farmers (agents) and benefits not from individual farm output but from pooled (or average) output. This situation becomes most relevant when a product quality threshold exists and quality varies across producers. On the agribusiness front, a mailing list of Pennsylvania-based food processors/manufacturers has been assembled and progress is underway to design a short survey about contracting practices.
Impacts
Private contracts are one of several strategic devises used to coordinate production and marketing decisions, especially those centered on quality, up the production chain. The potential benefits from establishing efficient buyer-seller relationships, other inter-firm partnerships, and/or optimal contracts have generally not been estimated. The primary impact from this study will be an improved understanding of how to improve the economic efficiency of these relationships.
Publications
- No publications reported this period
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