Vertical Contracts of Farmer Professional Cooperatives in China

1、vertical contracts of farmer professional cooperatives in chinaxiangping jiaa, b * jikun huanga, b a. center for chinese agricultural policy, chinese academy of sciences b. institute of geographical sciences and natural resource research, chinese academy of sciences. jia 11 datun road, anwai, beijin

2、g 100101, china* corresponding author. tel.: +86 10 64888985; fax: +86 10 64856533 e-mail address: jiaxp.ccapauthors note: the authors are grateful to the valuable comments from colin poulton, george hendrikse and john humphrey. we would like to thank the financial supports from international develo

3、pment research center and chinese academy of science (kscx2-yw-09-04), national natural science foundation of china (grant no. 70903063), national science foundation for post-doctoral scientists of china (grant no. o7z7601az1).1vertical contracts of farmer professional cooperatives in chinaabstractw

4、hile the agro-food market in china is dominated by spot market exchanges of small farmers and various small traders and there is minor penetration of modern supply chain at farmgate, the emergence of farmer cooperatives in china becomes an important institutional arrangement in the wave of transform

5、ed agrofood system in china. the overall goal of this study is to describe the current status of fpcs in china and to determine the vertical contracts of the agrofood chain via fpcs. based on a national representative survey on 157 fpcs, this paper shows that fpcs start to substitute market exchange

6、 for vertical contracting with mid- & down-stream partners. marketing contracts are used most in high-value sector and processing sector. if fpcs brand their products, contracts are more likely to be used. public certification to food quality, however, does not promote the vertical contracts in of t

7、he agrofood chain in china. the government faces challenges to provide a wide range of supporting institutions and enabling environment, particularly the quality certification system that helps farmers source the value-adding from the rights of producers. jel classification: l14; q13; q18keywords: f

8、armer; cooperatives; vertical coordination; contract; certification, china281 introductionduring the socialism era, millions of small peasant farms were replaced by large state or collective farms, termed as “cooperatives”. the institutional reform in agricultural sector during 1978-1984 (household

9、responsibility system, hrs) allocated collectively owned land to individual farmers in each village, contributing to the increased productivity in agriculture. lin (1992b) find that about half of the 42.2 percent increase in total farm output in china between 1978-1984 can be explained by the instit

10、utional reform of decentralization. the decentralized decision-making under family faming system contributed to the agricultural development in the early reform period and facilitated the subsequent economic reforms (de brauw, huang, & rozelle, 2004; johnson, 1998; lin, 1992a).the family farming eco

11、nomy promotes the transformation of the agrofood market. the upstream segment has evolved dramatically from a country with a food system based on rationing in the cities to one that was based on wet markets and small shops to one in which the supermarket and restaurant sectors are growing faster tha

12、n anywhere else in the world (huang, et al., 2007). in the midstream wholesale sector, consolidation occurs and there is an emerging group of large wholesalers that have formal and informal ties with supermarket chains. the downstream segment of the agrofood market saw the fast emergence of supermar

13、kets than in other developing regions (hu, et al., 2004). although the agrofood market in china has evolved dramatically in the past 15 years, there is little evidence that this is directly moving down to the farmgate, where marketing is dominated by the sales of farmers to small traders and small w

14、holesalers. for example, huang et al. (2007) surveyed the horticultural market in north china and found 20.4 percent of farmers sold their product to small brokers and 78.3 percent of farmers sold products to wholesalers in 2001. the figure turns to 18.4 percent and 80 percent respectively in 2005.

15、only 0.3 percent of small farmers reported marketing via modern supply chain, say, supermarkets. none of the surveyed farmers contracted with the buyers and none of them got any service (viz. technology, inputs or credit) from the midstream or downstream segment. there is almost no penetration of th

16、e new agribusiness mode, termed as “supermarketization” and “agro-industrialization” in some studies (hu, et al., 2004; waldron, 2009). internationally, the percentage of agricultural product value produced under contracts is increasing at a rapid rise in developing as well as developed countries, a

17、nd “the growing number of complex contractual arrangements replacing spot markets is a defining characteristic of the agro-industrialization phenomenon” (cook & chaddad, 2000, p. 213). in usa, the poultry, egg, and pork industries have taken significant steps to improve the control of production thr

18、ough vertical contracts (and/or vertical integration) (martinez, 2002). according to key and macdonald (2006), the share of farms contracting in the usa accounted for 39 percent. in brazil, 75 percent of poultry production is coordinated via contracts. in viet nam, 90 percent of cotton and milk, 50

19、percent of tea and 40 percent of rice are being purchased through contracts (da silva, 2005). small farmers, traders, large scale commercial firms and government agencies all face substantial difficulties in accessing information and in working together in low cost and low risk agrofood systems. the

20、 use of contract along the agrofood chain arise when a) small volume of transaction in product and marketing limit the turnover of investment; b) limited opportunities for processors and retailers to source farm produce in traditional marketing approach; (c) smallholder farmers limited capability to

21、 get inputs and the knowledge to use the inputs (dorward, kydd, & poulton, 1998; little & watts, 1994; poulton, dorward, & kydd, 2005). given the various challenges small family farmers face, it becomes crucial to embark on new institutional arrangements in the agrofood supply chain. as one of them,

22、 collective organization that set and enforce formal rules is one option to overcome the coordination problems in the agrofood system, while there exist a wide range of options and combinations (poulton, et al., 2004). since the early of 21st century, chinese government becomes a driving force behin

23、d to push the emergence of farmer organizations. a systematic promotion occurred in 2004 as, in december 2003, the standing committee of the 10th peoples congress officially accepted the “l(fā)aw of farmers cooperative economic organizations” into the agenda for drafting legislation. meanwhile, several

24、relevant laws impinged on the operation of farmer cooperatives. for example, in the “agricultural law” of 2003, “farmers specialized cooperative economic organizations” were officially encouraged but the operations must be confined in production and marketing. in october 31st of 2006, the “l(fā)aw of fa

25、rmer professional cooperatives” was passed in the standing committee of the 24th peoples congress, and the law was promulgated in july 1st of 2007. the law confines cooperatives function in providing service like purchasing agricultural inputs, marketing, processing, transportation, storage, agricul

26、tural technology and information. cooperatives function in providing finance and other social service are not declared though. it was reported that 2.9 percent farmers and 10 percent of villages are covered by fpcs by 2003 (shen, et al., 2005). the statistical figure of village coverage is misleadin

27、g as there are both formal fpcs that are barely functional and fpcs that were not formally registered but provided functional services to farmers. shen et al (2005) decomposed the functional and formal farm associations and therefore found 7 percent of villages in china had function of fpcs. deng et

28、 al. (forthcoming) found 21 percent of chinas village and county seats had fpcs in china and these fpcs provided services to about 24 million farm households in 2008. although there are many factors that correlate with the emergence of fpcs in rural china, the role of government is of primary import

29、ance. given the above mentioned backdrops, we want to know what is the role of the emerging farmer cooperatives in restructuring the agrofood market in china. this study aims to investigate the vertical contracts of the farmer professional cooperatives (fpcs) in the wave of transformed agrofood mark

30、et where the upstream segment is dominated by small household-based participants. the research is unique as it determines the vertical contracts of fpcs on the transaction attributes by developing a set of parameters in the framework of transaction cost economics. the methodology of transaction cost

31、 approach helps to uncover in which situation vertical coordination between fpcs and their buyers emerges. meanwhile, the large-scale survey data will provide the most updated observations and knowledge on the most recent development of farmer organizations in transitional china. the article is stru

32、ctured as follows. section 2 presents a conceptual framework and draws research hypotheses. section 3 introduces data collection and describes contractual arrangement of fpcs (with their mid- and down-stream buyers). in section 4, we model the determinism of the contractual arrangement and vertical

33、coordination of fpcs. conclusions are presented in section 5. 2 conceptual framework2.1 vertical contracts in agrofood market: an neo-institutional economics viewpointthe transaction cost approach has been used to explain transactions of the global commodity chains (gereffi, humphrey, & sturgeon, 20

34、05; humphrey & schmitz, 2001; peterson, wysocki, & harsh, 2001). these studies acknowledge that, besides market-based relationships and hierarchies (vertically integrated firms) that both make up opposite end, there exist a set of hybrid forms of the spectrum of explicit coordination. vertical coord

35、ination via contracts is one of the hybrid forms. the rationale applies to agro-food market as well (frank & henderson, 1992).the neo-institutional economists seek to understand market and non-market exchange under positive transaction costs. the emergence and structure of contracts are explained in

36、 terms of information incompleteness, moral hazard, and missing markets (menard & shirley, 2005). in other words, when the characteristics that the buyer is concerned about are difficult to be obtained in market exchange, vertical contracts and/or vertical integration will emerge. from the viewpoint

37、 of specific agricultural sector, martinez (2002) found that the emergence of new specialized large-scale production technology affected the transaction complexity of marketing exchange in poultry, egg, and pork industries. vertical contracts provided an efficient means of organizing markets by redu

38、cing the transaction costs. non-standard products that originate from food safety and environmental concerns lead to the substitution of vertical contracts for arms-length market exchange (humphrey & memedovic, 2006). the new-institutional economists conclude that the transformation of the agrofood

39、market increase the transaction costs associated with spot-market coordination and buyers and sellers can reduce some of these costs by entering into a contract arrangement, although they will encounter other types of costs, namely ex ante contracting costs (when drafting, negotiating, and safeguard

40、ing the agreements) and ex post costs (when enforcing the contracts).to investigate the information incompleteness in agrarian institutions, in their pioneer work, binswanger and rosenzweig (1986) view the production relations (including contractual arrangements) in agriculture as an endogenous resp

41、onse to materials conditions such as spatial dispersion, seasonality, and risks. some endogenous determinants, such as specific consumption goals and legal codes, are excluded from the analysis of binswanger and rosenzweig (1986). they conclude that family farming is the most efficient institutional

42、 arrangement in the agrarian economy. although they did not use the framework of the nie approach, the transactional attributes that determine the agrarian forms in their study fall perfectly in the transaction cost economics (tce) framework. years after, allen and lueck (1998) formalized a model of

43、 farm organization and attributed seasonality and uncertainty as the determining factors affecting transaction costs in agrarian economy.while the nie approach provides insightful views in investigating the governance and coordination of agro-food market and various organizational forms, three issue

44、s are under-addressed. first, is the agro-food chain different from general value chain? second, even within the agro-food category, why does the governance structure vary across different agro-products? third, why does the agro-food market in china differ from others? in other words, how is the gov

45、ernance of agro-food chain in china affected by the chinese characteristics? how does the movement of fpcs in china affect the vertical contracts along the agrofood chain via fpcs? 2.2 conceptual framework and hypothesesto uncover the determinism of the vertical contracts of fpcs, transaction attrib

46、utes are modeled as a collection of parameters. where is the vertical contract of agro-food chain between farmer cooperatives and their transaction partners. the fpcs may collect products from members and contract with the buyers. alternatively, a loose coordination between fpcs and their partner ma

47、y be used; members of fpcs ship the products to the buyers individually. as such, the vertical coordination between fpcs and their mid- & down-stream partners presents a dichotomy of individual market exchange and contractual arrangements. is the length of production stage (of one harvest) and is th

48、e total number of tasks in a given stage. is the frequency of harvest and is the optimal date under which the quality of harvest would not decrease significantly. besides the material characteristics, the model specifies several additional factors that affect transaction costs: whether the product o

49、f fpcs has brand (); whether the product has been certificated to certain quality (). denotes other controlling variables. the parameters and explain the seasonal forces that may affect production complexity and uncertainty. the longer a production stage lasts and the more tasks one stage has, the m

50、ore complicated the transaction is and the higher moral hazard costs incur, limiting vertical coordination between fpcs and their mid- or down-stream buyers. when production stage is short and the number of tasks is minor, the transaction costs decrease. as such, hypothesis 1: where production stage

51、 and the number of tasks are large, contracting will less likely be used between fpcs and their mid- & down-stream partners. the parameter explains the frequency of harvesting and marketing. the frequency of harvest and market will not necessarily be the same. for example, farmers may harvest maize

52、and sell them for several times; the green house farmers in shandong province in china harvest tomatoes 8 times for the fall-winter cycle, and, for each harvest, they may sell for several times. nevertheless, the two types of frequency are correlated. in the case of the greenhouse farmers, they can

53、not keep the tomatoes for long time and most of products have to be sold before the next harvest. some agricultural products have only one life cycle and the marketing occurs only one time (or limited times) for one harvest. wheat, maize, cottons, and some orchard fruits fall into this category. har

54、vesting and marketing of some orchard fruits (e.g. apples) may not be a one-time affair; it may take several rounds. nevertheless, the ripe season is a physical limit of nature, and the optimal harvesting should be finished no less than certain days, for example, 14 days in the province of shandong

55、in north china. horticultural crops such as greenhouse vegetables, however, have several harvests for one cycle. when similar transactions occur frequently over a long period of time involving some of the same parties, the one who interacts repeatedly may find it valuable to design and introduce low

56、-cost routines to manage the transactions (bijman, 2002). parties involved in a long and close relationship with frequent interactions may subject to less opportunism and thus substitute informal rules for written contracts. as such, hypothesis 2: where the frequency of marketing () is high, market

57、exchange may be adopted over contracting.the parameter measures the perishability of fpcs products. when the optimal dates within which the quality will not change significantly decrease (viz. the smaller), a timing marketing is crucial and contracts will be used. timeliness is an important asset sp

58、ecificity, and the notion was expanded as “temporal specificity” by masten, meehan, and snyder (1991). where timely performance is critical, an opportunistic delay becomes a potentially effective strategy to seek a large share of the gains by threatening. contracting via fpcs offers a likely solutio

59、n to reduce the losses of untimely shipment. as such,hypothesis 3: where the products of fpcs are perishable, contractual arrangements of marketing will be used. the parameters and explain the brand and certification of fpcs products. in williamsons transaction cost theory, reputation is one of the dimensions of asset specificity. in williamsonism, asset specificity takes basically five forms: physical, human, sit