Cost economies in the presence of marketing contracts

Abstract

We examine the impact of marketing contracts on farm cost structure and implied scale and scope economies for large samples of dairy, corn and wheat farms. We consider a multi-product, multi-market technology to examine returns from diversifying marketing schemes. Allowing for risk preferences under price uncertainty, we estimate the contract adoption decision, risk preferences and structural parameters simultaneously. We derive measures of economies for both contracting and noncontracting farms. Each industry exhibits significant scope and multi-output scale economies but vary in product-specific scale economies. We find that marketing contracts improve returns to corn and wheat farms, but not to dairy farms.