Efficiency and Welfare Considerations in Integrated Agriculture

Abstract

VERTICAL integration, often suggesting a myriad of coordinating activities, will here imply control by complete or partial ownership, with capital flowing from the integrating to the integrated industry. The two types of integrated agriculture, then, would be ownership of farms by supply or processing firms and ownership of supply or processing firms by farmers. While the latter seems to be the more general pattern of integrated agriculture, the ownership or even contractual control of farms by supply or processing firms causes by far the most ruckus. Efficiency and welfare questions arise from both types of integration. The thrust and direction of such questions are quite different, however. Over the years, a case has been made for integration by farmers. Where farmers have successfully integrated supply or processing operations, it has been judged in the interest of both the farmer and society at large., Either efficiency is improved or an alternative to buying or selling is provided. Since farmers enter these arrangements of their own initiative and the institutions created must compete with conventional channels, it is hard to make a case against integration by farmers. The reasons why farmers buy supply or processing facilities are significant here. It is not to improve production efficiency. It is not to obtain better industry coordination.2 It is almost always to provide a 'less monopolistic market outlet or supply or to provide services not otherwise available. The farmer who joins his neighbor in buying a dairy plantthrough which he expects to sell his milk-does not integrate production and marketing functions in any significant way. He merely sends his milk to a different and competing processor, which he controls, in hopes of getting higher prices and/or an assured market. Integration of agricultural production by other industries seems to be significantly different in a few ways. A farmer may own a few revolving shares of a half dozen farmer-owned supply or processing outfits, but this ownership will affect his production operations very little. On the other