Farm Business Practices Coordinate Production With Consumer Preferences

Abstract

Consumer pressures placed on agriculture for variety, quality, and safety are affecting how the industry is organized, including the types of buying and selling arrangements within the food supply chain and the application of information technologies. Farm production is becoming more capital intensive, with emphasis placed on adding value to commodities. Product differentiation and quality control are becoming more essential at the farm level. In some agricultural industries, contract production is becoming more common as food processors and distributors attempt to gain greater control over their products and ensure market outlets. Some contract arrangements specify particular production practices, such as the use of specific genetic strains or organic farming techniques. In other types of contracts, the food processor gains greater control over farm products by providing important inputs, such as the animals, feed, and management services. As contracts become more common, they replace traditional methods of buying and selling large supplies of homogeneous agricultural commodities. Traditionally, these products were conducive to buying and selling without prior commitments placed on producers, and with little control over the commodities by buyers. When the products were ready for sale, producers would take them to an auction market, terminal market, storage facility, or buying station and sell the products at the going market price in that region. Prices paid at these open, or spot, markets are referred to as spot prices.The extent of contracting varies widely across agricultural sectors (fig. 1). Nearly all poultry is produced under contract, but less than 15 percent of total grains are produced under contract. The changeover to contracting also varies by commodity. For example, in the broiler industry, contracting has been widely used since the 1950s and accounted for 93 percent of production by 1960. In the hog industry, increases in contracting are more recent. In grain markets, contracting represents a small, but growing, presence.