Management and Financing of Vertical Coordination in Agriculture: An Overview

Abstract

common in agriculture. Farmer-owned cooperatives are a familiar, widespread form of vertical integration. Farmers form cooperatives to enhance and coordinate markets for the inputs they use and the products they produce. Contractual arrangements in the poultry, swine, fruit, and vegetable industries are examples of vertical coordination achieved through contracts rather than through expanded ownership and control. For processors and retailers, these arrangements can help ensure predictable supplies and consistent quality. For producers, they can offer price stability and access to specialized expertise, information, and inputs. Vertical coordination has long been a focus of inquiry for agricultural economists. This session examines the challenges managers face in organizing, directing, and financing vertically coordinated enterprises in light of recent changes in industry structure and important new developments in the theory of the firm. In this brief introduction, I will set the stage for the longer papers and discussant remarks that follow by identifying three general classes of problems that are of central importance for the managers of vertically coordinated systems and for economists who study those systems. The first problem is that of establishing appropriate boundaries for the firm-of determining which activities should be incorporated into the firm, which should be coordinated through formal contracts, and which should be accomplished through open market transactions. A firm's size and span of control can affect production costs, procurement and marketing expenses, financing alternatives, and access to information. This makes decisions about firm boundaries a critical element in an organization's strategy. While these decisions have important long-term implications, managers must also realize that appropriate firm boundaries can be influenced by technical and institutional changes. Both the search for increased efficiency and the effects of a changing business environment on firm boundaries are evident to-