Risk Sharing and Compensation Guides for Managers and Members of Vertical Beef Alliances

Abstract

Vertical alliances in beef are growing in importance. Alliances struggle with decisions on how to compensate members. Both conceptual development and empirical analysis are needed. A conceptual framework building on transaction cost and principal agent literature is developed and strategies for sharing feeding and packing margins are analyzed. Premiums for high-quality cattle increase revenues to the alliance. Margin and premium sharing interactions are investigated and guidelines are presented. Compensations that provide incentives for improving cattle quality help ensure the success of alliances as vertical coordination and quality control mechanisms. The beef sector is experiencing significant change in coordination of activities along the supply chain. Historically, there have been separate profit centers between the producer and consumer with reliance on the price system to ensure coordination between what is produced and what consumers want. Since the late 1970s, the effectiveness of price as a coordinating mechanism has been questioned. Demand decreases have persisted and accumulated. A demand index developed for the National Cattlemen's Beef AssQciation indicates beef demand decreased more than 49% between 1980 and 1998 (Demand Indexes at http://www.aaec.vt.edu/rilp). The reasons for the demand problems have been apparent for a number of years. Surveys and focus groups indicate that consumers want a consistent, high-quality eating experience. The first national beef quality audit in 1990 listed excessive fat, low palatability, and inadequate tenderness as major quality concerns (National