Stability of contracts in the Brazilian wine industry

Abstract

A variety of contracts between wineries and grape growers are observed in Brazil. This study addresses the concept of coordination of food chains, particularly the stability of contractual relationships. A qualitative analysis of industry-farmers contracts is presented, followed by a quantitative analysis testing transaction cost economics-based hypothesis. Scale, location, age of vineyard, and the cooperative organizational form are addressed in terms of the effect on the stability of contracts. Vertical and horizontal coordination are addressed. Data come from a sample of 139 grape-growers that supplied 10 major wineries. The results show that more stable contracts or vertical integration are characteristic of high quality wine production, where the need for strict contractual coordination is more relevant, i.e. risk of hold up losses is larger. We test the hypothesis that site specificity and quality-related specific investments are associated with more stable contractual architectures. Farmers' cooperatives present poorer performance but tend to hold more stable relationships with their members, possibly the result of adverse selection, since specialized farmers prefer to maintain contracts with investor-owned wineries, instead of farmers' cooperatives. Conclusions are presented in the final part.