Product differentiation and the role of contracts : the US pork industry case

The entire dissertation/thesis text is included in the research.pdf file; the official abstract appears in the short.pdf file (which also appears in the research.pdf); a non-technical general description, or public abstract, appears in the public.pdf file.Title from title screen of research.pdf file (viewed on July 27, 2009)Thesis (Ph. D.) University of Missouri-Columbia 2008.This dissertation studies factors influencing the rapid transition from spot markets to contracts recently observed in the exchanges between farm producers and processors or distributors. In particular, it attempts to fill gaps between the existing literature on organizational form choice and processors' or retailers' practices on contract choice recently observed in the agro-food sector by offering theoretical arguments and empirical analysis. On the theoretical side, it develops the concept of product specificity to a buyer by looking at the interaction between processors' or retailers' product differentiation activities in downstream markets and their procurement practices in upstream markets and then incorporates it into the existing theories of contracts to more consistently explain the rapid transition. On the empirical side, the product specificity analytical framework is applied to a more comprehensive analysis of contract structure and choice in the US pork industry. The results from long-term hog procurement contract documents analysis and an econometric analysis of the primary data generated from a survey of pork packers support the theoretical arguments.Includes bibliographical reference

Unilateral vs. Bilateral Incentives: Evidence from the U.S. Pork Industry

The idea that individuals adapt their behaviors in response to changes in incentive systems is fundamental to most economic analysis. This paper incorporates the concept of price discovery costs into the incentive theory to offer a theoretical model and empirical evidence on the differential incentive effects of long-term contracts and spot markets. Using the US pork industry case where procuring intertemporally consistent weights of hogs have been critical to pork processors, we show why the effectiveness of unilaterally determined and posted incentive price for the hog quality by the pork packers on the intertemporal consistency erodes and why a bilateral incentive structure built through long-term hog procurement contracts is demanded, in the presence of volatile hog price and feed price movements. The MGARCH model analysis of USDA AMS data supported our hypotheses that long-term hog procurement contracts would help moderate the erosion relative to the spot markets, resulting greater intertemporal consistency of hog weights.long-term contracts, incentive effects, price discovery costs, MGARCH model, Livestock Production/Industries,

Contracting for Consistency: Hog Quality and the Use of Marketing Contracts

Despite the dramatic change in the organization of the US hog industry over the past two decades, the existing literature offers little insight into the decision by pork packers to use long-term marketing contracts, which represent the dominant form of hog procurement transactions. Existing studies focus instead on the efficacy of incentive mechanisms for which contracts are neither necessary nor sufficient, on hog producers' motivations for accepting contracts, or on packers' use of production contracts or vertical integration, which represent a relatively small share of slaughtered hogs. This paper offers a framework to explain pork packers' adoption of marketing contracts based on packers' downstream strategic market positioning and their resulting demands for specific hog quality attributes. Based on an analysis of hog procurement contract terms and of survey data related to packers' procurement practices, we provide support for the argument that packers' use of contracts is driven by issues of measurement costs and demand for intertemporal consistency of quality rather than by technological and market structure factors associated with asset specificity arguments

The role of product differentiation for contract choice in the agro-food sector

This research examines the recent growth of contract use in the USA and European agro-food sector where asset specificity is not a dominant concern and secondary markets exist. It sheds light on the neglected capabilities of a contract to transmit buyer-specific information, obtain secondary information and price uncertain costs of buyer-specific product attributes when compared with alternative spot markets. It proposes that the value of a contract's capabilities increases with a processor's or retailer's demand for buyer-specific input attributes which require unique production practices and cannot be realised by after-harvest sorting. The implications for policy and contract design are also discussed. Oxford University Press and Foundation for the European Review of Agricultural Economics 2010; all rights reserved. For permissions, please email [email protected], Oxford University Press.

Contracting for Consistency: Hog Quality and the Use of Marketing Contracts

Achieving consistency in hog quality has been one of the greatest challenges in the US pork industry. Packers, processors and retailers all ranked lack of uniformity in live hogs, carcasses, and retail cuts with regard to size and backfat as the most important quality issue facing the industry in the mid 1990s (NPPC, Pork Quality Audit, 1994), and quality consistency continues to be a leading industry concern (Martinez and Zering, 2004). The past 15 years have also witnessed dramatic changes in the organization of the US hog industry. In 1993, over 82% of hogs were sold through spot markets while 11% were sold under marketing contracts. By 2005, only 11% of hogs were sold through spot markets, with 67% sold under marketing contracts and over 20% owned by packers through formal integration or production contracts. This change in industry structure has not gone unnoticed by agricultural economists. A large body of literature examines the relations between hog quality and newly developed organization modes, particularly production contracting and vertical integration. A variety of theoretical frameworks and empirical approaches have been employed, whether using surveys (Kliebenstein and Lawrence, 1995), simulation techniques (Poray, 2002), contract document analysis (Martinez and Zering, 2004), and quality outcome analysis (Muth, et al., 2007). However, research focusing on production contracts and formal vertical integration fails to address the dominant institutional form, namely marketing contracts. Likewise, research focusing on market-based incentive mechanisms fails to provide a consistent explanation for the use and design of long-term hog marketing contracts. We propose a theoretical explanation for the use of long-term marketing contracts in the presence of buyer-specific quality attributes in an otherwise commoditized industry. This theoretical framework draws from and builds upon existing theories of contracting and organizational economics. In particular, the paper develops an analytical model that accounts for the use and structure of long-term marketing contracts to increase intertemporal quality consistency in hog procurement. The paper links the packer’s decision to move from spot-market transactions to long-term marketing contracts to the packer’s downstream product differentiation strategy. We provide empirical evidence to support the model and its explanatory power relative to existing theories

Contracting for Consistency: Hog Quality and the Use of Marketing Contracts

Achieving consistency in hog quality has been one of the greatest challenges in the US pork industry. Packers, processors and retailers all ranked lack of uniformity in live hogs, carcasses, and retail cuts with regard to size and backfat as the most important quality issue facing the industry in the mid 1990s (NPPC, Pork Quality Audit, 1994), and quality consistency continues to be a leading industry concern (Martinez and Zering, 2004). The past 15 years have also witnessed dramatic changes in the organization of the US hog industry. In 1993, over 82% of hogs were sold through spot markets while 11% were sold under marketing contracts. By 2005, only 11% of hogs were sold through spot markets, with 67% sold under marketing contracts and over 20% owned by packers through formal integration or production contracts. This change in industry structure has not gone unnoticed by agricultural economists. A large body of literature examines the relations between hog quality and newly developed organization modes, particularly production contracting and vertical integration. A variety of theoretical frameworks and empirical approaches have been employed, whether using surveys (Kliebenstein and Lawrence, 1995), simulation techniques (Poray, 2002), contract document analysis (Martinez and Zering, 2004), and quality outcome analysis (Muth, et al., 2007). However, research focusing on production contracts and formal vertical integration fails to address the dominant institutional form, namely marketing contracts. Likewise, research focusing on market-based incentive mechanisms fails to provide a consistent explanation for the use and design of long-term hog marketing contracts. We propose a theoretical explanation for the use of long-term marketing contracts in the presence of buyer-specific quality attributes in an otherwise commoditized industry. This theoretical framework draws from and builds upon existing theories of contracting and organizational economics. In particular, the paper develops an analytical model that accounts for the use and structure of long-term marketing contracts to increase intertemporal quality consistency in hog procurement. The paper links the packer’s decision to move from spot-market transactions to long-term marketing contracts to the packer’s downstream product differentiation strategy. We provide empirical evidence to support the model and its explanatory power relative to existing theories.Livestock Production/Industries,

Unilateral vs. Bilateral Incentives: Evidence from the U.S. Pork Industry

The idea that individuals adapt their behaviors in response to changes in incentive systems is fundamental to most economic analysis. This paper incorporates the concept of price discovery costs into the incentive theory to offer a theoretical model and empirical evidence on the differential incentive effects of long-term contracts and spot markets. Using the US pork industry case where procuring intertemporally consistent weights of hogs have been critical to pork processors, we show why the effectiveness of unilaterally determined and posted incentive price for the hog quality by the pork packers on the intertemporal consistency erodes and why a bilateral incentive structure built through long-term hog procurement contracts is demanded, in the presence of volatile hog price and feed price movements. The MGARCH model analysis of USDA AMS data supported our hypotheses that long-term hog procurement contracts would help moderate the erosion relative to the spot markets, resulting greater intertemporal consistency of hog weights