CAST Weighs Vertical Coordination in Farms

March 27, 2001

A report from the Council for Agricultural Science and Technology (CAST) shows that vertical coordination among farmers is increasing in the United States and will continue to expand in rural areas as producers seek alliances with food processors and others to provide capital, technology and markets.

The report is designed to give policymakers, community leaders and farmers guidance to weigh the advantages and disadvantages of contract farming and other forms of vertical coordination in agriculture. The report analyzes how vertical coordination in the food chain can change rural communities that have farming-dependent economies.

As a result of vertical coordination, farmers can lower risks and costs to produce more efficiently. However, the practice is controversial because it can put traditional family farmers at a disadvantage to more integrated business structures that are typically large-scale operations.

These integrated businesses also have posed environmental challenges, including waste disposal and odor issues resulting from the large number of animals often raised in concentrated areas. "Vertical coordination is not all good and not all bad," said CAST report co-chair Luther G. Tweeten of The Ohio State University Department of Agricultural, Environmental, and Development Economics. "It is like the institution of marriage. The institution is good, but it isn't for everybody. Prospective outside firms or 'spouses' need to be good housekeepers environmentally as well as stable financial providers and more."

According to the CAST report, a few communities in the Great Plains potentially could attract value-added agricultural manufacturing through vertical coordination, because their low rainfall and open spaces help mitigate waste management issues. However, no single formula works for every community to evaluate the pros and cons of vertical coordination.

"State and federal governments can assist in this decision-making process by establishing ground rules and regulations regarding the environment, building local leadership and by providing information," said report co-chair Cornelia B. Flora of Iowa State University's North Central Regional Center for Rural Development. "The Cooperative Extension Service can help communities assemble information and develop procedures for sound decisions, including creating alternative integrated value chains."

Some of the public policy considerations addressed in this CAST report, Vertical Coordination of Agriculture in Farming-Dependent Areas, include costs of odor, waste and pest control need to be charged to the producing units and not to their neighbors or other "downstream" parties. If vertical coordination is deemed inappropriate, labeling backed by proper standards and enforcement may provide a useful policy option.

Also firms will tend to go to the places with the weakest environmental standards. Thus some national standards may be appropriate. A county option is sometimes useful where environmental regulations need to differ appropriately among local areas. It is essential that the United States continue to promote competition through antitrust and other measures, the report notes.

Instead of investing in attempts to bring in agriculturally related industry, many rural communities will find it advantageous to use their resources to build the skills and networks of local residents to increase their options, says the report, and greater transparency in vertical integration contracts would keep parties to the contract better informed and would promote competition and public awareness.

The report also addresses the role of electronic commerce in rural development. It concludes that e-commerce will at best only help rural communities catch up with technology already available to both urban and suburban communities. Rural communities will need to focus on social organization, rather than technology alone.

CAST is an international consortium of 37 scientific and professional societies representing more than 180,000 member scientists. Its mission is to assemble, interpret, and communicate science-based information regionally, nationally, and internationally on food, fiber, agricultural, natural resource, and related societal and environmental issues to stakeholders--legislators, regulators, policy makers, the media, the private sector, and the public.

More information on CAST and its numerous scientific reports are available at http://www.cast-science.org. Copies of Vertical Coordination of Agriculture in Farming-Dependent Areas ($25.00) and other CAST reports are available from CAST at 515-292-2125 or by e-mail at cast@cast-science.org.