I was just reading the Center for Rural Affairs May 1999
Newsletter which contains a reprint of the article below.
It first appeared in the Leopold Letter. The clarity of
the writing and the astute summation of the issues strike
me as exceptional. But then there is very little about
Neil Harl that is ordinary. So in case you missed this
before, here's the text again.
Excerpt from the Winter 1998 issue of the Leopold Letter.
Find it at www.leopold.iastate.edu
Contract agriculture: Will it tip the balance?
By Neil E. Harl, Charles F. Curtiss Distinguished
Professor and professor of economics
The signs of increasing use of contracts are
everywhere-especially on the production side of
agriculture. Specialty grains, feeder livestock, even
vegetables, are being produced under contract and have for
some time. So what's the concern about the rising tide of
contract agriculture? Basically, the concern is the
possible shift in bargaining power that is barreling down
the economic highway.
This topic is particularly important in light of the Des
Moines Register's series, "Can Iowa Tap Its Wealth?" in
September and that newspaper's editorial, "Iowa's Golden
Challenge." I agree that the technology of processing and
the exciting developments in corn genetics are important to
the state. The key question is: Who will benefit from these
Concentration in seed companies
Except for those who are taking the scenic trip to Mars,
it's clear what's happening with seed companies. Mergers,
alliances and various other forms of arrangements are
reducing the number of players and increasing the level of
But that's not the whole story. The revolution in ownership
of germ plasm, the feature of cells that determines the
characteristics of offspring, also is moving rapidly toward
concentration in a few hands. The high-profile alliance
between DuPont and Pioneer Hi-Bred International, the
Monsanto acquisition of a greater interest in DeKalb and
the Monsanto acquisition of Delta and Pine Land Company are
recent examples of how the ownership and control of genetic
material in crops is falling into the hands of a few,
economically powerful players.
This development is partly related to the changing role of
the land grant universities, partly to the ability in
recent years to manipulate germ plasm through genetic
engineering, and partly to the consequence of the ability
to obtain a monopoly-like position over unique life forms
and over the process of genetic manipulation.
For decades the land grant universities developed the basic
genetic lines and made those lines available to the seed
industry. Because of limitations on university funding and
the near-revolution in genetic engineering, the private
sector began pouring more money into basic research.
The advent of genetic engineering meant that scientists
could manipulate genetic composition-not through
conventional crop breeding techniques but through
laboratory procedures-to change the genetic makeup of plant
and animal life. That has produced herbicide-resistant
crops, for example.
Finally, the U.S. Supreme Court in a 1980 landmark case
determined that life forms could be patented. In addition
to federal Plant Variety Protection (PVP) and simply
shrouding research efforts with secrecy, the ability to
patent life forms provides a powerful tool to keep
competitors at bay.
Effect on contracts
So what effect will concentration in the seed business and
control by the few resulting firms over germ plasm likely
have on contract negotiations with producers? It depends on
the options open to producers who don't like the terms of
contracts offered to them. With numerous contract
possibilities available from input suppliers, each offering
inputs of roughly equal productivity and cost, the answer
is perhaps "not much."
But if there are just a few options, with the next best
offering a much less attractive set of inputs in terms of
cost and productivity, the answer is "take what you're
offered." The outcome is likely to be a tilting in the
terms of contracts in favor of the input supplier. The
division of revenue from production, thus, would be
expected to shift over time in favor of the party with the
monopoly or near-monopoly position. Seed companies and
other input suppliers can be expected to drive the best
possible bargain which means, in the case of seed,
capturing the greatest possible percentage of the value
from any yield premium.
The outcome would be a smaller share of the revenue from
production going to the producer, resulting in less
compensation to the producer and less to capitalize into
Seed companies would end up with a larger share of the pie
with more to capitalize into the stock of the input supply
firms. Even if unique corn derivatives produce revenue of
$2 million per acre, it's fairly clear that whomever holds
the rights to the technology involved will capture the
lion's share of the revenue, not the producer.
A good argument can be made that this perception of
potential profits in the future is part of what is driving
the intense push toward concentration in control over germ
plasm and the process of genetic manipulation that is now
Other shifts may follow
The negotiating power of seed firms could well have other
In an effort to control the germ plasm more completely,
seed companies are likely to negotiate for ownership of the
product with the producer under contract to produce but
with only a contract right to payment, without ownership of
the crop or livestock involved.
Similarly, the contract may contain what would appear at
first glance to be an attractive feature-the input supplier
bearing the price risks.
These seemingly innocent shifts would mean, however, that
the economic position of the producer would be transformed
from that of a risk-taking entrepreneur into a relatively
risk-free world of fixed compensation. Thus, a shift not
only of compensation would occur in favor of the input
supplier but also a shift of management functions in the
same direction. The outcome would be reminiscent of the
limited role played by growers under broiler contracts.
Natural barriers inhibited
In general, one would expect high-handed economic behavior
by near monopolists to be met by entry of new competitors
attracted by the generous terms of contracts in favor of
the input suppliers. And that would likely occur if entry
were possible. However, barriers to entry may be fairly
One barrier is capital. Substantial capital may be needed
to mount a research effort to maintain a product flow
similar to that of the firms pressing for monopoly-like
Existing patent and PVP may mean that potential competitors
are frozen out of competition (as a practical matter) for
the duration of the patent or PVP certificate.
One possible strategy for farmers is to forge alliances
among themselves (specifically allowed by federal law so
long as it does not "unduly enhance" price). The push to
achieve such countervailing power was the driving force
behind the formation of labor unions a century ago.
Historically, however, farmers have been unwilling to
accept such a disciplined approach to achieving bargaining
Another possible area of protection against a sharp tilt in
the economic terms of contracts is increased vigilance by
federal (or state) anti-trust agencies. Certainly, the
Federal Trade Commission (FTC) and the U.S. Department of
Justice should be sensitized to the potential for economic
abuses down the road. It's been well established for
decades that firms with monopoly power over a product
should not be able to "tie" other products to the
transaction and extend the monopoly position. Such
arrangements, which involve tying products over which a
firm does not have monopoly power (such as financing,
insurance or risk management) to a product over which the
firm does have monopoly power (such as a seed variety), are
illegal per se unless it can be demonstrated that the
product in monopoly status wouldn't work as well with other
firms' products. And, that's rarely the case. The FTC and
the Department of Justice should scrutinize all seed
industry mergers carefully for anti-competitive
consequences and all practices by seed companies in tying
credit, insurance, risk management or other needed inputs
to seed availability.
It seems a bit far-fetched for agricultural production to
be transformed so dramatically. And it may never happen to
the degree painted by the scenario outlined in this
article. But it's well within the range of feasibility.
Only time will tell.
In the meantime, the prudent course would suggest careful
evaluation of mergers and alliances now occurring in rapid
Dr. Harl is director of the Center for International
Agricultural Finance that conducts educational programs for
individuals from Central and Eastern Europe, the
Commonwealth of Independent States and the Baltics. He is
author or coauthor of more than 350 publications in legal
and economic journals and bulletins and more than 800
articles in various farm and financial publications. He has
spoken widely on debtor-creditor relations, estate planning
and organization of the farm business with more than 2,900
speaking appearances in 42 states.
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