Are Farmers Trapped in Hold-Up Relationships with their Contractors in the Supply Chain? The Case of Dairy Farmers and Feed Suppliers

Abstract

Agricultural production is widely discussed in the context of imbalances in bargaining power in the food chain and farmers’ difficult position relative to their contractors. The paper attempts to explain the nature and reasons of the bargaining power imbalances that may lead to hold-up relationships in the farming sector in the light of the Transaction Costs Theory (TCT). In order to provide a certain focus, the theoretical discussion is illustrated by an empirical example of backward vertical relations between farmers and input (feed) suppliers. The article investigates the reasons for long-term and stable relationships between farmers and feed suppliers and whether these may be partly explained by an imbalance in bargaining power, trapping farmers in the specific monopolistic (hold-up) relations with their contractors.
Overall, the picture that emerges from the analysis does not support the assumptions that farmers are experiencing a large imbalance in bargaining power with regard to their input contractors, and are trapped in a specific monopolistic (hold-up) relationship with them. Despite that there is no written contract between the farmers and their suppliers, relations are based on unwritten, privately enforced terms. The parties tend to respect the mutually agreed relationship rather than breaching it ex-post in order extract the holdup quasi-rents. In this case a binding written supply commitment may increase transaction costs, limit the freedom to change supplier and reduce the farmer’s bargaining power over the feed producer by adding additional inter-dependency.