Journal of Agricultural & Food Industrial Organization

Volume 8 2010 Article 4

An Empirical Anal sis of t!e "eterminants of #ar$eting %ontract &tructures for %orn and &o 'eans
(ic!olas ") *aulson Ani +) ,atc!o-a &ergio .) +ence

/ni-ersit of Illinois at /r'ana0%!ampaign1 npaulson2illinois)edu /ni-ersit of ,entuc$ 1 a$atc!o-a2u$ )edu Io3a &tate /ni-ersit 1 s!lence2iastate)edu

%op rig!t c 2010 4!e 5er$ele Electronic *ress) All rig!ts reser-ed)

An Empirical Anal sis of t!e "eterminants of #ar$eting %ontract &tructures for %orn and &o 'eans
(ic!olas ") *aulson1 Ani +) ,atc!o-a1 and &ergio .) +ence

A'stract
%ontracts ser-e as coordination mec!anisms 3!ic! allocate -alue1 ris$1 and decision rig!ts across 'u ers and sellers) 4!e use of mar$eting contracts in agriculture1 specificall for crop pro0 duction1 !as 'een increasing o-er t!e past decade) 4!is stud in-estigates t!e determinants of agricultural mar$eting contract design emplo ing data from t!e /&"A6s Agricultural 7esource #anagement &ur-e ) #odels are estimated to anal ze t!e association 'et3een producer and con0 tractor c!aracteristics1 t!e decision to produce under contract1 and t!e t pes of contract struc0 tures o'ser-ed in practice1 3!ile controlling for t!e potential for endogenous matc!ing 'et3een contracting parties) 7esults indicate t!at 3!ile certain producer c!aracteristics are significantl associated 3it! t!e decision to produce corn or so 'eans under contract1 t!ere is no significant association 'et3een t!ose c!aracteristics and specific contract attri'utes) ,E89O7"&: contracts1 mar$eting contracts1 endogenous matc!ing1 corn1 so 'eans

(ic$ *aulson is Assistant *rofessor in t!e "epartment of Agricultural and %onsumer Economics at t!e /ni-ersit of Illinois at /r'ana0%!ampaign) Ani ,atc!o-a is Assistant *rofessor in t!e "epartment of Agricultural Economics at t!e /ni-ersit of ,entuc$ ) &ergio +ence is #arlin %ole %!air of International Agricultural Economics and *rofessor in t!e "epartment of Economics at Io3a &tate /ni-ersit ) 4!e aut!ors 3ould li$e to t!an$ t!e editor1 an anon mous re-ie3er1 and participants at t!e 2008 AAEA annual meetings for t!eir !elpful comments and suggestions)

*aulson et al): Empirical Anal sis of #ar$eting %ontract &tructures

1. INTRODUCTION
4!e proportion of /)&) agricultural production sold under contract is 'ecoming increasingl large) In 200;1 41 percent of t!e -alue of /)&) farm production 3as sold under contract1 compared to 28 percent in 1<<1 and =ust 11 percent in 1<>; ?#ac"onald and ,or'1 2008@) (umerous eAplanations for t!e increased use of contracting !a-e 'een proposed1 including suppl 0c!ain organization ?4soulou!as and Vu$ina1 1<<<@1 more discriminating consumers ?5ar$ema1 1<<B@1 more efficient relations!ips 'et3een 'u ers and sellers ?"ra'enstott1 1<<<@1 information as mmetries ?.enness 1 1<<>@1 Cualit control ?.uet! and +igon1 1<<<D .enness and +a3rence1 1<<<@1 procurement considerations specific to t!e d namics of agricultural decision ma$ing ?&eAton and E!ang1 1<<>@1 declining commodit prices ?Fulton et al)1 200B@1 and t!e decoupling of farm support legislated in t!e 1<<> farm 'ill ?%oaldra$e et al)1 1<<;@) 4!e ris$ preferences of producers !a-e also 'een s!o3n to impact t!e intensit of agricultural contracting decisions1 3it! more ris$0a-erse farmers preferring production contracts o-er t!e use of mar$eting contracts or spot mar$ets in t!e /)&) !og industr ?E!eng et al)1 2008@) %ontracted crop production is usuall coordinated t!roug! mar$eting contracts1 3!ic! pro-ide for more control and decision rig!ts to t!e producer compared to t!e production contracts used in li-estoc$ production) #ar$eting contracts can ser-e as a met!od of price ris$ management to t!e producer andFor 1 pro-ide a premium to a-erage spot mar$et prices1 and are used most intensi-el for !ig!0-alue or trait0specific -ersions of general commodities ?e)g)1 !ig!0oil corn and lo30linoleic so 'ean@) Additionall 1 t!e can also ser-e as coordination mec!anisms in t!in mar$ets for specialt crops) In general1 a contract can 'e c!aracterized ' its allocation of -alue1 ris$1 and decision0ma$ing rig!ts among t!e contractor?s@ and contractee?s@ ?& $uta and *arcell1 200BD & $uta and %oo$1 2001@) 4!at contracts are structured1 in eCuili'rium1 to efficientl allocate ris$ 'et3een t!e parties to3ards t!e goal of aligning incenti-es is an assumption 'ased in t!e principal0agent approac! to contract t!eor ?&!eldon1 1<<>D Allen and +uec$1 1<<<@) 4!ere are t3o -er general ?and related@ ! pot!eses stemming from t!e standard principal0agent approac!1 namel 1 ?a@ !ig!er le-els of ris$ in t!e contracted acti-it ?i)e)1 agricultural production@ s!ould result in contracts more !ig!l moti-ated ' ris$0 2 s!aring 'et3een t!e contracting parties1 and ?'@ optimal contract design 3ill s!ift a relati-el greater s!are of t!e ris$ to t!e less ris$0a-erse part ?&tiglitz1 1<G4@) Hi-en t!ese ! pot!eses1 one 3ould eApect t!e preferences and c!aracteristics of
1

#ac"onald and ,or' ?2008@ report premiums in t!e range of 10020 percent a'o-e a-erage /)&) spot prices recei-ed for corn and so 'ean from 1<<>0200; using t!e /&"A A7#& data) 2 &ee Allen and +uec$ ?1<<<@ for furt!er discussion and additional references)

Produced by The Berkeley Electronic Press, 2010

Journal of Agricultural & Food Industrial Organization

Vol) 8 I2010J1 Article 4

t!e contractor and contractee1 as 3ell as t!e c!aracteristics of t!e commodit 'eing contracted1 to determine t!e attri'utes of t!e optimal contract) 4!e present stud contri'utes to t!e literature ' in-estigating t!e determinants of agricultural mar$eting contract design1 specificall controlling for endogenous matc!ing of principals1 agents1 and acti-ities) 4!e met!od ad-anced ' Ac$er'erg and 5otticini ?2002@ to control for endogenous matc!ing is applied to data from t!e /&"A6s Agricultural 7esource #anagement &ur-e ?A7#&@) 4!e A7#& data set lends itself 3ell to t!is purpose1 as it is administered to t!ousands of producers e-er ear ' t!e Economic 7esearc! &er-ice and t!e (ational Agricultural &tatistics &er-ice and is designed to pro-ide an accurate representation of t!e agricultural sector in t!e /)&) ?E7&1 2008@) 4!e sur-e contains a section de-oted to mar$eting and production contracts 3!ic! includes Cuestions regarding t!e structure of eac! contract1 as 3ell as c!aracteristics of t!e contractor) Furt!ermore1 socioeconomic data are a-aila'le for eac! farm included in t!e sur-e 1 pro-iding a -ariet of measures 3!ic! can 'e used as proAies for farm0le-el producti-it and ris$ preferences) 9e construct and estimate se-eral models to anal ze t!e association 'et3een producer and contractor c!aracteristics and t!e decision to produce under contract and t!e t pes of contract structures t!at arise in practice1 3!ile controlling for t!e potential for endogenous matc!ing 'et3een contracting parties and crops) Our results indicate t!at 3!ile producer c!aracteristics are significantl associated 3it! t!e decision to produce corn or so 'eans under contract ?regardless of t!e specific design of t!e contract@1 t!ere is no significant association 'et3een t!e same producer c!aracteristics and t!e specific attri'utes of t!e contracts1 suc! as its specific pricing terms)

2. BACKGROUND
9!ile t!e t!eoretical 3or$ on contracts !as 'een an important and relati-el recent de-elopment in t!e economics literature1 empirical 3or$ in t!is area !as produced miAed results) EAperimental and sur-e 0'ased contri'utions to t!e literature !a-e also 'een pro-ided1 illustrating some support for t!e relations!ip 'et3een t!e ris$ attitudes of t!e producer and t!e contract attri'utes in crop and1 to a larger eAtent1 li-estoc$ contracting eAamples ?+a=ili et al)1 1<<GD *arcell and +angemeier1 1<<GD 7oe et al)1 2004@) .o3e-er1 inferences 'ased on t!eoretical models1 sur-e responses1 or deri-ed from eAperimental designs ma differ from t!e results o'tained ' anal zing o'ser-ed contract data)

!ttp:FF333)'epress)comF=afioF-ol8Fiss1Fart4

*aulson et al): Empirical Anal sis of #ar$eting %ontract &tructures

4!ere eAists a large 'od of literature1 'ot! t!eoretical and empirical1 B focused on land0tenure contracts) Allen and +uec$ ?1<<<@ performed an empirical anal sis of t!e role of ris$ in contract c!oice 'ased on a large data set of land rental agreements 'et3een landlords and farmers in (ort! America) /sing an ordinar 0least0sCuares ?O+&@ frame3or$1 t!e found little support for t!e ! pot!esis t!at ris$0s!aring is an important determinant in s!aping rental agreement contracts and concluded t!at transaction costs are li$el t!e more rele-ant factor due to t!e a-aila'ilit of !ig!l de-eloped crop insurance1 credit1 and commodit mar$ets for t!e management of price and production ris$s) Ac$er'erg and 5otticini ?2002@ 'uilt and impro-ed upon pre-ious 3or$ on land0rental contracts using a data set on crop0s!aring agreements in Ital from t!e 1400s) 4!e proposed a model 3!ic! recognized t!e potential for endogenous matc!ing of t!e contracting parties 'ased on t!eir preferencesFc!aracteristics1 as 3ell as on t!e c!aracteristics of t!e commodit 'eing produced) /sing estimation met!ods 3!ic! control for suc! endogenous matc!ing1 t!e found e-idence of ris$0s!aring moti-ations in t!eir data set 3!ic! 3ould not !a-e 'een e-ident !ad t!e effects of endogeneit not 'een controlled) Ot!er aut!ors !a-e focused on t!e impacts of contractor1 or principal1 c!aracteristics on t!e design of agricultural production and mar$eting contracts) & $uta and %oo$ ?2001@ outlined a t!eoretical frame3or$ t!at suggests differences in t!e attri'utes of contracts offered t!roug! producer0 and in-estor0 o3ned firms are moti-ated ' relati-e le-els of trust in t!e organization on t!e part of producers) /sing a sur-e of crop producers in #issouri1 James and & $uta ?200>@ pro-ided e-idence of a producer preference for mar$eting to cooperati-es o-er pri-ate or in-estor0o3ned firms stemming from a !ig!er le-el of trust in cooperati-e organizations1 3it! t!e effect 'eing greater for t!e mar$eting of so 'eans compared to corn) 7oe et al) ?2004@ found a similar preference for cooperati-e firms in t!e c!oice of mar$eting contracts ' !og producers in t!eir eAperimental sur-e approac!) Anal sis specific to mar$eting contracts and crop production !as 'een more limited1 3it! t!e 'ul$ of t!e 3or$ focusing on t!e mar$eting of specialt crops suc! as fruits and -egeta'les ?Fraser1 200;D .uet! and +igon1 1<<<D &eAton and E!ang1 1<<>@) An eAception is t!e stud ' +a=ili et al) ?1<<G@1 3!o emplo ed a t!eoretical model to deri-e some testa'le ! pot!eses regarding t!e relations!ips 'et3een asset specificit 1 ris$ a-ersion1 le-erage1 and t!e le-el of cost and ris$ s!aring 'uilt into crop production and mar$eting contracts) /sing eAperimental data from a sur-e design1 t!e found t!at more !ig!l le-eraged farms preferred
B

9!ile t!e relations!ip 'et3een principal and agent under a mar$eting contract differs from t!e one under a land0tenure contract1 t!e t!eor can 'e sufficientl generalized so t!at predictions appl to 'ot! t pes of contracts)

Produced by The Berkeley Electronic Press, 2010

Journal of Agricultural & Food Industrial Organization

Vol) 8 I2010J1 Article 4

contracts o-er s!orter periods of time 3it! !ig!er le-els of ris$ s!aring1 3!ile ot!er o'ser-ed farmer c!aracteristics1 suc! as age and farm size1 did not !a-e a significant effect on preferences o-er a menu of contracts)

3. METHODOLOGY AND DATA

Follo3ing Ac$er'erg and 5otticini ?2002@1 3e 'egin ' supposing t!at t!ere eAists a general relations!ip 3!ere t!e attri'utes of t!e optimal contract ?y@ are determined ' t!e c!aracteristics of t!e acti-it 'eing contracted ?c@1 t!e principal ?p@1 and t!e agent ?a@) &uc! a relations!ip is represented ' a regression as in ?1@: y K c c L p p L a a L 1 ?1@

3!ere t!e s denote coefficients associated 3it! t!e respecti-e c!aracteristics1 and is an error term) A fundamental pro'lem for estimating ?1@ arises 3!en t!e agent6s c!aracteristics ?a@ are uno'ser-a'le) /nfortunatel 1 t!is is precisel t!e situation faced ' researc!ers 3!en attempting to fit ?1@ to in-estigate t!e ! pot!eses postulated ' contract t!eor ) 4!is is true 'ecause according to contract t!eor 1 t!e principal and t!e agent6s ris$ preferences are crucial determinants of t!e contract attri'utes1 'ut suc! preferences are t picall uno'ser-a'le) Ot!er uno'ser-a'le agent c!aracteristics t!at ma 'e important to determine t!e attri'utes of t!e optimal contract are !isF!er producti-it and opportunit cost of effort) If t!e rele-ant agent c!aracteristics are uno'ser-a'le1 ?1@ cannot 'e estimated as suc!) .o3e-er1 one ma su'stitute t!e uno'ser-a'le c!aracteristics 3it! o'ser-a'le -aria'les or proAies ?o@ correlated 3it! t!em as in ?2@1 and estimate regression ?B@ instead: a K o o L a1 y K c c L p p L o o L o1 ?2@ ?B@

3!ere o M a o and o M a a L ) For eAample1 income1 3ealt!1 age1 off0farm income1 and t!e de't0to0asset ratio are often used as proAies for ris$ a-ersion ?.uffman and Just1 2004D #is!ra and El0Osta1 2002D Allen and +uec$1 1<<<D +a=ili et al)1 1<<GD &mit! and 5aCuet1 1<<>@1 3!ile education and eAperience are commonl used proAies for ris$0a-ersion ?Velandia et al., 200<D &!erric$ et al., 2004@ and farm0le-el producti-it ?+oc$!eed et al)1 1<80@) &uccinctl 1 t!e pro'lem 3it! estimating ?B@ ' means of standard met!ods ?e)g)1 O+&@ is t!at t!e coefficients are 'iased if agents endogenousl matc! 3it! acti-ities andFor

!ttp:FF333)'epress)comF=afioF-ol8Fiss1Fart4

*aulson et al): Empirical Anal sis of #ar$eting %ontract &tructures

principals) If suc! endogenous matc!ing eAists1 'ias in t!e coefficients arises 'ecause of t!e correlation 'et3een t!e regressors in ?B@ and t!e residuals ?o@) 4o see 3! regressors ma 'e correlated 3it! residuals ?o@ in ?B@1 suppose for eAample t!at t!ere is endogenous matc!ing 'et3een agents and crops 'ecause agents 3it! certain c!aracteristics tend to select acti-ities 3it! specific features) 4!is association 'et3een crops and agents is represented ' t!e matc!ing eCuation ?4@: c K a a L c1 c K a o o L a a L c1 ?4@ ?46@

3!ere ?46@ follo3s from ?2@) 5ut ?46@ implies t!at t!e co-ariance 'et3een regressor c and o in ?B@ eCuals a a Var?a@) &ince regressors are correlated 3it! t!e residual in ?B@1 estimation ' means of standard met!ods 3ill ield 'iased coefficient estimates for suc! a regression ?Hreene1 200B1 p) G;@) 4o control for t!e potential 'ias induced ' endogenous matc!ing1 Ac$er'erg and 5otticini ?2002@ proposed using a t3o0stage estimation approac! to account for endogeneit ) #ore specificall 1 t!eir approac! consists of replacing t!e actual -alues of t!e potentiall endogenous acti-it and principal -aria'les in eCuation ?B@ 3it! t!eir respecti-e estimated -alues) 4!e latter are o'tained ' fitting matc!ing eCuations li$e ?46@ across non0o-erlapping geograp!ic regions so as to ac!ie-e identification) 4!e present anal sis is performed ' means of t!e approac! introduced ' Ac$er'erg and 5otticini ?2002@1 emplo ing data from t!e Agricultural 7esource #anagement &ur-e ?A7#&@ 3!ic! is conducted annuall ' t!e /)&) "epartment of Agriculture) A7#& data include detailed information on mar$eting contracts used ' farmers to sell t!eir commodities1 and to t!e 'est of our $no3ledge it pro-ides t!e largest data set a-aila'le for t!is t pe of anal sis) Farmers identif t!e price1 Cuantit 1 and -alue for eac! commodit sold under contracts) 4!e main -ersion of t!e sur-e also includes more detailed Cuestions a'out t!e specifications of t!e mar$eting contracts1 suc! as t!e Cuantit and pricing mec!anisms1 and c!aracteristics of t!e contractors) "ue to a-aila'ilit of information a'out contract attri'utes1 t!e anal sis is 'ased on A7#& data from t!e main -ersion of t!e sur-e for t!e ears 200B1 20041 and 200;) 4!e sample is furt!er restricted to farmers in t!e states of Illinois1 Indiana1 Io3a1 #innesota1 #issouri1 and O!io 3!o produced corn andFor so 'eans) 4!e su'sample c!osen s!ould pre-ent t!e results from 'eing dri-en ' t!e su'stantial differences in tec!nological and en-ironmental resources found across t!e farms in t!e entire sample)

Produced by The Berkeley Electronic Press, 2010

>

Journal of Agricultural & Food Industrial Organization

Vol) 8 I2010J1 Article 4

4a'le 1 summarizes t!e sample statistics for t!e main -aria'les used in t!e anal sis) 4!e dataset used in estimating t!e decision to contract models are at t!e farm le-el1 and includes 11>4G farm operations) 4!e dataset used to estimate t!e contract attri'ute models is at t!e contract le-el1 and includes a total of 110;4 contracts for corn and so 'ean production) &ince t!e A7#& data include sur-e 3eig!ts indicating t!e num'er of farms in t!e /)&) t!at is represented ' eac! farm in t!e sur-e sample1 means and standard de-iations calculated using t!e 4 =ac$$nife approac! are also reported in 4a'le 1) &uc! estimates are useful 'ecause t!e are representati-e of all mar$eting contracts used ' /)&) corn and so 'ean producers) For a similar reason1 all of t!e estimations performed and reported in t!e follo3ing ta'les are 3eig!ted using t!e =ac$$nife met!od) 5inar dumm -aria'les CornContractD1 SoyContractD1 For ulaD1 !ualityD1 and !uantityD represent t!e contract c!aracteristics 'eing in-estigated ?i)e)1 -aria'le y in regression ?1@@) CornContractD ?SoyContractD@ eCuals one if t!e farmer enters into a formal contract for corn ?so 'eans@1 and eCuals zero ot!er3ise) For ulaD eCuals one ?zero@ if t!e contract does ?does not@ stipulate a commodit price calculated ' a formula) !ualityD eCuals one ?zero@ if t!e contract does ?does not@ specif t!at t!e price 'e 'ased on Cualit attri'utes of t!e commodit ) Finall 1 !uantityD eCuals one ?zero@ if t!e contract does ?does not@ pro-ide for a specific Cuantit of t!e commodit ) Acti-it c!aracteristics ?i)e)1 -aria'le c in regression ?1@@ are measured ' t!e proportion of t!e -alue of t!e farm6s production o'tained from corn and so 'eans ?Corn"rop and Soy"rop1 respecti-el @ at t!e decision to contract le-el1 and1 at t!e contract attri'ute le-el1 ' a 'inar -aria'le eCual to one if t!e contract is for corn and eCual to zero if t!e contract is for so 'eans ?CornD@) 4!e c!aracteristics of t!e principal ?i)e)1 -aria'le p in regression ?1@@ are mainl captured ' a 'inar -aria'le descri'ing t!e organizational structure of t!e contractor1 eCual to one if t!e contractor is a cooperati-e and eCual to zero ot!er3ise ?CoopD@) 4!e Ot#erContD -aria'le acts as a proA for t!e mar$et po3er of t!e contractor?s@ a-aila'le in t!e area) Finall 1 t!e -aria'les emplo ed as proAies for t!e uno'ser-a'le agent c!aracteristics ?i)e)1 -aria'le o in regression ?1@@ are t!e -alue of t!e farm6s total production ?VF"@1 t!e farm !ouse!old6s net 3ealt! ?$$%&@1 t!e total income earned off t!e farm ?OFI@1 t!e farm operation6s de't0to0asset ratio ?D'A@1 t!e age of t!e farm operator ?Age@1 t!e farm operator6s ears of eAperience ?()perience@ and education ?(ducation@1 and a set of 'inar -aria'les eCual to one if t!e farm is defined as a !o'' farm ?$o**yD@1 if t!e farm purc!ased crop insurance
4

"u'man ?2000@ pro-ides details on t!e =ac$$nife approac! and its implementation to anal ze A7#& data)

!ttp:FF333)'epress)comF=afioF-ol8Fiss1Fart4

*aulson et al): Empirical Anal sis of #ar$eting %ontract &tructures

4a'le 1) Varia'le "escriptions and &ummar &tatistics

Varia'le CornContractD SoyContractD For ulaD !ualityD !uantityD Corn"rop Soy"rop CornD CoopD Ot#erContD $$%& VF" OFI D'A Age CropInsD ()perience (ducation "escription K1 if t!e farmer !as corn contracts K1 if t!e farmer !as so 'ean contracts K 1 if contract contains a price formula K 1 if t!e contract specifies premiums for commodit attri'utes K 1 if t!e contract specifies a Cuantit to 'e deli-ered Value of corn production to total -alue of farm production Value of so 'ean production to total -alue of farm production K 1 if t!e contract is for corn K 1 if t!e contractor is a cooperati-e K 1 if t!ere are ot!er contractors in t!e area .ouse!old net 3ort! ?in N1001000@ Value of farm production ?in N1001000@ Off0farm income ?in N1001000@ "e't0to0asset ratio Operator age ?in ears@ K 1 if operator !as crop insurance Operator eAperience ?in ears@ Operator education ?categorical@ Farm0+e-el "ata &tandard #ean "e-iation 0)184 0)1G1 n)a) n)a) n)a) 0)B8B 0)B>2 n)a) n)a) n)a) <)GB4 1)8;4 0)4<1 0)140 ;4)G;1 0);8< 28)82< 2)B8< 0)01B 0)01; n)a) n)a) n)a) 0)012 0)012 n)a) n)a) n)a) 0)4;B 0)048 0)022 0)00< 0)B84 0)02G 0);18 0)02B %ontract0+e-el "ata &tandard #ean "e-iation n)a) n)a) 0)1B0 0)214 0)G>2 n)a) n)a) 0);>0 0)48< 0)>B1 11);BG 2)8>0 0);4< 0)20; ;1)>4> 0)G8> 2;)<;< 2)>08 n)a) n)a) 0)0B2 0)0B; 0)0B8 n)a) n)a) 0)02< 0)0;8 0)0B< 0)G;< 0)240 0)0;B 0)01G 0)G20 0)02B 1)241 0)1BB

Produced by The Berkeley Electronic Press, 2010

Journal of Agricultural & Food Industrial Organization

Vol) 8 I2010J1 Article 4

4a'le 1) Varia'le "escriptions and &ummar &tatistics ?continued@

Varia'le $o**yD O*ser+ations "escription K1 if farm is limited resource or rural residence Farm0+e-el "ata &tandard #ean "e-iation 0)B>8 0)02B 11>4G %ontract0+e-el "ata #ean 0)1<4 &tandard "e-iation 0)028 110;4

?CropInsD@1 or if ot!er contractor alternati-es 3ere a-aila'le in t!e area ?Ot#erContD@1 and eCual to zero ot!er3ise) Varia'les $$%&1 OFI1 VF"1 D'A1 Age1 and CropInsD are postulated to 'e related to t!e agent6s 'e!a-ior to3ard ris$1 3!ereas ()perience1 (ducation1 and $o**yD are posited to 'e associated 3it! t!e agent6s producti-it ) Ceteris pari*us1 farmers 3it! greater le-els of net 3ealt! ?$$%&@1 off0farm income ?OFI@1 and -alue of farm production ?VF"@ are li$el to 'e 3illing to 'ear greater le-els of ris$ under t!e common assumption of decreasing a'solute ris$ a-ersion) In contrast1 follo3ing t!e findings of +a=ili et al) ?1<<G@1 operations 3it! !ig! de't0to0asset ratios ?D'A@ are assumed to induce farmers to ta$e on less ris$ ; acti-ities relati-e to similar operations 3it! lo3er le-erage le-els) &imilarl 1 ot!er t!ings eCual1 older farmers ?Age@ are li$el to 'e less 3illing to ta$e on ris$s t!at ma imperil t!eir retirement income due to t!eir life0c cle stage ?Fu$unaga and .uffman1 200<@) CropInsD is clearl associated 3it! t!e farmer6s attitudes to3ard ris$1 'ut its relations!ip 3it! ris$ ta$ing is am'iguous a priori) 4!is is true 'ecause CropInsD re-eals a preference for insurance1 and as suc! a smaller 3illingness to ta$e on ris$s) .o3e-er1 it ma also 'e argued t!at a farmer 3!o purc!ased insurance is more 3illing to ta$e on additional ris$s) #oreo-er1 c!oices 3it! respect to ris$ management acti-ities com'ine to form a ris$ management portfolio 3it! t!e use of indi-idual tools ?i)e) contracting or insurance@ impacting t!e use of alternati-es ?Velandia et al., 200<@) *roducti-it is eApected to 'e positi-el associated 3it! eAperience ?()perience@ and education ?(ducation@1 and to 'e lo3er for !o'' operations ?$o**yD@) Additionall 1 t!e !o'' farm dumm also controls for differences in farm t pe ?i)e)1 !o'' -s) OcommercialP farms@)

(ote1 !o3e-er1 t!at !ig!er D'A -alues ma also 'e associated 3it! less ris$0a-erse producers1 as farmers 3it! lo3er le-els of ris$ a-ersion are more 3illing to ta$e on more ris$ t!roug! !ig!er le-erage le-els)

!ttp:FF333)'epress)comF=afioF-ol8Fiss1Fart4

%onceptuall 1 a farmer6s optimal contract can 'e considered at t3o different le-els1 namel 1 ?a@ 3!et!er to enter a formal contract or not1 and ?'@ conditional on contracting1 t!e optimal contract structure) 4!e t3o le-els of anal sis are discussed in respecti-e order in t!e neAt su'sections) ,.- '#e Decision to Contract A farmer6s decision of 3!et!er to enter into a formal contract is eAamined ' estimating logit model ?;@:
Crop Crop "ro*.CropContractD/ K 0 L Crop"rop Crop"rop L Crop $$%& $$%& Crop

?;@

Crop Crop Crop L VF" VF" L OFI OFI L D'A D'A L Age Age Crop L Crop Crop (ducation (ducation CropInsD CropInsD L ()perience ()perience L

L $o**yD $o**yD L

Crop

y0ear

Crop yD

0earD L

Crop

for Crop K QCorn1 SoyR and 0ear K Q12231 1224R) EAcept for t!e omission of t!e principal c!aracteristics1 regression ?;@ !as t!e same structure as ?B@) *rincipal c!aracteristics cannot 'e included in ?;@ 'ecause A7#& contains information a'out t!e contractor onl for t!ose farms 3!o c!oose to contract) 4!e Crop"rop -aria'le descri'es t!e relati-e intensit of t!e farm6s production of t!e commodit 3!ic! is potentiall 'eing contracted1 3!ic! is assumed to 'e an endogenous c!oice of t!e farm operator) 4!is endogeneit is controlled for t!roug! t!e O+& estimation of a matc!ing eCuation li$e ?46@ for eac! state1 outlined in eCuation ?>@: Crop"rops K 01s L OFI 1 s
Crop"rop Crop"rop Crop"rop VF"s L $$%& 1 s $$%&s L VF" 1 s D'A 1s Crop"rop

?>@

Crop"rop

Crop"rop OFIs L

D'As L

Age 1 s Crop"rop

Ages

L CropInsD 1s CropInsDs L Crop"rop ()perience 1 s ()periences

Crop"rop L (ducation 1s (ducations L $o**yD 1 s $o**yDs Crop"rop

y0ear

Crop"rop yD 1 s

0earDs L

s Crop"rop

for Crop K QCorn1 SoyR and s K Q Illinois, Indiana, Io5a, 6innesota, 6issouri, O#ioR) E-idence for endogeneit eAists if t!e coefficient estimates from ?>@ are statisticall different across states) 4!us1 3e also estimated ?>@ across t!e pooled sample including state dummies interacted 3it! eac! of t!e regressors) Indi-idual t0tests performed on t!e interaction term coefficients indicated t!at effects differ

across states1 pro-iding e-idence for endogeneit and =ustification for our t3o0 > stage approac!) %ontract eCuation ?;@ is t!en estimated using t!e predicted -alues of Crop"rop from t!e estimated matc!ing eCuations) &tate dummies are not included in t!e estimation of ?;@ to satisf eAclusion restrictions) 4o =ustif t!is eAclusion1 t!e ad-ocated model assumes t!at relations!ip ?1@ !olds regardless of t!e state) 4!is assumption is similar to1 e)g)1 assuming t!e same production function for a cross section of farmers 3!en estimating production parameters) It is not possi'le to pro-e or dispro-e t!is assumption1 'ecause to do so 3ould reCuire fitting relations!ip ?1@ on a state0' 0 state 'asis) 4!e reCuired data on principal c!aracteristics ?p@ are not a-aila'le) 4o ma$e t!is assumption more tena'le1 3e restrict our attention to corn and so 'ean contracts for relati-el !omogeneous states 3it!in t!e %orn 5elt region) 4o account for t!e additionall -aria'ilit introduced ' t!e use of estimates from t!e first0stage in o'taining t!e estimation results for t!e second0 stage1 3e !a-e implemented a t3o0stage =ac$$nife procedure to ad=ust t!e second0 stage standard errors) For eac! =ac$$nife su'sample1 first0stage estimates 3ere computed and fitted -alues 3ere generated for t!e entire sample) 4!en1 second0 stage estimates 3ere computed for eac! of t!e first0stage su'samples) 7eported standard errors are 'ased on t!e resulting sampling distri'ution of t!e second0 stage estimates) ,.1 '#e Contract Attri*utes 4o eAamine t!e impacts of t!e commodit t pe1 t!e contractor1 and t!e c!aracteristics of t!e operator on t!e contract attri'utes1 regression ?B@ is specialized to t!e logit model ?G@:
Attri*uteD "ro*.Attri*uteD/ K 0Attri*uteD L CornD CornD L CoopD Attri*uteD L Ot#erContDL $$%& $$%& L Attri*uteD VF" L Attri*uteD OFI L Attri*uteD D'A VF" OFI D'A Attri*uteD Attri*uteD Attri*uteD Age L CropInsD CropInsD L ()perience ()perience L Age Attri*uteD Attri*uteD L (ducation (ducation L $o**yD $o**yD Attri*uteD Ot#erContD Attri*uteD

CoopD

?G@

y0ear

Attri*uteD yD

0earD L

Attri*uteD

>

4!e estimation results from t!e state0le-el and pooled matc!ing eCuations are not t!e main results of interest for our anal sis and1 t!erefore1 not pro-ided) 4!e are a-aila'le from t!e upon reCuest)

!ttp:FF333)'epress)comF=afioF-ol8Fiss1Fart4

aut!ors

Produced by The Berkeley Electronic Press, 2010

for Attri*ute K QFor ula1 !uality1 !uantityR and 0ear K Q12231 1224R) 4!e specific contract attri'utes anal zed are 3!et!er t!e price recei-ed ' t!e farmer is determined ' a formula ?For ulaD@ or 'ased on Cualit attri'utes of t!e commodit deli-ered to t!e contractor ?!ualityD@1 and 3!et!er t!e contract is for a specified Cuantit of product ?!uantityD@) Endogeneit of t!e contractor and crop t pe -aria'les is controlled for G t!roug! t!e logit model matc!ing eCuations ?8@ and ?<@:
CornD CornD CornD "ro*.CropDs/ K 01 L Ot#erContD $$%&s 1 Ot#erContDs L s s

?8@

L VF" 1 s

CornD CornD CornD

CornD

VF"s L OFI 1 s OFIs L D'A1 s D'As L

Age 1 s 1 s $$%& CornD

Ages

L CropInsD 1 s CropInsDs L CornD ()perience 1 s ()periences

CornD CornD L (ducation 1 s (ducations L $o**yD 1 s $o**yDs

y0ear

CoopD

CornD yD 1 s

0earDs L s

CornD

1 ?<@

"ro*.CoopDs/ K 01 s

CoopD

CoopD L Ot#erContD 1 Ot#erContDs s

CoopD OFI L $$%& 1 s $$%&s L VF" 1 s VF"s L 1 s OFIs CoopD CoopD CoopD CoopD CropInsD L D'A 1 s D'As L Age 1 s Ages L 1 s CropInsDs CoopD CoopD L ()perience 1 s ()periences L (ducation 1 s (ducations

L $o**yD 1 $o**yDs L
s

CoopD

y0ear

CoopD yD 1 s 0earDs L s

CoopD

for Crop K QCorn1 SoyR and s K Q Illinois, Indiana, Io5a, 6innesota, 6issouri, O#ioR) For identification purposes1 matc!ing eCuations ?8@ and ?<@ are estimated ' state1 and a logit regression is t!en used to estimate ?G@ eAcluding state dummies and using t!e predicted -alues for CropD and CoopD) As 'efore1 t!e matc!ing eCuations 3ere also estimated across t!e pooled sample 3it! state dummies interacted 3it! t!e regressors to test for endogeneit ) &imilar to t!e decision0to0contract anal sis1 t!e indi-idual t0tests on t!e interaction coefficient estimates pro-ided e-idence of endogeneit 1 again =ustif ing our t3o0stage approac!)

4!e potential for endogeneit in t!e a-aila'ilit of ot!er contractors ?Ot!er%ont"@ ma also eAist1 especiall from t!e contractor6s perspecti-e and o-er a long0term decision !orizon) 9e assume t!e a-aila'ilit of or access to ot!er contractors is eAogenous to t!e producer1 at least for t!e s!ort0term !orizon o-er 3!ic! t!e anal sis is conducted)

4. RESULTS AND DISCUSSION

7esults corresponding to t!e estimation of regressions ?;@ and ?G@ are discussed in respecti-e order in t!e follo3ing t3o su'sections) 3.- '#e Decision to Contract 4a'le 2 reports t!e regression results1 marginal effects1 #cFadden6s 7 1 and 1 %ount 7 ?percent of correctl predicted -alues@ for t!e farmer6s decision to 8 produce corn under contract) 4!e naS-e results of t!e logit model estimation impl t!at more intensi-e corn operations ?i)e)1 t!ose 3it! larger Corn"rop -alues@ are more li$el to enter into contracts for corn) .o3e-er1 after ad=usting for endogeneit 1 t!e effect of t!e farm6s corn intensit is found to 'e statisticall insignificant) 4!e effect of ad=usting for endogeneit 3as also found to impact t!e statistical significance of t!e -alue of production ?VF"@ and de't0to0asset ratio ?D'A@ -aria'les) 4!us1 not correcting for endogeneit could lead to misleading conclusions related to t!e effects of t!ese agent c!aracteristics on contracting decisions) Among t!e set of ris$0related eAplanator -aria'les in t!e logit model for corn1 onl t!e crop insurance ?CropInsD@ dumm 3as found to 'e statisticall significant) Farmers 3!o purc!ase some form of crop insurance 3ere found to 'e more li$el to enter into mar$eting contracts for corn) 4!e presence of crop insurance increased t!e pro'a'ilit of contracting corn ' an estimated 1B)1G percent 'ased on t!e marginal effects implied ' t!e ad=usted coefficients) 4!is result is consistent 3it! pre-ious researc! 3!ic! !as indicated t!e potential for more intensi-e use of mar$eting options in t!e presence of crop insurance ?*aulson et al)1 2008D %o'le et al)1 2000@) 4!e eAplanation 'e!ind t!ese results is fairl intuiti-e) 8ield insurance co-ers t!e ield ris$ t!at could eAacer'ate losses under a mar$eting contract1 ultimatel reducing t!e ris$ of t!e farmer not 'eing a'le to deli-er on a contract) 7e-enue insurance co-ers 'ot! ield and price ris$1 t!us reducing t!e incenti-e to enter into a mar$eting contract to manage price ris$)
1

Follo3ing Ac$er'erg and 5otticini ?2002@1 naS-e regressions refer to t!ose estimated 3it!out instrumenting to correct for potential endogenous matc!ing) 9e report t!ese to allo3 for comparison 3it! t!e t3o0stage results 3!ic! ad=ust for endogeneit )

Produced by The Berkeley Electronic Press, 2010

4a'le 2) +ogit Estimation 7esults for t!e "ecision to %ontract %orn

Varia'le Intercept Corn"rop $$%& VF" OFI D'A Age CropInsD ()perience (ducation $o**yD 1223D 1224D 6cFadden 7 1 Count 7
1

%oef) Est) ?&t) Error@ 02)G12TTT ?0)GB0@ 1)84BTTT ?0)484@ 0)01G ?0)014@ 0)0;4T ?0)02<@ 0)B4< ?0)B2>@ 1)B;4TT ?0)>2G@ 00)01; ?0)01;@ 0)G1;TTT ?0)21>@ 00)001 ?0)011@ 00)04; ?0)21>@ 00)G21TT ?0)B18@ 0)G88TTT ?0)24B@ 0)G81TT ?0)BG8@

(aS-e Est) #arginal Effect n)a) 0)B210 0)002< 0)00<; 0)0>0G 0)2B;8 00)002G 0)124> 00)000B 00)00G< 00)12;; 0)1BG2 0)1B>0

Ad=usted %oef) Est) Est) #arginal ?&t) Error@ Effect 02)B28TTT ?0);8;@ 1)0GB ?0)8G>@ 0)018 ?0)014@ 0)044 ?0)0B0@ 0)B1> ?0)2<>@ 1)B>2TT ?0)>>8@ 00)012 ?0)018@ 0)G2GTTT ?0)22>@ 00)00G ?0)01;@ 00)044 ?0)22B@ 00)>;0T ?0)B41@ 0)GBGTTT ?0)208@ 0)G14T ?0)B<1@ n)a) 0)1<42 0)00B2 0)00G< 0)0;GB 0)24>> 00)0022 0)1B1G 00)0012 00)00G< 00)11GG 0)1BB; 0)12<2

0)121 0)0<< 0)G0G 0)>>B (ote: &tandard errors are reported in t!e parent!eses) TTT1 TT1 and T denote significance at 1U1 ;U1 and 10U1 respecti-el )

In t!e case of producti-it 0related eAplanator -aria'les for t!e decision to contract corn production1 t!e !o'' farm dumm ?$o**yD@ 3as found to negati-el impact t!e decision to contract and 3as statisticall significant at a 10 percent le-el) 4!e estimated coefficient implied t!at !o'' farms 3ere1 on a-erage1 11)GG percent less li$el to use contracts for corn production) .o'' operators ma 'e less inclined to contract t!eir corn production1 as t!e ma

!ttp:FF333)'epress)comF=afioF-ol8Fiss1Fart4

assign a relati-el larger 3eig!t on t!e negati-e aspects of contracts ?e)g)1 t!e potential lia'ilit 'urden and t!e loss of managerial freedom associated 3it! contracting@) (one of t!e ot!er farm c!aracteristics1 suc! as t!e net 3ealt! of t!e !ouse!old ?$$%&@1 off0farm income ?OFI@1 and t!e operator6s age ?Age@1 eAperience ?()perience@1 and education ?(ducation@ 3ere estimated to !a-e significant effects on t!e pro'a'ilit of producing corn under contract) 4a'le B) +ogit Estimation 7esults for t!e "ecision to %ontract &o 'eans
Varia'le Intercept Soy"rop $$%& VF" OFI D'A Age CropInsD ()perience (ducation $o**yD 1223D 1224D 6cFadden 7 1 Count 7
1

%oef) Est) ?&t) Error@ 01);G1TTT ?0);;2@ 0)<B>T ?0);24@ 0)00; ?0)00<@ 0)0;4TT ?0)02G@ 0)0<2 ?0)100@ 1)20GTT ?0)>12@ 00)022T ?0)01>@ 0)B;BT ?0)202@ 00)00B ?0)01B@ 00)0;0 ?0)1;4@ 00);G1TT ?0)2<0@ 0)414 ?0)2G4@ 0)<1GTTT ?0)B1G@

(aS-e Est) #arginal Effect n)a) 0)1;80 0)0008 0)00<1 0)01;; 0)20B8 00)00BG 0)0;<> 0)000> 00)0084 00)0<>4 0)0><< 0)1;4<

Ad=usted %oef) Est) Est) #arginal ?&t) Error@ Effect 0B)14>TTT ?1)010@ 4)>>1TT ?1)81G@ 0)00> ?0)012@ 0)0<BTTT ?0)0B;@ 0)082 ?0)0<4@ 2)014TTT ?0)G81@ 00)021 ?0)01>@ 0)4<<T ?0)2>4@ 0)004 ?0)01>@ 00)120 ?0)1>8@ 00)<14TTT ?0)B;0@ 0)B;; ?0)28B@ 0)G<4TT ?0)B<1@ n)a) 0)GG>B 0)0010 0)01;> 0)01BG 0)BB;; 00)00B; 0)08B2 0)000G 00)0200 00)1;22 0)0;<2 0)1B2B

0)0G1 0)0<1 0)>>G 0)>81 (ote: &tandard errors are reported in t!e parent!eses) TTT1 TT1 and T denote significance at 1U1 ;U1 and 10U1 respecti-el )

Produced by The Berkeley Electronic Press, 2010

4!e results for so 'ean contracts are reported in 4a'le B) 4!e intensit of so 'ean production is estimated to 'e significantl and positi-el associated 3it! t!e decision to contract so 'ean after ad=usting for endogeneit 1 3it! an increase of 10 percent ?0)10@ in t!e proportion of so 'ean production on an operation increasing t!e pro'a'ilit of using contracts ' an estimated G)G> percent on a-erage) +arger farms1 as measured ' t!e -alue of production ?VF"@1 are estimated to 'e more li$el to contract1 3it! an increase of N1001000 in t!e VF" leading to a 1);> percent greater pro'a'ilit of using contracts) Operations 3it! greater de't0 to0asset ratios are also significantl more li$el to gro3 so 'ean under contract1 3!ic! is consistent 3it! t!e ! pot!esis t!at more !ig!l le-eraged farms are more li$el to engage in ris$ management acti-ities) 4!e effects of t!e CropInsD and $o**yD -aria'les are similar to t!ose for corn contracts) Farms 3it! crop insurance are significantl more li$el to produce so 'ean under contract1 as t!e presence of crop insurance is estimated to increase t!e pro'a'ilit of so 'ean contract use ' 8)B2 percent) .o'' farms are significantl less li$el to enter into contracts for so 'ean1 3it! an estimated a-erage marginal effect of 01;)22 percent on t!e pro'a'ilit of contracting so 'ean for t!ose operations defined as !o'' farms) 4!e relations!ips 'et3een farm size1 t pe1 and t!e propensit for contracting are consistent 3it! t!e o'ser-ations of #ac"onald and ,or' ?2008@ in anal zing t!e A7#& data) As 3it! t!e results for corn contracts1 ot!er farm c!aracteristics suc! as $$%&1 OFI1 ()perience1 and (ducation 3ere not found to 'e insignificant eAplanator -aria'les in t!e decision to use mar$eting contracts for so 'ean production) 4!e lac$ of significance of t!ese farm c!aracteristics 3as ro'ust to a num'er of alternati-e specifications for 'ot! t!e corn and so 'ean contract models) (ote t!at t!e crop intensit -aria'le ?Corn"rop@ 3as found to 'e positi-e and significant for corn contract decisions prior to t!e ad=ustment for endogeneit ) .o3e-er1 once t!e matc!ing eCuation ?>@ is included and t!e estimates in t!e contracting decision eCuation ?;@ are ad=usted1 t!e crop intensit -aria'le 3as found to 'e non0significant) 4!e opposite effect 3as found for t!e decision to contract so 'ean1 3it! t!e crop intensit -aria'le ?Soy"rop@) Ad=usting for endogeneit results in a coefficient estimate for t!e Soy"rop -aria'le impl ing an effect four times as large as t!e naS-e estimate) #oreo-er1 t!e naS-e estimate 3as onl significant at t!e 10 percent le-el1 3!ereas t!e ad=usted estimate 3as significant at ; percent) Among t!e limited su'set of ot!er -aria'les t!at 3ere
<

<

Among t!e 11>4G farms in t!e sample1 B8B ?2B percent@ farms entered into contracts for corn or so 'eans 3!ile 202 ?12 percent@ farms entered into contracts for 'ot! corn and so 'eans) A total of 112>4 ?GG percent@ of t!e farms in t!e sample did not enter into contracts for eit!er crop)

!ttp:FF333)'epress)comF=afioF-ol8Fiss1Fart4

estimated to !a-e a statisticall significant effect on contracting decisions1 t!e magnitudes of t!e coefficient estimates and corresponding marginal effects also differed) At t!e -er least1 t!is implies t!at endogenous matc!ing ma 'e a concern and t!e failure to ad=ust for t!is effect could lead to 'iased results and inaccurate inferences related to t!e relations!ip 'et3een t!e farm or agent c!aracteristics on t!e decision to produce corn or so 'ean under contract) 3.1 '#e Contract Attri*utes 4a'le 4 reports t!e parameter estimates and goodness0of0fit measures for t!e specific contract attri'ute models defined ' eCuation ?G@) 4!e second and t!ird columns s!o3 t!e estimates corresponding to t!e naS-e and ad=usted logit models 3!ere t!e dependent -aria'le is 3!et!er t!e price recei-ed under t!e contract is determined ' a formula ?For ulaD@) 4!e use of a formula implies a larger degree of price uncertaint relati-e to a contract 3!ic! specifies a single deterministic price) 4!erefore1 one 3ould eApect more ris$0a-erse producers to prefer contracts t!at outline a single price) &imilarl 1 producers 3ould 'e eApected to 'e more 3illing to accept contracts 3it! formula prices ?i)e)1 more price ris$@ 3it! a cooperati-e organization t!at garners greater le-els of trust ?James and & $uta1 200>@) .o3e-er1 neit!er producer ris$ nor producti-it c!aracteristics nor t!e organizational structure of t!e contractor 3ere found to significantl impact 3!et!er t!e contract included a formula0'ased pricing mec!anism) 4!e insignificance of t!e eAplanator -aria'les !eld e-en after t!e estimation procedure 3as ad=usted to account for potential endogeneit ) 4!e fourt! and fift! columns of 4a'le 4 report1 respecti-el 1 t!e naS-e and ad=usted estimates of t!e effects of producer and contractor c!aracteristics on t!e li$eli!ood of prices recei-ed under t!e contract 'eing conditional on Cualit attri'utes of t!e contracted product ?!ualityD@) &imilar to contracts 3it! formula pricing1 t ing price to Cualit attri'utes of t!e commodit ma eApose t!e farmer to more price ris$ dri-en ' Cualit uncertaint ) 4!is implies t!at1 all else eCual1 more ris$0a-erse producers 3ould tend to enter into contracts 3!ere price is independent of Cualit attri'utes) .o3e-er1 as in t!e case of formula pricing1 t!e A7#& data pro-ide no statisticall significant e-idence of t!e utilization of contracts 3it! Cualit 0contingent prices differing across producers or contractor t pes) Again1 t!e insignificance of t!e crop1 contractor1 and farm c!aracteristics applied to t!e results from 'ot! t!e naS-e and ad=usted estimation procedures)
10

10

#arginal effects for t!e contract attri'ute models are not reported due to t!e o-erall insignificance of t!e parameter estimates and to conser-e space) 4!e are a-aila'le from t!e aut!ors upon reCuest)

Produced by The Berkeley Electronic Press, 2010

Finall 1 t!e siAt! and se-ent! columns of 4a'le 4 report t!e naS-e and ad=usted estimates for t!e regressions 3!ere t!e dependent -aria'le is 3!et!er or not t!e contract outlines a specific Cuantit to 'e deli-ered ' t!e producer ?!uantityD@) &pecif ing a Cuantit eAposes t!e producer to a greater s!are of t!e commodit production ris$1 so one 3ould eApect more ris$0a-erse producers to 'e more li$el to enter into contractual arrangements t!at do not specif a Cuantit to 'e deli-ered to t!e contractor) 4!e !uantityD results differ slig!tl from t!ose of t!e ot!er attri'ute models s!o3n in 4a'le 4 in t!at more !ig!l educated producers are more li$el to use contracts 3!ere Cuantities are specified) Farmers 11 3it! !ig!er educational le-els 3ere estimated to increase t!e li$eli!ood of contracting ' 12)8 percent) As for t!e ot!er c!aracteristics included in t!e anal sis1 no e-idence of an significant effects 3as found indicating 3!et!er mar$eting contracts outlining specific Cuantities to 'e deli-ered are more or less li$el to 'e used) 4!e regression results are surprising in t!at contract t!eor predicts t!at t!e ris$ preferences and c!aracteristics of t!e contracting parties s!ould impact t!e resulting contract) A num'er of arguments could 'e used to eAplain our findings) First1 ot!er t!an organizational structure ?CoopD@1 3e lac$ed data on t!e principals) It is possi'le for contractors to 'e relati-el more ris$ a-erse t!an producers1 in 3!ic! case t!e ?uno'ser-ed@ ris$ preferences of t!e former ma 'e t!e main dri-ers of t!e contract outcomes) A related eAplanation is t!e potential mar$et po3er of t!e contractors) If onl one or a limited num'er of contractors are located 3it!in feasi'le proAimit 1 producers ma lac$ t!e a'ilit to negotiate specific contract terms) In t!is instance1 t!e c!aracteristics and preferences of t!e contractor 3ould tend to determine t!e specific contract designs1 3it! t!e producers effecti-el 'eing faced 3it! ta$e0it or lea-e0it offers) Additionall 1 as 3as pre-iousl stated1 our a'ilit to separate t!e allocation of -alue at t!e contract le-el 3as limited ' t!e nature of t!e data) 4!e contract specifications associated 3it! !ig!er le-els of relati-e ris$ ?e)g)1 formula prices or specific Cuantities@ ma use !ig!er price premiums to compensate for t!e additional price or production ris$) Finall 1 t!e o'ser-ation of insignificance ma 'e due to t!e c!oice of crops and regions eAamined) As !ig!lig!ted ' Allen and +uec$ ?1<<<@1 t!ere eAists !ig!l de-eloped commodit 1 credit1 and1 for corn and so 'ean1 su'sidized insurance mar$ets t!at can 'e used to manage and mitigate price and production ris$s) 4!e importance and a'ilit of ris$0s!aring to 'e ac!ie-ed t!roug! contract design ma 'e dominated ' t!e opportunities afforded ' t!ese ot!er ris$ management alternati-es)
11

4!e A7#& data includes four education le-els: 1@ less t!an !ig! sc!ool1 2@ !ig! sc!ool1 B@ some college1 and 4@ college graduate and 'e ond)

!ttp:FF333)'epress)comF=afioF-ol8Fiss1Fart4

4a'le 4) +ogit Estimation for &pecific Attri'utes %onditional on %ontracting 02)G8< 7esults 02)8G< 04)8>B 04)4<B 0)B;; 1)14B
Varia'le Intercept CornD CoopD Ot#erContD $$%& VF" OFI D'A Age CropInsD ()perience (ducation $o**yD 1223D 1224D 6cFadden
1

For ulaD ?2)BB0@ ?2)<;;@ (aS-e Ad=usted 0)BBG 0)11< ?0)B80@ ?1)>>0@ 00)BBB ?0)G4>@ 0)0;> ?1)4G<@ 00)G;0 ?0)G<2@ 0)01; ?0)01;@ 00)001 ?0)0;B@ 00)2<B ?0)82G@ 01)28> ?1);G;@ 00)018 ?0)0;B@ 0);>8 ?1)084@ 0)04B ?0)0;B@ 0)121 ?0)4<;@ 0)10< ?1)048@ 0);G4 ?0);8G@ 0)4G; ?0)G4G@

!ualityD ?B)20>@ ?B)411@ (aS-e Ad=usted 00)048 01)4G< ?0)244@ ?1)4G8@ 0)>;4 ?0);;<@ 0)0G4 ?0)B8G@ 0)01; ?0)018@ 00)0<> ?0)0>>@ 0)BBB ?0);0<@ 01)1;1 ?1);>B@ 00)040 ?0)0;;@ 0)41< ?0)<>1@ 0)0>1 ?0)0;2@ 0)4G2 ?0)4;G@ 0)41< ?1)042@ 0)218 ?1)11B@ 0)GGG ?1)BG<@ 0)14B ?0)B80@ 0)01G ?0)018@ 00)101 ?0)0>G@ 0)B80 ?0);B>@ 01)014 ?1);>1@ 00)0BB ?0)0;;@ 0)4;4 ?1)0B2@ 0)0;0 ?0)0;;@ 0);1B ?0)4<1@ 0)2>> ?1)102@ 0)421 ?1)0<2@ B);4>TTT ?0)<1G@

!uantityD ?1)248@ ?1)444@ (aS-e Ad=usted 0)240 01)280 ?0)2>2@ ?1)GB8@ 01)0>4 ?0)8;;@ 0)>1< ?0)G8;@ 0)00B ?0)021@ 00)0;8 ?0)048@ 00)2>4 ?0)B>B@ 0)GG1 ?0)8<G@ 00)0B< ?0)0BB@ 0);84 ?0)G;;@ 0)00> ?0)02G@ 0)881TT ?0)40B@ 00)B8; ?0)4<;@ 0)208 ?0)>02@ 0)><8 ?0);B>@

00);<<TT ?0)28;@ 0);>0 ?0)G>>@ 0)001 ?0)021@ 00)0;B ?0)04B@ 00)B21 ?0)B20@ 0);>4 ?0)88>@ 00)042 ?0)0B2@ 0)40; ?0)G>1@ 0)01< ?0)022@ 0)844TT ?0)B><@ 00)2<0 ?0)482@ 00)04> ?0);8;@ 0)>B2 ?0);;B@

00)GB> ?00)G;0@ 0)014 ?0)01>@ 00)00B ?0)0;B@ 00)B10 ?0)G>G@ 01)28G ?1);;<@ 00)018 ?0)0;B@ 0);<G ?1)021@ 0)042 ?0)0;4@ 0)11B ?0);40@ 0)1B8 ?1)002@ 0)>1; ?0);GG@ 0)4<> ?0)G20@

B);2;TTT ?0)<GB@

7 0)0<1 0)084 0)B4; 0)B4G 0)120 0)12< 1 Count 7 0);8; 0);8B 0)80B 0)801 0);BG 0);;2 (ote: &tandard errors are reported in t!e parent!eses) TTT1 TT1 and T denote significance at 1U1 ;U1 and 10U1 respecti-el )

5. CONCLUDING REMARKS
9!ile contract t!eor postulates t!at t!ere eAists a lin$ 'et3een certain c!aracteristics of t!e principal and agent and t!e resulting contract 'et3een t!e

Produced by The Berkeley Electronic Press, 2010

parties1 t!ere seems to 'e limited support for t!is relations!ip in t!e scant empirical literature de-oted to mar$eting contracts used for crop production) 9e add to t!e empirical literature on mar$eting contracts ' appl ing t!e econometric met!od proposed ' Ac$er'erg and 5otticini ?2002@ to A7#& sur-e data for corn and so 'ean producers in siA #id3estern states from 200B t!roug! 200;) 4!e met!od accounts for t!e potential impact on estimation and inference of endogenous matc!ing 'et3een agents1 contractors1 and acti-ities) 4!e estimation of t!e contracting eCuation is performed using instrumental -aria'les to correct for t!e potential impact of endogenous matc!ing) Our results at t!e contract decision le-el illustrate t!at t!e failure to account for t!is potential endogeneit can impact t!e magnitude of t!e coefficient estimates as 3ell as t!e interpretation of t!ose estimates 3it! respect to t!eir statistical significance) 9e find e-idence of producer c!aracteristics impacting t!e decision to gro3 corn or so 'ean under formal contract agreements) 4!ese effects are largel consistent 3it! 'ot! t!eoretical predictions and t!ose 'ased on sur-e data and eAperimental approac!es reported in pre-ious studies) For eAample1 farmers 3!o purc!ase crop insurance are more li$el to produce corn and so 'ean under contract 3!ile small !o'' farms are less li$el to use mar$eting contracts) Farm size and le-erage are found to !a-e positi-e and significant impacts on t!e use of contracts for so 'ean production) .o3e-er1 3e find almost no e-idence of o'ser-ed producer or contractor c!aracteristics impacting t!e attri'utes of t!e mar$eting arrangements at t!e contract le-el1 more specificall pricing1 Cualit 1 and Cuantit pro-isions 3it!in t!e contract) Our findings indicate t!at factors ot!er t!an t!e proAies used for farmer ris$ preferences ma pla a more dominant role in determining t!e specific structure of agricultural mar$eting contracts for corn and so 'ean in t!e #id3est1 3!ic! is a result consistent 3it! pre-ious 3or$ in ot!er areas) For eAample1 t!e ris$ preferences of t!e contractor ?principal@1 3!ic! are also largel uno'ser-ed and for 3!ic! proAies do not eAist in t!e A7#& data1 !a-e 'een s!o3n to impact t!e attri'utes of land0tenure contracts o'ser-ed in practice ?Fu$unaga and .uffman1 200<D .uffman and Just1 2004D 7aine et al)1 200;@) #onopol po3er of t!e contractor mig!t also limit t!e menu of contract options a-aila'le to 12 producers as 3ell as t!eir negotiating po3er 3it! respect to contract terms) 4!ese results s!ould 'e interpreted 3it! care due to t!e limitations of t!e data under stud ) In particular1 t!e lac$ of information a'out t!e -alue deri-ed from t!e specific contracts t!at are compara'le across o'ser-ations ma$es it
12

4!is s!ould 'e differentiated 'et3een t!e pricing of contracts under monopol ) For eAample1 ,atc!o-a ?2010@ anal zed t!e effect of !a-ing multiple -s) single contractors a-aila'le in a single area1 and found t!at t!e prices offered ' monopolist contractors did not statisticall differ from t!ose offered in a more competiti-e en-ironment)

!ttp:FF333)'epress)comF=afioF-ol8Fiss1Fart4

difficult to separate t!e effects of compensation ?allocation of -alue@ from t!ose of producer and contractor c!aracteristics) Also1 t!e ma=orit of principal and agent c!aracteristics t!at are postulated to affect contract c!oice and design ?e)g)1 ris$ preferences@ are uno'ser-ed and t!erefore o'ser-ed proA measures are used in t!eir place) %onseCuentl 1 t!e eAplanator po3er of our models is limited ' !o3 3ell t!e o'ser-ed -aria'les proA t!e true uno'ser-ed c!aracteristics) (ot3it!standing t!e aforementioned Cualifications1 our results lead to potentiall important implications for 'ot! contract t!eor and contract design as t!e are applied to production agriculture) If in fact o'ser-ed producer and contractor c!aracteristics are not determining factors in t!e design of mar$eting contracts1 furt!er t!eoretical and empirical researc! is 3arranted to unco-er and identif t!eir underl ing moti-ations) #oreo-er1 to t!e 'est of our $no3ledge1 A7#& represents t!e largest data set a-aila'le allo3ing for t!is t pe of anal sis) "espite t!e eAisting data limitations1 it 3ould 'e eAceedingl difficult to collect primar data t!at 3ould 'e as ric! and include a more representati-e collection of agricultural producers in t!e /)&)

REFERENCES
Ac$er'erg1 ") A)1 and #) 5otticini) OEndogenous #atc!ing and t!e Empirical "eterminants of %ontract Form)P Journal of "olitical (cono y 110?2002@: ;>40;<1) Allen1 ")9) and ") +uec$) O4!e 7ole of 7is$ in %ontract %!oice)P Journal of 8a5, (cono ics, and Organization 1;?1<<<@: G040GB>) 5ar$ema1 A)") O7eac!ing %onsumers in t!e 21 %entur : 4!e &!ort 9a Around t!e 5arn)P A erican Journal of Agricultural (cono ics G;?1<<B@: 112>011B1) %oaldra$e1 ,)F)1 &)4) &on$a1 ") &ud!aras!an1 and F)9) 9inter1 eds) %e5 Industries and Strategic Alliances in Agriculture9 Concepts and Cases. %!ampaign1 I+: &tipes *u'lis!ing1 1<<;) %o'le1 ,).)1 7)H) .eifner1 and #) Euniga) OImplications of %rop 8ield and 7e-enue Insurance for *roducer .edging) Journal of Agricultural and 7esource (cono ics1 2;?2000@: 4B204;2) "ra'enstott1 #) O%onsolidation in /& Agriculture: 4!e (e3 7ural +andscape and *u'lic *olic )P (cono ic 7e+ie5 84?1<<<@: >B0G1)
st

Produced by The Berkeley Electronic Press, 2010

"u'man1 7)9) OVariance Estimation 3it! /&"A6s Farm %osts and 7eturns &ur-e s and Agricultural 7esource #anagement &tud &ur-e s)P &taff *aper (o) AHE& 00001) Economic 7esearc! &er-ice1 /nited &tates "epartment of Agriculture1 9as!ington1 "%1 2000) E7&) :riefing 7oo s9 Agricultural 7esource 6anage ent Sur+ey .A76S/) Economic 7esearc! &er-ice1 /nited &tates "epartment of Agriculture1 9as!ington1 "%) A-aila'le at #ttp9;;555.ers.usda.go+;:riefing;A76S;) Accessed Januar 1 2008) Fraser1 I) O#icroeconometric Anal sis of 9ine Hrape &uppl %ontracts in Australia)P Australian Journal of Agricultural (cono ics 4<?200;@: 2B04>) Fu$unaga1 ,) and 9)E) .uffman) O4!e 7ole of 7is$ and 4ransaction %osts in %ontract "esign: E-idence from Farmland +ease %ontracts in /)&) Agriculture)P A erican Journal of Agricultural (cono ics <1?200<@: 2BG0 24<) Fulton1 J)1 J) *ritc!ett1 and 7) *ederson) O%ontract *roduction and #ar$et %oordination for &pecialt %rops: 4!e %ase of Indiana)P *aper presented at *roduct "ifferentiation and #ar$et &egmentation in Hrains and Oilseeds: Implications for Industr in 4ransition & mposium1 E7& /&"A and Farm Foundation Inc)1 9as!ington1 "%1 Januar 200B) Hreene1 9).) (cono etric Analysis1 ; 7i-er1 (e3 Jerse 1 200B)
t!

Edition) *rentice .all1 /pper &addle

.enness 1 ")A) OInformation As mmetr as a 7eason for Food Industr Vertical Integration)P A erican Journal of Agricultural (cono ics G8?1<<>@:10B40 104B) .enness 1 ")A)1 and J)") +a3rence) O%ontractual 7elations1 %ontrol1 and Vualit in t!e .og &ector)P 7e+ie5 of Agricultural (cono ics 21?1<<<@: ;20>G) .uet! 5) and E) +igon) O*roducer *rice 7is$ and Vualit #easurement)P A erican Journal of Agricultural (cono ics 81?1<<<@: ;120;24) .uffman1 9) and 7) Just) OImplications of Agenc 4!eor for Optimal +and0 4enure %ontracts)P (cono ic De+elop ent and Cultural C#ange ;2?2004@: >1G0>42)

!ttp:FF333)'epress)comF=afioF-ol8Fiss1Fart4

James1 .)&) and #)E) & $uta) OFarmer 4rust in *roducer0 and In-estor0O3ned Firms: E-idence from #issouri %orn and &o 'ean *roducers)P Agri*usiness 22?200>@: 1B;01;B) ,atc!o-a1 A)+) OAgricultural %ontracts and Alternati-e #ar$eting Options: A #atc!ing Anal sis)P Journal of Agricultural and Applied (cono ics 42?2010@: 2>102G>) +a=ili1 ,)1 *)J) 5arr 1 &)4) &on$a1 and J)4) #a!one ) OFarmer6s *references for %rop %ontracts)P Journal of Agricultural and 7esource (cono ics 22?1<<G@: 2>40280) +oc$!eed1 #)E)1 4) Jamison1 and +)J) +au) OFarmer Education and Farm Efficienc : A &ur-e )P (cono ic De+elop ent and Cultural C#ange 2<?1<80@: BG0G>) #ac"onald1 J) and *) ,or') OAgricultural %ontracting /pdate1 200;)P Economic Information 5ulletin (o) B;1 Economic 7esearc! &er-ice1 /&"A1 April 2008) !ttp:FF333)ers)usda)go-F*u'licationsFEI5B;FEI5B;)pdf #is!ra1 A),) and .)&) El0Osta) O#anaging 7is$ in Agriculture 4!roug! .edging and %rop Insurance: 9!at "oes a (ational &ur-e 7e-ealWP Agricultural Finance 7e+ie5 >2?2002@: 1B;0148) *arcell1 J)+) and #)7) +angemeier) OFeeder0*ig *roducers and Finis!ers: 9!o &!ould %ontractWP Canadian Journal of Agricultural (cono ics 4;?1<<G@: B1G0B2G) *aulson1 ()")1 H)") &c!nit$e 1 and 5)J) &!erric$) OImpacts of %rop Insurance and #ar$eting on +and 7ental "ecisions)P *aper presented at t!e 2008 &%%0G> Economics and #anagement of 7is$ in Agriculture meetings1 Orange 5eac!1 A+1 #arc! 2008) 7aine 1 7)+)1 5)+) "iAon1 5)+) A!rendsen1 +)") *arsc!1 and 7)9) 5ierlen) OAr$ansas +andlord &election of +and0+easing %ontract 4 pe and 4erms)P International Food and Agri*usiness 6anage ent 7e+ie5 8?200;@: 101<) 7oe1 5)1 4)+) &porleder1 and 5) 5elle-ille) O.og *roducer *references for #ar$eting %ontract Attri'utes)P A erican Journal of Agricultural (cono ics 8>?2004@: 11;012B)

Produced by The Berkeley Electronic Press, 2010

&eAton1 7)J) and #) E!ang) OA #odel of *rice "etermination for Fres! *roduce 3it! Application to %alifornia Ice'erg +ettuce)P A erican Journal of Agricultural (cono ics G8?1<<>@: <240<B4) &!eldon1 I)#) O%ontracting1 Imperfect Information1 and t!e Food & stem)P 7e+ie5 of Agricultural (cono ics 18?1<<>@: G01<) &!erric$1 5)J)1 *)J) 5arr 1 *)() Ellinger1 and H)") &c!nit$e ) OFactors Influencing Farmers6 %rop Insurance "ecisions)P A erican Journal of Agricultural (cono ics 8>?2004@: 10B0114) &mit!1 V).) and A)E) 5aCuet) O4!e "emand for #ultiple *eril %rop Insurance: E-idence from #ontana 9!eat Farmers)P A erican Journal of Agricultural (cono ics G8?1<<>@: 18<0201) &tiglitz1 J)E) OIncenti-es and 7is$ &!aring in &!arecropping)P 7e+ie5 of (cono ics Studies 41?1<G4@: 21<02;;) & $uta1 #)+) and #)+) %oo$) OA (e3 Institutional Approac! to %ontracts and %ooperati-es)P A erican Journal of Agricultural (cono ics 8B?2001@: 12GB0 12G<) & $uta1 #) and J) *arcell) O%ontract &tructure and "esign in Identit 0*reser-ed &o 'ean *roduction)P 7e+ie5 of Agricultural (cono ics 2;?200B@: BB20B;0) 4soulou!as1 4) and 4) Vu$ina) OIntegrator %ontracts 3it! #an Agents and 5an$ruptc )P A erican Journal of Agricultural (cono ics 81?1<<<@: >10G4) Velandia1 #)1 7)#) 7e=esus1 4)O) ,nig!t1 and 5)J) &!erric$) OFactors Affecting Farmers6 /tilization of Agricultural 7is$ #anagement 4ools: 4!e %ase of %rop Insurance1 For3ard %ontracting1 and &preading &ales)P Journal of Agricultural and Applied (cono ics 41?200<@: 10G012B) E!eng1 X)1 4) Vu$ina1 and %) &!in) O4!e 7ole of Farmers6 7is$ A-ersion for %ontract %!oice in t!e /)&) .og Industr )P Journal of Agricultural & Food Industrial Organization >?2008@: Article 4) A-aila'le at !ttp:FF333)'epress)comF=afioF-ol>Fiss1Fart4F)

!ttp:FF333)'epress)comF=afioF-ol8Fiss1Fart4

Iowa State University does not discriminate on the basis of race, color, a e, reli ion, national

ori in, se!ual orientation, ender identity, se!, marital status, disability, or status as a U"S" veteran" #n$uiries can be directed to the %irector of E$ual &''ortunity and %iversity, ()*0 Beardshear +all, ,-1-. 2/012)12"