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The Economics of Contract Farming: A Credit and Investment Perspective

Author:
Xiaoxue Du   Liang Lu   David Zilberman  


Issue Date:
2014


Abstract(summary):

Agribusiness firms introduce new products that require agricultural production and then processing. Firms have to decide about processing capacity and assure availability of agricultural feedstock. Some of this is done in-house, and some is secured through con- tracts. We investigate the allocation of capital between processing capacity and in-house production, while the remainder of agricultural inputs is procured through contracts. Our results show that contract farming will increase with the cost of capital and decline when agribusiness firm has monopsony power over feedstock producers. Moreover, when sup- ply of contracted feedstock is uncertain, expected final output will be less than under certainty and more capital will be allocated to in house production of the feedstock.


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