Vertical co-ordination in the New Zealand beef industry: an analysis of risks and returns for farmers and meat processors

Abstract

The number of closely co-ordinated arrangements in agriculture has been growing significantly in the last decade. These arrangements are a response mainly to changes in consumer demand, changes in the structure of firms and technological innovations. This research aims to identify and quantify the nature and sources of risks, returns and trade-offs for beef farmers and processors in the New Zealand beef industry. Five different marketing arrangements were identified and their main characteristics were analysed in terms of how they might influence the risks and returns for each participant of the system. The sources of risk were carefully defined and then a spreadsheet simulation model was built in order to quantify the implications of each marketing system.

The results show that farmers' and processors' risk-return profile is affected by their marketing arrangement decisions. Using the mean-variance (E-V) efficiency criterion to rank the marketing alternatives, it was found that all the systems, with one exception, are E-V efficient. However, when shocks were performed on the systems, in order to simulate extreme production and price situations, significant changes in the risk-return trade-offs were identified. The greatest differences among the contractual arrangements were not in terms of expected returns, but in the amount of risk. It was also found, using value added sensitivities, that a small premium in the final market and some adjustments in the incentive structures would be enough to make the most closely aligned marketing systems attractive to both farmers and processors. Overall, results show that different contractual arrangements involve a series of trade-offs that need to be carefully understood by both farmers and processors.