Question

Regarding Vertical Relations:

1.Understand the agricultural production chain.

• 2.Differetiate between vertical relations and horizontal relations.

• 3.Understand why use agricultural contracts.

• 4.Know the difference between production contracts and market contracts.

• 5.Know the benefits of agricultural cooperatives.

Answer 1

1. The agricultural production chain concept has been used since the beginning of the millennium, primarily by those working in agricultural development in developing countries.

It normally refers to the whole range of goods and services necessary for an agricultural product to move from the farm to the final customer or consumer.

At the heart of the concept is the idea of actors connected along a chain producing and delivering goods to consumers through a sequence of activities.

However, this “vertical” chain cannot function in isolation and an important aspect of the value chain approach is that it also considers “horizontal” impacts on the chain, such as input and finance provision, extension support and the general enabling environment.

2.Effective vertical relationships can contribute to value chain competitiveness in other ways, by creating conditions that support risk-taking and investment. Examples of this can be found in handicraft value chains, where it is common for lead firms to provide inputs to their artisan suppliers. This assures the lead firm of a quality product, even when quality inputs are not locally available. Such in-kind credit is an embedded service that helps artisans overcome cash flow constraints.

Through horizontal linkages, firms at the same level of the value chain interact to accomplish what a single firm working independently could not do so well. This interaction may come in the form of either cooperation or competition (or both). Effective horizontal relationships can promote efficiencies, reduce costs, open markets and spur beneficial competition. Cooperation makes it possible for small-scale producers to reduce the costs of inputs and supporting services (e.g., training or transportation), while gaining access to new buyers and better prices through group marketing.

3. An Agricultural Contract can be defined as agricultural production carried out according to an agreement between a buyer and farmers, which establishes conditions for the production and marketing of a farm product or products. Typically, the farmer agrees to provide agreed quantities of a specific agricultural product. More commonly, however, contracts outline conditions for the production of farm products and for their delivery to the buyer’s premises. The farmer undertakes to supply agreed quantities of a crop or livestock product, based on the quality standards and delivery requirements of the purchaser. In return, the buyer, usually a company, agrees to buy the product, often at a price that is established in advance. The company often also agrees to support the farmer through, e.g., supplying inputs, assisting with land preparation, providing production advice and transporting produce to its premises.

4. The marketing contract stipulates the producer will still own his or her output, but will market a certain percentage to strictly one packer. Marketing contracts are often long-term-from five to seven years.

A production contract involves the producer raising crops for someone else in the producer's own facilities.

5. Agricultural cooperatives can help farmers benefit from economies of scale to lower their costs of acquiring inputs or hiring services such as storage and transport.

Agricultural cooperatives also enable farmers to improve product and service quality and reduce risks.

The owners provide tangible support for the business with their equity investments, and in return the cooperative provides benefits to member-owners.