Vertical integration in the food industry and contract farming - The case of Turkey

Abstract

The relationship between farmers and the food industry ranges from carrying out spot market transactions to complete integration, characterized as vertical integration. In this study, the relationship between farmers and the food industry has been investigated focusing on contract farming. The Turkish food industry is a promising sector, but still has a dual structure with some small-scale manufacturing alongside larger plants employing modern technologies. The two main cooperative associations of Turkey, Trakyabirlik and Marmarabirlik, have considerable interests, especially in sunflower, olive and vegetable oil processing. Balikesir, Bilecik, Bursa and Canakkale provinces, the regions where the present investigations were conducted, have well developed vegetable, fruit, hop and sugar beet processing, tomato paste and frozen food industries. In the dairy, olive and vegetable oil industries, most firms have relied upon open market purchase to provide raw materials, whereas one of the widespread means of vertical coordination in this sector is contract farming. The share of contract farming, especially in tomato and pea growing, may be anywhere between 1 and 100%, with an average of 75%. Sixty per cent is more typical for hop production. Sugar beet growing can only realistically be accomplished via contract farming. Contract farming is potentially beneficial, especially for small farmers, providing various services, credit facilities, etc, although there are some inherent problems in implementation. Farmers could, however, solve many of the problems involved in contract arrangements by establishing organizations to undertake cooperative bargaining on their behalf.