An analysis of partially-guaranteed-price contracts between farmers and agri-food companies

• Partially-guaranteed price contracts in agri-food sector described and analyzed.
• Both farmer and buying firm benefit when demand is given exogenously.
• Both also benefit even when demand is endogenous to the negotiation process.
• Both benefit when buying firm offers free advisory service or incentives to farmer.
• Thus, mutual benefits of PGP contracts are robust in many practical settings.

Global agri-food companies such as Barilla and SABMiller are purchasing agricultural products directly from farmers using different types of contracts to ensure stable supply. We examine one such contract with partially-guaranteed prices (PGP). Under a PGP contract, around sowing time, the buying firm agrees to purchase the crop when harvested by the farmer, offering a guaranteed unit price for any fraction of the produce and offering the commodity market price prevailing at the time of delivery for the remainder. The farmer then chooses the fraction. By analyzing a Stackelberg game, we show (1) how the PGP contract creates mutual benefits when the firm’s purchase quantity is taken as being exogenous. We also analyze how the PGP contract is robust in creating value for both the firm and the farmer (2) when the firm’s purchase quantity is endogenously determined; (3) when the firm provides advisory services to the farmer; and (4) when the firm offers a price premium as an incentive for farmers to exert efforts to comply with ‘sustainable’ agricultural practices.