Farmers’ self-reported bargaining power and price heterogeneity

Abstract

Purpose While it is commonly argued that food supply chains are characterized by severe imbalances of power between contracting parties, there is an insufficient understanding of the factors affecting the negotiating position of farmers. The purpose of this paper is to provide quantitative evidence documenting the position of farmers and to explain variation in farm gate prices in the dairy supply chain by using unique micro-survey data from Poland. Design/methodology/approach The bargaining power of farmers is elicited from their self-reported assessment about how confident they feel in their relationships with both the processing industry and input suppliers. Findings Using econometric modelling, it is shown that farmers who perceive themselves as having a relatively “strong position” in the food chain receive a higher milk price from dairy companies. Research limitations/implications While this result comes with some caveats, it suggests that the self-reported beliefs farmers hold about relations with their contractors may reveal additional insights into the distribution of power throughout the food chain. Originality/value Compared to the existing studies, the paper offers two innovations. First, to construct a proxy for farmers’ bargaining power, their subjective opinion on how easy they could be substituted for by their contractors is used. In effect, the paper goes beyond the standard measures which focus on farm size or its location. Second, it investigates farmers’ relationships vis-à-vis both processing industry and input suppliers. Consequently, this paper is the first to analyze power relationships by explicitly taking into account three stages of the supply chain.

Farmers’ Bargaining Power and Input Prices: What Can We Learn from Self-Reported Assessments?1

“…This is notwithstanding the fact that they are often essential to a region's economy and employment (Csaki et al 2008). It has been also shown that the changes taking place in the agri-food supply chain, such as consolidation of downstream segments and implementation of food 2 A similar strategy was used by Fałkowski et al (2017). Their study however analyzes farmers' relations with the processing industry and its focus is not on farmers-input suppliers relations.…”

“…Other examples include farmers' personal connections or their (intrinsic) ability to negotiate prices (Do Prado and Martinelli 2016). All this suggests that farmers' bargaining power in the agri-food chain would depend not only on various tangible assets they possess, but also on the way in which they perceive strengths and weaknesses of themselves, their contractors and the environment in which they operate (Fałkowski et al 2017). The problem though is that most of these aspects are hardly observable and thus very difficult to measure.…”

“…When constructing our proxy for farmers' bargaining power vis-à-vis input suppliers, we tried to integrate two key points (Fałkowski et al 2017). First, our focus was on farmers' beliefs about the extent to which they can be substituted for by their contractors.…”

Econometric modelling of heterogeneity and structural changes in Dutch horticulture

“…A vast majority of studies in agricultural economics assumes that agricultural producers are price-takers (see e.g. Norwood and Lusk, 2018;Arnade and Pick, 2000), meaning they face a market price P in period t depending on the total quantity produced Q in period t. Nevertheless, considerable differences in firm-specific output prices can be observed in various agricultural markets (Falkowski et al 2017). In order to explain price dispersion, it is most often assumed that some form of price heterogeneity exists (Sauer et al, 2012).…”

“…Current studies that do challenge the assumption of perfect competition in agricultural markets mainly focus on aspects as price transmission (Liu et al, 2019;Assefa et al, 2017;Bakucs et al, 2014) and the distribution of rents among various partners in the food supply chain, hereby mostly emphasizing the low bargaining power of primary producers (Bonanno et al, 2018a;Sexton, 2013). Potential output price differences between primary producers are however barely studied, Falkowski et al (2017) being one of the few exemptions. In contrast, most studies on price dispersion and the ability of producers to obtain higher prices in food markets focus on food manufacturers (e.g.…”