Contracting for Consistency: Hog Quality and the Use of Marketing Contracts

Abstract

Despite the dramatic change in the organization of the US hog industry over the past two decades, the existing literature offers little insight into the decision by pork packers to use long-term marketing contracts, which represent the dominant form of hog procurement transactions. Existing studies focus instead on the efficacy of incentive mechanisms for which contracts are neither necessary nor sufficient, on hog producers' motivations for accepting contracts, or on packers' use of production contracts or vertical integration, which represent a relatively small share of slaughtered hogs. This paper offers a framework to explain pork packers' adoption of marketing contracts based on packers' downstream strategic market positioning and their resulting demands for specific hog quality attributes. Based on an analysis of hog procurement contract terms and of survey data related to packers' procurement practices, we provide support for the argument that packers' use of contracts is driven by issues of measurement costs and demand for intertemporal consistency of quality rather than by technological and market structure factors associated with asset specificity arguments.