Design of Production Contracts : an examination of the Findus pea production contract

University essay from SLU/Dept. of Economics

Abstract: The Swedish processor Findus contracts approximately 500 pea producers annually to secure the company’s supply of green peas for human consumption. A production contract, which has had roughly the same design for decades, regulates the relation between Findus and the pea producers. Agriculture is typically a risky business. The main sources of risk in agricultural production are production risk and price risk. It can be questioned whether the current pricing model in the Findus pea production contract is optimal as the conditions facing a grain farmer have changed due to increased price risk in agricultural commodity markets. The aim of this study is to examine, from the producer’s viewpoint, the current production contract between Findus and its pea producers and whether there are alternative pea pricing models that are more effective for both contract parties given volatile agricultural commodity markets. A quantitative approach is used. The method consists of a telephone survey with a number of Findus pea producers and a mathematical programing model based on mean-variance (EV) analysis (Hardaker et. al., 1997) with historical data from a case farm. The main findings are that the Findus pea production contract functions well in terms of motivation; the pea producers have incentives to maximize the integrated profit (Bogetoft & Ballebye Olesen, 2004). This is also verified by the results of optimization model and the survey. The differences between the examined pricing models are very small both in terms of expected net farm income, expected utility and risk. The value of incorporating Findus peas in the crop rotation is considered to be high. In the south western part of Skåne, Findus peas is the second most profitable crop in the crop rotation in terms of gross margin 3 (GM3). This can be explained by substantially lower costs compared to alternative crops, especially in terms of machinery costs.

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