Files
Abstract
Agribusiness firms introduce new products that require agricultural production and then
processing. Firms have to decide about processing capacity and assure availability of
agricultural feedstock. Some of this is done in-house, and some is secured through contracts.
We investigate the allocation of capital between processing capacity and in-house
production, while the remainder of agricultural inputs is procured through contracts. Our
results show that contract farming will increase with the cost of capital and decline when
agribusiness firm has monopsony power over feedstock producers. Moreover, when supply
of contracted feedstock is uncertain, expected final output will be less than under
certainty and more capital will be allocated to in house production of the feedstock.