Direct-contracting and Brokers in the Producer-processor Transaction: the Uruguayan Beef Industry Case

Mario Mondelli (University of Missouri)
Decio Zylbersztajn (University of São Paulo)

Abstract: What are the determinants of contractual arrangements in producer-processor transactions in the Uruguayan beef industry? Coordination has become a strategic issue for this industry, which exports 75% of its production, not only to assure quality attributes of products but also to explore new market access opportunities. Two contractual arrangements coexist: direct-contracting (48%) and broker-induced transactions (52%). In addition, all processors and 46% of producers use both types of arrangements. Theory: Transaction Cost Economics offers helpful insights to understand reasons for the development and adaptation of different contractual arrangements. Method: we use a probit model with panel data to test the relationship between direct-contracting mechanism and asset specificity, site specificity and frequency. The panel contains population information of producer-processor transactions (77,458 transactions, 10,130 producers and 47 processors). Results: The probability of a transaction being aligned with the direct-contracting arrangement increases in transactions with a greater degree of asset specificity (e.g.,young steer), lower distance between producer and processor and higher frequency of transactions between the two parties involved. The direct-contracting arrangement is aligned with higher quality products. These results have implications for organizations in the beef industry and policy makers in terms of a “national strategy” focused on higher quality beef products.


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