Contracting, negotiation, and the policy change: The conflict between Korean farmers and their agricultural coo

Abstract

Farmers- owned agricultural cooperatives should have the same interests with their farmer owners. However, the operating team of the cooperatives may have different interests. Under this situation, the terms of contract between farmers and cooperatives are important to both sides. Farmers' share of the cooperatives' profits specified in the contracts is an important issue in the long- term sustainability of rice processing and marketing in Korea. This paper discusses the behavior of farmers and their cooperatives in determining the optimal share of profits in their contracts. It also illustrates the impacts of the policy changes due to the Korea's accession to the WTO on the relative negotiation power between farmers and cooperatives. The results show that the Korean rice cooperatives have more negotiation power than farmers. They set the profit share to farmers based on their own profit maximization criteria, while taking farmers supply decision into consideration. Farmers only choose how much to supply. This relationship was seen changing after 2005, when the Korean government reduced and removed the price subsidy it provided to rice cooperatives before. As the cooperatives' margin goes down without the subsidy, farmers are pushed to bargain hard for their share of the margin to maintain their revenue.

Keywords

• contracts
• principal-agent
• cooperatives
• market risk