Contractual Relationships and Countervailing Power of Milk Producers in Hungary: Need for Producer-Owned Organisations

Abstract

In some cases spot markets fail to govern the whole or a part of the marketing channel effectively and contractual relations are gaining more importance. It is especially true in case of the dairy market, since this market became more differentiated and producers are vulnerable in most of the cases. The aims of our research were to present a theoretically structured framework of contracting arrangements of milk pro-ducers based on Transaction Cost Economics’ predictions and to carry out an empirical analysis of the key determinants of governance structure between dairy farmers and processors in Hungary from economic, legal and cultural point of views. In the second quarter of 2005 we carried out a postal survey among milk producers. With the help of empirical research the following main research questions have been asked: how contracts are arranged, what kind of diversifications exist in contracting practice and what the driving forces behind the chosen governance structures are. We also tried to find what kind of coordination means can be used to be able to harmonise producer-processor relationships. In this paper – beyond the theoretical approach to coordination by contracts – we present empirical results regarding dairy producers’ bargaining power against processors in Hungary. As a conclusion, we underline the importance of Western-European experi-ences and the need for more producer-owned organisations, like co-operatives and producers’ groups in Hungary.