Volume 20 Issue 2

Special Issue

International Food and Agribusiness Management Review

Agroholdings and Mega-Farms in a Global Context Official Journal of the International Food and Agribusiness Management Association

Volume 20 Issue 2 2017

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Volume 20 Special Issue 2 Agroholdings and Mega Farms in a Global Context Special Issue Editors Lead Editor: Frans L. P. Hermans, Research Associate, Leibniz Institute of Agricultural Development in Transition Economies (IAMO), Germany Fabio R. Chaddad, Associate Professor, University of Missouri, USA Taras Gagalyuk, Research Associate, Leibniz Institute of Agricultural Development in Transition Economies (IAMO), Germany SebastiĂĄn Senesi, Director, Food and Agribusiness Masters Course, Agronomy School, University of Buenos Aires, Argentina Alfons Balmann, Head of the Department Structural Change, Leibniz Institute of Agricultural Development in Transition Economies (IAMO), Germany

Dedication On Thursday, November 24, 2016, Dr. Fabio R. Chaddad, one of the guest editors of this special issue and a member of the editorial board of the International Food and Agribusiness Management Review passed away in St. Louis, Missouri, at the age of 46. He was affiliated with the department of Agricultural and Applied Economics at the University of Missouri and Insper in SĂŁo Paulo, Brazil.

Fabio was an internationally renowned expert and scholar with wide-ranging interests in the global agribusiness sector. He was intimately involved in the conception and editing of this special issue: organizing the pre-conference workshop in Milan on which this special issue was built, contributed his own paper and edited and reviewed the contribution of other authors, including this last part of the special issue: the editorial.

We dedicate this special issue to his memory.

International Food and Agribusiness Management Review

Editorial Staff Executive Editor

Gerhard Schiefer, University of Bonn, Germany

Regional Managing Editors Asia, Australia, and New Zealand

Derek Baker, UNE, Australia Kim Bryceson, University of Queensland, Australia Kevin Chen, IFPRI-Bejing, China Jeff Jia,University of Exeter, United Kingdom Nicola M. Shadbolt, Massey University, New Zealand

Europe

Pegah Amani, Technical Institute of Sweden, Sweden Vera Bitsch, Technical University of Munich, Germany Alessio Cavicchi, University of Macerata, Italy Hans De Steur, Ghent University, Belgium Klaus Frohberg, University of Bonn, Germany Cristina Santini, University San Raffaele, Italy Jacques Trienekens, Wageningen University, The Netherlands

North America

Ram Acharya, New Mexico State University, USA Yuliya Bolotova, Clemson University, USA Michael Gunderson, Purdue University, USA William Nganje, North Dakota State, USA R. Brent Ross, Michigan State University, USA Aleksan Shanoyan, Kansas State University, USA David Van Fleet, Arizona State University, USA Nicole Olynk Widmar, Purdue University, USA Cheryl Wachenheim, North Dakota State University, USA

South America

Aziz da Silva Júnior, Federal University of Vicosa, Brazil Jose Vincente Caixeta Filho, University of Sao Paulo, Brazil

Africa

Ajuruchukwu Obi, University of Fort Hare, South Africa Nick Vink, Stellenbosch University, South Africa Filippo Arfini, Universita’ di Parma, Italy Stefano Boccaletti, Universita’ Cattolica, Italy Michael Boehlje, Purdue University, USA Dennis Conley, University of Nebraska - Lincoln, USA Francis Declerck, ESSEC Business School, France Jay Lillywhite, New Mexico State University, USA Woody Maijers, INHOLLAND University, The Netherlands

Marcos Fava Neves, FEA / USP / PENSA, Brazil Onno Omta, Wageningen University, The Netherlands Hernán Palau, Buenos Aires University, Argentina Christopher Peterson, Michigan State University, USA Thomas Reardon, Michigan State University, USA Mary Shelman, (Retired) Harvard Business School, USA Johan van Rooyen, University of Stellenbosch, South Africa

The IFAMR (ISSN #: 1559-2448) is published quarterly and the archived library is available at http://www.ifama.org. For copyright and publishing information, please contact: Marijn van der Gaag, Administrative Editor Wageningen Academic Publishers • P.O. Box 220 6700 AE Wageningen • The Netherlands • Tel: +31 317 476511 Fax: +31 317 453417 • Email: ifamr@wageningenacademic.com • Web: http://www.wageningenacademic.com/loi/ifamr.

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TABLE OF CONTENTS Special Issue: Agroholdings and Mega-Farms in a Global Context

Editor's Introduction 1.

The emergence and proliferation of agroholdings and mega farms in a global context Frans L. P. Hermans, Fabio R. Chaddad, Taras Gagalyuk, Sebastián Senesi, Alfons Balmann................................................................................................................

p.175

Industry Speaks 2.

Australian agricultural scale and corporate agroholdings: environmental and climatic impacts Bradley Plunkett, Andrew Duff, Ross Kingwell, David Feldman...... p. 187

Review Article 3.

Scale farming operations in China Zuhui Huang, Lijun Guan, Shaosheng Jin.............. p. 191

Case Study 4.

Agency costs and organizational architecture of large corporate farms: evidence from Brazil Fabio Chaddad and Vladislav Valentinov........................................ p. 201

Review Article 5.

Ownership versus management: the role of farming networks in Argentina Sebastián I. Senesi, Marcos F. Daziano, Fabio R. Chaddad, Hernán Palau.............................

 2017 International Food and Agribusiness Management Association (IFAMA).

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Research Article 6.

Incentive provision to farm workers in post-socialist settings: evidence from East Germany and North Kazakhstan Martin Petrick ....................................

p. 239

Review Article 7.

Strategic role of corporate transparency: the case of Ukrainian agroholdings Taras Gagalyuk .............................................................................................. p. 257

ď›™ 2017 International Food and Agribusiness Management Association (IFAMA). All rights reserved.

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http://www.wageningenacademic.com/doi/pdf/10.22434/IFAMR2016.0173 - Monday, May 08, 2017 4:26:50 PM - IP Address:24.21.169.207

International Food and Agribusiness Management Review Volume 20 Issue 2, 2017; DOI: 10.22434/IFAMR2016.0173

The emergence and proliferation of agroholdings and mega farms in a global context Special issue: Agroholdings and mega-farms in a global context

EDITORIAL Frans L.P. Hermans a, Fabio R. Chaddadb†, Taras Gagalyukc, Sebastián Senesid, and Alfons Balmanne aResearch

Associate, cResearch Associate, and eHead of the Department Structural Change, Leibniz Institute of Agricultural Development in Transition Economies (IAMO), Theodor-Lieser-Str. 2, 06120 Halle (Saale), Germany bAssociate

Professor, University of Missouri and INSPER, 125 Mumford Hall, Columbia, MO 65211-6200, USA. † Deceased

dDirector,

Food and Agribusiness Masters Course, Agronomy School, University of Buenos Aires, Av. San Martin 4453, CP 1417, Ciudad de Buenos Aires, Argentina

Abstract During the last two decades an increasing amount of large-scale farming operations have emerged all over the world: from (Eastern) Europe, to South America, China and the countries of the Former Soviet Union.

These agribusinesses go under the name of mega-farms or agroholdings: horizontally or vertically integrated operations with farm sizes of up to 500,000 hectares and sometimes even more. These types of farms are not only found in crop farming, but also in animal husbandry. Although some information on agroholdings and other forms of mega-farming operations is available, a systematic analysis of their prevalence, economic performance as well as their social and environmental implications in an international perspective is missing. In this special issue of the International Food and Agribusiness Management Review we present a number of papers that highlight the different aspects of such farms. In this editorial we introduce the topic of agroholdings and place the papers in within the context of the available literature. We end with the presentation of a research agenda for the future.

Keywords: agroholdings, mega farms, integration, farm size JEL code: Q13, Q14, Q16 Corresponding author: hermans@iamo.de

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1. Introduction The organization of food production has been the subject of an academic and political controversy for decades. Current changes in the organizational landscape of farm businesses indicate an increasing role of industrialized agriculture with large organizational units. In the recent two decades, new agribusiness models emerged that are operating at a far larger scale than traditional types of farms. The main characteristics of these new agribusiness models include their enormous size, which sometimes approaches several hundred thousand hectares of land, the integration of multiple stages of production and processing, and the increasing influence of outside investors with no background in primary agricultural production (Boehlje, 1999; Petrick et al., 2013; Rylko et al., 2008). In a number of developing countries, such enterprises resulted from foreign direct investments; a development which has been extensively analyzed and debated in the context of ‘land grabbing’ (De Schutter, 2011; Visser et al., 2012; Von Braun and Meinzen-Dick, 2009). However, in a number of industrialized and emerging market economies, such ‘mega farms’ reached a substantial share of production as well (Deininger and Byerlee, 2011).

Compared to the issue of land grabbing, far less research attention has been paid to some fundamental aspects related to the emergence and operation of large agricultural enterprises that raise a number of additional concerns. These concerns include economic, societal and environmental issues such as land concentration, market power, tax evasion, non-transparent lobbying, loss of biodiversity and functioning ecosystems; and the externalization of social costs facilitating social imbalances or a potential incompatibility of large farming structures with the values of democracy and civil society (Baland and Robinson, 2008; Conning and Robinson, 2007).

One reason for limited research efforts so far may be seen in the widely accepted presumption among agricultural economists that large-scale farming operations involving many workers under a centralized management authority are only economically viable under some very restrictive conditions (Allen and Lueck, 1998; Binswanger et al., 1993; Hayami, 2010). However, recent developments in Argentina, Australia, Brazil, Czech Republic, East Germany, Poland, Romania, Russia, South Africa, Ukraine, and the US are challenging these beliefs. The increasing competition over fertile agricultural land and increased access to international capital markets have led to the ongoing growth of these already very large enterprises, while the need for close supervision of labor has been compensated by an increased use of innovative technologies and corporate-style organizational architecture (Chaddad, 2014; Deininger and Byerlee, 2011).

The second reason for insufficient science-based discussion of the role of large agricultural enterprises in the global food system has been the low density of ties among researchers that investigate large farm operations and the resulting impacts. Being geographically and inter-disciplinary dispersed, researchers have not yet conducted insightful cross country comparisons and created a critical mass of knowledge on the relevant topics. Land markets and competition, aspects of corporate finance and human capital management, as well as the ethical dimension of large-scale agriculture in industrialized and emerging economies have hardly received any systematic scrutiny. It is this gap that this special issue of the International Food and Agribusiness Management Review aims to fill. Given a loosely coupled network of agroholdings’ scholars, this special issue brings together a number of different perspectives and creates a state-of-the-art overview of current research into the different issues involving large-scale farming operations such as agroholdings and other types of mega farms. It also makes a first step towards setting up and executing a broad research agenda on this phenomenon.

First we will review some of the theoretical underpinnings of current research into corporate farms and agroholdings. Then we will shortly discuss the papers collected in this special issue and how they fit into these broader themes. Finally we will end this editorial with the outline of a broad research agenda for the future.

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2. Agroholdings, corporate farming and mega farms Large scale farming is not a new phenomenon. The earliest example dates back to the large scale ‘latifundia’ of the Roman Empire. These large estates relied on slave labor and Pliny the Elder famously blamed them for ‘ruining Rome and its provinces’ (Scullard, 1982; White, 1967). The model of the latifundia was further developed in the plantations and haciendas of the colonial era (Conning, 2002). The first large scale corporate farms were established in the United States with the Bonanza Wheat farms (Drache, 1964). In the Soviet Union, the collective and state farms known as kolkhozes and sovkhozes, respectively, could also be included in the category of large scale farming structures that were intended to mirror the organization of the industrial sector and away from the traditional family farm (Lerman et al., 2007).

In this special issue we are interested specifically in the modern day equivalent of these industrial and corporate farms that we will label as ‘agroholding’. So far, the term agroholding has been used specifically in Eastern Europe and the countries of the Former Soviet Union. However, there is no widely shared view of the legal and organizational structure of an agroholding (Kuns and Visser, 2016; Magnan, 2015). The formal definition of an agroholding is an agricultural organization whose controlling blocks of shares are owned by a holding company. This holding company acts as an umbrella for a number of horizontally or vertically integrated units in the agri-food chain, such as producers of concentrated fodder, elevators, processing units and wholesalers (Visser et al., 2012). An agroholding can thus execute the concentrated management of multiple farms/agricultural enterprises that are officially separate legal entities such as limited liability companies, joint stock companies or even family farms. For instance in Ukraine, these umbrella organizations include public joint stock companies, private joint stock companies (often with capital from other sectors such as steel, mining, energy, banking, etc.), and private equity/trust funds (UCAB, 2015). Serova (2007: 189) describes agroholdings in Russia as a phenomenon that ‘unites a number of quite different agricultural companies, established in different ways and motivated by different incentives. [...] Sometimes such companies are organized under the control and with the participation of regional and/or local administrations, however in the majority of cases it is purely a private initiative.’ Kuns and Visser (2016) make a distinction in this regard between ‘oligarch-led’ versus ‘investor-led’ agroholdings. The first type of companies have only a minority of shares traded on a stock exchange, while the bulk of the ownership remains in the hands of the founder of the company or an entity controlled by the founder. For ‘investor-led’ companies, most shares are in free-float trading.

Given the wide variety of organizational and legal forms already found in these countries, we argue that it can also be applied on some of the large corporate farms in other parts of the world as well. For instance, large-scale farming in Argentina can be organized as a trust fund (fideicomiso) or investor-oriented corporate farm but increasingly also a range of hybrid organizational forms for horizontal and vertical integration can be found (Senesi et al., 2013). In the Brazilian cerrado, agroholdings are organized as publicly-traded corporations, privately-held corporations and family-owned hybrids, known as family groups (Chaddad, 2016). The first two models include capital structures with equity participation of outside investors, while family groups retain ownership rights only to family members.

Apart from their legal and organizational forms, the other typical feature of agroholdings is their size. Typical farm sizes of mega farms and agroholdings can reach up to 500,000 hectares and sometimes even more.

Currently several of the largest land banks in the world are agroholdings and they can be found in Australia, China, North and South America and some of the countries of the Former Soviet Union (e.g. Russia, Ukraine and Kazakhstan). In Ukraine, 80 agroholdings farm about 6 million hectares; the largest of them operates more than 600,000 hectares (UCAB, 2015). In the Brazilian cerrado, 38 corporate farms and family groups with more than 30,000 hectares of planted area produced 14 million tons of grains and oilseeds in 3,5 million hectares in 2012 (Chaddad, 2016). In Argentina, the four largest agricultural companies, El Tejar, Los Grobo, Cresud and Adecoagro were estimated to control about 825,000 hectares of agricultural land in 2011-2015.1 1

http://tinyurl.com/lvz6ewq; http://tinyurl.com/jeqvgzb; http://tinyurl.com/hlrsbal.

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In the United States, the Chinese owned company Smithfield Foods Inc. is estimated to produce annually around 18 million pigs, which represents more than 9% of total pig production.2 These large intensive livestock operations are generally recognized to be very similar to manufacturing operations (Allen and Lueck, 1998). On the other side are the very large extensive livestock operations as found in Australia. Here, beef producers like S. Kidman & Co, Australian Agricultural Company and North Austrialian Pastoral, farm areas of up to 10 million hectares3,4 and the geographically wide dispersal of these operations is thought to help in reducing risks. Even in the European Union, where family farms prevail as a form of agricultural organization, several large agricultural enterprises emerged such as Spearhead International Ltd., with a land area of 84,300 hectares in the UK, Poland, Czech Republic, Slovakia and Romania; or KTG Agrar SE with some 45,000 hectares in Germany and Lithuania.5 Many of the issues of agroholdings are therefore not necessarily due to their specific legal form, but have to do with the size of the farm and consequent farm management challenges as well. In this special issue we have brought together a number of contributions that highlight some different questions around the emergence and operations of agroholdings: 1. How do different regional/national differences contribute to the emergence of different types of agroholdings with different business structures, sources of capital and management structures?

2. How are horizontal and vertical coordination processes of farm production and the value chain organized?

3. How are profitability and efficiency of agroholdings affected in different environments?

The first issue deals with the question of what factors contribute to the emergence and proliferation of agroholdings in different parts of the world. The emergence and continued growth of agroholdings reopens the debate in agricultural economics regarding the natural scale of farming enterprises. In contrast to other sectors, agricultural production does not seem to benefit from significant economies of scale. In fact, the negative relationship between farm size and output per area in non-mechanized agriculture has become broadly accepted in the scientific literature (Eastwood and Newell, 2010). Often cited reasons include: (1) the owner-operators of the typical family farms have proper incentives to work harder, since they are the residual claimants, but farms of a certain size require the input of hired labor that is less motivated and thus requires costly supervision; (2) family farms have a deep knowledge of local conditions, for instance regarding soil and climate, that is sometimes built up and passed along over generations; and (3) family farms are more flexible with regard to allocating superfluous labor to other off-farm economic opportunities (Allen and Lueck, 1998; Deininger et al., 2013).

Discussions on the emergence of large-scale agroholdings, therefore, investigate whether these assumptions are still valid and under what circumstances large-scale farming operations can succeed beyond the already well-established exceptions of plantations (Byerlee, 2014). The plantation model often can make use of increasing returns to scale because of the typical types of crops they usually cultivate: either perennial crops with low seasonality (that allow for year round employment and the specialization of labor and supervision of hired labor), or crops (like palm oil and sugar cane) that require close coordination of production, harvesting, transportation and processing in order to maximize processing efficiency and avoid costly deterioration of the raw material (Byerlee and Deininger, 2013). In this special issue we focus on agroholdings that do not fit the plantation model as they mostly produce annual crops, or are involved in animal husbandry.

The growth of farm sizes can be related to various reasons that undercut the advantage of family farms. For instance, the introduction of new technologies is an important reason why farm sizes can grow over time. New technologies related to crop breeding, minimum tillage farming systems, and pest-resistant and herbicidetolerant varieties reduce the number of production processes and make it possible to substitute capital for 2 3 4 5

http://tinyurl.com/glkxryz; http://tinyurl.com/h3eshdb. http://tinyurl.com/zlp2oyc. http://tinyurl.com/jkhoyca.

Cf. http://www.spearheadinternational.com and http://www.ktg-agrar.de.

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labor. Other types of new technology (e.g. GPS steering and information technology) make it possible to supervise hired labor more efficiently, while satellite data and remote sensing may reduce the knowledge advantage of traditional family farms about local conditions (Byerlee and Deininger, 2013). The introduction of corporate-style organizational architecture, including clear allocation of decision rights, incentive-based compensation contracts for corporate and farm managers, and performance evaluation systems, also help ameliorate some of the internal transaction (agency) costs in agroholdings (Chaddad, 2014).

Another reason is related to the extent to which changes in relative input prices can account for changes in farm sizes. One factor here is how rising wages in the non-agricultural sector have led farm operators to seek ways to attain incomes comparable to what they can obtain in other sectors of the economy (Eastwood and Newell, 2010). Normally this implies substitution of capital for labor and an increase of farm size over time in line with wage rates (Byerlee and Deininger, 2013; Kislev and Peterson, 1982). Although this is a popular explanation for changes in farm size in the US between 1930 and 1970, it no longer seems to be very compelling since manufacturing wages in the US have stagnated (in real terms) since around 1980 and farm household incomes have caught up to and exceeded non-farm incomes. Substitution of capital for labor can still be accounted for, but now through the falling costs of capital (including equipment prices as well as user costs of capital) relative to wage rates in the US (MacDonald et al., 2013). This would be in line with other regions that see an increasing importance of finance related transaction and agency costs. Particularly for transition and emergent economies with rather weak financial institutions traditional family and corporate farms may suffer from credit rationing (e.g. Petrick, 2004; Zinych and Odening, 2009). The argument is that very large enterprises can overcome such limitations through direct investments from other sectors, foreign direct investments or through the access to international financial markets and this will lead to a particular advantage (Byerlee and Deininger, 2013). Indeed, many agroholdings have such a financial background.

The second research question of this special issue is how the horizontal and vertical integration processes of production are organized. Within vertically organized agricultural enterprises, the farms serve as input suppliers of processors. Within horizontally organized agricultural enterprises, a management company operates different farms at different geographical locations. Vertical integration can be found in the livestock sector, while horizontally organized firms can be found in crop farming. However, agroholdings are usually part of a mixed form with both horizontal and vertical integration of agricultural production. According to Byerlee and Deininger (2013), the recent trends in the certification of agricultural value chains with regard to food safety and environmental standards provides an opportunity for agroholdings because of the associated high fixed costs of the certification process and the need to preserve product identity through the supply chain. They add that integration is also a strategy that helps to overcome some of the aforementioned institutional weaknesses and market failures in some countries, leading to lower transaction costs and better prices. For instance, the emergence of agroholdings in the countries of the Former Soviet Union has less to do with economies of scale and more to do with some of the institutional weaknesses of these countries and a governmental predisposition for large farms in order to provide national food security (Wandel, 2009).

On the other hand, government intervention in land policy and subsidies can also reduce average farm sizes below what could be expected without government intervention (Binswanger et al., 1993).

The third question in this special issue has to do with the governance and profitability of agroholdings.

Historical examples include the rise and collapse of large-scale corporate farms, such as the Bonanza wheat farms that were established in North-Dakota and Minnesota at the end of the 19th century. The rise of these farms was linked to new technological developments in the mechanization of agricultural production and efficient transportation routes with the availability of new railroad tracks (Benton, 1925; Drache, 1964). In the end however, these corporate farms proved very vulnerable for economic boom-and-bust cycles. The rise and decline of the Bonanza farms thus seems to show some parallels with their modern day equivalent, the agroholdings, because despite their promise and a lot of hype many agroholdings are facing substantial difficulties in turning a profit. Issues to be addressed include productivity deficits, the internal transaction (agency) costs and financial risks related to the increased dependence on local and international financial markets (Balmann et al., 2013; Lapa et al., 2015). Kuns et al. (2016) explain how some of these problems International Food and Agribusiness Management Review

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are related to a lack of understanding of outside investors in agroholdings of the specific nature of (local) agricultural production that often lead to an initial prioritization of short-term speculative strategies over longer-term production-oriented strategies. A related question is what kind of organizational structure and management strategies may overcome the challenges of managing large-scale farms, in particular human resources management. In addition, questions arise with regard to the quality of corporate governance in agroholdings. Kuns and Visser (2016) put that there is a great diversity in corporate governance practices agroholdings, with some agroholdings performing badly, while others belong to the best led and most transparent organizations in their region. An important question regarding corporate governance is therefore how to manage farm labor and corporate managers, and which kind of incentive and control mechanisms contribute to both good governance and the profitability of the firm.

3. Papers in this special issue This special issue contains a number of papers that address these three questions in different parts of the world. The papers by Plunkett et al. (2017) and Huang et al. (2017) are intended to provide an overview of the development of agroholdings and large-scale farms in Australia and China, respectively. These two countries can be seen as two more or less opposites as it comes to government intervention in agriculture.

The short paper by Plunkett et al. argues in this regard that the relatively low level of public subsidies for agriculture combined with low productivity gains and the absence of competing land uses in much of regional Australia makes farmland relatively cheap, thereby allowing larger sizes of farms. However, the paper shows the impact of climatic circumstances in explaining the pattern of agroholdings and family farms in relation to the geographic factor of climate variability within Australia. The paper thus calls attention to the effects of climate change on the (limited) future development of agroholdings in certain areas that will likely suffer from increased climate variability. The paper by Huang et al. (2017) provides an overview of the historical government policies regulating the agricultural sector. The paper reviews the recent scale development of farming operations in China based on cases taken from Zhejiang province. The paper identifies two trends that have contributed to increasing scale operations in China. The first is based on the concentration of farmland due to transfer of farmland management rights and the establishment of farmland shareholder cooperatives. The second is related to the agricultural service system that encourages technology intensive types of production often promoted by the government.

The paper by Chaddad and Valentinov (2017) focuses on the relationship between farm size and organization of crop production by juxtaposing it to the property rights structure of corporations from other sectors. They describe and analyze the management and ownership structures of three large Brazilian corporate farms.

In addition, they show the role of advanced farm technologies in enabling the rise of large corporate farms in the Brazilian agricultural frontier. New technologies not only affect crop production, but also help to generate technical solutions to the internal challenges of managing a large corporate farm. Coupled with corporate-style organizational architectures, these new technologies help ameliorate pervasive agency costs in large-scale farming entities.

The paper by Senesi et al. (2017) investigates the process of horizontal and vertical coordination organized as networks in the case of Argentina. The authors investigate hybrid forms of agricultural production by studying what these informal temporal networks in Argentina look like and how they have developed as compared to the corporate farms that could also be found in Argentina in the same time period. They highlight the importance of such integration to combat the institutional uncertainty that pervaded Argentinian agricultural sector and show how agroholdings can grow out of these hybrid networks of agricultural production.

The paper by Petrick (2017) takes economic agency theory in agroholdings as the starting point for discussion.

It makes an assessment of the effects of different pay systems on the productivity and profitability of these farms by making a comparison between the developments in Eastern Germany and Kazakhstan. The author presents a framework to evaluate agricultural pay systems specifically for large farms. The paper concludes that farms in both countries seem to work well under mixed bonus systems combining a time rate with a International Food and Agribusiness Management Review

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simple performance pay scheme, as it balances the trade-off between productivity and cost. Differently from their Kazakhstani counterparts, East German managers pay a lot of attention to non-wage incentives.

Managers tend to move away from the Soviet piece rate system if external investors become engaged in farming operations and if farms specialize in crop rather than livestock production.

Finally, the paper by Gagalyuk (2017) delves further into the performance of agroholdings and asks how agricultural corporations can capitalize on being transparent in weak institutional environments that are characterized by imperfect capital and land markets. The author demonstrates that the issue of top management opportunism can persist in such environments even despite higher requirements toward mandatory disclosure that are imposed by participation in international equity markets. However, the use of effective corporate governance mechanisms, coupled with voluntary disclosure and corporate citizenship initiatives, increases the competitiveness of agroholdings as it helps to preserve access to international equity markets and to reduce uncertainty arising from local market imperfections.

4. Toward a research agenda The papers in this special issue only inform on some of the issues and challenges related to the emergence and operation of agroholdings. This special issue is therefore only the beginning of an intensified investigation of agroholdings. In what follows, we provide an overview of some of the open questions that should be included in a future research agenda on agroholdings and corporate mega farms.

The interplay between farm size, integration, geographical and institutional frameworks In the debate on global ‘land grabbing’ in agriculture, it is increasingly recognized that the social benefits of large-scale agricultural investments in land are highly dependent on the institutional frameworks for land ownership and land management that exist in different countries (Deininger and Byerlee, 2011). Analysis of legal and spatial aspects of access to land, implementation of new production and management technologies as well as their socio-economic effects become key questions for assessing the impacts of investments. The social benefit of large-scale agricultural investments is also highly dependent on the institutional frameworks for land use, human capital development, and implementation of production and management technologies (Petrick et al., 2013). Ideally, further research should address these questions at the regional and farm levels.

At the regional level, it would be necessary to analyze how existing institutional conditions affect different stakeholders (management, employees, rural communities, etc.) of large agricultural enterprises. This type of analysis would help to clarify under which conditions large-scale investments and the emergence of large farms contributes to positive social effects. At the farm level, research should aim to better understand how internal governance structures (e.g. intra-farm coordination, management supervision, etc.) and transaction costs (e.g. labor supervision costs, combatting theft, human resource management, etc.) affect the performance of large farms and which conditions (e.g. implementation of new monitoring technologies and organizational architecture) reduce these costs. The obtained results will essentially contribute to the literature on land management, transaction costs and human resource development.

Organizational structure and performance of mega farms Further research should also address the issue of economic and financial sustainability of large farms by analyzing the interrelationships between financial strategies, access to capital, economic performance and structural characteristics such as organizational and corporate governance structures of large farms.

In conditions of constrained credit markets, the greater dependency of large farms on internal funds for investments can be assumed to restrict desired investment levels (Swinnen and Gow, 1999; Zinych and Odening, 2009). However, many large farms have reached a size that makes their access to equity markets possible. Indeed, some of them have successfully undergone listing in international stock markets (Chaddad, 2014; UCAB, 2015). The possible implications for the stability of these companies, as well as for the risks to current and potential investors, are one of the main motivations of further research. This research could be International Food and Agribusiness Management Review

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closely related to the research direction under the last point of discussion, which focuses on interrelationships of governance structures and distributional justice as well as on labor supervision and transaction costs, targeting the question of whether the comparative advantages of large farms fully lie in their ability to overcome challenges caused by non-functioning markets. This research will particularly contribute to the literature on strategic management and corporate governance.

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The role of technology and innovation Although it is acknowledged in the literature that technological development can both help in streamlining primary production processes and facilitate the management of large agricultural operations, most studies focus on the issue of technology transfer and technology adoption. However, current innovation literature not only points to the importance of diffusion and adoption of technologies, but also stresses that innovations themselves are not fixed and they can change over time, between different regions and at different scales and levels (Hermans et al., 2016), thus shifting the attention from processes of transfer to processes of ‘translation’ of technology in different contexts (Garb and Friedlander, 2014). The process of ‘co-evolution’ of technology development and its institutional environment has remained underappreciated in the literature of agroholdings so far. The emergence of agroholdings in certain regions, for instance in South America, with the introduction of conservation tillage and new genetically modified organism-seed varieties can provide interesting examples of how technology, institutions and agriculture influence each other.

The socio-political and ethical aspects of large scale agricultural production Large-scale farms are subject of an intense societal and political debate. The establishment of large scale farms may come under intense public opposition of the local population as well as campaigns led by nongovernmental organizations (Beers et al., 2014). An important element of such political processes is related to images and discourses about the place of the farm within the countryside (Hermans et al., 2009) and agroholdings, especially some horizontally integrated operations that grew out of family run businesses, challenge the ‘agri-ruralist’ discourse of the traditional family farm that still dominates many western countries (Frouws, 1998). This debate often involves discussions about perceptions of scale: when does a large scale farm becomes a ‘mega farm’ (Van Lieshout et al., 2011).

One of the most striking features of large farms is their power, which originates from their size, resource base as well as political connections, particularly on the local level and in the rural development context (Gagalyuk et al., 2013). As this power is held privately, it necessarily raises important ethical and societal issues related to the compatibility of large farms with democratic values (Binswanger et al., 1993). Being disposed to such discourses, large farms may implement social responsibility strategies in order to address the ethical dimension of their operations. Both external and internal dimensions of the ethical implications should be analyzed in-depth. The external dimension includes aspects such as corporate social responsibility, reputation, transparency, stakeholder management, and advocacy activities of large farms. The internal dimension addresses agency problems such as trust, social capital, employee rights and ‘organizational citizenship behavior’ within large farms as they are generally exposed to higher opportunism than traditional family farms (Allen and Lueck, 1998).

For the non-industrialized countries, the issue of large-scale farms is often closely connected to the issue of land grabbing and the relation of agroholdings with subsistence farmers in their direct environment. Land reform in many countries including former socialist countries in Eastern Europe have not always benefitted local smallholders, but instead has allowed outside operators to purchase large pieces of land, causing unemployment and the creation of a class of landless unemployed workers without alternative employment opportunities (De Schutter, 2011; Visser et al., 2012;). Moreover, such operations may gather considerable political clout, influencing political processes in their favor, distorting market forces and locking out alternative types of farms. The question of how mega farms can fit within regional development strategies (as opposed to the national export oriented strategy alone) is of special interest.

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5. Conclusions Large farms are quite visible today and will likely become more widespread and important in the future.

However, in-depth insights into the ownership and organizational architecture settings that facilitate these effects are still missing. Empirical evidence suggests that corporate agriculture based on many hired workers under a centralized management authority attracts outside capital and displays remarkable growth rates, a fact which cannot be explained with existing theories and requires further empirical and theoretical investigation.

The papers in this special issue form a first step toward a better understanding of the emergence and operation of such agroholdings.

Post script On Thursday, November 24, 2016, Dr. Fabio R. Chaddad, one of the guest editors of this special issue and a member of the editorial board of the International Food and Agribusiness Management Review passed away in St. Louis, Missouri, at the age of 46. He was affiliated with the department of Agricultural and Applied Economics at the University of Missouri and Insper in SĂŁo Paulo, Brazil.

Fabio was an internationally renowned expert and scholar with wide-ranging interests in the global agribusiness sector. He was also intimately involved in the conception and editing of this special issue: organizing the pre-conference workshop in Milan on which this special issue was built, contributed his own paper and edited and reviewed the contribution of other authors, including this last part of the special issue: the editorial.

We dedicate this special issue to his memory.

Acknowledgements Early drafts of the papers collected in this special issue have been discussed during a pre-conference workshop organized on August 8th 2016, as part of the 29th International Conference of Agricultural Economists of the International Association of Agricultural Economists held in Milan, Italy. We want to thank the organizers of this conference and especially all presenters and attendees of this workshop for their input. In addition we want to thank the editors Peter Goldsmith and Gerhard Schiefer, managing editors Kathryn White and Marijn van der Gaag and all the reviewers of IFAMR for their supporting role in the production of this special issue.

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Deininger, K. and D. Byerlee. 2011. Rising global interest in farmland. Can it yield sustainable and equitable benefits? World Bank. Available at: http://tinyurl.com/hupov8w.

Deininger, K., D. Nizalov and S.K. Singh. 2013. Are mega-farms the future of global agriculture? Exploring the farm size-producticity relationship for large commercial farms in Ukraine. Discussion paper series. Kyiv School of Ecnomics and Kyiv Economics Institute, Kyiv, Ukraine.

Drache, H.M. 1964. The day of the bonanza: a history of bonanza farming in the Red River Valley of the North. North Dakota Institute for Regional Studies, Fargo, ND, USA. Eastwood, R., M. Lipton and A. Newell. 2010. Farm size. In: Handbook of agricultural economics, edited

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Gagalyuk, T. 2017. Strategic role of corporate transparency: the case of Ukrainian agroholdings. International Food and Agribusiness Management Review 20: 257-277.

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MacDonald, J.M., P. Korb and R.A. Hoppe. 2013. Farm size and the organization of U.S. crop farming.

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Petrick, M. 2017. Incentive provision to farm workers in post-socialist settings: evidence from East Germany and North Kazakhstan. International Food and Agribusiness Management Review 20: 239-255.

Petrick, M., J. Wandel and K. Karsten. 2013.‘Rediscovering the Virgin Lands: agricultural investment and rural livelihoods in a Eurasian frontier area. World Development 43: 164-179.

Plunkett, B., A. Duff, R. Kingwell and D. Feldman. 2017. Australian agricultural scale and corporate agroholdings: environmental and climatic impacts. International Food and Agribusiness Management Review 20: 187-190.

Rylko, D., I. Khramova, V. Uzun and R. Jolly. 2008. Agroholdings: Russia’s new agricultural operators. In: Russia’s agriculture in transition. Factor markets and constraints on growth, edited by Z. Lerman.

Lexington Books, Lanham, MD, USA, pp. 95-133.

Scullard, H.H. 1982. From the Gracchi to Nero: a history of Rome from 133 BC to AD 68. Routledge, London, UK. Senesi, S., F.R. Chaddad and H. Palau. 2013. Networks in agriculture: a multiple-case study approach.

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Senesi, S., M.F. Daziano, F. Chaddad and H. Palau. 2017. Ownership versus management: the role of farming networks in Argentina. International Food and Agribusiness Management Review 20: 221-237.

Serova, E. 2007. Agro-holdings: vertical integration in agri-food supply chains in Russia. In: Global supply chains, standards and the poor: how the globalization of food systems and standards affects rural development and poverty, edited by J.F. Swinnen. CABI. Swinnen, J.F.M. and H.R. Gow. 1999. Agricultural credit problems and policies during the transition to a market economy in Central and Eastern Europe. Food Policy 24: 21-47.

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Van Lieshout, M., A. Dewulf, N. Aarts and C. Termeer. 2011. Do scale frames matter? Scale frame mismatches in the decision making process of a ‘mega farm’ in a small Dutch village. Ecology and Society 16: 7-38.

Visser, O., N. Mamonova and M. Spoor. 2012. Oligarchs, megafarms and land reserves: understanding land grabbing in Russia. Journal of Peasant Studies 39: 899-931.

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OPEN ACCESS International Food and Agribusiness Management Review Volume 20 Issue 2, 2017; DOI: 10.22434/IFAMR2016.0027

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Received: 13 February 2016 / Accepted: 2 May 2016

Australian agricultural scale and corporate agroholdings: environmental and climatic impacts Special issue: Agroholdings and mega-farms in a global context

INDUSTRY SPEAKS Bradley Plunkett a, Andrew Duffb, Ross Kingwellc, and David Feldmand aSenior

economist and bSenior policy officer, Department of Agriculture and Food, Western Australia, 3 Baron-Hay Ct, South Perth WA, 6151 Australia cChief

economist, Australian Export Grains Innovation Centre, 3 Baron-Hay Ct, South Perth WA, 6151 Australia

dResearch

officer, School of Agricultural and Resource Economics, University of Western Australia, 35 Stirling Hwy, Crawley WA, 6009 Australia

Abstract The average size of Australian farms in scale and revenue are the globe’s largest. This scale is a result, in part, of low average rural population densities; development patterns in broadacre production; low levels of effective public policy transfers; a stable and suitable institutional setting suitable for corporate and other large scale investment; and low yields. It is also a factor of the natural variability of the country’s climatic systems which have contributed to the scale of extensive northern cattle production; this variability has implications for the pattern of ownership of broadacre and extensive production. Corporate ownership, tends to concentrate production aggregations at sufficient scale to offset its additional overheads in areas of relative climatic stability and to replicate these agroholding aggregations spatially to protect the stability of revenue flows. Family structures are more dominant in areas of greater climatic variability. Of interest is the impact that any increasing climatic variability (versus rapid changes in technology) may have upon this pattern.

Keywords: climatic variability, large scale agroholdings JEL code: Q13, Q15 Corresponding author: brad.plunkett@agric.wa.gov.au

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1. Introduction

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The purpose of this article is to draw attention to the impact of environmental factors on scale in Australian farming and its influence on ownership options for large size holdings. The paper’s focus is on corporate ownership of large scale, spatially diverse agroholdings. The combination provides scale economies and greater revenue stability.

By global standards, Australian farms are comparatively large in size as indicated in Table 1. Australia also has the largest average farm businesses by gross value of agricultural production per farm (AFI, 2014).

Several factors contribute to this enormous size. The Australian continent’s 22 million people are among the most urbanized in the world and live mostly in the state capital cities. Consequently, low average rural population densities result in comparatively little competition for agricultural land in the main broadacre and pastoral production areas. Furthermore, very low levels of effective public policy transfers (OECD, 2016) imply little capitalisation into land values. Nearly all industries are subject to either international or domestic competitive pressure implying a need for scale to maintain returns. A stable political and legal system facilitates the transfer of land assets into larger holdings (freehold in the southern broadacre areas and long term Crown leases in extensive pastoral areas). A growing lease market for freehold broadacre land also encourages the creation of larger broadacre enterprises.

Comparatively high labour costs and efficient capital markets have encouraged the substitution of labour for machinery, particularly in cropping, as enterprises have sought to increase work rates and access embodied productivity from new machineries. Particularly in broadacre cropping, a productivity divide has emerged between more technologically endowed, often larger farms compared to those of often smaller sizes with less access to the latest machinery. The resulting difference in returns is further driving farm amalgamations.

Australia’s pattern of land settlement was much later than most other advanced agricultural economies and much of the 20th century settlement followed the development of the science necessary to bring it into production. Its poor soils and consequent low yields, particularly in Western Australia, meant that farms had to be of larger scale to support settlement. Again, larger block sizes assists the process of farm amalgamation.

Table 1. Number of farms and area for selected countries and years (adapted from Statistics Canada, 2006).

Country

Census Farm number year

Area on farms Average (acres) farm size (acres)

Total land area Area of farms as a (×1000 acres) percentage of total land area

Canada Canada Argentina Australia Brazil China France United Kingdom United States

2001 2006 2002 2001 1996 1997 2000 2000 2002

166,802,197 167,010,491 425,273,427 1,126,091,533 873,773,389 321,326,863 73,877,143 40,839,774 938,268,725

2,278,502 2,278,502 676,236 1,898,296 2,089,604 2,304,806 135,930 59,521 2,263,179

246,923 229,373 295,485 140,516 4,859,865 193,445,894 663,810 233,250 2,128,982

676 728 1,439 8,014 180 2 111 175 441

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7.3 7.3 62.9 59.3 41.8 13.9 54.3 68.6 41.5

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2. Climatic factors and farm management The large average farm size also partly reflects the enormous size of Australian cattle stations (ranches) in the northern part of the country. Cattle stations are low input, low output systems that reflect Australia’s lack of natural agricultural endowment, in so far as its soils are generally aged and poor and its climate is on average dry and highly variable. Climate variability is a feature of all Australian agriculture (Kingwell, 2012). Large northern cattle holdings, such as Kidman (a family structure) and the ASX listed AAco, are generally vertically integrated into feedlots and abattoirs, and they are mostly corporate-owned. Spatially spreading production assures a constant flow of stock for feedlots and abattoirs and properties display some specialisation such as calf production or backgrounding of older cattle (Cottle and Kahn, 2014: 165-166).

Corporate ownership in the Northern Territory tends to be concentrated in its more climatically stable north (‘from Tennant Creek to Darwin’: Curtain and Brown, 2013) and family ownership tends to predominate in central Australia.

Cattle stations aside, where scale and vertical integration provide strong incentives for corporate ownership, corporate interest in large scale broadacre farming has also grown strongly in recent years. This is because of the returns available from agriculture (Eves, 2012), the size potential of investments, and investors’ perceptions of Australia’s proximity to markets, its quality of infrastructure, its surplus production for export and its Free Trade Agreements with other countries (Allens Linklater, 2014).

Allens Linklater (2014) also identified climatic variability as the major factor discouraging international and domestic investment into agriculture. It is unsurprising, therefore, that a pattern of corporate ownership centred on more climatically stable/higher rainfall areas (and/or irrigation) is also observable in broadacre agricultural industries. For instance, Lawson Grains (http://lawsongrains.com), owned by a prominent investment bank (Macquarie), has recently become the largest grain producer in Australia. It operates 74,000 ha across eight aggregations in relatively climatically stable areas and these are spread across five regions to further protect the stability of returns. This pattern of diverse spatial aggregations at scale and spatial dispersion is observed across the corporate landscape, from owner operators such as Lawson Grains to land lessors such as Westchester1.

Scale is necessary for corporates because of higher overheads compared to family structures (Plunkett, 2015). Yet corporate farms have struggled to outcompete well run family structures (Planfarm/Bankwest, 2015; Tomlinson, 2014) and anecdotally it would appear that adopting simpler management structures that lessen overheads and increase on site management responsiveness (i.e. adopting the some key features of family farms) may be an important factor in lifting returns.

Research underway by the authors indicates an emerging pattern of large family entities adopting some corporate governance structures to increase returns from strategic planning.

The preceding description may be thought to reflect the Allen and Lueck’s (2004) thesis that corporate investment has a comparative advantage in relatively less variable environments and that more nimble family management structures are better suited to more variable environments. Of interest is how this phenomena may evolve if climatic variability increases – and presumably increases the returns from nimble, on site management – versus the impacts of unfolding technology changes that lower monitoring costs and improve performance measurement and so presumably lessen the importance of real time, site specific management decision making.

1 See

also http://hassad.com.au/properties; http://tinyurl.com/zwaodgm.

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References Allen, D. and D. Lueck. 2004. The nature of the farm: contracts, risk and organisation in agriculture. The MIT Press, Cambridge, MA, USA. Allens Linklater. 2014. A greater yield: attracting investment into Australian agribusiness. Allens Agribusiness Survey’ December. Available at: http://tinyurl.com/j7gu5ec.

Australian Farm Institute (AFI). 2014. Australian farm businesses still the largest on average but global competitors are catching up. Available at: http://tinyurl.com/h397tx6.

Cottle, D. and L. Kahn. 2014. Beef cattle production and trade. CSIRO Publishing, Canberra, Australia.

Curtain, C. and C. Brown. 2013. Beefing up foreign investment. ABC Online. Available at: http://tinyurl. com/j3vc6ma.

Eves, C. 2012. An analysis of NSW rural property market 1990-2010. Proceedings of 18th annual pacific rim real estate society conference, pacific rim real estate society (PRRES), Adelaide, Australia. Available at: http://eprints.qut.edu.au/48606.

Kingwell, R. 2012. Revenue volatility faced by some of the world’s major wheat producers. Farm Policy Journal 9:23-33.

Organisation for Economic Co-operation and Development (OECD). 2016. Producer and consumer support estimates database: interactive data comparison’ organisation of economic co-operation and development. Available at: http://tinyurl.com/nqogb6c.

Planfarm/BankWest. 2015. Planfarm Bankwest Benchmarks: 2014-15. Bankwest Agribusiness Centre, West Perth, Australia, pp. 83.

Plunkett, B. 2015. Prime agriculture Australia 2007-13: a suitable structure for long term investment in agriculture? Australasian Agribusiness Review 23 Paper 3. Available at: http://tinyurl.com/znhx8kh.

Statistics Canada. 2006. Snapshot of Canadian agriculture. Available at: http://tinyurl.com/zpamqx2.

Tomlinson, A. 2014. Australian farm businesses could do better with different funding models. Australian Farm Institute, Canberra, Australia. Available at: http://tinyurl.com/gocpdpk.

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OPEN ACCESS International Food and Agribusiness Management Review Volume 20 Issue 2, 2017; DOI: 10.22434/IFAMR2016.0018

http://www.wageningenacademic.com/doi/pdf/10.22434/IFAMR2016.0018 - Monday, May 08, 2017 4:35:38 PM - IP Address:24.21.169.207

Received: 25 January 2016 / Accepted: 18 October 2016

Scale farming operations in China Special issue: Agroholdings and mega-farms in a global context

REVIEW ARTICLE Zuhui Huanga, Lijun Guanb, and Shaosheng Jin

c

aProfessor

and Dean, China Academy for Rural Development (CARD), Zhejiang University, 866 Yuhangtang Road, Hangzhou 310058, China

bPhD

Candidate, School of Management, Zhejiang University, 866 Yuhangtang Road, Hangzhou 310058, China cAssociate

Professor and Deputy Chair, Department of Agricultural Economics and Management, School of Public Affairs, Zhejiang University, 866 Yuhangtang Road, Hangzhou 310058, China

Abstract Agriculture in China is often characterized as small-scale farming because of the limited farm sizes. However, in recent years the country has witnessed widespread increased-scale farming operations. In this paper, we aim to systematically illustrate the recent scale development of farming operations in China based on cases taken from Zhejiang province. Two main types of the scale farming operations in China are identified. These are based on: (1) concentrated farmland and (2) agricultural services. Finally, the trends of scale farming operations in China are discussed.

Keywords: China, scale farming operation, farmland transfer, agricultural service JEL code: Q12, Q15, Q18 Corresponding author: ssjin@zju.edu.cn

Š 2016 Huang et al.

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1. Introduction Agriculture in China is often characterized as small-scale farming because of the country’s limited farm sizes. In 2012, the average area of cultivated farmland in Chinese rural households was 0.47 hectares (China Statistics Yearbook, 2013). This is in sharp contrast with other countries, such as Japan, for example, where the average was 1.4 hectares, South Korea (1.2 hectares), the US (195.2 hectares), and in Western European countries (18 to 69 hectares) (Mei, 2002). There are also significant differences among the 31 Chinese provinces in terms of average area of cultivated farmland in Chinese rural households (Figure 1); for example, in 2012 this equated to 2.50 hectares in Heilongjiang province (northeast region), and only 0.04 hectares in Shanghai municipality (east region). Generally, the average household farmland size in the northwest and northeast regions is larger than in other regions, and is smaller in coastal areas1.

In recent years, however, there has been a widespread increase in the scale of farming operations. With the continual development of the Chinese economy, rural labor has been absorbed by non-agricultural sectors, which are mainly located in the coastal provinces (Yang et al., 2013). The agricultural workforce dropped dramatically from about 95% of the entire Chinese workforce in 1978 to about 70% in 1995; since 1995, it dropped more gradually, to about 65% in 20102 (Xie and Jiang, 2016; Yang et al., 2013). The impact of the labor outflow from the agricultural sector in China is twofold. First, food security has been threatened.3 Small rural households have tended to adjust from farming grain to non-grain products that are less labor intensive. Furthermore, some small rural households have even abandoned farming, leaving their farmland idle (Xie and Jiang, 2016). Second, the labor outflow has led to a decline in food safety. In the face of labor constraints (Cai and Wang, 2008; Zhang et al., 2011), small rural households have become more likely to increase their use of chemical products (Lambert, 1990; Wen, 2010), such as chemical fertilizers instead of manure (Hu and Yang, 2015), or herbicides instead of manual weeding. This issue has been highlighted by several authors (e.g. Zhou and, Jin 2009),4 and is one of the central causes of food safety problems in 1 The geographic disparities are mainly due to two reasons. The first is the endowment difference. Northwest and northeast regions are less populated

but with more abundant cultivated farmland; while the average household farmland in coastal regions is smaller because of a larger population but with limited amount of farmland. The second reason is the economic factors. Since the reform and opening up, the faster pace of economic development in coastal regions is followed by rapid urbanization, which resulted in the loss of vast areas of cultivated farmland to construction.

2 According to Yang et al. (2013), the sharp drop of the rural agricultural workforce over the past three decades is mainly due to two reasons: (1) the rapid increase in rural nonfarm employment, and (2) the massive rural-to-urban migration that occurred during the past two decades.

3 Because China has the largest population in the world, food security has long been one of the primary concerns of the Chinese government, particularly since Brown (1994) raised the question of who is able to feed China.

4 Zhou and Jin (2009) indicated that unspecialized (small-scale) farmers lack basic knowledge of pesticides, and are more likely than specialized (large-scale) farmers to spray highly toxic pesticides on fresh produce.

Figure 1. Average area of cultivated farmland of Chinese rural households in 2012 (adapted from China Statistics Yearbook, 2013).

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This paper aims to systematically discuss the rapid development of scale farming operations in China based on case studies. The cases considered in this paper will mainly be taken from Zhejiang province, which is one of the most developed provinces of coastal China. Zhejiang province is made up of 11 cities: Hangzhou, Ningbo, Wenzhou, Jiaxing, Huzhou, Shaoxing, Jinhua, Quzhou, Taizhou, Lishui, and Zhoushan. With the rapid development of rural industries, a large amount of the agricultural labor force in Zhejiang province has transferred to non-agricultural sectors. Although the average cultivated land area in Zhejiang province is only 0.10 hectares, its farmland transfer rate is among the highest in China (Figure 3). According to the Zhejiang Provincial Department of Agriculture, an average of 48% of rural household farmland was transferred at the end of 2013; this is about 30% higher than the national level.6 As a result, Zhejiang province can be seen as a pioneer of scale farming operations in China.

The remainder of this paper is organized into four sections. Following this introduction is a background analysis of scale farming operations in China. Multiple types of scale farming operations are then systematically illustrated, followed by a conclusion.

5 Although

the agricultural economy in China has grown markedly since the reform and opening up, this growth has come at the expense of the environment. For example, the agriculture sector produced a large amount of agricultural non-point source pollution (Chen, 2002). According to the 2014 China Environmental State Bulletin published by the Ministry of Environmental Protection, agricultural chemical oxygen demand emissions totaled 11,024,000 tons in 2013, which accounted for 48.0% of the national total discharge of waste water. Furthermore, agricultural ammonia and nitrogen emissions equated to 755,000 tons, which accounted for 31.7% of total emissions in 2013.

6 According to the China Agricultural Statistical Material (2014), the rural household farmland transfer rate was 18.36% at the end of 2013.

35 30.36

30 25.70

25 %

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China. In addition, the overuse or abuse of chemical products degrades farmland and the agro-environment.5 From the end of the 1980s, the Chinese government began to encourage moderate scale farming operations.

Different types of scale farming entities, including specialized large-scale farmers, family farmers, specialized cooperatives, agricultural enterprises, and so on have been fostered, such that scale farming operations have developed rapidly in recent years. As depicted in Figure 2, the ratio of transferred contract farmland to total increased sharply from 2005 to 2013, from 5 to 30.36%, that is, over six times in eight years.

21.24

20

17.84

15

12.00

10 5 0

5.00

2005

2009

2010

2011

2012

2013

Figure 2. Ratio of transferred contract farmland (Adapted from China Agricultural Development Report, 2010, 2006; Ministry of Agriculture of China, 2011, 2012, 2013, 2014).

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Figure 3. Farmland transfer rate in Zhejiang province in 2013 (adapted from Zhejiang Provincial Department of Agriculture, 2014).

2. Background of scale farming operations in China In general, the development process of China’s scale farming operations can be divided into three stages.

■■ Stage 1, 1978-1987 Based on the establishment of the household responsibility system,7 large-scale agricultural operations began. The Third Plenary Session of the 11th Central Committee of the Communist Party of China (CPC) in 1978 initiated reform and opening up in China, and the household responsibility system was initiated and implemented. Although the household responsibility system resulted in a remarkable rise in agricultural productivity (Lin, 1992), farmland was segmented and assigned to individual rural households according to size.8 With the economic development brought about by the reform and opening up policy, farmland held by less productive rural households in certain economically developed areas began to be transferred to more capable farmers. In addition, farmland that could not be assigned to rural households in the form of contracting was concentrated by the village for scale farming operations, and thus formed a prototype for this type of farming. For example, in Zhejiang province, by the end of 1983, more than 97% of villages in the province had implemented the household responsibility system, and 3% of the farmland that could not be assigned to rural households in the form of contracting, or that had been left unattended by rural households, was collectively retained and contracted to more capable and willing farmers.

■■ Stage 2, 1988-1997 Due to the rapid development of the rural economy, and against the background of a need to address food security problems, large-scale farming operations entered into an accelerated stage of development. Following a proposition by the CPC Central Committee in Document No. 5 in 1987 to promote moderate-scale farming

7 Prior

to implementation of the household responsibility system, farmland was owned and managed collectively. It was divided into plots to match the soil type, irrigation, and drainage conditions, and for the convenience of management (Tan et al., 2006). For a brief description of the household responsibility system, see Lin (1992).

8 The negative impact of the household responsibility system on scale farming in China may not lie simply in the segmentation of farmland on an area basis. Rather, farmland fragmentation, which resulted from the fact that farmland was shared according to soil fertility, may also have been a factor, as rural household farmland was often scattered across a number of plots with different fertility levels (Niroula and Thapa, 2005).

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operations in different forms,9 the transfer of contracted farmland developed rapidly. After Deng Xiaoping’s South Inspection Speech in 1992, rural industrialization based on township village-enterprises also saw rapid development. A large amount of rural labor was transferred from rural areas to secondary and tertiary industries, thus enabling the transfer of contracted farmland. Meanwhile, the responsibility system of the provincial governor for grain production10 was implemented nationally, and the provincial government focused on grain fields and actively promoted farmland transfers. For example, in Zhejiang province, the government promulgated the Decision on the Development of Moderate-Scale Operation of Grain Fields in 1994, which actively supported grain production household with farmland of more than 2 hectares. In addition, the key counties for scale farming operations were increased from 15 to 25. During 1988-1997, the transfer of farmland gradually expanded from southern and eastern Zhejiang to the north of Zhejiang, which had relatively more per-capita farmland compared to south and east. This also triggered subsidized subcontracting in Wenzhou, Taizhou city, and other areas, and the recruitment of nonlocal farmers for rice production in cities such as Ningbo city. Thus, rice production became the main reason for farmland transfers and the development of scale farming operations.

■■ Stage 3, 1998-present Based on the increased profits from agriculture due to the recognized economic benefits and policy incentives, scale farming operations entered a stage of steady development. In October 1998, it was proposed in the Third Plenary Session of the 15th Central Committee of the Chinese Communist Party that ‘for few places with well conditions, the farmland moderate scale operation in various forms can be developed on the basis of improving agricultural intensification and voluntariness of the rural households.’ By the end of 2008, it was proposed in the Third Plenary Session of the 17th Central Committee of the Chinese Communist Party that farmland transfer should be further promoted, and that various types of scale farming operations should be developed. Thereafter, many local governments actively set up farmland transfer service agencies to regulate farmland transfer activities. During this period, the farmland transfer policy became more systematic, and new types of scale farming operations appeared. Due to the increased economic benefits from the agricultural sector, as well as policy incentives, the farmland transfer rate rapidly increased each year. As depicted in Figure 2, the ratio of transferred contract farmland increased from 12.0% in 2009 to 30.6% in 2013. Against the background of the adjusted agricultural structure proposed by the Chinese government, scale farming operations gradually extended from rice production to cash-crop production.

3. Multiple types of scale farming operations in China Scale farming operations based on concentrated farmland The scale farming operations based on concentrated farmland is the most important form of scale farming operations in China. This was achieved mainly through the transfer of farmland management rights,11 or in the form of farmland share-cooperatives. The transfer form and direction are detailed in Table 1. According to Table 1, farmland management rights are mainly transferred through subcontracting12 or leasing;13 these activities account for 79.72% of the total farmland transferred. The majority of transferred farmland went to farmers (including specialized large-scale farmers and family farmers), while 31.53% went to cooperatives, and companies. Farmland assigned to the cooperatives increased from 13.40% in 2010 to 21.91% in 2013.

9 Document

No. 5 proposed, for the first time, that in Beijing, Tianjin, and Shanghai suburbs, and in southern Jiangsu and the Pearl River Delta, one or two counties in each could be chosen for the set-up of moderate-scale family or cooperative farms. In addition, other forms of professional contracting could be organized in order to conduct intensive farming.

10 The responsibility system of the provincial governor for grain production was introduced in China in 1994-1995. The policy was designed to strengthen food security by making provincial governors and governments responsible for balancing grain supply and demand, and stabilizing provincial food markets and prices (Huang et al., 1999).

11 Under the household responsibility system in China, the ‘property right’ of farmland is collectively held by administrative villages in rural areas, while rural households within these villages have a ‘contract right’ to farmland. After receiving farmland, rural households may decide to transfer their farmland ‘management right’ to another party. See Li and Vandermeer (1998) for a detailed description.

12 Subcontracting here refers to rural households transferring their contract farmland to other households within the village for agricultural production.

13 Lease in our context means that the rural households rent some or all of their contract farmland to others outside the village for agricultural production.

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Table 1. Form and direction of transferred farmland (%) (Ministry of Agriculture of China, 2011, 2012, 2013, 2014).

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Year Form Subcontract Lease Share-cooperative Others Direction To farmers To cooperatives To companies To others

2010

2011

2012

2013

51.10 27.10 5.50 16.30

49.32 28.86 5.89 15.92

46.87 31.67 6.94 14.52

46.57 33.15 6.72 13.56

67.60 13.40 8.40 10.60

64.69 15.85 9.18 10.28

60.29 20.36 9.44 9.91

58.37 21.91 9.62 10.10

Farmland concentration is achieved via the transfer of farmland management rights and the establishment of farmland shareholder cooperatives. These are explained in more detail below.

Transfer of farmland management rights This method enables scale farming entities to concentrate farmland after receiving farmland management rights from rural households, and allows them to carry out large-scale production operations. According to our field survey, there are currently two main ways to achieve the transfer of management rights.

The first is to transfer the farmland of an entire village. This is applied in economically developed areas where the village head has a strong persuasive skill. For instance, 118 villages accounted for more than 80% of the farmland transfer rate in Shaoxing City, Zhejiang Province; 28 of these transferred all (100%) of the village’s land in 2014. In the context of the relatively rapid development of local industry, and increased rural labor transfer, Yaobang Village, in Xindai Town, Pinghu City, Zhejiang Province formulated a document entitled ‘Implementing rules for land transfer in the whole Yaobang village’. After this was approved based on a vote by the Village Member Representative Congress, household contracts for farmland management rights transfer were signed by 488 rural households – that is, every household in the village. Thus, 100% of the village’s farmland, with the total area of 172 hectares, was transferred to scale farming entities; this allowed the objective of implementing scale farming operations to be achieved.

The second form of transfer is called an entrusted transfer. This is used in areas with a developed farmland transfer market. For example, a standard process for farmland transfer was developed in 2005 in Ningbo City, Zhejiang Province. According to this standard process, a farmland transfer engagement letter must first be issued by the rural households, in which they indicate their willingness to entrust their farmland to the village. In Xinmian Village in Beilun District, Ningbo city, where the farmland per capita was less than 0.07 hectares, the village began to acquire farmland entrusted to it by its rural households in 2008. After the transfer was complete,14 this farmland was then contracted to specialized large-scale farmers. Also in Qiaotou Town in Cixi County, in Ningbo city, the construction of farmland infrastructure was also jointly invested in collectively by the local government and villages. About 800 hectares of farmland, which originally comprised low terrain and weak infrastructure, were transferred by being contracted to more than 30 specialized large-scale farmers.

14 The village implemented collective investment in the construction of farmland infrastructure such as roads, canals, ditches, and so on, along with

the rebuilding of standardized greenhouses and the undertaking of routine maintenance of agricultural facilities, so as to fully meet the production demands of the specialized large-scale farmers.

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Farmland shareholder cooperatives A farmland shareholder cooperative15 is formed based on members’ investment in terms of management rights of farmland. Shares of a member are evaluated on the basis of both the size and quality of the farmland.

Pooled farmland of the membership is operated collectively to gain scale economy. A representative case is Xinhe Share Cooperative Farm in Xianju County, Taizhou City, Zhejiang Province. This farm was formerly Qidu Cultivation and Breeding Professional Cooperative in Xianju County, which was established in 2013 with a registered capital of 1.2 million Yuan. The farm had 132 initial shareholders and an operating area of 100 hectares, and was the first cooperative farm in Zhejiang province. The farm was built into a cooperative farm by the 132 shareholders on the basis of 0.4 hectares of farmland per share (with a total of 53 hectares of farmland), accounting for 50% of the registered capital; merger of the original cooperatives assets (rice processing plant, rice cake, rice and noodle processing plant and warehouse) accounting for 30% of the registered capital, 10% of technology share and 10% of business share.

Another example of this type is that of the Renfa cooperative, located in the north of Heilongjiang province16, which represents typical large-scale grain production based on farmland shareholder cooperatives. Initially, in order to attract rural households to join, the cooperative promised that each share (comprising one hectare) would be guaranteed at 5,250 Yuan, compared to the market price of about 3,900 Yuan per hectare for leasing the management rights to the farmland. Moreover, the cooperative promoted the farmland as an investment for rural households, which could yield year-end dividends and benefit from subsidy funds provided by the government are also distributed to the shareholders. In this way, the rural households could benefit from three types of revenues from purchasing the farmland management shares. After the farmland became concentrated in this manner, the cooperative pushed the mechanization of farming operations via modern, large-scale agricultural machinery for the production of grain and other crops.

Scale farming operations based on agricultural services Scale farming operations based on agricultural services rely on scale farming entities developing the agricultural service system so as to realize scale farming operations in one or several parts of the agricultural production process. Usually, the role of scale farming entities is twofold.

First, scale farming entities provide professional services during the technology-intensive production stage to ensure that farmland productivity is not reduced due to a decrease in the agricultural production skills of rural households following transfer of the labor force.17 For example, in the farming of rice, the wide variety of rice pests means that disease and pest control should be conducted multiple times throughout each season. Meanwhile, recent years have witnessed an increase in fulminant pests and diseases in rice.

The conventional self-defense way by small-scale households entails problems with inefficient prevention and control, high prevention and treatment costs, and poor control effects. In 2007, the Green Agriculture Professional Cooperative was established in Nanhu District, Jiaxing City, Zhejiang Province, initially with the aim of controlling the most prevalent pests in the agricultural production chain. This gradually evolved to include agricultural services such as tractor-ploughing, mechanical transplanting, mechanical harvesting, the purchase and sale of agricultural products, etc. The Green Agriculture Professional Cooperative’s pest prevention and treatment services for the surrounding rural households led to the rapid development of the service scale. The area of farmland in the District increased from 432 hectares in 2007 to 4,194 hectares in

15 Farmland

shareholder cooperatives are a special model of farmer cooperatives in China. Farmers obtain the membership by transferring their management rights of farmland to the cooperative. Pooled farmland of the membership is operated collectively and benefits are distributed among members, which by definition is a farmer cooperative (that is, member owned, member controlled, and member benefited) and is different from an investor-owned firm.

16 Heilongjiang province has the highest latitude and the easternmost longitude of China. Its abundant arable land resources provide favorable conditions for the development of agricultural large-scale operations.

17 In China, younger, more educated labor forces are entering into the off-farm labor market (De Brauw et al., 2002), leaving the elderly, women, and children at home to take care of the farm work and causing a decrease in the agricultural production skills of rural households.

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2013, which accounted for 39.90% of the rice planting area. In addition, the Cooperative provides technical training, and technology consulting services related to agricultural production for rural households.

Second, scale farming entities provide mechanization services for the labor-intensive production stage to ensure land productivity is not reduced due to limitations to physical strength of rural households following transfer of the labor force. Jinsui Whole-process Mechanization Grain Production Cooperative, located in Luqiao District, Taizhou City, Zhejiang Province, was the first farmer cooperative established via industrial and commercial capital investment in Zhejiang province. Since its foundation in 2005, it has effectively mitigated several critical issues in the agriculture sector, including the low comparative benefits of manual grain production methods and low land utilization rate, via mechanization of grain-production.

This mechanization covers grain production from farming, seedling growing, planting (seeding), irrigation, plant protection, harvesting, drying, processing, etc. While retaining the contract rights of the farmland, the Cooperative provides rural households with three kinds of mechanization service modes. First, they may rent out their contract farmland to the Cooperative for a quarter or a whole year, whereby the lease payments are settled in the form of grain provision. Second, with respect to independent farming by the rural households, the Cooperative provides the whole-process mechanization services outlined above, for which the rural households pay a service fee; under this arrangement, all the harvested grain is owned by the relevant households. Third, households may buy mechanization services from the Cooperative for any of the grainproduction processes. As of 2014, the Cooperative’s operating area has developed to more than 40 hectares, the service area of annual mechanical transplanting is more than 600 hectares, and the mechanical harvesting area is over 1,600 hectares. Besides local scale farming entities, there are many national-level professional service organizations in China. For example, according to Yang et al. (2013), there are tens of thousands of private mechanization service providers in Peixian in Jiangsu Province18 that offer inter-regional harvesting services. Representatives of these entities travel across the provinces of China throughout the year to sell harvesting services (as harvesting is the most labor-intensive task in grain production).

Of course, the promotion of scale farming operation entities is extremely important to the development of scale farming operations based on agricultural services. Currently, there are two main approaches to promote this in China. This first is via government support. The government has a leading role in promoting scale operations in China, and local governments may encourage the construction of facilities or purchasing of equipment by providing financial support and various incentives, subsidies, etc. to increase scale farming capabilities of existing agricultural entities. Scale farming entities are then able to serve the surrounding rural households using existing equipment, and thus conduct large-scale farming operations. The second approach is enacted at the grassroots level. By jointly constructing facilities or purchasing equipment, entities in villages or industries that are in close geographical proximity may generate scale economies, which can be continuously improved. One example of this is the nine-village collective economic organization in Xindai Town of Pinghu City, Zhejiang Province. Through joint construction, Cooperative of Xinlian grain and oil, pig farming has been established, professional service teams formed, and scale farming operations conducted in different regions; thus, scale farming entities have been created.

4. Conclusions During the last two decades, scale farming operations have been encouraged by the Chinese government against the backdrop of labor decline in the agricultural sector, and rapid development thereof. This paper systematically considered the recent development of scale farming operations in China. Using cases from Zhejiang province, two main types of scale farming operations were identified. These are based on: (1) concentrated farmland and (2) agricultural services. Regarding trends, the development of scale farming operations based on land concentration may slow due to the difficulties encountered in improving farmland transfers; however, scale farming operations based on agricultural services will continue to expand. Nevertheless, the regional disparities in China’s scale farming operations will not fundamentally change in the near future.

18 Jiangsu

province is situated on the eastern coast of China, and borders Zhejiang province to the south.

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Acknowledgements The authors thank the Zhejiang Provincial Department of Agriculture and the Zhejiang Provincial Center of Rural Development for their generous help during this research. The authors also gratefully acknowledge funding support from the National Natural Science Foundation of China (NNSFC-71333011, 71273233) and the Major Program of the Key Research Institute of Chinese Ministry of Education (No. 15JJD790032).

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Hu, H. and Y. Yang. 2015. Research on the application of farm household chemical fertilizer from the perspective of factor substitution – Based on the data of rural fixed observation points. Journal of Agrotechnical Economics (Chinese) 3: 84-91.

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Mei, J. 2002. The proper scale farming operation – A review of the current hazards of land scale farming.

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Ministry of Agriculture of China. 2006. China Agricultural Development Report. Agricultural Press of China, Beijing, China.

Ministry of Agriculture of China. 2010. China Agricultural Development Report. Agricultural Press of China, Beijing, China.

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Ministry of Agriculture of China. 2012. China Agricultural Statistical Material. Agricultural Press of China, Beijing, China.

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Ministry of Agriculture of China. 2014. China Agricultural Statistical Material. Agricultural Press of China, Beijing, China.

National Bureau of Statistics. 2013. China Statistics Yearbook. China Statistics Press, Beijing, China.

Niroula, G.S. and G.B. Thapa. 2005. Impacts and causes of land fragmentation and lessons learned from land consolidation in South Asia. Land Use Policy 22: 358-372.

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Zhejiang Provincial Department of Agriculture. 2014. Zhejiang Agricultural Statistical Material. Available at: http://www.zjagri.gov.cn.

Zhou, J. and S. Jin. 2009. Safety of vegetables and the use of pesticides by farmers in China: Evidence from Zhejiang province. Food Control 20: 1043-1048.

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OPEN ACCESS International Food and Agribusiness Management Review Volume 20 Issue 2, 2017; DOI: 10.22434/IFAMR2016.0009

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Received: 14 January 2016 / Accepted: 10 October 2016

Agency costs and organizational architecture of large corporate farms: evidence from Brazil Special issue: Agroholdings and mega-farms in a global context

CASE STUDY Fabio Chaddada† and Vladislav Valentinov aAssociate

bResearch

b

Professor, University of Missouri and INSPER, 125 Mumford Hall, Columbia, MO 65211, USA; †Deceased

Associate, Leibniz Institute of Agricultural Development in Transition Economies, Theodor-Lieser-Str. 2, 06120 Halle, Germany

Abstract Drawing inspiration from American institutionalism and new institutional economics, this paper discusses the rise of large corporate farms as the transition from the classic capitalist firm to the corporate form of organization based on the separation of ownership and control. Three case studies from the Brazilian cerrado show the rise of large corporate farms to be enabled and impelled by the advance of agricultural production technologies and the search for scale economies. The key finding from the case studies is that complex technology not only necessitates large-scale farming but also generates technical and organizational solutions to the potentially pervasive agency problems. In addition to the use of sound corporate governance practices, these solutions include organizational architecture encompassing computer-aided accounting and budgeting systems, incentive-based compensation, clear definition of performance goals, and delegation of operational decisions to farm managers. Furthermore, organizational architecture has been shown to promote a culture of trust and accountability, which counteract the opportunistic tendencies of farm managers and workers.

Keywords: corporate farms, separation of ownership and control, organizational architecture, corporate governance.

JEL code: D23, L22, Q13 Corresponding author: valentinov@iamo.de

© 2016 Chaddad and Valentinov

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1. Introduction The rise of large industrialized corporate farms is a well-documented trend in the evolution of agricultural organization all over the world. These farms are not only quite visible today but will likely become even more widespread and important in the future. The driving forces of this trend in different parts of the world vary and include, for example, food price volatility, technical change facilitating the supervision of the production process, existence of benefits from horizontal and vertical integration, deficiencies of public infrastructure, requirements of certification and traceability, as well as inelastic labor supply (Deininger and Byerlee, 2012). For all their heterogeneity, these forces lead to the same effect: they facilitate and indeed require large-scale business organization. This effect is known to cut the ground from under the prevalent transaction cost economics argument about the superiority of family farms (Allen and Lueck, 1998; Pollak, 1985). Large corporate farms evidently do not enjoy the transaction cost advantages of family loyalty in the organization of agricultural production activities that are very costly to supervise.

Drawing on an extensive literature review, Deininger and Byerlee (2012: 706) identify three advantages of this kind in traditional family farms. First, family members involved in the farm business have strong incentives to do their best since they are also residual claims to profits (and losses). Second, they benefit from ‘an intimate knowledge of local soil and climate, often accumulated over generations.’ And finally they can flexibly adjust their labor supply to the seasonally contingent conditions of production (cf. Allen and Lueck, 1998; Pollak, 1985; Valentinov, 2007). It is clear that the rise of the large-scale industrial agriculture poses a challenge to these arguments. The advantages of the owner-managed family farm may be real, but the driving forces behind the recent rise of large corporate farms may decrease the relevance of such advantages over time. Interestingly, the issue of the transaction cost advantages of large farms surfaced in the agricultural economics literature more than a decade ago in the context of the agricultural restructuring in the Central and Eastern Europe (cf. Rozelle and Swinnen, 2004). Valentinov and Curtiss (2005) related some of these advantages to the broader institutional environment of agriculture, while noting that the traditional rationale for family farming tends to be based on intra-organizational terms.

This argument seems to remain relevant today, with the qualification that institutional environment factors must be seen to be acting in concert with the evolution of technology, very much along the lines of Hodgson’s (1988) observation that both institutions and technology present exogenous parameters that are likely to be neglected by orthodox economics. The essential institutional environment factors that were conducive to the rise of the modern large-scale farms include ‘market failures related to availability of infrastructure, technology, and property rights’ (Deininger and Byerlee, 2012: 701), but also the failures of capital and credit markets. The effects of these factors are further enhanced by the technological developments that helped to obviate the need for close supervision of hired labor. Far from being theoretically predetermined, the comparative efficiency of small and large farms thus emerges to be contingent not only on the intraorganizational considerations but also on the state of the broader institutional environment and technology.

Acknowledging this contingence, however, does not mean denying the importance of the agency problems that must be faced by large corporate farms. Even if innovative technologies indeed largely reduce the transaction cost advantages of family farms, it is still not clear how large corporate farms manage to achieve effective organization of their production activities. In contrast to corporate farms, family farms embody the ideal of the classic owner-managed capitalist firm which creates stronger incentives for owners to internalize the wealth effects of their actions than alternative firm types do, such as corporations, public firms, and non-profits (Alchian and Demsetz, 1972; Furubotn and Pejovich, 1972; Valentinov et al., 2015). The organization of corporate farms obviously rests on the separation of ownership and control, and thus on the divergence of interests between owners and managers (Berle and Means, 1932). This divergence is bound to cause agency problems posing a serious challenge to the viability and efficiency of corporate farms. These problems, however, are not necessarily fatal and can be addressed by appropriate governance instruments.

The aim of this paper is to draw on three case studies of large Brazilian corporate farms in order to explain the governance instruments allowing these farms to keep their agency problems in check.

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The case studies have been inspired by the idea that the mitigation of agency costs is a challenge that is faced not only by corporate farms but also more generally by corporations which present the dominant form of business organization in the Western world (Hansmann, 1996). The rise of corporations has been a premier field of study by American institutional economists throughout the twentieth century. While Berle and Means (1932) acknowledged that corporations are radically different from classic capitalist firms, Galbraith (1967) attributed the rise of corporations to technological imperatives, and more specifically to the tendency of modern technology to require large-scale business organization. As Allan Gruchy (1972: 142) put it, ‘the large corporation must plan to minimize risk by controlling its sources of supply, the demand for its products, the sources of its capital, and fluctuations in its prices’.

It is true that the planning required of large corporate farms must deal with additional agriculture-specific issues such as site and season specificity of production, tacit knowledge, imperfections of capital and risk markets, environmental and labor regulatory contexts, as well as pioneering and developing costs. Yet, the institutionalist emphasis on the role of technology still seems to retain its validity in the agricultural context too.

If the benefits of corporate planning are not attainable without the separation of ownership and control, then ownership may be seen as a ‘ceremony’ hindering the advance the progressive technologies (cf. Gruchy, 1972; Hodgson, 2004; Samuels, 1995). In this line, Clarence Ayres (1978), a classic of American institutionalism, argued that the logic of technological development calls for the weakening of the institution of ownership if this institution becomes obstructive. He saw the rise of corporations as a crucial manifestation of this weakening: ‘so great has been the proliferation of technical instruments and skills in modern business that ‘management’ has come to play a constantly increasing part in its conduct, and ‘ownership’ a correspondingly decreasing part’ (ibid: 199). The case studies in the present paper demonstrate that the Ayresian dialectics of ‘management’ and ‘ownership’, despite its radical flavor, lines up remarkably well with the current governance practices of Brazilian large corporate farms.

In interpreting corporations as an institutional response to technological imperatives, American institutionalists unfortunately paid less attention to the micro-analytic issues of agency costs and opportunistic behavior more generally, leaving this terrain to new institutional economics. The present paper draws on both of these schools of thought in order to make the case that the technological imperatives not only give a boost to the separation of ownership and control but also facilitate the emergence of governance instruments that are able to mitigate the agency problems resulting therefrom. These governance mechanisms will be referred to as ‘organizational architecture’ and will be shown to play a crucial enabling role in the operation of large corporate farms. Based on case studies of three of such farms operating in the Brazilian agricultural frontier with different types of potential agency problems between owners, managers, and farm workers, the paper describes how these problems are mitigated by organizational architectures.

2. The context: agricultural development in the Brazilian cerrado Before describing the structures of large corporate farms, it is important to understand the context from which they emerged. This section provides a brief analysis of agricultural development in the Brazilian agricultural frontier and how the structure of agricultural production evolved over time. Brazilian agriculture has experienced significant growth in the last four decades. Between 1975 and 2010, total agricultural production in Brazil grew fourfold, making it a top-five producer of 36 commodities globally by 2008 (Rada and Buccola, 2012). As a result of impressive productivity gains, which averaged 3.0% per year since 1975, Brazil was able to achieve food security, real food prices decreased, and the country became one of the main agricultural producers and exporters in the world.

This agricultural production growth occurred primarily in the cerrado region. The cerrado is a savannahlike vegetation of low trees, scrub brush and grasses. It occurs entirely within Brazil and covers 204 million hectares or 23% of Brazil’s land area. Until the 1970s, the cerrado was considered to be of limited value for agricultural production. Major constraints to agricultural production in the cerrado included acidic soils with low natural fertility and high biological pressure of pests, diseases and weeds. The development of the Brazilian International Food and Agribusiness Management Review

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cerrado into productive agricultural land required a portfolio of technologies, including the introduction of new plant varieties and hybrids adapted to low latitudes, investments in soil fertility improvements, strategies to control diseases, pests and weeds, use of no-tillage systems, and integrated crop and livestock production systems. These technologies developed over the last 40 years removed the constraints to producing highyield crops and livestock in the poor, acid soils of the cerrado under tropical conditions.

Following these agricultural technology developments, the cerrado was opened up to agriculture and new land was brought into production. Between 1975 and 1996, the area in planted pastures soared from 18 to 49 million hectares and the area used for row crop production increased from 9 to 13 million hectares. As a result, about 40% of the cerrado had been converted to agricultural land by 1995. The development of the cerrado into new agricultural land was responsible for the largest share in food production between 1970 and 1990. Since then, most of the production increases in the cerrado was due to yield growth. Grain production in the cerrado increased from 8 million tons in 1970 to 48 million tons in 2006. In 2006, the cerrado produced 89% of the cotton, 69% of the sorghum, 55% of the beef, 53% of the soybeans, 48% of the coffee, 37% of the rice and 30% of the corn produced in Brazil (Mueller and Martha Jr., 2008).

Since the cerrado is such a vast biome, this paper focuses on how agriculture developed in the state of Mato Grosso, which has become the leading crop producer in the country in the last decade. Table 1 shows the evolution of farming in Mato Grosso since the 1970s. In 1975 total land in farms was about 22 million hectares or 24% of the state’s landmass. But only 12 million ha or 54% of the land in farms were actually cleared of natural forests and used in production, of which 8.6 million ha were in natural pastures, 2.6 million ha in planted pastures and 500,000 ha in temporary and permanent crops. At that time the state did not have adequate infrastructure and was isolated from the rest of the country. In addition, the agricultural technologies adapted to the tropics developed by Embrapa and other research institutes were yet to be developed and disseminated. Thus farming activities in the state of Mato Grosso were predominantly extensive cattle ranching and staple crops for subsistence both with low levels of productivity.

This situation started to change with a set of policies implemented by the military regime that aimed to integrate the Legal Amazon1 to the rest of the country with the enactment of the National Integration Plan (PIN) in 1970. These policies included infrastructure development (primarily roads), tax exemptions for enterprises investing in the region and subsidized credit. The early beneficiaries of these policies were cattle development projects. In addition to large-scale cattle ranching projects, PIN also included development initiatives as a response to a widespread drought in the Northeast region, which increased the incidence of poverty and famine among peasant farmers. State-led colonization projects were designed to settle poor 1 In

order to implement its development policy, the Brazilian military government created the Legal Amazon, a region that includes the states of Acre, Amapá, Amazonas, Pará, Roraima, Mato Grosso, Tocantins, and Maranhão west of the 44th meridian.

Table 1. Evolution of agriculture in Mato Grosso, Brazil (IBGE, 2006).

Number of farm establishments Total land in farms (ha) Area cleared in establishments (ha) Permanent crops (ha) Temporary crops (ha) Natural pastures (ha) Planted pastures (ha) Number of employed farm workers Number of tractors Number of beef cattle

1975

1985

1995-1996

2006

56,118 21,949,146 11,767,758 42,174 459,093 8,640,861 2,602,607 263,179 2,643 3,110,119

77,921 37,835,651 18,559,984 136,605 1,992,838 9,685,306 6,719,064 359,221 19,534 6,545,956

78,762 49,839,631 24,471,635 169,734 2,782,011 6,189,573 15,262,488 326,767 32,752 14,438,135

112,987 48,688,711 28,559,105 408,550 6,018,182 4,404,283 17,658,375 358,336 42,330 20,666,147

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farmers and landless individuals in the Legal Amazon. Major state-led colonization projects settling more than 5 million hectares were implemented in the 1970s and 1980s.

Private colonization projects organized by colonization firms and cooperatives were also relevant agents of agricultural development in the Legal Amazon. These private colonization entities surveyed, demarcated and occupied land, built infrastructure, opened roads, developed urban areas, and provided basic health and education services to smallholders that migrated primarily from the southern region. Thirty-five private enterprises organized 104 settlement projects and colonized almost 4 million hectares of farmland in Mato Grosso between 1970 and 1990. Private colonization in Mato Grosso represented 39% of the total area colonized in the Legal Amazon. Jepson (2006a,b) provides detailed accounts about the role of private colonization projects in the Legal Amazon. She concludes that, ‘state incentives were, in fact, insufficient to cause the frontier expansion. Central to Brazil’s frontier historical geography are private colonization cooperatives and firms, both of which developed into critical organizations in the process of agricultural expansion’ (Jepson, 2006a: 858).

As a result of these policies to develop the Legal Amazon, the number of farm establishments in Mato Grosso increased from 56 to 78 thousand and the total land in farms almost doubled from 22 to 38 million hectares between 1975 and 1985 (Table 1). During this period, the area actually used in production increased from 11.7 to 18.5 million hectares with notable increases in planted pastures (from 2.6 to 6.7 million ha) and temporary crops (from 460,000 to 2 million ha). Many critics of these policies argue that this first phase of agricultural development in the cerrado led to excessive land clearing, environmental degradation and increased land concentration (Klink and Machado, 2005). The poor soils of the cerrado could not sustain adequate levels of productivity after three years of being used in production. Without investments in soil fertility, natural pastures would degrade and row crops would not produce enough to cover costs, leading famers to abandon the land.

The integration and development policies initiated by the military government were, however, short lived.

In 1979 Brazil experienced the effects of the second oil crisis, which severely affected the ability of the government to invest in proactive development policies. Government expenditures in agricultural policy reached their peak in the 1980s and were significantly reduced after that (Chaddad and Jank, 2006). Following restoration of democracy in 1985, subsequent policies related to the development of the Amazon region cut subsidies and tax incentives to agricultural projects and started to pay more attention to environmental issues, the protection of indigenous land rights, and land reform. Substantial tracts of cerrado and tropical rain forests in the Legal Amazon are now off limits to agricultural expansion and remain protected in nature conservation units and indigenous reserves. Land reform settlements also started to be implemented in the 1990s to address the issue of land concentration.

A second major push to agricultural development in the cerrado occurred after the economic reforms of the 1990s. The Real Plan of 1994 played a critical role in agricultural development throughout the country with currency stabilization and the control of inflation. Initially, the Real Plan led to a crisis in agriculture as a result of an overvalued currency but the currency devaluation of 1999 under a free-floating exchange rate policy – coupled with increased international demand for agricultural commodities in the 2000s – provided a massive boost to agricultural development. Also, since the mid-1980s, new agricultural technologies started to become available to farmers in the cerrado, which led to the development of commercial agriculture and ranching with increasing levels of productivity.

Between 1985 and 2006, the area with planted pastures in Mato Grosso increased from 6.7 to 17.6 million hectares and the number of beef cattle increased from 6.5 to 20.6 million head (Table 1). The beef cattle herd reached 28 million head in 2014 with beef production representing 20% of the state’s gross value of agricultural production. The improvement of forages, coupled with appropriate soil management practices, solved the issue of pasture degradation and significantly improved the economic prospects of cattle ranching

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in the region. With the expansion and increased productivity of cattle herds in the cerrado, Brazil has become the second largest producer and the leading exporter of beef in the world.

Even more impressive than the growth of the livestock sector has been crop production expansion – in particular, soybean, corn and cotton. Between 1985 and 2006, the area planted with temporary crops in Mato Grosso tripled from 2 to 6 million hectares (Table 1). Recent data show that crops continued to expand in the state, with planted area reaching 13 million hectares and total crop production of almost 48 million tons in 2014 (Table 2). Agricultural production growth resulted from planted area expansion and productivity gains, which increased from 1.4 tons per hectare in 1977 to 3.6 tons per ha in 2014. Mato Grosso surpassed Paraná as the country’s largest producer and currently accounts for 25% of the domestic grain and oilseed production. The state produces 30% of the Brazilian soybean crop, 23% of the corn crop, and 58% of the cotton crop. In 2014 crop production represented 74% of the state’s gross value of agricultural production, with soybeans alone accounting for 50% of the total value.

In what follows, we take a closer look at the organization of agricultural production in Mato Grosso. Initially, smallholders who migrated from southern Brazil formed colonization and production cooperatives to address the market failures and transaction costs they faced in the frontier. These cooperatives are analyzed in section 2.1. Subsequently we discuss the structural changes that occurred in Brazilian agriculture since the 1990s and how they led to the demise of most cooperatives. Without the services provided by cooperatives, most family farmers found themselves in a difficult situation to access credit and technology, store and market production and cope with the market failures and lack of infrastructure typical of agricultural frontiers.

Intense competition for land and commodity price volatility further undermined family farm survival. The gap left behind by cooperative failures was partially addressed with the emergence of large family groups, corporate farming structures and new generation cooperatives.

The first wave of cooperatives in Mato Grosso (1975-1995) Mato Grosso attracted a large number of migrants from several parts of the country – but primarily from the southern and southeastern regions – in the 1970s and 1980s. These pioneers were smallholders who sold small farms in their region of origin to pursue the dream of becoming commercial farmers in the agricultural frontier. However, they faced several constraints in the frontier, including poor infrastructure, missing services, market failures and high transaction costs to obtain farm inputs and market production.

Table 2. Evolution of crop production in Brazil and Mato Grosso (Conab, 2015).1 Brazil Planted area (1000 ha) Crop production (1000 tons) Productivity (kg/ha) Mato Grosso Planted area (1000 ha) Crop production (1000 tons) Productivity (kg/ha) 1

1976/77

1984/85

1994/95

2004/05

2013/14

37,314 46,943 1,258

39,693 58,143 1,465

38,539 81,065 2,103

49,068 114,695 2,339

56,988 193,386 3,393

2,238 3,046 1,361

1,561 2,642 1,693

3,278 7,617 2,324

8,564 24,731 2,878

13,323 47,703 3,580

Includes 15 crops.

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Based on case studies of a private colonization firm (called CONAGRO) and a colonization cooperative (called COOPERCOL), Jepson (2006b: 301) concludes that: private colonization projects provided the initial conditions of settlement by accessing state subsidies and securing property rights in the region. Moreover, private colonization lowered the risks and transaction costs of frontier settlement through financial support during unproductive years. It was the promise of secure titles (and lower enforcement costs), combined with access to state loans, that made it economically feasible for smallholders to invest in mechanized commercial agriculture in a frontier region.

These private colonization organizations played a critical role in providing the initial conditions for families to migrate from the south to the agricultural frontier. However, poor transportation infrastructure, distance to markets, insufficient grain storage, and high transaction costs to obtain credit and farm inputs were common challenges of the early colonists. Consequently, they decided to organize an agricultural cooperative to overcome these market failures and provide the missing services they needed to be successful (cf. Valentinov, 2009).

Founded in 1975, COOPERCANA played a central economic role in regional development as follows (Jepson, 2006b). First, it invested in warehouses and grain storage facilities across the region. The cooperative stored the grain, initially rice, and marketed the production to the government under the minimum price program.

In doing so, it enabled the farmers to have access to governmental subsidies, which they otherwise would not have. The cooperative also assisted the farmers in accessing subsidized credit from Banco do Brasil.

The state bank funneled the total value of loans to the cooperative, which then redistributed the funds to the farmers. COOPERCANA also provided farmers with agricultural inputs and agronomic services to plant and harvest rice. Inputs were supplied at a discount for cooperative members, which reduced the need for farmers to travel to Barra do Garรงas, the main local market located 300 km away from the settlements.

COOPERCANA also disseminated information about suitable agricultural practices for production on poor cerrado soils. Lastly, the cooperative provided emergency flights on its DC-3 to Barra do Garรงas during the rainy season, when the main unpaved road (BR-158) connecting the settlements to the town was flooded.

In the early 1980s, COOPERCANA was instrumental in helping the farmers improve soil fertility and thus decrease dependence on rice with production diversification. Based on agronomic recommendations from Embrapa, the cooperative provided lime, chemical fertilizers and technical advice to encourage farmers to invest in soil fertility and avoid soil degradation. As farmers invested in soil fertility, the cooperative introduced new crops in the region. The cooperative technical staff experimented with new soybean and corn cultivars and tested their yields under different growing conditions. In collaboration with Embrapa research staff, COOPERCANA implemented crop experiments and provided important agronomic information to farmers. New technologies were disseminated to farmers in field days and educational programs. With the availability of adapted cultivars and credit for soil improvement, agricultural production and productivity in the region increased dramatically. Between 1983 and 1993, soybean area increased from 5,000 hectares to 40,000 hectares, while corn area increased from 700 hectares to 3,000 hectares.

Production growth and agricultural development in eastern Mato Grosso provided the impetus for the growth of COOPERCANA in the 1980s. In addition to the services provided to farmers explained above, the cooperative diversified and engaged in several vertical integration projects upstream and downstream in the value chain. These growth projects included the following: lime processing and marketing; corn, rice and soybean seed production and marketing with own brand name; seed quality laboratory to test seeds from third party vendors; a network of supermarkets and gas service stations; and a livestock processing plant to become a local supplier of beef and pork.

COOPERCANA was not a unique example. Several multipurpose, local cooperatives were formed in the 1970s and 1980s across Mato Grosso by the early pioneers. Because these pioneers came mostly from the International Food and Agribusiness Management Review

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southern region, the cooperatives they formed followed the traditional model of the cooperatives they knew or were members of in southern Brazil. This first wave of cooperative development in the cerrado was also influenced by increased federal intervention in cooperatives that lasted until 1988. Federal law 5764 of 1971 established the institutional framework within which the Brazilian cooperative system operates until today.

The 1971 law defined the legal status of cooperatives and set strict rules for their formation and functioning.

Between 1966 and 1988, a state agency known as Instituto Nacional de Colonização e Reforma Agråria regulated and controlled agricultural cooperatives.

Despite their early successes, COOPERCANA and most of the first wave cooperatives formed across Mato Grosso went bankrupt in the early 1990s. There were several exogenous and endogenous factors that led to their demise. With unsustainable debt levels, these cooperatives could not survive the period of hyperinflation of the late 1980s and the economic liberalization and macroeconomic reforms introduced in the early 1990s. Farmers, in turn, also suffered from the economic crisis and the end of agricultural subsidies and many were forced to exit agriculture. In addition, there were some serious management and governance issues that prevented these cooperatives from taking the necessary steps to reinvent and survive the crisis (cf. Valentinov and Vacekova, 2015).

Structural changes and the emergence of corporate farms (1990-2015) With the failure of cooperatives and the consequent exit of farmers in large numbers in the 1990s, the structure of farming became increasingly concentrated in Mato Grosso. Data from the last Census of Agriculture show that the average farm size in the state is 431 hectares (Table 3), which is significantly higher than the national average of 64 hectares. About 70% of the producers in the state farm less than 100 hectares. These farm establishments include traditional smallholders and peasants who were settled in land reform projects since 1995. The total land in smallholder farms adds up to 2.6 million hectares, equivalent to 5% of the total agricultural land in the state. Among commercial producers, there are three size categories: small (100-500 ha), medium (500-2,500 ha) and large (above 2,500 ha). The 35,000 commercial producers in Mato Grosso farm 45 million hectares or 95% of the agricultural land in the state.

There are about 10,000 commercial producers in Mato Grosso farming an average of 1,100 hectares (Table 3).

They are family farmers that were able to survive several crises since the 1980s and establish themselves as commercial producers. Our field research in Mato Grosso suggests that 500 hectares is the minimum efficient scale that a producer needs to farm to be able to acquire the machinery, build the on-farm infrastructure and have access to modern inputs to make a living in commodity agriculture in the cerrado. These small and medium-sized family farmers overcame collective action problems and the negative consequences of the cooperative failures of the 1990s and formed 43 new cooperatives since then. These second-wave cooperatives are structurally different from the traditional cooperatives of the 1970s and 1980s and focus on organizing producer pools to buy farm inputs and market agricultural commodities with larger volumes. They have a limited effect on market structure and performance due to their limited scale and resources (Chaddad, 2016).

Table 3. Farm structure in Mato Grosso (2006) (IBGE, 2006).

0-100 ha 100-500 ha 500-2,500 ha >2,500 ha Total

Number of establishments

Area

n

Share (%)

Total area (ha) Share (%)

Average area (ha)

77,786 21,334 10,052 3,815 112,987

68.8 18.9 8.9 3.4 100.0

2,641,168 4,503,981 11,316,022 30,227,539 48,688,710

34 211 1,126 7,923 431

5.4 9.3 23.2 62.1 100.0

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Other producers, however, were able to achieve a much larger scale than this. Table 3 shows that there are about 4,000 large commercial producers in Mato Grosso with an average farm size of 8,000 ha. These large producers farm about 30 million hectares or 62% of the land in farms in the state. According to primary data collected by Agroconsult, a consultancy firm, there are 38 ‘mega producers’ farming more than 30,000 hectares in the cerrado region with several of them farming more than 100,000 hectares. A recent phenomenon that is changing the structure of agricultural production in the Brazilian cerrado is the emergence of corporate farms since the commodity super cycle started in 2005. These new players include publicly traded companies, privately held companies controlled by private equity funds, and subsidiaries of multinational trading companies. These corporate farms with diverse ownership arrangements have three characteristics in common – very large scale, professional management and access to capital markets (Chaddad, 2014).

3. Case studies of family groups and corporate farms There are two basic types of very large producers operating in the Brazilian cerrado: family groups and corporate farms. The dominant form is the family group, where multiple family members farm together in areas ranging from 5,000 to 250,000 ha. These family groups were developed since the 1990s by the second and third generation sons and daughters of the first generation pioneers as an organizational response to pool resources and cope with the market failures, transaction costs, poor infrastructure, market volatility and lack of credit in the agricultural frontier. On the other hand, corporate farms financed by public and private equity markets were formed in the mid- to late-2000s to benefit from the commodity boom of the time.

In what follows, the paper describes three case studies – one family group (Produzir), one publicly traded corporation (BrasilAgro) and one privately-held corporation controlled by private equity funds (Agrifirma)2.

The ownership structures are different but all involve the separation of ownership and control in the sense that owners are not involved in operating and managing the farms. The case studies also describe how these very large producers attempt to ameliorate agency problems with organizational architecture. The case studies were developed based on personal interviews with corporate managers (chief executive officers (CEOs), chief financial officers (CFOs), chief operating officers (COOs)), farm managers who run the farms and several visits to farms in Mato Grosso and western Bahia. The personal interviews were complemented with information from company documents, such as incorporation statutes and bylaws, annual financial reports (when available) and presentations to investors.

Produzir S.A. Eugênio Pinesso was the son of an Italian immigrant couple that arrived in southern Brazil in the 1930s to work as sharecroppers on coffee plantations. Eugênio grew on the farm in northern Paraná state and, despite not going to school, was a shrewd businessman who was an early adopter of several new technologies. He learned how to bring low-fertile soils in to production. With hard work and a bit of luck, he was able to make it as a commercial farmer in southern Brazil in the 1960s and 1970s. In 1983 Eugênio took the bold decision to exchange 5 farms totaling 1,500 hectares in Paraná for 2 farms with 19,600 hectares in Campo Verde, MT located 100 km to the east of Cuiabá, the state capital. The farms were not yet developed so family members worked hard to clear the land and bring it into production. Eugênio had 6 daughters and sons and most family members were involved in agriculture. They worked as a team. While some family members worked in developing land into crop production in Mato Grosso, other family members stayed in 2 Since we conducted the personal interviews and collected data to write these case studies in 2014, a lot has changed in Brazil. In 2015, the country

entered a deep recession with high inflation and currency devaluation. Some farm operators who were leveraged in dollar-denominated debt found themselves in financial distress. Many had to declare bankruptcy, merge with another entity or liquidate. The economic crisis persisted in 2016 with high political risk because Congress started an impeachment process against the President that was only resolved in August. At the same time, farmers in western Bahia suffered three years of drought that significantly affected yields. And, for the first time many farmers in Mato Grosso also had poor soybean yields due to lack of rain. One of the three corporate firms described in this paper was forced to liquidate not because of the financial and production risks described above, but simply because one of their majority shareholders decided to cash in and leave the partnership.

Suddenly, the managers of the firm were left without funding to carry out the business plan for the 2015-2016 crop year and thus the company was folded. This story highlights the importance of a robust capital structure to the survival of start-up farm corporations.

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Mato Grosso do Sul focusing on livestock production, including hogs and beef. One of the key features of large producers in the cerrado is that they developed as family groups, pooling resources from many family members under the leadership of one trusted individual. With the passing of his wife in 1986, Eugênio started to groom one his sons, Gilson Pinesso, to take over his role as the family leader.

In 1993 the Pinesso Group took another bold step with the acquisition of a 61,000-hectare farm in Nova Ubiratã, MT located 150 km to the east of Sorriso in an area without any infrastructure, including roads and electricity. The land was developed over time and required investments in basic infrastructure, including building more than 200 km of roads, bridges, housing, electricity and a school for rural workers and their families. In 2014 the district developed by the Pinesso Group had a population of 2,000 with a school, health center, pharmacy, supermarket and service station. The farm currently produces soybeans, corn, cotton, sunflower, beef cattle, and hogs.

In 2014 the Pinesso Group had 10 farms in the cerrado totaling 108,000 hectares. It also leased 48,000 hectares in the new frontier state of Piauí. Planted area with crops increased from 48,000 ha in 2005 to 117,000 ha in 2014. The area used for livestock production in planted pastures comprised 35,000 ha.

■■ Separation of ownership and control and the potential for agency problems In 2012 the Pinesso Group incorporated and changed its name to Produzir S.A., which literally means ‘to produce.’ All assets were transferred to the corporate entity and family members received shares in return.

Produzir S.A. has 6 shareholders, each a limited holding company controlled by the 6 siblings (or their descendants). The family group decided to incorporate for two main reasons. The first was to give shares to family members, which would allow exit at fair value. The second was to enable the firm to adopt corporate governance practices and hire professional managers. The board of Produzir S.A. is comprised of six directors nominated by each family holding company (the shareholders) and one independent, professional director. A CEO with professional experience in finance was hired to run the business. According to one family member, ‘we needed someone from outside the family to make business decisions with cold blood and without emotion.’

■■ Organizational architecture The CEO also plays the role of CFO and the company also hired two additional senior-level professionals – a COO to run the farming operations and a Chief Commercial Officer in charge of commercial and marketing decisions. This senior management team is assisted by 6 mid-level managers, 4 of which are responsible for managing crop operations and 2 in charge of the livestock operations. The firm has 1,050 employees with about 110 of them involved with some management or administrative function. As a result of these organizational changes, family members are no longer involved with the business. The senior management team receives incentive compensation based on clearly defined goals, including revenue growth and profits.

In a personal interview, Mr. Pinesso explained how the family (represented in the Board of Directors) was able to oversee such a large farming operation. In simple terms, he stated that, ‘in agriculture, it is the eye of the owner that fattens the ox.’ Even though the family is not directly involved with the business operation, family members constantly visit the farms and develop personal relationships with farm managers and workers. ‘We have formed our team over the last 30 years. Today we have the sons and daughters of our first employees working in our firm. They have a sense of belonging to the group and we offer a lot of opportunities for personal growth and development.’

In addition to a strong organizational culture based on personal relationships, Produzir S.A. has adopted a control system with key performance indicators (KPIs) to monitor the performance of its production units across the cerrado. ‘We benchmark the performance of each production unit relative to the others, which provides a strong incentive for the teams to perform. The managers of these production units also share information International Food and Agribusiness Management Review

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and best practices among themselves.’ The firm also introduced an incentive compensation system for farm managers based on production and productivity levels achieved by each production unit. In other words, the organizational architecture of Produzir is based on both trust built by years of relationship between family members and farm managers and workers, coupled with formal control mechanisms (benchmarking across operational units and incentive compensation).

A recent phenomenon that is changing the structure of agricultural production in the Brazilian cerrado is the emergence of corporate farms since the commodity super cycle started in 2005. Corporate farms are increasingly found in Mato Grosso, but especially in the new agricultural frontier of the cerrado known as Mapitoba, a region comprising four states – Maranhão, Piauí, Tocantins and western Bahia. These new players include publicly traded companies (e.g. SLC Agrícola, Vanguarda Agro, and BrasilAgro), privately-held companies controlled by private equity funds (e.g. Agrifirma, Agrinvest and Tiba Agro), and subsidiaries of multinational trading companies (e.g. Ceagro-Mitsubishi and XinguAgri-Multigrain). These corporate farms with diverse ownership arrangements have three characteristics in common – very large scale, professional management and access to risk capital from outside investors. In what follows, we describe these emerging corporate-style structures.

Companhia Brasileira de Propriedades Agrícolas S.A. (BrasilAgro) BrasilAgro is a publicly traded company headquartered in São Paulo, Brazil and listed in the Bovespa stock exchange with American Depositary Receipts traded in the New York Stock Exchange. Its 2006 initial public offering (IPO) raised 584 million BRL (about 286 million USD)3 from investors based on a business plan and a promise ‘to create value by acquiring, developing and operating properties through sustainable and innovative practices.’ The firm did not have any assets and employed only 2 managers at the time of listing. Since then, it has become one of the leading agricultural land development and farming companies in South America.

The core business of BrasilAgro is the acquisition, development, operation and sale of rural properties suitable for agricultural production. Once BrasilAgro acquires a rural property, it invests in infrastructure, facilities and technology necessary for efficient agricultural production. It then engages in high productivity agricultural operations aiming to maximize cash flow per area. BrasilAgro selectively divests of a farm when it reaches its optimal value to capture capital gains. The company combines the returns generated from land value appreciation and farming operations, while mitigating production risks with geographic diversification.

Its vision is ‘to be the leading platform for investing in and developing farmland in Brazil.’

With the capital raised in the IPO, BrasilAgro acquired 11 farms in agricultural frontier regions throughout the cerrado. After taking possession of its first farm in July 2007, the firm planted 22,000 hectares in its first year of operation. The planted area increased every year since then reaching 80,000 hectares in the 2013/2014 crop year. In 2014 BrasilAgro had a land portfolio of 8 farms with 180,000 hectares with an estimated market value of 1.3 billion BRL (about 381.8 million USD). Three farms had already been sold allowing the firm to realize considerable capital gains.

■■ Separation of ownership and control and the potential for agency problems The idea for the formation of BrasilAgro came from a group of investors led by Cresud, a diversified real estate development firm in Argentina with a business unit in farming. Cresud is currently the controlling shareholder in BrasilAgro with a 39.6% stake in the company. The remaining shares are traded in the Bovespa stock exchange and are held by minority shareholders. BrasilAgro is listed in Bovespa’s New Market, which requires high levels of corporate governance practices and transparency. With the decision to list in

3 BRL =

Brazilian Real; conversion to USD calculated on the basis of the exchange rate on November 30, 2016.

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the New Market, BrasilAgro was able to raise capital at a competitive cost as it offered more security and transparency to investors.

Corporate governance practices attempt to ameliorate the potential agency costs between shareholders and corporate managers. The Board of BrasilAgro is composed of nine directors, of which three are independent.

Together, the Board of Directors and the Board of Executive Officers are responsible for managing BrasilAgro.

The Board of Directors is responsible for establishing long-term strategies and setting general business policies and guidelines. Professional executive officers are delegated responsibility for the day-to-day management of BrasilAgro’s business following the resolutions of the Board of Directors. The Board of Executive Officers is comprised of four professional managers led by Mr. Julio Piza Neto, the firm’s CEO. The cornerstone of the business model developed by BrasilAgro is its large size, which enables it to benefit from economies of scale. According to Julio, economies of scale are realized at two levels: the farm level and the corporate level. Farm-level economies of scale include the following: fixed cost dilution (such as overhead expenses and compliance costs with labor, environmental and tax laws that were exceedingly high in Brazil); ability to attract and retain professional managers and experienced technical staff to run each farm; efficient use of on-farm facilities and infrastructure; and operational efficiencies of modern farm equipment. Economies of scale at the corporate level include commercial advantages in buying farm inputs (e.g. volume discounts) and in negotiating commodity prices or forward contracts (due to higher bargaining power). Its size and access to capital allow BrasilAgro to invest in modern information and communication systems and to develop knowledge to make better commercial and risk management decisions. Perhaps more importantly, size and scale lead to a lower cost of capital and the reduction of price and production risk due to geographic and product diversification.

■■ Organizational architecture To benefit from these potential economies of scale, the major challenge confronting large corporate farms like BrasilAgro is that the owners (shareholders) are not involved in the major operations and are distant from the farms. This separation of ownership and control gives rise to conflicts of interest and agency costs between owners, managers and farm workers. These agency costs are potentially very severe in agriculture because of the unpredictable effects of Mother Nature. Julio believes that it is possible for a corporate farm to overcome agency costs and thereby achieve high performance by means of a well-designed organizational architecture. The organizational architecture of BrasilAgro includes a hierarchical structure with well-defined responsibilities and communication channels between the corporate team in São Paulo and managers at each farm, formal control systems, and incentive compensation based on key performance indicators.

The formal organizational structure of BrasilAgro comprises the central office (headquarters) in São Paulo and local offices in each farm. The central office includes the top management team and staff organized by function. Each farm is a separate business unit and profit center with its own budget and performance goals.

Each farm office is headed by a farm manager, with decision making authority over farming operations, assisted by a deputy farm manager, an administrative officer and a chief of field operations overseeing a team of field staff. In decentralizing operational decisions to farm managers, the company attempts to benefit from effective and timely use of local, specific knowledge. However, decentralization of decision-making requires effective coordination and communication between farm managers and staff at the central office.

The organizational architecture of BrasilAgro is designed to facilitate seamless coordination between the central office and each farm manager. Information and computer technologies allow direct, real time communication between farm managers and staff in the central office. Each farm has a scale to weigh everything arriving at (e.g. fertilizers, chemicals) and leaving (e.g. grains) the farm gate to enforce a strict control of inventories of farm inputs and output. The key feature of BrasilAgro’s architecture is a control system called PGP (an acronym for production planning and management), which provided the basis for evaluating performance, incentivizing and holding employees accountable.

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At the core of the organizational architecture is a focus on formal systems and processes geared to foster a culture of accountability and meritocracy. The Chief Administration Officer and his team are in charge of developing a management control system based on formal processes and protocols called the PGP. In the PGP system, each activity conducted by the firm, from land acquisition to land development and farming, is standardized in a formal process with steps and KPIs. For example, KPIs for a corn field includes distance between seeds, number of seeds planted per row meter, fertilizer weight applied per row meter, number of drops per cm2 (for pest control) and corn weight loss per hectare. This formalization and standardization of all farming activities serve as the basis for planning, budgeting, control, incentive and performance evaluation systems.

Planning of farm operations is the first step in the PGP system, which is the responsibility of the top management team with input from farm managers. First, the COO and the chief technology officer plan operations for each farm from a technical perspective following best agronomy practices. The first draft of the plan is discussed with farm managers to receive their input and buy-in. From this interactive, participatory process emerges the operational plan for each plot on each farm along with a budget. The operational plan and budget for each farm then receives the input from the CEO and the head of BrasilAgro’s new business development team. They review the technical plan from a strategic perspective focusing on expected margins and profitability for each crop. In other words, they consider economic variables to maximize expected returns on each farm. The outcome is an operational plan and budget that seeks to maximize cash flow generation for each plot in each farm considering the constraints imposed by technical feasibility. The operational plan includes the crops to be planted in each plot, the use of inputs and technology, and a detailed agenda (with dates and KPIs) for each activity to be performed on a field from soil preparation to harvesting.

Each farm manager leads a team of field staff responsible for the execution of farming operations following the operational plan and the budget. According to Julio, ‘the beauty of our PGP system is that each farm plot has an owner.’ He does not mean that workers own land but rather that all activities performed on a farm plot are traced back to a single person who is held accountable for her actions. Since the PGP describes operations and KPIs for each farm plot, he believes that BrasilAgro is able to monitor and control from a distance the effort and efficiency of each worker and thus minimize potential agency costs.

Execution of the plan is monitored in real time by the central office staff with the use of information and communication technologies. When an operation is performed, the responsible field staff for that operation updates the PGP system. As a result, the central office in the city of São Paulo has real time information about operations carried out in every plot of every farm across the country. Field staff is also responsible for making decisions on the field if any change to the operational plan is required. For example, if weather is not appropriate for a certain scheduled operation, field staff has the decision-making authority to postpone it – for example, to delay crop spraying when it rains. But a decision to change the operational plan due to some unforeseen contingency must be justified in the PGP system. Since BrasilAgro has weather stations in each farm plot, the central office staff has up-to-date weather information to monitor and control execution of operations. Taken together, the operational plan and this control system foster a culture of accountability among field staff.

Another key feature of the PGP system is that the operational plan is tied to a budget. Each farm operation is linked to a required quantity of inputs (such as seeds, fertilizers, chemicals, fuel, etc.) and machinery use.

The field staff responsible to perform an activity (e.g. corn seeding) requests the necessary materials (e.g. corn seeds, tractors, seeding machine, diesel, etc.) from the farm office to perform that operation. Based on an enterprise system developed by SAP (SAP SE, Walldorf, Germany), a German multinational firm, which integrates each farm with the central office, the use of requested materials for a given activity triggers a reduction in inventories and an update to the budget. While the PGP system enables physical control of operations, the SAP system provides a platform for financial control. The central office consolidates all these pieces of information from the PGP and SAP systems for control and reporting purposes.

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The PGP system also serves as the basis for BrasilAgro’s incentive system. For example, the variable pay of senior staff, farm managers and field staff is partially based on how well the operational plan and the budget are executed. More specifically, the performance of each farm manager is assessed by the executive committee based on several objective and subjective performance indicators, including: operational yield (hectares planted and productivity per hectare) compared to budget; SMS (safety, environment and health); adherence to the PGP system including participation in the planning phase, execution of activities according to the operational plan and entry of information about activities performed in the fields into the PGP system; actual vs budgeted costs; and a qualitative assessment of dedication, effort and creativity. The performance of field staff is also evaluated on the basis of safety, environment and health indicators and adherence to the PGP system. The compensation package of farm managers and field staff is based on a fixed salary (65% of total compensation) and a variable pay (35% of total compensation) based on formal performance evaluation.

Agrifirma Brasil Agropecuaria S.A. Agrifirma was formed in 2008 with capital provided by RIT Capital Partners and Lord Rothschild, both private equity firms headquartered outside Brazil. In 2011 it received another large investment from BRZ Investimentos, a large Brazilian private equity firm. The current ownership structure of Agrifirma includes two controlling shareholders – Genagro (a holding company owned by the initial investors – RIT and Rothschild) and BRZ – and a group of minority investors. These are all ‘passive investors’ in the sense that Agrifirma is just one asset in their diversified portfolios. As is the case with private equity firms, they have a limited horizon of 7-8 years after which they expect to exit with considerable capital gains.

The business model adopted by Agrifirma is very similar to the BrasilAgro described above – to acquire cheap farmland in the Brazilian cerrado, make the necessary investments to bring the land in to production and then maximize cash flow from farming operations. Since 2008, Agrifirma has bought 70,000 hectares of farmland in western Bahia, in three clusters of about 20,000 hectares. In 2014, Agrifirma planted 23,200 ha including soybeans, corn and cotton.

■■ Separation of ownership and control and the potential for agency problems As is the case with BrasilAgro and Produzir, Agrifirma owners (shareholders) are not involved in the business. Each majority shareholder (Genagro and BRZ) appoints two directors to the Board, which also has three seats for independent directors. The board of directors meets on a quarterly basis to set policy and monitor business performance, but they are not involved in managing the business. Despite not being a listed company, Agrifirma follows corporate governance rules in terms of transparency and disclosure to minimize conflicts of interest between shareholders and senior management.

■■ Organizational architecture The corporate structure based in São Paulo is comprised of the board of directors and a senior management team of 4 professionals (CEO, CFO, COO and legal counsel) assisted by support staff. The firm estimates that this corporate structure costs about USD 60 per hectare and serves the purpose of providing a governance structure to attract investor capital at low cost. As the firm grows with the acquisition of more farmland, this corporate cost is expected to be diluted. ‘Our corporate costs are heavy given the current size of our farming operations. This is why growth is crucial for Agrifirma in the future,’ according to Fabiano Costa, the CFO. The COO, Rodrigo Rodrigues, oversees all farming operations conducted in the three clusters in western Bahia. The field staff includes 30 managers responsible for basic administrative functions (e.g. human resources, accounting, finance, commercial, etc.) and 450 farm managers and workers. Each farm cluster is managed by one farm manager, who reports directly to the COO. The organizational architecture at the farm level is very similar to BrasilAgro, including a hierarchical structure, formal budgeting and control

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systems, and performance-based compensation. According to Rodrigo, the major challenge of Agrifirma is to recruit, develop and incentivize human resources.

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Agriculture is not a one-man show. You have to develop a good team to execute the business plan laid out by the board of directors. Unfortunately in Brazil, especially in remote frontier regions like western Bahia, talent is a scarce resource. It will take time, patience and commitment to form a team and an organizational culture focused on delivering results to shareholders.

Agrifirma estimates that overhead costs associated with farming operations are about USD 100-120 per hectare. According to Rodrigo, organizational architecture is the backbone of any large scale, corporate farming entity. It is a substitute for the personal ties and informal organization of traditional family farms. However, it takes time to develop because there is a learning curve. The difference is that formal organizational architecture is scalable. Once you make it work, there is no limit to how large you can grow.

4. Discussion Table 4 summarizes the main organizational characteristics of the three case studies from the Brazilian cerrado. First, despite the fact that each firm adopts a different ownership structure, they all share the same common characteristic – the separation of ownership and control. The owners provide risk capital but are not involved in management decisions. The separation of ownership and control allows these large corporate farms to access risk capital from outside investors – e.g. capital markets, private equity firms – and to hire professional managers. However, it introduces conflicts of interest between owners and managers – i.e. the classic principal-agent problem.

The second organizational characteristic shared by corporate farms is that they adopt sound corporate governance practices, including a board with independent directors, the separation of the roles of Board Chair and CEO, and transparency. The objective of corporate governance is to assure investors that they will receive a return on investment (Shleifer and Vishny, 1997) and to minimize conflicts of interest between owners and corporate managers. Consequently, the firm is able to raise equity capital from investors at a lower cost.

A third common organizational characteristic is that corporate managers delegate operational decisions to farm managers and workers. Although discretion of farm managers might be limited by a budget and operational plan, there is significant scope for opportunistic behavior as pointed out in the literature (e.g. Allen and Lueck, 1998). Hierarchies, formal control systems, performance evaluation and incentive compensation are used in combination to mitigate such agency costs between workers, farm managers and corporate managers. In the case of the family-owned corporation Produzir, informal mechanisms based on personal relationships appear to complement more formal control mechanisms. It remains to be seen whether a strong corporate culture based on trust is a substitute or complement to formal organizational architecture.

Corporate governance and organizational architecture are necessary to reduce agency costs in corporate farms, but they cost money. In fact, they constitute fixed costs that are not found in the traditional family farm. Managers of these corporate farms are constantly monitoring such ‘bureaucratic’ costs (Williamson, 1991) on a per hectare basis and benchmark against competitors to keep them as low as possible. The presence of bureaucratic costs in corporate farms is a major incentive for them to grow to dilute these costs over more hectares.

In the broad spectrum of the institutionalist literature, J.K. Galbraith’s vision of industrial corporations stands out as a particularly useful contrast with the organizational characteristics of Brazilian large farms.

As in the case with corporations studied by Galbraith, the rise of large farms is enabled and impelled by the emergence of complex production technologies. Another similarity with Galbraith’s story is that the large International Food and Agribusiness Management Review

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Table 4. Summary of case studies.

BrasilAgro

Agrifirma

Produzir

Ownership structure

• Publicly traded corporation • One majority shareholder

Corporate governance

• Listed on BOVESPA new market • Chairman of the Board is not the CEO • 3 independent directors

• Privately-held corporation • Controlled by 2 private equity funds • Company is not listed but follows best practices in corporate governance and transparency • Chairman of the Board is not the CEO • 3 independent directors • Team of professional managers runs the firm • Operational decisions delegated to farm managers • Discretion of farm managers limited by budget and operational plan • Clearly-defined performance goals • Incentive compensation

• Family-owned corporation • 6 family trusts are the only shareholders • Board comprised of 1 representative from each family plus 1 independent director • Board delegates management decisions to professional managers • Team of professional managers runs the firm • Operational decisions delegated to farm managers • Organizational culture based on personal relationships • Introduction of benchmarking between operational units and incentive compensation to complement informal control mechanisms • 108,000 hectares

Organizational • Team of professional architecture managers runs the firm • Operational decisions delegated to farm managers • Discretion of farm managers limited by budget and operational plan • Clearly-defined performance goals • Incentive compensation Planted area (2014)

• 80,000 hectares

• 23,000 hectares

farm size and the complexity of technology led to a shift in the power structure away from owners toward professional managers, whom Galbraith designated as the ‘technostructure’. These similarities are reflected in the first above-mentioned organizational characteristic related to the hiring of professional managers. It is also important to point out that the emergence of large corporate farms in the Brazilian cerrado is also a response to the strong competitive pressures (e.g. competition for land) and complexities (e.g. high transaction costs, pervasive market failures, inefficient credit markets, poor infrastructure and market volatility) of farming in the agricultural frontier, thousands of kilometers away from markets. The challenges of farming in the cerrado, coupled with the demise of most agricultural cooperatives in the 1990s, make it increasing difficult for the traditional family farm to survive and prosper.

In contrast to other institutionalists (e.g. Ayres, 1978; Berle and Means, 1932; Gruchy, 1972), Galbraith tended to assume a harmonious relation between the corporation and the technostructure, whose ‘members seek to adapt the goals of the corporation more closely with their own; by extension the corporation seeks to adapt social attitudes and goals to those of the members of its technostructure’ (Galbraith, 1967: 217). In addition, he did not see a serious conflict potential in the relationships between the technostructure and the workers. In Brazilian corporate farms, the potential for conflicts of interest and opportunistic behavior between owners, managers, and workers is apparently present but can be controlled through organizational characteristics related to corporate governance, organizational architecture and informal control mechanisms. While corporate governance installs a system of checks and balances to control the actual power of the ‘technostructure’, organizational architecture creates disincentives for workers to shirk from the careful fulfillment of their duties. It is noteworthy though that organizational architecture is by no means inconsistent with organizational culture based on accountability and trustful personal relationships, thus providing support for Galbraith’s vision of the convergence of various individual goals within the corporation. Corporate managers’ ambitions

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to cut bureaucratic costs through constant production growth are indicative of the forces of circular cumulative causation, which likewise play a major role in Galbraith’s evolutionary account of corporations.

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5. Conclusions Agricultural economists tend to frame their discussions of very large farms by the conceptual dichotomies of ‘small size’ versus ‘large size’ or family labor versus hired labor. The present paper informs the study of very large farms by invoking a further conceptual perspective inspired by American institutionalism and new institutional economics. According to this perspective, very large farms embody the supersession of the classic capitalist firm (i.e. the traditional family farm), resting on the identity of the owner-manager, by the corporate form based on the separation of ownership and control. As a result, large corporate farms face the critical challenge of coping with the potentially pervasive agency costs. Firms adopt different organizational architectures to cope with agency costs, including personal relationships and trust, delegation of decision making to farm managers, performance evaluation systems, incentive compensation programs and formal control mechanisms.

In line with the institutionalist perspective, the case studies from the Brazilian cerrado show the advance of agricultural technology to be a key determinant of the rise of very large farms. The key finding from the case studies is that complex technology not only necessitates large-scale corporate farming but also generates technical solutions to the potentially arising agency problems. In addition to the use of sound corporate governance and supply of outside capital, these solutions are presented by organizational architecture encompassing computer-aided accounting and budgeting systems, incentive-based compensation, clear definition of performance goals, as well as the delegation of operational decisions to farm managers.

Paradoxically, a crucial outcome of organizational architecture is a culture of trust and accountability that is seemingly at odds with Allen and Lueck’s (1998) assumption of opportunistic propensities of hired agricultural labor. Our case study findings lend empirical support to the institutionalist theory of self-enforcing technological imperatives but also call attention to the institutionalist concerns about their societal effects that may be particularly disruptive in rural areas.

Finally, our analysis informs the organization and management of large-scale farms. The introduction of new technologies and the opportunity to benefit from economies of scale and access external finance at lower cost to fund land development costs and production growth are the major drivers of the separation of ownership and control. Yet, farm managers need to be aware that capital providers require sound corporate governance practices and transparency, including board independence, the presence of external directors and the adoption of generally accepted accounting principles (GAAP) accounting rules. Additionally, farm managers must face the fact that agriculture requires the use of local, specific knowledge so that farm workers can quickly adapt agronomic practices to changes in local conditions. Large-scale farms, therefore, delegate decision-making authority to farm managers and workers, which introduces the classic principal-agent problem. The article describes some informal and formal organizational solutions that can be adopted by farm managers seeking to control this problem. While these solutions have proved to be quite effective so far, it is nevertheless well to remember that the emergence of large-scale corporate farms in Brazil is a recent phenomenon. Only time will tell if these solutions will remain effective in the longer term.

Acknowledgements The authors are grateful to the editors and anonymous reviewers for their helpful comments. Dr. Chaddad acknowledges the support of INSPER to conduct the field research and personal interviews in Brazil used to develop the case studies. Dr. Valentinov acknowledges the support from the Volkswagen Foundation.

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Valentinov, V., S. Hielscher and I. Pies. 2015. Nonprofit organizations, institutional economics, and systems thinking. Economic Systems 39: 491-501.

Valentinov, V. and G. Vacekova. 2015. Sustainability of rural nonprofit organizations: Czech Republic and beyond. Sustainability 7: 9890-9906.

Williamson, O. 1991. Comparative economic organization: the analysis of discrete structural alternatives.

Administrative Science Quarterly 36: 269-296.

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OPEN ACCESS International Food and Agribusiness Management Review Volume 20 Issue 2, 2017; DOI: 10.22434/IFAMR2016.0030

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Received: 18 February 2016 / Accepted: 17 December 2016

Ownership versus management: the role of farming networks in Argentina Special issue: Agroholdings and mega-farms in a global context

REVIEW ARTICLE Sebastián I. Senesia, Marcos F. Daziano b, Fabio R. Chaddadc†, and Hernán Palaud aDirector, bResearcher/Consultant,

and dResearcher, Department of Institutions, Organizations and Strategy, Food and Agribusiness Program, Agronomy School, University of Buenos Aires, Av. San Martín 4453, Ciudad Autónoma de Buenos Aires (C1417DSE), Argentina cAssociate

Professor, University of Missouri and INSPER, 125 Mumford Hall, Columbia, MO 65211-6200 USA; †Deceased

Abstract Agroholdings are ‘horizontally and vertically integrated agricultural and agribusiness enterprises, which often have an explicit holding structure consisting on quite a number of legal entities’. This might be true in the countries the authors evaluated, but it certainly is not the case in Argentina, where horizontal and vertical coordination (rather than integration) is the norm. During the last 25 years the institutional environment impacted the way farming is organized in Argentina, mainly by using contracts between different players and service providers. The agricultural production sector increasingly shifted from a low to medium and to a large-scale business model, and production units expanded horizontally by means of land leases (coordination) and purchases (integration) in order to increase the scale of production and dilute fixed costs in an attempt to generate higher margins. In that sense this paper arises four questions: (1) why is it that in Argentina large-scale farming is predominantly done via contracts instead of vertical and horizontal integration?; (2) why have large-scale farming networks recently stalled or even declined in terms of area growth?; (3) how and why do these networks vary their scale of production, locations and strategies?; and (4) what can we expect in terms of evolution of different types of large-scale farming? It is observed that in Argentina there were different institutional contexts, sometimes with clearer and more stable conditions and low levels of uncertainty, sometimes with higher intervention policies and transaction costs. The paper discusses how new organizations emerged during different periods and scenarios, in a context of increased international demand for agricultural commodities. The most relevant conclusions drawn from this analysis are that, in Argentina’s agriculture, there is a continuous shift from ownership to management, although consolidation towards larger scale entities has slowed down due to the existence of institutional and policy restrictions.

Keywords: hybrid forms, agroholdings, innovation, institutions, adaptation JEL codes: D23, L14, Q13 Corresponding author: daziano@agro.uba.ar

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1. Introduction

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Agroholdings, as defined by Balmann et al. (2013), are ‘horizontally and vertically integrated agricultural and agribusiness enterprises, which often have an explicit holding structure consisting on quite a number of legal entities’. This might be true in the countries the authors evaluated, but it certainly is not the case in Argentina, where horizontal and vertical coordination (rather than integration) is the norm.

In Argentina, farming traditionally took place in small and medium-sized family farms, mostly by means of their own land, labor, capital (which would entail a full integration) and entrepreneurship. Farmers owned enough equipment to cope with all required activities of the production cycle. This traditional family farm model is the dominant organizational form in agriculture in almost every country (Allen and Lueck, 1998).

Over the past 25 years, different institutional changes have impacted the way farming is organized in Argentina. The agricultural production sector increasingly shifted from a low to medium and to a largescale business model, and production units expanded horizontally by means of land leases (coordination) and purchases (integration) in order to increase the scale of production and dilute fixed costs in an attempt to generate higher margins.

Several different hybrid organizational forms (Ménard, 2004) in agriculture emerged, which significantly changed the nature of relationships between the participants involved in Argentina’s agri-food system.

Some landowners and farmers without land invested in modern machinery and leveraged their knowledge and resources on new leased lands, controlling larger farming operations, with higher technological levels, which helped reduce costs. Added to this, some agents specialized in custom agricultural services (such as seeding, spraying and harvesting) and invested in modern farming equipment and machinery. Therefore, agents involved in agriculture were becoming specialized in a few activities or services, which created the need for coordination.

Various authors indicate that a high percentage of agricultural production in Argentina is carried out via some form of horizontal or vertical coordination. Vilulla and Amarilla (2011) state that this figure stands at over 60%, Pengue (2014) establishes it around 60-65%, Hernández and Muzlera (2016) from 70-85%, while Bisang et al. (2008) identify several different percentages of services supplied to farmers by third parties, ranging between 60 to 95%, depending on the type of service.

We expand on the definition proposed by Balmann et al. (2013) (op. cit.), by creating three categories of agroholdings that help to better show the diversity of arrangements within the broader concept. With the evidence provided by the argentine case, we define an agro-holding as the concentrated management of over 20 thousand hectares, while defining the three previously mentioned groups as: (a) Private enterprises or corporate farms, where integration is predominant; (b) Network of networks, in which a company acts as a coordinating node that generates contracts with local agents; and (c) Investor-oriented hybrids, where an agricultural company is created by pooling financial resources from various partners, while keeping a centralized coordination of the enterprise. It becomes clear from the existing literature that the first category has been the main subject when dealing with agroholdings (e.g. Chaddad, 2014; Deininger and Byerlee, 2012). This paper builds upon the concept of agroholdings by exploring the latter two categories. Its main addition to the study of agroholdings comes from the particularities in their development in Argentina, where increasingly agriculture is organized based on management (and coordination) rather than ownership, with an array of hybrid forms dominating agriculture as a result.

As a result, the questions posed by this paper are: (1) why is it that in Argentina large-scale farming is predominantly done via contracts instead of vertical and horizontal integration?; (2) why have large-scale farming networks recently stalled or even declined in terms of area growth?; (3) how and why do these networks vary their scale of production, locations and strategies?; and (4) what can we expect in terms of evolution of different types of large-scale farming?

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The paper is organized as follows. In the next two sessions, we outline the theoretical framework and methods used in the paper. Subsequently, the emergence and evolution of agroholdings in three different periods are described and analyzed. Then, the paper introduces a discussion on the interplay between the institutional and organizational environments and how this generated the need for adaptation by agroholdings since 1990.

The last section includes conclusions, recommendations and queries for future research.

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2. Theoretical framework The analysis of the recent evolution of the farming sector in Argentina is based on the new institutional economics (NIE). Hoff et al. (1993) state that traditional neoclassic economic theory does a good job of explaining economic systems when markets ‘work’ reasonably well, but it fails in the presence of ‘missing markets’ within those systems. This is the reason why the price mechanism cannot regulate transactions on its own. In business models, where gaining scale and efficiency are of great importance, the precepts proposed

by NIE scholars explain reality in a more adjusted way. In particular, the paper follows two NIE pathways introduced by Joskow (1995, 2004) and Williamson (2000): the institutional analysis and the governance structure analysis (Table 1).

According to this model, the first level of institutional analysis is the social embeddedness level. ‘This is where the norms, customs, mores, traditions, etc. are located’ (Williamson, 2000: 596). This has a strong relation with trust, reliance and compliance to agreements between agents. North (1990) refers to this level as ‘informal institutions,’ generally associated to the self-enforcement of contracts and rules (with no institutional control), both for ethic and reputation purposes. In this case, social punishment is the way of controlling opportunistic behavior of agents. The frequency of change is between 100 to 1000 years, following spontaneous innovation and not related to a change driven by someone.

The second level of analysis encompasses the basic institutional environment or what Williamson calls ‘the formal rules of the game’.

At this level we define constitutions, political systems and basic human rights; property rights and their allocation; laws, courts and related institutions to enforce political, human rights and property rights, money, basic financial institutions, and the government’s power to tax; laws and institutions governing migration, trade and foreign investment rules; and the political, legal and economic mechanisms that facilitate changes in the basic institutional environment. (Joskow, 2004: 10).

Table 1. Levels of analysis in institutional economics (adapted from Williamson, 2000), Level

Frequency of changes (years)

Purpose

Discipline

L1-Embeddeness: informal institutions, customs, traditions, norms.

L2-Institutional environment: formal rules of game, especially property (policy, judiciary, bureaucracy).

L3-Governance: play of the game, especially contract (aligning governance structures with transactions).

L4-Resource allocation and employment (price and quantities incentives alignment).

100 to 1000

Spontaneous

Social theory

10 to 100

Get institutional environment right First order economizing Get governance structures right Second order economizing Get marginal conditions right Third order economizing

Economics of property rights Positive political theory Transaction cost economics Agency theory1 Neoclassical economics

1

1 to 10

Continuous

The authors included Agency theory at L3 due to its impact on contracts.

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This opens up the opportunity for first-order economizing: get the formal rules of the game right (Williamson, 2000: 598).

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This is due to innovations in terms of norms and regulations that are aimed at reducing uncertainty and transaction costs. The frequency of change varies from 10 to 100 years, depending on the level of path dependency (North, 1990) these formal norms have.

According to North (1990), institutions matter especially when transaction costs are high. Following Kherallah and Kirsten (2001), it is important to study institutions inasmuch as their level (and the enforcement of current laws) influences economic growth and sustainable economic growth comes from important institutional changes. A fragile institutional environment often results in low levels of investment and innovation due to the uncertainty in appropriating value resulting from investments (Brunetti and Weder, 1998; North, 1990).

The third level of analysis is related to the organizational environment and how the actors interact. This is where the institutions of governance (or governance structures) are located.

Although property remains important, a perfectly functioning legal system for defining contract laws and enforcing contracts is not contemplated ... settlement action is dealt with directly by the parties through private ordering. (Williamson, 2000: 599) Williamson (1991: 271) suggests that ‘each viable form of governance – market, hybrid, and hierarchy – is defined by a syndrome of attributes that bear a supporting relation to one another’. Williamson (1991) advances the hypothesis that each generic form of governance is supported by a different form of contract law; and that there are crucial differences between markets, hybrids and hierarchies in how they adapt to changing circumstances (related to the attributes of transaction: frequency, uncertainty and asset specificity) and in the use of incentive and administrative control instruments.

According to transaction cost economics, hybrid forms such as the farming networks analyzed in this study, are characterized by ‘semi-strong incentives, an intermediate degree of administrative apparatus, displays semi-strong adaptations of both kinds and works out of semi-legalistic contract law regime’ (Williamson, 1991: 281). Ménard (2004: 348) argues that ‘there is indeed a great diversity of agreements among legally autonomous entities doing business together, mutually adjusting with little help from the price system, and sharing or exchanging technologies, information and know-how, capital, products, and services, but without a unified ownership’. Ménard’s (2004) central proposition is that hybrid organizations form a ‘specific class’ of governance structures, combining contractual agreements and administrative entities or ‘authorities,’ with the purpose of coordinating partners’ efforts to generate rents from mutual dependence while attempting to control the risks of opportunism, while facing bounded rationality (Simon, 1957) and asymmetric information (Akerlof, 1970). Under this view, hybrid forms emerge as a way of reducing uncertainty especially regarding the appropriation of property rights. Moreover, informal institutions (related to ways of doing business), combined with formal arrangements, help these hybrid forms reduce uncertainty and transaction costs.

Since this third level of analysis is where transactions are organized and actors interact, here is where agency theory (Arrow, 1963, 1968; Jensen and Meckling, 1976) becomes more relevant to explain the relationships between actors. Agency theory is based on the existence of incomplete contracts and the asymmetry of information between two people celebrating a contract (Caldentey, 1998). Jensen and Meckling (1976) define an ‘agency relationship’ as a contract under which one or more persons (the principal) contract another person (the agent) to carry out an activity for the benefit of him or them, thus delegating responsibility. The agency relationship involves costs related to monitoring and control by the principal, especially when attempting to gain information about the agent’s performance or possible opportunistic behavior. In terms of agriculture, the larger the scale and the longer the distances, the harder it becomes for the principal to control the agent.

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Contracts may offer a way to achieve these purposes due to the fact that the principal is able to select a partner, determine the duration of the relationship, specify quantity and quality requirements, lay out procedures for regulating renegotiations when ex post adaptation is required, and specify rules for distributing the expected gains from joint actions. Despite this apparent ‘control’ of the contractual relationship, in order to understand its success or failure, several other aspects must be taken into account, such as social structure, level of information shared between actors, frequency of transaction, level of organizational uncertainty (related to information asymmetry, opportunism and bounded rationality), level of trust, reputation and leadership, type of contracts (formal and informal), incentives and control, the specificity of assets involved in the transaction.

This paper will also take into account the literature on complex organizations. The idea is to bring to light the relevance of how dynamic capabilities (Teece et al., 1997) affect the performance of relational contracts. This concept explains that there are aspects of a company’s or sector’s competitiveness that are difficult to replicate, such as those related to processes and routines, positioning and path dependence. Regarding processes, it is considered that firms develop competitive advantage by management and organization, for instance, by non-replicable work culture. Regarding positioning, firms can create advantages by special business knowhow, reputation and relationship development. Path dependence analysis consists on recovering the origin of the firm to identify capabilities that were developed through years. This is relevant because they cannot be bought in the market and are difficult to imitate. Capabilities are created inside organizations, based on their past and personal relationships, and developed through time. They are key to understand management practices.

3. Methodology This study focuses on the interplay between analytic levels 2 and 3 of Table 1; in particular, how changes at the institutional environment level in Argentina affect the design of governance structures by agents engaged in agriculture.

A qualitative and descriptive research approach is adopted to accommodate the complexity and multidimensionality of the research topic. The research has an explanatory level, taking into account that it seeks to develop and clarify concepts and ideas, with a view to formulating more precise problems or hypotheses that can be examined in further studies, besides having a less rigid planning, not applying quantitative techniques and being carried out with more practical concerns (Gil, 1994).

This paper uses phenomenological knowledge as its methodology for studying agribusiness, as recommended by various authors (e.g. Bonoma, 1985; Peterson, 2011; Yin, 1989). This study is designed using the discrete structural analysis approach – that is, a description of the evolution of the agricultural production sector in Argentina through the characterization of its institutional, organizational and technological environments (Williamson, 1991; Zylbersztajn, 1996, 1999).

The paper analyzes the main institutional changes in Argentina for the periods 1990-2000, 2001-2007 and 2008-2012. These periods were chosen due to the significant changes that happened at the macroeconomic and institutional levels, with some drastic changes from one period to the next, which generated significantly different ‘rules of the game’. Institutional (rules of law), organizational (players and governance structures adopted) and technological (inputs and processes) environment changes in each period are used to explain subsequent changes in production, productivity and investments in the agricultural production sector.

This paper relies on primary and secondary data for the analysis. Interviews with experts were conducted in 2009 and 2014. Industry experts include participants and managers of different hybrid forms and agribusiness consultants. A total of eight experts, representing the four identified hybrid forms were interviewed. The experts are or have been directors, managers, or chief executive officers of organizations dedicated to largescale agricultural production, such as Cazenave y Asociados, Cresud, DTA, Los Grobo, El Tejar, Salentein and UPJ. Another six interviews with farming service suppliers were conducted, in order to get information about International Food and Agribusiness Management Review

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contracts between these actors and farm managers. Finally, interviews with 10 landowners were conducted with the purpose of understanding how land rental contracts are negotiated and what type of relationship develops between landowners and renters. The data collection instrument included general information questions regarding the development of new organizational forms in Argentina and specific questions regarding coordination and control mechanisms used in each hybrid structure. Moreover, the questionnaire included open-ended questions related to the importance of leadership in agroholdings, formality of contracts, incentives, business units, partners, and financial issues guided by the theoretical framework described above.

The results obtained from the interviews allowed the authors to group, categorize, describe and define four hybrid models, which are the basis for our analysis of agroholdings in Argentina.

Secondary information, especially regarding institutional and technological innovations, was obtained from several sources including ministries1, chain associations2, university libraries3, specialized magazines4, newspaper articles5, and postgraduate and undergraduate theses on the subject. Additionally, the papers published by Papa and Tuesca (2012), Pengue (2014), Lódola (2008), Bisang and Kosacoff (2014) and Trucco (2008) provided estimations on the importance of contracts in large-scale agriculture in Argentina.

4. Results Overall, the analysis covers the timeframe between 1990 and 2015, which will be divided into three distinct periods due to the fact that three very different institutional frameworks were in place. The first period (19902000) was characterized by economic liberalization and deregulation; the second period (2001-2007) was marked by debt default, currency devaluation, and the return of export taxes; and the final period (2008-2015) was a period of great governmental intervention where institutional uncertainty was strongly increased.

Economic liberalization and the birth of hybrid forms: 1990-2000 Until 1990, the agricultural production sector in Argentina was dominated by traditional family farms and farm production was primarily marketed in the domestic market. In order to describe the institutional environment until 1990, Ordóñez and Nichols (2003) explain: From 1930 to 1991 Argentina alternated weak democracies with strong dictatorships, both political settings sharing a welfare state paradigm with strong state intervention, protectionism, weak rule of law, imports substitution, rampant inflation and hyperinflation ...

Nevertheless, with the first socialization of wealth during this period, the model ended with a poor output, low economic growth and low volume of foreign trade ... The core issue in this paradigm was to allocate the Pampas’ productivity and rents to promote urban economy: export taxes on agribusiness output transferred a huge amount of resources to the State that were re-allocated to welfare policies, promoting the local industry for imports substitution. On the other hand, export taxes pushed down agribusiness prices, forcing cheap affordable food for the working class.

This introduction has an explanation: with high levels of intervention in the economy and uncertainty, farmers had weak incentives to invest in technology, increase the scale of their farming operations and develop different organizational forms. Agricultural production did not increase at a rapid rate during the period 1950-1990 and Argentina appeared to be left out of the ‘green revolution’.

1

Ministry of Agroindustry (www.agroindustria.gob.ar), Integrated system of agroindustrial Information (www.siia.gob.ar), Ministry of Energy and Mining (www.minem.gob.ar).

2 ACSOJA, ARGENTRIGO, MAIZAR, ASAGIR (Associations for soybean, wheat, corn and sorghum, and sunflower).

3 Agronomy School (University of Buenos Aires), Food and Agribusiness Program (University of Buenos Aires).

4 50 volumes of Márgenes Agropecuarios magazine, 20 volumes of Aapresid magazine, 10 volumes of Horizonte A magazine, 10 volumes of JJ Hinrichsen Annual Reports.

5 Over 100 newspaper clippings from Clarín Rural, La Nación Campo and Infocampo.

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Institutional changes were implemented in the early 1990s in order to move away from the high levels of inflation, unemployment and uncertainty of the previous decade. More specifically, the country embarked on dramatic economic liberalization policies that can be summarized as follows: ■■ Privatization of state-owned companies including port and river dredging, railways, oil companies, energy facilities, communications systems, highways and road systems, with subsequent increased private investments. As a result, the country’s basic infrastructure was upgraded resulting in lower costs of doing business.

■■ The enactment of the Convertibility Law (Law 23.928/1991) (Ministerio de Justicia y Derechos Humanos, 1991) with the implementation of the currency board that linked the local peso to the US dollar (one peso-one dollar) resulted in a less volatile scenario in terms of inflation and exchange rate.

■■ Agricultural markets were also liberalized with the elimination of the grain and beef boards and reduction of State intervention.

■■ Elimination of export taxes for agricultural commodities and reduction of import tariffs on farm inputs (e.g. fertilizers, chemicals), which resulted in significant reduction of distortions between domestic and international prices.

■■ The enactment of the federal law protecting plant breeder’s rights, together with the creation of the Comisión Nacional Asesora de Biotecnología Agropecuaria (CONABIA – the biotech commission) and the Instituto Nacional de Semilla (INASE – the national seed institute), provided private firms with the necessary protection to develop and introduce new agricultural technologies in Argentina.

In particular, new soybean transgenic events were approved.

■■ The regulation of the trust funds Law (fideicomiso), which enabled agricultural financing by using the stock exchange market.

Convertibility fixed the currency rate and effectively nullified the risk of inflation. A more stable environment led farmers to invest in machinery with more producing capacity. On the other hand, competition among input suppliers became much stronger. This situation, coupled with a more certain ‘business environment’, resulted in further relationships between different agents – farmers, land owners, service suppliers, input suppliers, etc. – and great incentives to gain in scale in order to reduce unitary costs, coupled with riskreducing strategies, such as seeding in different regions.

This resulted in the emergence of more complex forms of organization in agricultural production, especially designed to benefit from economies of scale and scope and to take advantage of profitable investment opportunities in the agri-food sector. Consequently, the structure of farming enterprises in Argentina shifted from traditional small and medium scale, family-owned farms to a large-scale model of agricultural production based on horizontal growth by integration and contracts.

One such model is that of private companies or corporate farms, in which growth happened mostly by integration. This meant that these companies purchased farmland in order to grow scale and internalized most of the processes such as seeding, harvesting and spraying. Some of these companies also rented land, but mostly as a way to better utilize idle capacity of machinery (Figure 1).

Some other organizational structures, which emerged at this point, focused on gaining scale by renting land and adding specialized services, including seeding contracts, custom contracts for specific farming activities, harvesting contracts, marketing contracts, future markets contracts, crop insurance contracts, among others.

These are known as hybrid forms, which initially took two basic forms: (a) informal hybrid form; and (b) network of networks. Informal hybrid forms basically consist of short-term contractual relations, based on informal or verbal agreements, in which farmers participate in a number of transactions for services related to grain and oilseed production (land leases, production inputs, sowing services, weed and insect control, harvesting, commercialization and storage) (Figure 2).

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Land (own and rented)

Farming (financing with internal and/or external resources)

Input supply

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Spraying

Sowing

Harvesting

Rented land

Spraying

Sales of grains and oilseeds

Figure 1. Corporate farms.

Farming (financing with internal and/or external resources)

Input supply

Sowing

Sales of grains and oilseeds

Harvesting

Figure 2. Informal hybrid forms.

The network of networks (agroholdings) is based on a network of contracts with local partners with specific knowledge, called ‘contractors.’ Generally, the whole network is kept in a specific area of influence, but this model has been spread to other regions beyond traditional ones (Figure 3).

The coordinating node acts as a central planner, coordinating activities between different network peripheral nodes. Some of these networks have subsequently expanded to other neighboring countries, including Brazil, Paraguay, Uruguay and Bolivia (e.g. Los Grobo and El Tejar). The main characteristics and differences between informal networks and the network of networks are described in Table 2. Local coordinators are players that have a tradition in the location where the expanding farmers enter. Reputation, knowledge about the region, potential new players to incorporate to the organization and leadership are especial skills these actors should have.

The common variable between all these organizational forms was the economies of scale achieved by them.

In the case of the informal hybrid form, larger scale provided the possibility of heavier use of machinery, thus amortizing the investment in a quicker fashion and gaining in bargaining power with suppliers and landowners.

In the case of corporate farms, the incentive was to spread and diversify farming area (reducing risk) and reduce unitary costs. The network of networks model also took advantage of the benefits reaped by corporate

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Input supply

Rented land

Spraying Coordinating node

Storage of grains and oilseeds

Input supply

Harvesting

Sowing

Spraying Coordinating node

Storage of grains and oilseeds Harvesting

Sowing

Centralized storage

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Centralized financing

Network of networks coordinator

Centralized trading

Input negotiating Rented land Input supply

Rented land

Spraying Coordinating node

Sowing

Storage of grains and oilseeds

Input supply

Harvesting

Spraying Coordinating node

Sowing

Storage of grains and oilseeds Harvesting

Figure 3. Network of network organization.

Table 2. Main characteristics of the informal hybrid form and network of networks (adapted from Chaddad et al. (2009) and supplemented with information from interviews).

Informal hybrid form

Network of networks

First appearance in Argentina 1990 Contract type Informal, relational Contract duration Actors involved

Sources of finance

Average production area Organizational uncertainty Leadership

Incentives

Relationship-specific assets

1995 Both formal and informal (based on trust) Short term (1-3 years) Short and long term (more than 5 years) Farmers and service Coordinator, land owners, suppliers service suppliers, banks, outside investors Farmer’s own capital and Internal and external, credit from input suppliers including banks, external investors and input suppliers 1000 to 5,000 hectares 20,000-350,000 hectares (owned and leased land) (mostly leased land) Medium Very low (importance of trust) Not really important Very important (central coordinator and local managers) Low (due to the High (participants must impossibility of long term fulfill agreements) contracts) Low (know-how)

High (know-how, reputation of actors, technology)

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Corporate farms 1990 Vertical and horizontal integration – Manager/director/ CEO; local managers; administrative support.

Internal and external, including banks and external investors.

20,000-350,000 hectares (mostly owned land) Medium-low (determined by agency costs) Very important (centralized decisionmaking) Medium (due to vertical integration, although monetary incentives are attempted as solution) Low

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farms, while adding an interaction with different types of partners (not only contractors, but also storage service companies).

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It is important to note that both these hybrid forms and corporate farms co-exist, even though some informal hybrid forms evolved into networks of networks. What is clear is that, out of the two hybrid types, only the network of networks model has grown to a size where we can define them as agroholdings. Most of the informal hybrid forms have remained in relatively small scale (not more than 5,000 hectares), due to the financial and organizational challenges. The comparison can be observed in Table 2.

The technological environment also saw great innovations with the introduction of no-till farming practices and intensive use of fertilizers, agrochemicals and genetically modified seeds. Moreover, industry players, such as transnational companies ADM, Cargill, Bunge, Dreyfus, Nidera and some other domestic companies, such as AGD and Vicentín, also made new investments in modern, large scale sunflower and soybean processing plants, resulting in higher processing capacity primarily destined for export markets.

Economic crisis and currency devaluation: 2001-2007 The late 1990s witnessed significant economic turmoil in emerging economies culminating with the 1998 currency devaluation in Brazil, which followed Mexico’s 1994 crisis. Both of them significantly affected Argentina’s competitiveness and ability to export. In addition, the federal budget sustained a deficit of about 2.5% of the gross domestic product. The government decided to raise tax rates and to adjust the convertibility system pegging the Argentine peso to a currency basket with a 50-50 combination between the US dollar and the Euro. Investors understood that this adjustment could lead toward currency devaluation and short-term interest rates immediately jumped, while a ‘silent’ run on banks (with significant reduction in bank deposits and increasing withdrawals) began in September 2001 (Saxton, 2003).

New and abrupt institutional changes occurred by the end of 2001. The president’s resignation, followed by a sequence of 5 presidents in 2 weeks, created a chaotic political scenario. Debt payment to foreign and local bondholders was suspended, characterizing a massive sovereign debt default. On January 1 2002, Eduardo Duhalde assumed the presidency, determined to reverse free market policies, in particular the convertibility system (Saxton, 2003). Under the Law of Public Emergency and Reform of the Exchange Rate Regime of January 6, 2002 and related measures, the government: ■■ Ended the convertibility system, in effect confiscating $14.5 billion in foreign reserves that, under the convertibility system, were held in trust for the Argentine people and other holders of pesos.

■■ Devalued the peso from the previous rate of 1 per dollar to 1.40 per dollar, and later floated the exchange rate, allowing further currency depreciation. The peso peaked at $4 per dollar and stabilized at around $3 per dollar.

■■ Forcibly converted bank deposits and loans denominated in US dollars into pesos (pesificación).

Deposits were converted at 1.40 pesos per dollar loans, at 1 peso per dollar. Interest rates were frozen at pre-devaluation levels.

■■ Forcibly prolonged time deposits (the Spanish name for this measure is the corralón, or big corral, to distinguish it from the earlier corralito). Depositors were unable to freely access their bank accounts and cash withdrawal limits were set at 250 Argentine pesos per week.

■■ ‘Pesified’ contracts in dollars at 1 peso per dollar.

■■ Imposed exchange controls with restrictions on buying foreign currencies.

■■ Suspended bankruptcy proceedings.

■■ Established a variety of new taxes and regulations, such as export taxes on agricultural commodities and State controls on exports (similar to those implemented before the 1990s).

Schuler (2002) identified the most pressing problems to be addressed in order for the country to restore economic growth: the currency, the financial system and the tax system. Because economic agents did not trust the currency or the banking system, people were not conducting ordinary transactions such as buying, International Food and Agribusiness Management Review

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selling, saving and investing, which are necessary to generate economic activity (Ordóùez and Nichols, 2003). On the other hand, funds available for credit were almost nonexistent.

Despite this chaotic scenario, the agricultural system benefited from currency devaluation. However, by 2002 export taxes were implemented again for the major farm commodities. Because land and trade credit markets froze, financial constraints were widespread among agricultural producers and networks. Margins in agriculture became interesting not only for farmers or contractors, but also for outside investors who did not trust the banking system. This situation opened the possibility for agricultural production ventures to offer them investment opportunities. These were private investors, not necessarily linked to agriculture, who required additional organizational changes to participate in funding agricultural production, be it hybrid forms or corporate farms.

As a result, farmers and financial agents developed more complex arrangements and business relationships involving contractors, landowners, input suppliers, processors, exporters and outside investors. Contracts in agriculture provided the level of enforcement that was necessary to attract new partners but also to expand and develop the sector.

Two organizational hybrid forms evolved and gained market participation following the 2001 crisis: (a) agricultural trust funds; and (b) investor-oriented hybrid forms. An agricultural trust fund is a contractuallegal figure enforced by National Law 24,441/1995 (Ley de Fideicomiso or Trust-Fund Law) (Ministerio de Justicia y Derechos Humanos, 1995). This entity includes an investor and a group of actors linked to an investment capital receiver (the coordinator of the organization). There is, in turn, a third party (generally a financial institution) that guarantees that the coordinator fulfils contractual obligations to the other trust fund parties unquestionably (Figure 4).

The investor-oriented hybrid form emerged as a mechanism to organize agricultural production using financial resources from several partners. Although often associated with common investment funds, investor-oriented corporate structures appear more private, between producing parties and investing parties (Figure 5).

Investors Shareholders Rented land

Spraying

% banks % investors

Input supply

Sales of grains and oilseeds

Coordinator

% service suppliers % coordinator

Sowing

Harvesting

Third party (bank)

Figure 4. Agricultural trust funds.

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Investors (% of profits)

Spraying

Input supply

Sales of grains and oilseeds

Coordinator

Sowing

Harvesting

Figure 5. Investor-oriented hybrid form.

The main characteristics of and differences between agricultural trust funds and investor-oriented hybrids are described in Table 3. The common attribute between both hybrid forms was the necessity to attract risk capital from investors, which led them to arrange transparent and enforceable contracts that could incentivize investors to participate. Agricultural trust funds and Investor-oriented hybrids co-existed during this period, while the Informal hybrid and Network of networks forms also continued to operate in farming.

Within the technological environment, there were also significant innovations between 2001 and 2007 with widespread implementation of no-till cropping systems, precision agriculture, intensive use of fertilizers, agrochemicals and genetically modified seeds in the major agricultural regions. The soybean and sunflower crushing capacity continued to expand during this period and so did agricultural commodity exports. With these innovations, producers were able to overcome the financial constraints that followed the 2001 economic Table 3. Main characteristics of Agricultural trust funds and Investor-oriented hybrids networks (adapted from Chaddad et al. (2009) and supplemented with information from interviews).

Agricultural trust funds First appearance in Argentina Early 2000s Contract type Formal Contract duration Actors involved

Sources of finance Average production area Organizational uncertainty Leadership Incentives Relationship specific assets

Short to medium term (1-3 years) Banks, lawyers, financial organizations, coordinator (administration company) of service and contracts with farmers, service and input suppliers Institutional and private investors 5,000-10,000 hectares (mainly leased land) Low Medium High Medium (know-how, reputation of actors)

Investor-oriented hybrids Late 1990s Formal and informal (friends and relatives are part of the business) Short term (1 year) Coordinator of services-contracts-inputs, capital investors, lawyers, accountants

Private external investors 10,000-100,000 hectares (leased land) Low Low High Medium (know-how, reputation of actors)

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crisis. In doing so, they attracted risk capital from investors and thus benefitted from the commodity boom of the 2000s.

Increased government regulation and uncertainty: 2007-2015

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By the end of 2005, the national government started to regulate agricultural markets and placed restrictions on exports, particularly on bovine livestock (beef and dairy products) and subsequently on wheat. However, the agricultural sector did not suffer significant changes at the institutional level until 2007.

In 2007 and 2008 the international price of soybean (Chicago Board of Trade (CBOT)) – Argentina’s main agricultural product and export – exceeded US$ 500 per ton. International commodity price increases led the government to establish significant changes in export taxes for all agricultural products with Resolution 125 in 2008. This resolution included the implementation of variable export taxes on commodity exports, thus installing de facto maximum prices for farmers. For instance, when the price of soybean in CBOT was lower than 450 US$/ton, the export tax stood at 35%. From that point on, export taxes would vary based on international prices: the higher the CBOT price, the higher the percentage of the export tax. After many protests and strong resistance from agricultural leaders, the resolution was sent to Congress, where the measure was annulled.

Despite the return of export taxes and the fall of international commodity prices following the 2008 world financial crisis, interventionist measures on commodity markets continued, including restrictions on wheat and corn exports. Additionally, further institutional changes included the recently sanctioned National Forest Law and Labor Law, which have set clearer boundaries for deforestation and protection of natural forests on the one hand; and new requirements for employers with heavy restrictions on temporary labor on the other. All these interventions on agriculture resulted in higher overall uncertainty and lower incentives for investment. As a result, risk capital supplied by outsider investors was substantially reduced. Companies, banks and individual investors decided not to continue investing in farming, or even reduce their level of investments, due to the higher institutional uncertainty and lower commodity prices.

During this period, the hybrid forms that continued to operate in Argentina included the network of networks (agroholdings) and informal hybrid forms, shifting to short-term contracts. The other hybrid forms decreased in importance as farming in the late 2000s did not offer sufficiently high returns given the exceedingly high levels of uncertainty, especially for outside investors.

Macroeconomic policy generated an increase in production costs (energy, labor costs, fuel, supplies, etc.) and tax about 40%. At the same time, the emergence of weeds with resistance/tolerance to glyphosate, has also generated an increase in production costs, with more spraying per hectare, using costlier products.

The drop in the price of commodities and on farm margins occurred at the same time that the cost of management, administration and control in the network began to have a significant weight in the total cost structure. The increased costs of controlling the contract system, in remote areas away from the central node of production, to keep transaction and agency costs low, reduced farm profitability even further. As a result, the large networks reduced their expansion or even decreased the area in which they operate, even though total sown area in the country has not decreased. Currently, most of them are only farming on the most productive areas, attempting to reduce uncertainty and transaction costs.

5. Discussion An analysis of the institutional, organizational and technological environments allowed us to understand the evolution of farming and agribusiness in Argentina during three different periods.

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As Joskow (2004: 10) states, ‘laws and institutions governing migration, trade and foreign investment rules; and political, legal and economic mechanisms facilitate changes in the basic institutional environment’. Changes in terms of norms and regulations can reduce or increase uncertainty and transaction costs. Observing argentine institutional evolution, there appears to be a strong relation between the level of institutional uncertainty and investments by agricultural players, which has a direct impact on the type of farming carried out in the country. This, of course, plays a major role in defining the type of agroholdings present in Argentina, which are predominantly hybrid forms of horizontal and vertical coordination. Only big (international and local funds) investors with local dynamic capabilities (Teece et al., 1997) as know-how, reputation and relationship play a minor role in vertically integrated, large-scale farming.

The first hybrid organizational forms (with higher scales) emerged during the first period of analysis (1990-2000) in order to take advantage of the higher capacity of machinery and to reduce costs (especially fixed costs). But these contracts became possible only because of the low institutional uncertainty and low transaction costs that prevailed at that time. Following Coase (1998) low uncertainty laid the groundwork for stronger and more transparent relationships between economic agents, thus facilitating the emergence of new organizational forms that were markedly different from the traditional family farm. The ‘network culture’, which arose in this period, made it possible for new participants with no previous knowledge or experience to be included in the business, thus kick-starting the second wave of hybrid forms. The average production area was between 1000 and 5,000 hectares. The ‘network culture’ was born and, which would set the stage for the emergence of contract-based agroholdings some years later. So, how have organizational structures developed in the agricultural sector in Argentina over time?

Abrupt institutional change occurred by the end of 2001. Debt payment to foreign and local bondholders were suspended, characterizing a massive sovereign debt default. Despite the chaotic scenario, the agricultural system benefited from currency devaluation. However, by 2002 export taxes were implemented again for most agricultural and agroindustrial commodities.

As stated before, the financial system and the tax system are pressingly important, while at that point in time, economic agents’ lack of trust in the currency and the banking system, caused that ordinary transactions such as buying, selling, saving and investing were not taking place ordinarily. This freezing of land and trade credit markets generated widespread financial constraints among agricultural producers and networks. The combination of lack of trust many investors had in the financial system, coupled with financial needs for producers created an opportunity for a bond between this demand and supply of financing. This situation opened the possibility for agricultural production ventures to offer common investors investment opportunities associated with agriculture. This necessitated additional organizational changes to create organizational structures that would allow for participation in funding agricultural production, be it hybrid forms or corporate farms. Informal institutional environment (culture, ethic and tradition) played an important role to reduce transactional uncertainty. These were private investors, not necessarily linked to agriculture, who required additional organizational changes to participate in funding agricultural production, be it hybrid forms or corporate farms. Informal institutional environment (culture, ethic and tradition) played an important role to reduce transactional uncertainty.

New contracts emerged enabling expansion into new areas and diversification of risk by investors. As a result, farmers and financial agents developed more complex arrangements and business relationships involving contractors, landowners, input suppliers, processors, exporters and outside investors. Contracts in agriculture provided the level of enforcement that was necessary to attract new partners but also to expand and develop the sector. As a result, Agroholdings in Argentina started to develop all around the territory with the particularities that they were mainly organized based on management (and coordination) rather than ownership, with an array of hybrid forms dominating agriculture as a result.

Organizational adaptation in a context of institutional uncertainty explained why Argentina kept on growing its agricultural sector despite institutional constraints until 2008. These hybrid forms provided the organizational International Food and Agribusiness Management Review

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framework necessary to reduce transaction costs and build trust among agents in such fashion that contracts and economic exchange could continue to occur in a highly uncertain institutional environment. They emerged to create order and enforce property rights among agri-food system participants, which in turn, enabled them to benefit from relatively higher commodity prices and profitable investment opportunities.

Hybrid forms constitute autonomous specialized nodes that work in a coordinated fashion assisted by modern information and communication technologies, trust, a shared vision, and the capacity to coordinate different agricultural processes. These organizations are more competitive because they enjoy aligned incentives, flexibility, and adaptability. Some of these hybrids grew in area and production, due mostly to the capacities built at the management level, with some organizations becoming what we currently understand as agroholdings.

Starting in 2008, a process marked by strong institutional changes, increased government intervention and high inflation rates started, which made agriculture much more challenging. Margins were reduced, while uncertainty and agency costs increased, resulting in higher transaction costs for the whole system. A process of area reduction and downsizing by the larger hybrid forms took place. Incentives started to decline and opportunism and micro transaction costs started to increase. From 2008 up to the present, the agricultural area has kept on growing, although at a lower rate than the previous period. Despite this continued growth, the share of farmland operated by agroholdings has decreased due to relatively lower commodity prices, higher production costs and, especially, increasing transaction and agency costs. Interestingly, agroholdings have indeed reduced the farming area at a larger rate than the smaller (informal) hybrid forms. This is due to the reputation and trust built among participants in these hybrid forms, which in practical terms, create informal institutions with a lower degree of uncertainty than the formal institutional framework to govern transactions and enforce contracts. In fact, in marginal production areas, these hybrid forms have taken vast areas operated by agroholdings in the past. It would appear that in this period, the increasing degree of uncertainty has been inversely related to the size of agroholdings. Concordantly, this particularly uncertain stage appears to have favored flexibility over scale.

The companies that maintained the scale in which they operate were those able to mitigate agency costs, such as Cresud, which has a high share of own land in the area they operate (but also rents area in order to reduce risks and increase margins). Agroholdings that operate mostly on rented land have had their degree of success determined by the coordinator’s leadership and managing capacity; something that not all players had and which in turn, helps to explain their declining relative participation in total agricultural area.

This did not affect corporate farms and smaller hybrid forms so strongly, which remained stable. At this point, some organizations decided to increase their participation in farming in other countries. It would appear that the introduction of technology was not sufficient to overcome the challenges posed by an everchanging institutional environment, and the agency costs that arose from managing such large operations.

6. Conclusions This paper described and analyzed the evolution of the institutional, organizational and technological environments in argentine agriculture since the 1990s. During this period, there were different institutional contexts, sometimes with clearer and more stable conditions and low levels of uncertainty, sometimes with higher intervention policies and transaction costs. The paper discussed how new organizations emerged during the different periods and scenarios, in a context of increased international demand for agricultural commodities.

The final thought on this topic would be that in Argentina, over the past 25 years, agroholdings have been developed not by ownership (integration), but by management of contracts (horizontal and vertical coordination). This has been the defining characteristic of these organizations, which is something that differs from countries such as Brazil, USA or FSU. International Food and Agribusiness Management Review

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The future research agenda on this topic is aimed at deepening the knowledge on certain aspects of how these organizations function. We believe that further research is needed on the role of agency costs in hybrid forms. Also, there is some interesting research to be conducted in understanding why some agroholdings have decreased area and expanded to other businesses, such as mills or input supply. Finally, analyzing how the new institutional framework that was announced by the new administration in December 2015, and which includes reductions and eliminations in export taxes affects these organizations would be a necessary update to this paper.

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OPEN ACCESS International Food and Agribusiness Management Review Volume 20 Issue 2, 2017; DOI: 10.22434/IFAMR2016.0020

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Received: 27 January 2016 / Accepted: 29 June 2016

Incentive provision to farm workers in post-socialist settings: evidence from East Germany and North Kazakhstan Special issue: Agroholdings and mega-farms in a global context

RESEARCH ARTICLE Martin Petrick Professor, Leibniz Institute of Agricultural Development in Transition Economies (IAMO), Theodor-Lieser-Strasse 2, 06120 Halle (Saale), Germany

Abstract This article explores the current practice of motivating agricultural workers in post-socialist settings. In addition, it attempts to evaluate the different wage systems observed in reality and better understand under which conditions they are reformed. It does so by contrasting the experience of two extreme cases representing fast and slow reform advance, East Germany and North Kazakhstan. The primary data for the analysis comes from cross-sectional farm surveys conducted by various researchers in both countries. East German farmers quickly replaced the inherited Soviet-style piece rate payment system by simple time rate schemes, augmented by wage premia for certain performance parameters, especially in livestock. To the contrary, the piece rate approach persists in many farms in North Kazakhstan. Moreover, the latter rarely use non-wage incentives to motivate their workers. In Kazakhstan, farms using either mixed systems or pure piece rates were more productive than the reference group using pure time rates. Labour cost per worker were lowest for pure time rate systems in both countries, followed by mixed bonus systems, whereas pure piece rate systems implied the highest cost in Kazakhstan. Kazakhstani managers tend to move away from the Soviet piece rate system if external investors become engaged in farming operations.

Keywords: human resource management, labour supervision, performance pay, post-Soviet agriculture, agroholdings JEL code: M52, P32, Q12 Corresponding author: petrick@iamo.de

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1. Introduction The organisation of agriculture in the former socialist countries of Central and Eastern Europe and the Soviet Union was driven by the Marxist ideal that agriculture, like other industrial sectors, should be organised in factory-style collective enterprises and run by a hierarchically structured labour force (Pryor, 1992). While socialist ideology disappeared with the collapse of the political regime, large-scale farming structures survived in many successor countries, and with them the need to organise agricultural labour based on hired workers.

Human resource management (HRM) under the conditions of a market economy became a key challenge for business administrators in agriculture.

In the following, an attempt is made to shed light on the current practice of motivating workers in postsocialist settings and to make some advance in evaluating the different systems observed in reality. How do large-farm managers provide incentives to their workers? Which are the effects of different pay systems on the productivity and profitability of farms? How can possible variation in observed practices be explained?

Despite the origin in a common tradition, the pace of economic reforms across the region varied greatly in scope and intensity. The literature has clustered countries according to their agricultural reform progress, where the most ‘advanced’ countries were found among the Central European states which in the meantime acceded to the European Union (EU). They are followed by the Southeast European and Transcaucasian countries, whereas Russia, Belarus, Ukraine and the Central Asian republics (with the exception of Kyrgyzstan) are typically considered as ‘slow’ reformers (Lerman, 2009; Swinnen et al., 2005). Even where large farms were preserved, these fundamental differences likely left their mark on how such farms are run today.

The article exploits this heterogeneity by comparing unique farm-level data from two extreme cases of reform that nevertheless left the large farm structure intact: East Germany and North Kazakhstan. East Germany entered the EU on the day of re-unification with West Germany in October 1990 and completed the transition process by the mid-1990s, when labour productivity had reached the West German level and the legal and institutional environment of farming was widely harmonised (Petrick and Zier, 2012). North Kazakhstan represents the ‘slow’ reform path, characterised by incompletely restructured state farms desperately in need of capital infusion and management upgrading. It was only in the end of the 1990s that a new type of farm organisation emerged, called agroholdings (Petrick et al., 2013).

Based on the canonical models by Holmstrom and Milgrom (1987) and Lazear (2000), the article sets out with a conceptual framework for the study of work incentives, which is used to derive hypotheses concerning the main questions of the article. Moreover, the historical context of pay systems in the former socialist countries is presented. As one of the first empirical explorations of this sort, the article evaluates the current management response to incentive problems in agricultural labour, using unique farm level data from East Germany and North Kazakhstan. Regression models are estimated to analyse the productivity and cost effects of different pay systems and the determinants of change. Confirming key insights of the economics literature on labour incentives, it is shown that piece rates increase productivity, but at the cost of higher wage expenses. East German farmers quickly replaced the inherited Soviet-style piece rate payment system by simple time rate schemes, augmented by wage premia for certain performance parameters, especially in livestock. To the contrary, the piece rate approach persists in many farms in North Kazakhstan. Given the historical legacy of narrow job designs, it is argued that the importance of piece rates declines as the overall economy evolves toward a Western market economy with its higher emphasis on worker autonomy and individualism. Moreover, managers tend to move away from the Soviet piece rate system if external investors become engaged in farming operations.

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2. Incentive provision to workers Two key propositions of economic agency theory are that workers provide more effort if monetary incentives are stronger, but that they may reject participation in the job if they have to bear too much of the risk (Holmstrom and Milgrom, 1987). As a consequence, payment based on output will lead to higher worker productivity than a time rate. However, in environments characterised by high uncertainty, contracts will typically include a payment component that is independent of output. The literature provides empirical support for both implications, for example using data from car windshield installers (Lazear, 2000), tree planters (Shearer, 2004) and crop harvest workers (Kandilov and Vukina, 2016). But none of these studies has investigated agricultural pay systems in contexts where tasks were more complex than manual planting or harvesting, and none has looked at former socialist countries. In the following, the implications of agency theory are thus examined in their relation to broader job designs and the specific requirements of agriculture.

The historical legacy of socialist work relations in agriculture is discussed in Section 3. To clarify terms, some formal notation is introduced first.

A model of monetary pay systems Consider a worker supplying effort e to the production process of a farm. The farm’s revenue q accrues to the owner and is a function of e. However, because effort is difficult to measure and profit may depend also on other factors than effort, the owner cannot directly contract the effort of the worker. For example, revenue may depend on effort and a random variable ε reflecting chance events such as weather or market fluctuations: q = f(e) + ε. To elicit effort from the worker even if it is not contractible, the owner offers her a linear wage schedule w consisting of a fixed rate r and a share α in revenue: w = r + αq, with 0 ≤ α ≤ 1

(1)

The following parameter values characterise different contractual models: (a) r = 0 and 0 < α < 1 define a pure piece rate contract (b) r > 0 and α = 0 define a fixed wage contract (c) r > 0 and 0 < α < 1 define a mixed or sharing contract (d) r < 0 and α = 1 define a fixed rent or tenancy contract The owner has to determine which values of r and α, hence which contractual option maximise his profit.

As the literature on principal-agent relationships has shown, he faces a trade-off between risk bearing and incentive provision (Holmstrom and Milgrom, 1987: 823). A fixed wage contract leaves all the risk with the owner but does not provide any financial incentive to the employee to work harder. A pure piece rate contract provides incentives to the worker, but at the cost of more risk bearing, thus jeopardising the participation of the worker in the first place. An extreme form of risk bearing and incentive provision is implied by the fixed rent contract, which turns the worker into an independent tenant and thus a residual claimant to revenue.

Under plausible assumptions about risk aversion and opportunity costs of the worker, a mixed contract is the most likely outcome (Holmstrom and Milgrom, 1987). The owner may make the payment of a share in output conditional on a certain minimum output level achieved by the worker. Under such a condition, a shift from pure time rate to a pure piece rate or mixed system will unambiguously increase average effort and thus output (Lazear, 2000).

Alternative job designs and non-monetary incentives This model is limited in that it does not take into account non-pecuniary incentives. In fact, management concepts differ in how much emphasis they place on the financial elements of workers’ compensation (Lazear and Gibbs, 2015). At one extreme, workers are assumed to be highly drudgery averse and naturally inclined to shirk, thus requiring strong monetary incentives at the margin. Frederick Taylor’s ‘Principles of International Food and Agribusiness Management Review

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Scientific Management’ (Taylor, 1911) exemplarily represent this view. External experts break down the production process into narrow tasks which they optimise ex-ante in the form of detailed instructions and work norms. Workers are closely monitored and strictly paid according to their contribution to total output, typically in the form of piece rates. Historically, this approach of ‘narrow’ job design led to massive gains from specialisation (Lazear and Gibbs, 2015: 167), and it is not necessarily outdated.

Following modern views of ‘enriched’ job design, workers are supposed to identify with their firm’s objectives and provide effort out of an intrinsic motivation. Such employees need little monetary incentive at the margin to perform their job well and they typically receive a considerable share of their salary as a time rate. Employers expect them to continuously and autonomously improve production outcomes and their work environment involves a high degree of multitasking and decentralised decision making (Lazear and Gibbs, 2015: 167). According to this second view, workers should be assigned to jobs with which they identify, and firms should invest in such attachments. Following the model above, this strategy will be cost effective to the firm if production uncertainty is high and contracting of effort very costly or impossible, and if workers are particularly risk averse (Akerlof and Kranton, 2010: 39-43).

Another reason why piece-rate systems and incentive pay are disfavoured by employers is that implementing them faces a number of practical difficulties (Akerlof and Kranton, 2010; Freeman and Kleiner, 2005). If actual performance measures are imperfectly correlated with effort, workers have an incentive to ‘game’ the system. For example, if job design involves multitasking and tasks differ in how well they can be monitored and rewarded, the unrewarded tasks will be undersupplied. Piece rates induce pilfering of complementary inputs, thus they require firms to spend more on supervision and quality control. They may make workers reluctant to introduce or share productivity increasing practices, as workers fear that firm-wide work norms will be increased. Moreover, workers may take greater risks, thus increasing injuries. The introduction of new technologies or product lines causes extra costs, as piece rates need to be adjusted, which in turn may induce acrimony among workers. Finally, ‘demoralised’ (i.e. non-adjusted) piece rates may lead to a disparity between actual pay and the opportunity costs of workers. If the degree of piece rate adjustment differs across departments, the workers’ ability to beat the normal rate within the same firm will highly vary.

While they may stimulate worker productivity, piece rate systems will often involve higher labour and input costs than time rate systems. A major American shoe manufacturer thus abandoned them recently (Freeman and Kleiner, 2005).

Incentive provision to workers in agriculture Agriculture has traditionally been regarded as a sector where gains from ex-ante optimisation and Taylorist approaches to industrial mass production are minimal (Allen and Lueck, 1998). The sequential and spatial nature of crop production inhibits gains from specialisation and makes supervision particularly costly.

Throughout the growing season, workers must repeatedly shift from one task to another. As production is highly exposed to the natural environment, the work pace cannot be controlled and assigning individual responsibility for harvest failures is difficult. Some authors considered these arguments to be the root cause for the inefficiency of industrialised agriculture in the Soviet Union (Bradley and Clark, 1972).

However, these factors seem to be less relevant in some forms of livestock production. If production takes place under the controlled conditions of buildings and closed production cycles, such as in large poultry breeding and hog fattening operations, payment linked to output, industry-type organisational principles and standardised job designs are observed more often (Allen and Lueck, 1998; Von Davier, 2007). Moreover, falling communication costs due to new information technology solutions may allow better ex-ante optimisation and centralised control. This applies, for example, to precision livestock farming based on the monitoring of individual animal performance and health that also allows workforce supervision and analytics. It may imply a ‘Taylorism run by computers’, leaving little discretion to the local managers or workers (Lazear and Gibbs, 2015: 190).

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3. The evolution of pay systems in (post-) socialist agriculture

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The legacy of the Soviet piece rate system Early in the 20th century, Taylorist methods of labour management sparked the interest of the Soviet revolutionaries who were keen on emulating the successes of Western industrialisation. In the 1920s, Vladimir Lenin endorsed the widespread adoption of Taylor’s principles, which seemed to harmonise well with the Soviet idea of central planning. The emerging Stakhanovite (heroes of labour) movement is sometimes regarded as the socialist variant of Taylorism. However, Soviet practice increasingly became a caricature of initial intentions (Van Atta, 1986). The overarching goal of plan fulfilment led to labour hoarding. Managers diluted the piece rates and equalised wage differences between workers in a usually informal and ad-hoc manner. Low real wages and a lack of consumer goods in the shops provided little incentive to workers.

At least from the 1970s onwards, there was no longer a threat of unemployment. In general, systemic inefficiencies arose from widespread coordination failures of the central planning system.

The industrialisation of agriculture began in the 1930s through a process of forced collectivisation, along with the adoption of a first set of agricultural work norms. The following decades saw an ongoing experimentation with agricultural payment systems and the permanent revision of work norms (Wädekin, 1989). In all socialist countries with a collectivised agricultural sector, pay systems representing a Soviet variant of Taylorism prevailed until the late 1980s. Farm workers were paid according to their material contribution to plan fulfilment, which implied the widespread use of piece rates and bonuses based on hectares ploughed, cows milked or tractors repaired.

Post-socialist restructuring paths After the collapse of central planning in 1990/1991, the formerly socialist countries embarked on quite differing reform paths in agriculture (Figure 1) (Lerman et al., 2004): ■■ A first group took the most radical steps of completely abandoning the collective and state farm sector and redistributing land to rural dwellers. This individualisation strategy typically implied a land reform through which former collective workers and other beneficiaries became the residual claimants of the returns to land. Family labour formed the basis of the emerging peasant farms.

The former pay systems of hired workers were terminated universally. Examples include Albania, Armenia, Georgia, and Kyrgyzstan.

■■ In a second group of countries, collective farms were reformed more gradually, by preserving or re-creating large scale structures. Anticipating accession to the EU’s common market, national governments were concerned with the competitiveness of their agricultural sectors and supported large farm restructuring with subsidies, for example in the Czech Republic, Slovakia and Hungary.

East Germany became part of the EU already in October 1990. While it seems likely that farm-internal management reforms accompanied this restructuring process, little systematic insight exists on how pay systems and job designs changed.

■■ Russia, Ukraine and Kazakhstan represent a third group with very little initial change. Collectives turned into joint stock companies and other types of corporations, but often this was not more than changing a sign on the door. In a difficult economic environment of collapsing output markets, rising input prices and a high degree of political uncertainty, farm managers muddled through and often took personal advantage of the privatisation struggle. After the turn of the millennium, outside (though typically domestic) investors took over many of the lingering former collectives in the most fertile agrarian regions. While they frequently invested in new technology, it is widely unknown to what extent they also instigated thorough management reforms in the newly formed agroholdings.

Except where land reforms led to a complete liquidation of the former collectives, corporate farming structures survived or even thrived. Because farm restructuring started earlier and was carried out more thoroughly in the Central European countries, the prevalence of modern HRM principles and the abolishment of the International Food and Agribusiness Management Review

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Collective and state farms generally using piece rate systems

Pathway 1:

Pathway 2:

Pathway 3:

Land reform and individualisation

Restructured corporate farms

Lingering collectives

Fixed rent contract or ownership

Reform of pay system?

Examples: Albania, Kyrgyzstan, Transcaucasus

Examples: East Germany, Czech Rep., Slovakia, Hungary

Agroholdings Reform of pay system?

Examples: Russia, Ukraine, Kazakhstan

Figure 1. Simplified scheme of agricultural reform paths and pay systems in the 1990s. traditional piece rate systems are most plausibly declining along a West-East gradient. Narrow job designs in agriculture involving pure piece rate systems are thus more likely in North Kazakhstan than in East Germany. Moreover, in the course of transition to market economic principles and more individualistic societies, narrow job designs in agriculture are likely to be replaced by enriched job designs that are also based on non-wage incentives.

Within countries, farms are expected to vary in the extent to which they keep the traditional piece rate system as well. For new entrants and farms in unpredictable environments it is more difficult to standardise work routines, they will thus lean towards enriched job designs that are not only relying on a pure piece rate system (Lazear and Gibbs, 2015: 168). Moreover, research on the barriers to adoption in other industries stresses the systemic nature of change that is required (Freeman and Kleiner, 2005; Ichniowski and Shaw, 2003). In other words, changes in pay systems are highly complementary to the reform of other management practices, for example in hiring, training, teamwork, and internal hierarchies. Enriched job designs are thus more likely on recently restructured farms and farms that are run by younger and better educated managers, or farms that were recently taken over by an outside investor.

4. Empirical approach Hypotheses to be tested In the following, the article investigates the empirical regularities under which different incentive systems are found in the post-socialist farming sectors of East Germany and North Kazakhstan and it studies their effects on economic outcomes. The analysis distinguishes three empirically observable systems, as introduced in Section 2 â&#x20AC;&#x201C; A model of monetary pay systems: 1. Pure piece rate systems: workers are entirely paid on the basis of output.

2. Pure time rate systems: workers are entirely paid on the basis of time spent on the job.

3. Mixed bonus systems: they involve a mixture of the two previous systems, often a minimum payment independent of performance plus bonuses or premia based on output or quality of the work done.

Following the discussion in Section 2 â&#x20AC;&#x201C; Alternative job designs and non-monetary incentives, piece rates are typically associated with narrow job designs, involving detailed instructions and work norms. Under pure time rates, managers will provide workers with non-wage incentives to keep them productive or rely on their intrinsic motivation. Time rates will thus more likely be associated with enriched job designs. Mixed

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systems are compatible with a wide range of job designs and their effects on farm outcomes are essentially an empirical matter to be explored below.

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Based on the theoretical and historical background and the conjectures presented in Sections 2 and 3, a number of hypotheses are formulated to guide the ensuing empirical analysis. The hypotheses address the incidence and evolution of pay systems, their effects on farm outcomes, and the determinants of change: H1: the incidence of piece rates in agriculture declines if the overall economy moves toward market economic principles.

H2: performance pay is more prevalent in livestock operations than in crop farming.

H3: farms using piece rate or mixed systems are more productive than those using pure time rates.

H4: farms using piece rates incur higher labour costs than those using pure time rates.

H5: piece rates are more likely to be abandoned if farms also undergo fundamental restructuring in other management areas.

In the sequel, the article puts these hypotheses to test using both descriptive statistics and regression analysis.

Data sources Statistical agencies typically do not collect information about contractual relations between management and workers and the prevalence of pay systems in agriculture. Researchers therefore have to rely on their own primary data collection. The following analysis is based on two groups of sources. First, over the last twenty years, a number of researchers conducted farm surveys among corporate, individual and cooperative farms in East Germany. These surveys were typically limited in their regional scope and sometimes based on small sample sizes. But to the extent that one is willing to generalise from these samples, they provide a unique opportunity for tracing the evolution of pay systems in East German agriculture over time. The next section presents findings on the prevalence of performance pay systems among large-scale farms by Beckmann (2000), Doluschitz et al. (1996), Jurk (2010), Kreyßig and Pippig (1997), Schüle (1997) and Von Davier (2007). Sample sizes and regional coverage of these studies are summarised in Table 1. This data is used to explore hypotheses H1 and H2.

Second, more specific data on pay systems and the incidence of non-wage incentives is taken from primary survey data collected by Von Davier (2007) and the IAMO Kazakhstan farm survey 2012 (Petrick, 2015).

Table 1. Sources of farm survey data on performance pay in East German agriculture.

Study

Survey period

Beckmann 2000

spring 1994

Region

Sample Average land Average size endowment number of per farm (ha) workers

Mecklenburg-West Pomerania 40 (Ludwigslust) and Thuringia (Wartburg) Doluschitz et al. 1996 1995 Mecklenburg-West Pomerania 30 Jurk 2010 fall 2009 Saxony 83 Kreyßig and Pippig 1997 01-06/1997 Saxony 40 Schüle 1997 fall 1994 East Germany 315 Von Davier 2007 07/2005-03/2006 East Germany 188 International Food and Agribusiness Management Review

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~1,600

~30

~1,500 ~1,900 unknown 1,619 1,322

unknown 36.9 unknown 40.4 16.8

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The questionnaires used in these two surveys included identical questions on HRM and thus allow a direct comparison of pay systems in East Germany and Kazakhstan. It is used to examine hypotheses H1, H2, and H4. As the data for Kazakhstan is richer in detail, it also allows examining hypotheses H3 and H5.

5. Comparing incentive provision to agricultural workers in East Germany and North Kazakhstan

East German corporate farms typically emerged from the former collective farms by changing their legal status to either registered cooperatives or limited liability companies, both under (West) German legislation (Forstner and Isermeyer, 2000). According to farm accountancy data provided by the Federal Ministry of Food and Agriculture (2015), the average corporate farm specialising in crop production cultivated 1,247 ha of arable land and employed 14 workers in 2013. An average corporate dairy farm kept 616 cows and had 33 workers on the payroll. The results of six farm surveys are available to study the popularity of performance pay in such entities (Figure 2). The surveyed farms were slightly bigger than the 2013 average (Table 1).

The figure takes the ideal-type socialist model of piece rate salaries as a benchmark, assuming that it was practiced on all farms in one way or the other (Gabler, 1995). Based on the stated sources, the figure then shows the share of farms that used performance pay systems in crop or livestock production in the years covered by the surveys. In the mid-1990s, about half of the farms keeping livestock used some form of performance pay in this production branch. Less than a third of the farms engaged in crop production ran performance pay schemes among their workers employed in this branch (Figure 2). While these numbers are broadly confirmed by Von Davier (2007) for 2006, Jurk (2010) suggests that the share of farms using performance pay went further down recently. Consistent with hypothesis H2, performance pay is used much more often in livestock than in crop production.

Socialist model

35

80

30

60

Von Davier 2007

KreyĂ&#x;ig Pippig 1997 Doluschitz et al. 1996 SchĂźle 1997

40

25 20 15

Beckmann 2000

10

20

Jurk 2010

5

Surplus per worker (thousand euros)

100

% of farms using performance pay

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Performance pay in East German corporate farms over time

0

0

1989

1991

1993

1995

1997

1999

2001 Year

2003

2005

2007

2009

2011

% of farms using performance pay in: Crop production Livestock Worker productivity

Figure 2. Share of East German farms using performance pay systems, based on farm surveys. Source given next to figure entry. Worker productivity is surplus per corporate farm worker before wage payments in 2010 prices, based on farm accountancy data.

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According to these sources, practically all workers receive a monthly salary (thus a time rate) that is topped up with additional bonuses on some farms as indicated in the figure, leading to a mixed bonus system.

Performance pay is commonly defined as the practice to pay employees a salary top-up (a monetary bonus) if the quality or quantity of their work fulfils certain criteria. Such criteria include but are not limited to the successful execution of a particularly demanding task, delivering a result of extraordinary quality or quantity, or the cost effective and/or careful use of machinery and equipment. The definition of performance pay excludes pay for overtime work, permanent salary increases or year-end bonuses.

None of the farms reported that it continues to use piece rates after the collapse of socialism. Commonly, farms abandoned the old payment system altogether in the early 1990s, released a significant share of workers, and introduced a new, much simplified pay system from scratch (Beckmann, 2000; Dirscherl, 1991). The new staff often consisted of only a small number of workers hand-picked from the former collective farm.

Farm accountancy data published by the Federal Ministry of Food and Agriculture (2015) implies that real worker productivity on average increased over the reported period (Figure 2). However, worker productivity and the share of farms using performance pay seem to move in parallel for several years. This finding is supportive of hypothesis H1 in the sense that most farms scrapped the rigid piece rate systems inherited from socialism. But the evidence is inconclusive on whether or not mixed bonus systems are conducive to higher productivity when compared with pure time rates (hypothesis H3).

Performance pay and non-wage incentives in East Germany and Kazakhstan compared In the following, the results of farm surveys on HRM in East Germany and Kazakhstan’s northern grain region are compared. When the Soviet Union disintegrated, the situation of the farming sector in Kazakhstan’s grain region was an extreme version of the typical Soviet model. In the late 1950s, in a quasi-overnight campaign, almost 500 sovkhozy (state farms) had been established in an attempt to make the ‘Virgin Lands’ of the Kazakh steppe amenable to grain production. Each state farm had a size of several 10,000 ha. Given this legacy, reform implementation in the 1990s led to the downsizing of former state farms, which were reorganised as agricultural enterprises. More recently and following the third pathway in Figure 1, some of the former state farms were taken over by outside investors and put under the umbrella of horizontally and vertically integrated holding structures, so-called agroholdings (Petrick et al., 2013). Today, the typical agroholding encompasses several enterprises and cultivates up to 100,000 ha of cropland, occasionally even more. In addition, large individual farms based on hired labour were established. Some of the farms keep livestock, often up to several hundred animals (Petrick and Oshakbaev, 2015).

The interviewers asked farm managers from both Germany and Kazakhstan an identically worded (though translated) set of questions on the prevalence of performance pay and the use of non-wage incentives.

The questions were asked separately for the crop production, livestock and administration departments of the farms. The interviews were held in East Germany in 2005 and 2006 (Von Davier, 2007) and in North Kazakhstan in 2012 (Petrick, 2015). On average, Kazakhstani farms were endowed with much more land per farm (Table 2). The average workforce was also bigger, but here the difference to Germany is smaller.

With regard to payment systems, more German than Kazakhstani farms use time rates as the only payment system, and they don’t use piece rates at all (Table 2). The starkest contrasts between the two countries can be observed in crop production (Figure 3). 85% of Kazakhstani farms employ performance pay systems.

More than two thirds of those or 61% of all farms use pure piece rate systems in crop production. In East Germany, 68% of farms use simple time rates in crop production. The remaining East German farms run mixed systems in crop production, consisting of a time rate and performance-related top ups.

To the contrary, with almost 40%, the share of farms using pure time rate systems in livestock production is similar in both countries. Thus in Germany, the prevalence of performance pay is higher than in crop production, whereas in Kazakhstan it is lower. However, 30% of farms in Kazakhstan work with pure piece rates also in livestock, whereas no farm follows this practice in Germany. Pure time rates are widespread International Food and Agribusiness Management Review

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Variable

East Germany2

North Kazakhstan

land endowment per farm (ha) number of workers (full time equivalent) annual labour cost per farm (thousand USD) % of farms keeping livestock livestock endowment (livestock units) materials input (thousand USD) fixed capital (thousand USD) farm revenue (thousand USD) quasi rent (thousand USD) % of farms using only time rates % of farms using only piece rates % of farms using mixed bonus systems years since last major restructuring of the farm % of farms part of an agroholding age of the manager (years) education of the manager (1..8)3 N

1,322 (0; 5,010) 16.8 (0; 135) 448.2 (0; 1,986.8) 85 765 (0; 5,790) n.a. n.a. n.a. n.a.

27.1 0 72.9 n.a. n.a. n.a. n.a.

188

6,628 (10; 80,000) 21.9 (0.5; 540) 62.3 (0; 1,428.6) 55 142 (0; 1,963) 84.1 (0; 1,517.0) 383.4 (0; 7,496.9) 391.0 (0; 7,768.7) 249.9 (-321.7; 5,401.4) 6.7 11.3 82.0 11.4 (0; 22) 5.3 47.7 (22; 73) 6.7 (4; 8) 150

1

Values are sample means (minimum; maximum). n.a. = not available.

3 Education measured as an index based on: 1=no formal education; 2=primary school; 3=incomplete secondary school; 4=secondary general; 5=vocational school; 6=college; 7=incomplete higher education; 8=university degree.

2

0 15 37

20 % of farms

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Table 2. Descriptive statistics on farms surveyed in East Germany and North Kazakhstan (adapted from Von Davier (2007) and the IAMO Kazakhstan farm survey 2012 (Petrick, 2015)).1

40

68

38

47

0

0

61

0

30

60 0

80 100

63

60

53

32

Crop

40

32

24

Livestock Admin East Germany

Crop

Livestock Admin North Kazakhstan

Pure time rate system Pure piece rate system Mixed bonus systems

Figure 3. Share of farms using time and piece rate as well as mixed systems by production departments.

Based on interviews with farm managers in East Germany and North Kazakhstan (adapted from Von Davier (2007) and IAMO Kazakhstan farm survey 2012 (Petrick, 2015)).

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in administrative departments in both countries. But the majority of the farms in both countries use mixed systems in this branch.

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Overall, this evidence supports hypothesis H1 in that systems on many Kazakh farms still resemble the Soviet piece rate system, whereas it was completely abandoned in East Germany. Even so, consistent with hypothesis H2, the majority of farms in both countries use some sort of performance pay in livestock production.

Farmers were also asked about their use of non-wage incentives (Figure 4). Again, there is a sharp difference between the two countries. Whereas the majority of German farms pursue the whole range of strategies listed in the figure, only gratifications and presents play an important role in Kazakhstan. This strategy probably comes closest to an immediate material benefit for the workers. Strategies that invest in a long-term relation between the farm and the worker include access to further training, employer contributions to health and pension plans. Other strategies aim at the non-pecuniary factors of work relations, such as flexible working hours and a good working atmosphere. Both groups of strategies were routinely practiced on German farms but were rarely followed by Kazakh managers. In particular the practices to provide further training and to allow flexible working hours are indicators of enriched job designs in East German agriculture.

Productivity effects of performance pay and the choice of pay systems The primary farm-level data available for this study also allows comparing farms that use different pay systems within the national subsamples. To this end, three (two) mutually exclusive groups of farms were defined in both subsamples. A farm is defined as using a pure time rate system if in both crop and livestock operations only time rates are paid. A farm is defined as using a pure piece rate system if in both crop and livestock operations only piece rates are paid. This set is empty in East Germany. Finally, a farm is defined as using a mixed bonus system if in either crop or livestock operations or in both some sort of performance pay is used. In Germany, such mixed systems typically involve the payment of top ups as explained in Section 5 â&#x20AC;&#x201C; Performance pay in East-German corporate farms over time. In Kazakhstan, farms under mixed

Gratifications and presents Access to further training

East Germany

Health and pension plans Flexible working hours Modern machines Good working atmosphere

North Kazakhstan

Job security Company receptions 0

20

40

60

80

100

% of farms using the strategy

Figure 4. Share of farms using specific non-wage incentives (adapted from Von Davier (2007) and IAMO Kazakhstan farm survey 2012 (Petrick, 2015)).

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systems typically paid piece rates for some tasks and time rates for others. The relative importance of the groups is shown in Table 2. In the following, this coding is used to compare the productivity, total labour costs and profitability of farms across groups. Unfortunately, only the Kazakhstan data is rich enough to allow productivity and profitability comparisons.

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Inspired by Freeman and Kleiner (2005), regression analysis was used to examine the effects of different performance pay systems on farm outcomes. The following models include the three groups in a dummy variable framework, testing the effect of piece rates and mixed systems against the reference of time rates: yi = xi β + δ ptip + δ mtim + ϵi (2) where y is farm outcome (output, labour cost or quasi rent), x is a vector of control variables, t p is a dummy variable indicating the presence of a piece rate system, t m is a dummy variable indicating the presence of a mixed bonus system, ϵ is an identically and independently distributed (i.i.d.) error term, i indicates the individual farm, and β and the δ’s contain parameters to be estimated.

Model 1 in Table 3 shows the results of a simple Cobb Douglas function estimation of Equation 2 using Ordinary Least Squares (OLS). Only observations with nonzero output and non-missing data were included.

Descriptive statistics of the variables are presented in Table 2. The two dummy variables test whether the presence of performance pay systems induces a linear productivity shift. In line with hypothesis H3, both Table 3. Regression estimates of the effect of performance pay on productivity, North Kazakhstan sample.1,2 Variable

Model 1: North Kazakhstan, farm output (OLS)3

Output equation log land input (ha) log labour input (full time equivalent) log materials input (USD) log fixed capital (USD) mixed bonus system (0/1) pure piece rate system (0/1) Mixed bonus system equation land endowment (ha) farm is keeping livestock (0/1) farm was taken over by an agroholding (0/1) years since last restructuring of the farm age of manager (years) education of manager (1..8) ρ (Wald test ρ=0) prob>F R2 N

0.199 (0.013)** 0.678 (<0.001)*** 0.173 (0.003)*** 0.031 (0.072)* 0.627 (0.013)** 0.573 (0.044)** – – – – – – – <0.001 0.74 125

1

Model 2: North Kazakhstan, farm output, endogenous mixed system (ML)4 0.150 (0.037)** 0.732 (<0.001)*** 0.206 (<0.001)*** 0.035 (0.015)** 1.898 (<0.001)*** 0.358 (0.193) -0.005 (0.536) -1.847 (<0.001)*** 3.797 (0.074)* -0.029 (0.115) 0.010 (0.566) -0.265 (0.009)*** -0.915 (0.002)*** <0.001 – 125

Dependent variable is log farm revenue (USD).

P-values in parentheses, based on robust standard errors; *,**,*** significantly different from zero at the 10, 5 and 1% level, respectively; all equations include constant terms.

3 OLS = ordinary least squares.

4 ML = Maximum likelihood.

2

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mixed system and piece rate dummies display significantly positive effects relative to the reference group of pure time rates. The effect of mixed bonus systems is larger than the piece rate effect.

A potential line of criticism concerns the assumption of an i.i.d. error term, on which the OLS estimation in Model 1 is based. This assumption is violated if the explanatory variables are not truly exogenous, but, for example, depend on some unobserved factor that is not accounted for in the regression. In Kazakhstan, factor market rigidities may provide a rationale why land, labour and capital input are not easily altered by farm managers, and may thus be considered as predetermined (Petrick, 2015). But it is a reasonable concern that pay systems are actually chosen by the manager and not exogenously given. An alternative Model 2 was thus estimated which considers the existence of the mixed bonus system (and thus a departure from the Soviet-style pure piece rate system) as endogenous and due to other factors that are exogenous to the farm, at least in the short run. This endogenous dummy variable model assumes the existence of a latent choice variable that determines whether mixed bonus systems are used or not, and that the latent choice variable can be explained by a second linear equation: tim =

{

1, if zi γ + ui > 0 0, otherwise

(3)

In this equation, z is a vector of determinants of t m, and γ is a parameter vector to be estimated. Moreover, the error terms of the output equation ϵ and the bonus system equation u are assumed to follow a bivariate normal distribution with mean zero and correlation ρ. The model is a standard workhorse in the econometric literature on qualitative choice (Maddala, 1983: 120). Both Equations 2 and 3 were estimated jointly using Maximum Likelihood (ML). Alternative estimates using a semi-parametric control function estimator yielded very similar results (not reported).

The specification of the mixed bonus system equation was partly motivated by hypothesis H5 and is given in the lower part of Table 3. The results show that better educated managers were actually less likely to run a mixed system, and the age of the manager did not have a significant effect. This finding might be reconciled with reality by the insight that Soviet farm managers often had a university education, but that did not necessarily turn them into reform advocates if they continued to be farm managers after 1991. An alternative specification using a dummy variable for college degree or higher confirmed the negative sign.

Consistent with hypothesis H5, farms belonging to an agroholding used mixed systems more often than other farms. This finding supports the idea that vertical integration and the takeover by outside investors give a boost to the reform of pay systems. Land endowment and the time that has elapsed since the last restructuring did not lead to significant effects.

Other than suggested by a cursory reading of Figure 3, farms keeping livestock were significantly less likely to use mixed systems across the entire farm than pure crop farms. In fact, almost all of the less productive pure piece and time rate farms were found among livestock producers, whereas only one pure crop farm runs a pure piece rate system. From this observation follows that most Kazakhstani farms indicating that they used only piece rates in crop production in Figure 3 also kept livestock. Unfortunately, the cross sectional data available here does not allow to ultimately clarifying the causal relationship between the decision to keep livestock, the choice of pay system, and overall farm productivity.

The negative sign of ρ implies that unobserved factors increasing the likelihood of a mixed bonus system tend to reduce farm output. Such factors may include the average quality of the labour force or the rate of staff turnover, which are unobserved in the datasets used for this study. Everything else equal, managers with less able workers may be more inclined to reform the pay system in order to counteract the negative effect on output. The statistical significance of ρ indicates that the enriched regression Model 2 is warranted and should be preferred to the OLS. In the simultaneously estimated output equation, the coefficients of the production factors change little compared to Model 1, but now the hypothesis must be rejected that piece rates have a positive effect on output.

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Cost and profitability effects

The previous finding is supported for Kazakhstan by regression analysis (Table 4). Model 3 estimates the effect on total labour cost per farm of mixed and pure piece rate systems, controlling for land and livestock endowment and using the same estimator as for Model 2. To enable the log transformation, observations with zero labour cost were replaced by 1 USD. Model 3 shows that piece rates increase labour costs, whereas mixed systems have no statistically significant effect vis-Ă -vis the pure time rate system. This result is insensitive to using other control variables, such as output or total labour force. Results for the mixed bonus system equation included in this model were very similar to the ones presented for Model 2.

Model 4 shows a similar estimation for the East German sample, using OLS. Due to a lack of data, an endogenous bonus system equation could not be specified here. Moreover, labour cost per farm had to be calculated by referring to farm-specific hourly wages and bonuses reported by the managers, and their rough estimates of how many hours workers were employed on the farm. The fit of the model is not very good, but it indicates that there was no statistically significant effect of performance pay on total labour cost per farm in the German sample.

60,000

6,000

40,000

4,000

20,000

2,000

0

USD Kazakhstan per worker

One step further is taken by Model 5, which aims to estimate the effects of pay systems on farm profitability.

The dependent variable is called the quasi-rent of the farm, calculated as total revenue minus labour cost minus material cost (Table 2). Observations with negative quasi-rents were eliminated from the estimation as they could not be transformed into logarithms. The regression does not show any significant effects of payment systems on quasi rents. However, if, in an attempt of data mining, the indicator for the mixed and

USD Germany per worker

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As posited by hypothesis H4, the median of labour cost in USD per worker is lowest for pure time rate systems in both countries (Figure 5). Furthermore, in the North Kazakhstan sample, pure piece rate systems imply the highest cost. However, the variation in labour cost for mixed systems is the highest in this sample, as expressed by the distance between the upper whisker and the box. Note that the scale for the German sample is ten times the scale of the Kazakhstan sample in this figure, to allow an easier comparison of the differences between payment systems within countries.

0

Pure time

Mixed

Pure time

East Germany

Mixed

Pure piece

North Kazakhstan

Figure 5. Boxplots of annual labour cost per worker, distribution across farms by pay system and countries (adapted from Von Davier (2007) and IAMO Kazakhstan farm survey 2012 (Petrick, 2015)).

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Table 4. Regression estimates of the effect of performance pay on total labour cost and profitability, East Germany and North Kazakhstan samples.1,2 Variable

Model 3: N Kazakhstan total labour cost (ML)3

Model 4: E Germany total labour cost (OLS)4

log land input (ha) log livestock units mixed bonus system (0/1) pure piece rate system (0/1) mixed & piece rate combined (0/1) R2 Endogenous mixed system prob>F N

1.642 (<0.001)*** 0.903 (0.002)*** -0.086 (0.160) 0.054 (0.239) -0.481 (0.803) -0.120 (0.846) 2.837 (0.003)*** – – –

0.772 (<0.001)*** 0.798 (<0.001)*** -0.059 (<0.068)* -0.023(0.440) -0.354 (0.661) – -0.815 (0.207) – – 1.010 (0.065)*

– yes <0.001 150

– yes <0.001 103

0.04 no <0.001 122

Model 5: N Kazakhstan quasi rent (ML)

Model 6: N Kazakhstan quasi rent (OLS)

0.51 no <0.001 103

1 Dependent variable is log annual labour cost per farm (USD) in Models 3 and 4, and log quasi-rent per farm (USD) in Models 5 and 6.

2

P-values in parentheses, based on robust standard errors; *,**,*** significantly different from zero at the 10, 5 and 1% level, respectively; all equations include constant terms.

3 ML = Maximum likelihood 4 OLS = ordinary least squares.

piece rate systems is merged into one, Model 6 shows that the effect on quasi rents is significantly positive versus farms with pure time rate systems.

6. Conclusions The principles of narrow job designs and piece rate payment heavily influenced the industrialisation of agriculture in the former socialist countries. The evidence presented in this article suggests that the influence continues today, although it tends to vanish when the overall economy becomes more liberal and individualistic. In the very first years of transition, large farm managers in East Germany replaced the Soviet system by much less complicated time rate schemes. Some managers continued to pay wage premia for certain performance parameters, leading to mixed bonus systems. To the contrary, the Soviet piece rate approach persists up to the present day in many farms in North Kazakhstan. Moreover, the latter rarely use non-wage incentives to motivate their workers. Most East German farmers stress that they invest in team building, allow flexible working hours and provide benefits such as pension plans, further training or job security. These practices indicate that more enriched job designs involving worker autonomy, multitasking and higher skills took root in East German agriculture. Even so, the majority of farms in both countries use some sort of performance pay in livestock production.

The empirical findings are consistent with the implications of established economic theories of the employment relationship. It was found that linking pay to output does increase worker productivity but also labour cost.

For the Kazakhstan data, it was shown that farms using either mixed systems or pure piece rates were more productive than the reference group using pure time rates. Labour cost per worker were lowest for pure time rate systems in both countries, followed by mixed bonus systems, whereas pure piece rate systems implied the highest cost in Kazakhstan. Moreover, there is weak evidence that Kazakhstani farms using some sort of performance pay were more profitable than those using pure time rates.

The results do not suggest that there is one optimal incentive system applicable to all farms in all places. In line with theoretical expectations, farms in both countries seem to work well under mixed bonus systems International Food and Agribusiness Management Review

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combining a time rate with a simple performance pay scheme, as it balances the trade-off between productivity and cost. Other than their Kazakhstani counterparts, East German managers pay a lot of attention to nonwage incentives. In Kazakhstan, even under mixed bonus systems, job designs appear to be still narrower and more hierarchical. Managers tend to move away from the Soviet piece rate system if external investors become engaged in farming operations and if farms specialise in crop rather than livestock production. More research is required into how exactly mixed bonus systems should be designed and how they relate to other productivity and cost affecting characteristics of farms.

This article is one of the first attempts to analyse payment systems in post-socialist agriculture in a comparative fashion. It raises the question whether managers in ‘slowly’ reforming countries such as Kazakhstan can learn from more ‘advanced’ reformers in East Germany. A careful assessment of this question should take into account that payment modes represent only one piece of a system of HRM practices that reinforce each other.

Moreover, they are part of an institutional environment and a set of social habits. In a study of traditional Russian companies under the influence of Western investors, Michailova (2002) points out how Russian managers consider more autonomous job designs for workers a ‘dangerous loss of power’. In addition, she argues that due to a legacy of a ‘socialist collectivist-autocratic system’, workers feel secured and guarded by an authoritarian boss and thus ‘prefer directives instead of discussions’ (Michailova, 2002: 183-184).

After the collapse of socialism, the economic environment changed tremendously in East Germany, but much less in the successor states of the Soviet Union. Outside this historical window of opportunity, fundamental change is more difficult to induce.

Acknowledgements The author is grateful to Zazie von Davier for making available the 2006 farm survey data on HRM practices in Germany, to all the interviewed farm managers for their cooperation and openness and to the editor and the reviewers of the journal, the late Fabio Chaddad, Nodir Djanibekov, Nozilakhon Mukhamedova, and seminar participants in Halle and Milan for helpful suggestions.

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Bradley, M.E. and M.G. Clark. 1972. Supervision and efficiency in socialized agriculture. Soviet Studies 23: 465-473.

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Doluschitz, R., A.S. Fuchs and S. Mucha. 1996. Praktiken und Schwachstellen der Unternehmensführung in größeren landwirtschaftlichen Unternehmen: Ergebnisse einer empirischen Untersuchung.

Agrarwirtschaft 45: 388-398.

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Freeman, R. B. and M.M. Kleiner. 2005. The last american shoe manufacturers: decreasing productivity and increasing profits in the shift from piece rates to continuous flow production. Industrial Relations 44: 307-330.

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Holmstrom, B. and P. Milgrom. 1987. Aggregation and linearity in the provision of intertemporal incentives.

Econometrica 55: 303-328.

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Kreyßig, L. and U. Pippig. 1997. Ergebnisse einer Befragung zum Stand der Entlohnung der Beschäftigten in Agrarunternehmen juristischer Personen. Infodienst der Sächsischen Landesanstalt für Landwirtschaft 12: 35-39.

Lazear, E.P. 2000. Performance pay and productivity. American Economic Review 90: 1346-1361.

Lazear, E.P. and M. Gibbs. 2015. Personnel economics in practice. 3rd ed., Wiley, Hoboken, NJ, USA. Lerman, Z. 2009. Land reform, farm structure, and agricultural performance in CIS countries. China Economic Review 20: 316-326.

Lerman, Z., C. Csaki and G. Feder. 2004. Agriculture in transition: land policies and evolving farm structures in post-Soviet countries. Lexington Books, Lanham, MD, USA. Maddala, G.S. 1983. Limited-dependent and qualitative variables in econometrics. Econometric Society Monographs. Cambridge University Press, Cambridge, UK. Michailova, S. 2002. When common sense becomes uncommon: participation and empowerment in Russian companies with Western participation. Journal of World Business 37: 180-187.

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Petrick, M., J. Wandel and K. Karsten. 2013. Rediscovering the virgin lands: agricultural investment and rural livelihoods in a Eurasian frontier area. World Development 43: 164-179.

Petrick, M. and P. Zier. 2012. Common Agricultural Policy effects on dynamic labour use in agriculture.

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Pryor, F.L. 1992. The red and the green: the rise and fall of collectivized agriculture in Marxist regimes.

Princeton University Press, Princeton, NJ, USA. Schüle, H. 1997. Organisations- und Managementstrukturen landwirtschaftlicher Grossbetriebe. Schriftenreihe des Bundesministeriums für Ernährung, Landwirtschaft und Forsten. Reihe A, Angewandte Wissenschaft 461. Köllen, Bonn, Germany.

Shearer, B. 2004. Piece rates, fixed wages and incentives: evidence from a field experiment. Review of Economic Studies 71: 513-534.

Swinnen, J.F.M., L. Dries and K. Macours. 2005. Transition and agricultural labour. Agricultural Economics 32: 15-34.

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Von Davier, Z. 2007. Leistungsorientierte Entlohnung in der Landwirtschaft: eine empirische Analyse. PhD thesis, Fakultät für Agrarwissenschaften, Georg-August-Universität, Göttingen, Germany. Available at: http://tinyurl.com/j5rjm92.

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OPEN ACCESS International Food and Agribusiness Management Review Volume 20 Issue 2, 2017; DOI: 10.22434/IFAMR2016.0055

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Received: 26 February 2016 / Accepted: 17 November 2016

Strategic role of corporate transparency: the case of Ukrainian agroholdings Special issue: Agroholdings and mega-farms in a global context

REVIEW ARTICLE Taras Gagalyuk Senior Researcher, Department of Structural Development of Farms and Rural Areas, Leibniz Institute of Agricultural Development in Transition Economies (IAMO), Theodor-Lieser-Str. 2, 06120 Halle (Saale), Germany

Abstract The paper argues that transparency of large corporate farms operating in transition economies is the factor that affects their competitive position as it helps to preserve access to international equity markets and to reduce uncertainty that arises from imperfect local input markets. We demonstrate that the corporate transparency of large farms is an issue of both public interest and private investor interest and decompose the construct of transparency respectively. Because firms tend to exhibit heterogeneous transparency strategies when facing common sets of pressures, we draw upon four case studies of different Ukrainian agroholdings using the suggested decomposition of the transparency construct. We find that large farms may benefit substantially in the long run if they establish effective corporate governance mechanisms and provide more evidence that they contribute positively to corporate social responsibility and rural development.

Keywords: corporate transparency, agroholdings, ownership structure, corporate governance, corporate social responsibility JEL code: Q14, Q15, O16, O43, G24, G34 Corresponding author: gagalyuk@iamo.de

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1. Introduction

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The emergence and persistence of large farming companies in the agricultural sector of transition countries and emerging market economies is increasingly recognized (Deininger and Byerlee, 2012; Wandel, 2011).

Apart from imperfect competition and market failure that follow the transformation process (Koester, 2005), political support is a considerable factor that facilitates the development of this type of companies (Wegren, 2005) which is often referred to as agroholdings (Balmann et al., 2013; Hockmann et al., 2009; Kataria et al., 2013).

Particularly, in countries such as Kazakhstan, Russia and Ukraine, the emergence of capitalism was characterized by unequal access to the privatization process and rapid development of large controlling shareholders in firms (Dallago and Rosefielde, 2016; Sutela, 2012). At the same time, transition to the market economy required the adoption of large numbers of laws and regulations over a short period of time (Berglöf and Pajuste, 2005). Given limited backing from the post-communist political process, the narrow base of the shareholder constituency of emerging enterprises became entwined with policymakers, causing concerns about the extent of implementation and sustained enforcement of key provisions (Visser et al., 2012). In this context, political protection by the rulers, tax reductions or waivers, subsidies and better access to financial services were and are among the major incentives of large-scale agricultural production (Matyukha et al., 2015). This entwinement of business and policy created a non-transparent economic environment with a high level of social unacceptance and mistrust of a free market economy (Epshtein et al., 2013; Oleinik, 2005). Land grabbing, tax evasion, rural unemployment and outmigration are not nearly enough to show the entire spectrum of problems agroholdings are publicly criticized for (Borras Jr. et al., 2011; Deininger and Byerlee, 2012; Iwański, 2015; Visser and Spoor, 2011).

Another factor that facilitates agroholdings’ growth is their ability to minimize costs of hired labor monitoring and maintain increasing returns to scale by means of modern technologies (Valentinov, 2007). However, growth based on technological progress requires access to capital whereas capital markets are often imperfect in transition and emerging market economies. The adoption of international reporting and accounting standards is substantially postponed (Kuzina, 2014; Zeghal and Mhedhbi, 2006) while insufficient disclosure of even mandatory information on companies makes it impossible for investors and commercial banks to make proper investment decisions (Il’chenko-Syuyva and Radzimovska, 2008). To this end, the existing empirical studies demonstrate that the large farm investment behavior is strongly affected by credit constraints (Swinnen and Gow, 1999; Zinych and Odening, 2009). Therefore, a number of agroholdings express a high demand for private and public equity in financing growth (Petrick et al., 2013) and increasingly attract outside capital through listing on international stock markets (Chaddad, 2014).

If a company that emerged and operates under such conditions intends to be listed on international financial markets, it may face some particular challenges. An international listing requires transparency as an effective mechanism to mitigate specific consequences of discretionary policies and managerial opportunism. The main concern is that such companies may not be sufficiently disciplined and regulated for developed capital markets outside the home jurisdiction (Barth et al., 2008; Sun and Tobin, 2005). Therefore, they may benefit from improvements in corporate transparency through greater liquidity, lower investor uncertainty and transaction costs (Lang et al., 2012).

However, the magnitude of the benefits that accrue from higher corporate transparency depends on the companies’ ability to appropriately address the institutional framework in a given economy. In this context, not only adherence to legal requirements and practice of information disclosure (Berglöf and Pajuste, 2005) but also response to ideological, mythological and moral societal discourses (Balmann et al., 2016; Hermans et al., 2009) may strengthen access to capital. Public concerns on the issues like land grabbing, tax evasion, layoffs, industrial farming practices, etc. that are publicly discussed in relation to agroholdings may cause social unacceptance of agriculture as well as biased public perceptions and policies. This is even

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more important given the initially focal role of agriculture in the society and its eventual ‘alienation’ from the society driven by agricultural technological progress1 (Thompson, 2010).

We therefore argue that corporate transparency of agroholdings is in the focus of both the private investor and general public interest while survival and growth of agroholdings hinge on their ability to address transparently the problems of both the investors and general public. Corporate governance, independent audits, financial disclosure regimes, securities laws and regulators are among the most discussed institutions that promote corporate transparency (Bushman and Smith, 2003; Bushman et al., 2004). However, such institutions do not entirely address the issue of corporate transparency as they often overlook public interests, especially against the backdrop of weak institutional environments and imperfect factor markets. This incomplete perspective prevails also in the corporate transparency literature that captures specific aspects of transparency rather than holistic views on the construct.

The general aim of this paper is thus to demonstrate how agroholdings manage their corporate transparency in order not only to secure access to capital markets through financial information disclosure but also to address the challenges of the institutional environment by means of transparent corporate social responsibility (CSR) activities and best communication practices. Because firms generally tend to exhibit heterogeneous strategies when facing common sets of pressures (Lewis et al., 2014), we draw upon case studies of four different Ukrainian agroholdings characterized by distinct founder ownership, financial results and extent of corporate transparency.

The paper is structured as follows. First, we elaborate on the theoretical background of the transparency construct in management and economic research. Second, we introduce the context of agroholdings in transition and emerging market economies followed by the results of the case studies. Finally, we develop managerial implications and conclusions.

2. The concept of corporate transparency The view that transparency deserves more attention in firm management is widely shared (Deimel et al., 2008; Fritz and Fischer, 2007; Hanf and Hanf, 2007). In this paper, we focus on the concept of corporate transparency and use the following research-oriented definition of it: ‘Transparency is the availability of firm specific information to those outside publicly traded firms’ (cf. Bushman et al., 2004: 207).

Corporate transparency has long been under scrutiny of the financial disclosure literature that followed the shareholder perspective on firm performance (Friedman, 1970). In this vein, finance and accounting scholars recognize higher firm transparency with respect to financial statements and the firm’s economic results as one of the important drivers of shareholder value (Bushman et al., 2004). Apart from timely delivery and comprehensiveness of financial reports, the financial disclosure research also focuses on complex systems of supporting institutions that promote the governance of publicly traded companies. Particular attention is paid to corporate governance structures as they serve to: (1) ensure that minority shareholders receive reliable information about the value of firms and that a company’s managers and large shareholders do not cheat them out of the value of their investments; and (2) motivate managers to maximize firm value instead of pursuing personal objectives. Institutions promoting the governance of firms include reputational intermediaries such as diverse boards, investment banks and audit firms, securities laws and regulators, and disclosure regimes that produce credible firm-specific information about publicly traded firms (cf. Bushman and Smith, 2003).

The information that is used for the assessments of the transparency-enabling environment includes annual reports, articles of association, memorandums of association, annual general meeting minutes, analyst reports, 1

There is an ongoing discussion among agricultural economists representing two different streams of thought on the societal role of agriculture, i.e. the agrarian vision and the agro-industrial vision of agriculture. Whereas the agro-industrial vision emphasizes the economic benefits of agriculture for the society (e.g. Boehlje, 1999), the agrarian vision underscores the exceptional moral role of agriculture calling for more agro-political privileges (Thompson, 2010).

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and other publicly available sources (Cheung et al., 2010). Accounting standards, auditor choice, earnings management and analysts following are named among the factors that influence corporate transparency (Lang and Maffett, 2011). Furthermore, there is evidence that more firm shares being publicly traded motivate firms to be more transparent, i.e. the firm’s ownership structure is another factor that affects corporate transparency (Chau and Gray, 2002; Patel et al., 2002). The financial disclosure literature also postulates that corporate transparency is positively related to a firm’s reputation that motivates firms to disclose information more intensively (Roberts and Dowling, 2002). However, this single effect on accounting performance might not reflect many of the benefits of good reputations, which usually materialize in the long run and involve various value drivers.

In this context, the shift from the shareholder focus to the stakeholder perspective in business and management research (e.g. Frooman, 1999) offers a new terrain for interpretations of the corporate transparency concept.

As a result, corporate transparency is not viewed solely from the agency cost perspective but also as a source of competitive advantage (Ioannou and Serafeim, 2015). Recent evaluations demonstrate that the perceptions of the general public also have important implications for future shareholder value (Raithel and Schwaiger, 2015; Rindova et al., 2010). The general public’s perceptions of the firm gain in importance as the demand for the firm’s ability to address the interests of many stakeholder groups with regard to environmental protection, social security, product and service quality poses new requirements toward corporate communications.

Importantly, the ability to fulfil these requirements may turn on a number of important drivers of shareholder value such as improved access to bank loans, sales growth and higher operating margins and thereby sustain the firm’s competitive advantage (Raithel and Schwaiger, 2015). Furthermore, along with the studies that argue that higher transparency leads to higher performance (Stiglbauer, 2010), there exists a body of literature that assumes reverse causality and emphasizes that companies which have already solved their agency conflicts and perform better may also be more transparent (Eng and Mak, 2003; Li and Qi, 2008). Moreover, institutional settings that are often unable to preclude the incurring social costs of corporatization may be a driver of a more ethical behavior of firms (Balmann et al., 2016).

The firm’s CSR activities play an important role in this respect. Ioannou and Serafeim (2015) demonstrate that the investments analysts’ assessments of the listed companies improve with the firms’ involvement in CSR. Particularly with regard to the analysts’ forecasts, the expected improvements can be achieved only if internal and external CSR activities are addressed (Hawn and Ioannou, 2015). Apart from disclosure on employee security issues, organizational and technological innovations, firms have to demonstrate their awareness of environmental pressure (Hellberg-Bahr and Spiller, 2012; Hoogiemstra, 2000) and be active in improvement of social and physical infrastructure, implementation of diversity, community and environment protection projects. Accordingly, a number of public and private initiatives on CSR disclosure have been recently developed. The most known of them include the United Nations Global Compact index, the Global Reporting Initiative (Gamerschlag et al., 2011), Kinder Lyndenberg Domini social ratings data (Bear et al., 2010) and others.

Importantly, the ability of firms to comprehensively inform about their social, environmental and economic activities increases with the development of modern communication technologies. These technologies enable firms to bring together all communications that involve a firm as a corporate entity and, thus, the corporate communication’s raison d’être becomes to organize a firm’s communication activities as a coherent totality (cf. Christensen, 2002). In order to address all potential stakeholders, compliance with best communication practices and the ability to use effectively the communication tools is relevant (e.g. Van den Bosch et al., 2005). The information that is used for the assessments of best communication practices includes company website, readability and downloadability of documents, conference calls, etc. (Cheung et al., 2010; Investor Relations Agency, 2014).

The above presented overview of the literature on corporate transparency as well as some earlier, more extensive reviews on this issue (e.g. Beyer et al., 2010; Gray et al., 1995; Healy and Palepu, 2001) inductively deliver a set of criteria that enable comprehensive empirical inquiry into the concept of corporate transparency.

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These criteria principally compose the following transparency constructs: (1) Information about the firm’s corporate governance structure; (2) information about owners, shareholders, shares and financial results; (3) information about the firm’s CSR activities; and (4) compliance with best communication practices (Table 1).

To the best of the authors’ knowledge, the concept of corporate transparency has not yet been analyzed in its entirety as proposed by this holistic view, particularly from the perspective of corporate enterprises engaged in primary agricultural production in transition and emerging market economies. We therefore introduce the context of Ukrainian agroholdings in the subsequent section and then scrutinize the role of transparency in the agroholdings through the lens of the proposed transparency constructs.

Table 1. Investor and general public orientated criteria for corporate transparency inquiry.

Transparency construct

Transparency criteria (disclosure/availability of information on:)

Corporate governance information (Bushman et al., 2004; Bushman and Smith, 2003)

• Independent directors • Board of directors • Corporate governance rules • Statute/articles of association • Corporate report • Press release on company events • Presentations for investors • Shareholder meetings • Prospectus • Shareholder structure • Share price • Offering structure • Independent auditor • Analyst coverage • Personal contact of investment relations officer • CSR reports • CSR events calendar • Commitment to CSR areas: –– community development –– diversity and equal opportunities –– employee relations –– product quality –– environment protection –– human rights • Possibility of conference calls • Multiple languages • Feedback form • General contacts • Website search • Site map • Usability (‘three clicks to the goal’) • Regular update • Document readability • Document downloadability

Ownership, share and financial information (Chau and Gray, 2002; Cheung et al., 2010; Lang and Maffett, 2011; Patel et al., 2002)

Corporate social responsibility (CSR) information (Bear et al., 2010; Gamerschlag, 2011; Ioannou and Serafeim, 2015)

Best communication practices (Cheung et al., 2010; Christensen, 2002; Investor Relations Agency, 2014)

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3. The context: large corporate farms in Ukraine

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Our focus on Ukraine is determined not only by the fact that its agricultural sector is increasingly dominated by operations of large-scale farms but also by the evidence that this transition country accommodates a number of institutional bottlenecks, driving non-transparent business practices. Entwinement of businessmen and policymakers, biased public policies, mistrust of a free market economy, insufficient social security systems and imperfect markets affect the country’s economy today (e.g. Sutela, 2012).

Furthermore, Ukrainian agriculture is subject to a broader controversy that originates from the so-called alienation of agriculture from the society since agriculture is becoming globally less capable of dealing with the new societal pressures such as animal welfare and environment protection (Thompson, 2010). Noteworthy, the related disputes are often less determined by an endeavor to find respective solutions whereas they are to a large extent characterized by ideological buzzwords such as ‘factory farming’, ‘death of peasant farms’, etc. There are also other, deeper problems associated with the special role of agriculture in the economic system. Agriculture enjoys countless privileges not only in the context of agricultural policies but also in the tax, social security and other areas of public policy. Sometimes even special legal provisions apply within the agricultural sector, such as the demarcation for commercial livestock or the distinction between legal forms of farming (Balmann et al., 2016).

The debate on reasonability of the privileges is particularly intensive in transition economies where agricultural policies and the associated path dependencies lead to the development of dualistic structures of agricultural production. For instance, in Ukraine, the Land Code of 2001 recognized private land ownership, allowed for certain land transactions and eliminated size restrictions for rural household plots and family farms.

Nevertheless, it included a moratorium on buying and selling of land by households and family farms that has been retained until January 2008 and then prolonged each year until present times. The Land Code also bans the investment of agricultural land in the equity capital of newly created businesses, a precautionary measure to counter pressure from farm managers on landowners to transfer their land to the corporate farm, thereby losing legal rights to it. However, the Land Code does not limit the lease term and very long-term leases lead to a de facto absorption of land in the corporate equity (OECD, 2003). As a result, huge agroholdings emerged as an important player of the Ukrainian agricultural and land markets while small-scale subsistence farming is also persistent and dominates several production sectors (Kataria et al., 2013; Lapa et al., 2015).

Moreover, agricultural policies that aim to facilitate farm incomes were often conducive to the development of agroholdings. In Ukraine, debt restructuring programs, simplified and lowered taxes on agriculture and subsidized loans for capital investment were among the main drivers of land consolidation by outside investors (Lapa et al., 2015). Even today some of the agroholdings are among the main recipients of state support in the form of tax exemptions2.

Another factor of the development of agroholdings is the growing global demand for food and integration into the world markets that made agriculture a profitable business in Ukraine. In particular, this holds for crop production (Table 2) as crop commodities exports prevail in the structure of exports and contribute to the country’s positive agricultural trade balance (Figures 1 and 2). Large-scale private investments in crop production thus became one of the major internal drivers of growth in Ukraine’s agriculture (Nivyevskyi et al. 2015).

As a result of land consolidation, the number of corporate farms shrank from roughly 17,700 in 2004 to 12,887 in 2014 (State Statistics Committee of Ukraine, 2015). An increasing number of these farms are coming under the control of agroholdings. The agroholdings’ mother companies typically have a controlling interest in 5 to 50 individual corporate farms of about 2,000-15,000 hectares each with the total size of an 2

http://tinyurl.com/jgccb2v. It is stated that six publicly listed Ukrainian agroholdings enjoyed a $295 million tax exemption in 2014. Based on the authors’ expert interview with the representative of Ukrainian Agribusiness Club, this made about 15% of total tax exemptions in Ukrainian agriculture in 2014.

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Profitability â&#x20AC;&#x201C; total Grains Sunflower seeds Sugar beet Vegetables Potatoes Fruit and berries Grapes Milk Cattle Pigs Sheep and goats for meat Poultry Eggs

2010

2011

2012

2013

2014

24.5 13.9 64.7 16.7 23.5 62.1 14.9 91.6 17.9 -35.9 -7.8 -29.5 -4.4 18.6

24.7 26.1 57.0 36.5 9.9 17.7 17.9 57.1 18.5 -24.8 -3.7 -39.6 -16.8 38.8

22.8 15.8 44.9 15.9 -0.6 -17.4 9.6 71.5 1.8 -28.3 1.8 -32.8 -5.9 47.6

11.7 2.4 28.2 3.1 7.5 22.4 127.5 99.0 13.1 -41.3 0.2 -36.2 -12.6 58.8

21.4 25.7 36.7 17.8 15.5 9.9 65.8 57.5 11.1 -34.5 5.6 -43.0 -5.4 60.9

Meat

8,000

Dairy

Cereals

Oilseeds

Vegetable oils

7,000 6,000 5,000 4,000 3,000 2,000 1000 0

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Figure 1. Development of main Ukrainian agri-food exports in 2004-2015 in million USD (adapted from United Nations Comtrade Database, 2016).

USD billion

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Table 2. Profitability of production in agricultural enterprises in Ukraine (%) (adapted from State Statistics Service of Ukraine, 2015).

20 18 16 14 12 10 8 6 4 2 0

Export

2004

2005

2006

2007

2008

Import

2009

2010

Balance

2011

2012

2013

2014

2015

Figure 2. Agricultural trade in Ukraine in 2004-2015 in billion USD (adapted from United Nations Comtrade Database, 2016).

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Because agroholdings benefit from economies of size, they often have better access to production inputs and external capital sources. Along with improved access to capital, listings on international stock markets often entail revision of the existing business models by agroholdings as they have to disclose information on governance structure, financials and organization (Chaddad, 2014; UCAB, 2012). However, the social benefit of large-scale agricultural investments is also highly dependent on the institutional frameworks for land use, human capital development, and implementation of production and management technologies (Petrick et al., 2013). Particularly in transition and emerging market economies which lack reliable social security systems and where the institutional environment is weak, the processes of corporatization and consolidation are able to induce high social costs such as, for example, replacement of labor through mechanization. Scarce evidence suggests that some agroholdings respond to the arising social challenges through the development of physical and social infrastructure in rural areas (Hanf and Gagalyuk, 2009) but, generally, little empirical research exists on these issues.

Hence, the current paper keeps its momentum, elaborating empirically on the role of corporate transparency in the context of large publicly listed agricultural companies with operations in Ukraine. Since the first initial public offering (IPO) that was conducted in 2005, the subsequent listings of Ukrainian agroholdings on international equity markets were able to raise more than $6 billion of additional investments (UCAB, 2012).

In 2005-2014, 21 agroholdings with operations in Ukraine were listed on international stock exchanges.

Within this period, some of them merged while some were delisted due to poor performance. Thus, today only 12 companies from primary agriculture of Ukraine are publicly listed (Supplementary Table S1.).

Noteworthy, no Ukrainian companies that are involved in primary agricultural production made an IPO after 2012. Since late 2013, the country risk of Ukraine was high due to a political turmoil and an ongoing military conflict in the eastern part of the country. Accordingly, the expected pricing conditions on international equity markets as well as the economic results of agroholdings got substantially worse. Inadequate macroeconomic and monetary policies led to triple devaluation of the Ukrainian hryvnia against the US dollar. As a result, the total net profit of $406.5 million that publicly listed agroholdings made in 2013 turned into the total net loss of $767.8 in 2014 (UCAB, 2016). Total capitalization declined twofold in the same period (Figure 3). This force majeure development renders comparability of some of the current performance figures of the listed agroholdings difficult. Therefore, further elaborations of this paper that consider capitalization, ownership and share value of the agroholdings are based on the figures that precede the 2014 events, i.e. lastly dated October 2013.

-1 2 30 -20 -0 09 4 31 -20 -0 10 8 31 -20 -1 10 2 30 -20 -0 10 4 31 -20 -0 11 8 31 -20 -1 11 2 30 -20 -0 11 4 31 -20 -0 12 8 31 -20 -1 12 2 30 -20 -0 12 4 31 -20 -0 13 8 31 -20 -1 13 2 30 -20 -0 13 4 31 -20 -0 14 8 31 -20 -1 14 2 30 -20 -0 14 420 15

12,000 10,000 8,000 6,000 4,000 2,000 0

31

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agroholding varying from 8,000 hectares to 640,000 hectares. Today 79 agroholdings farm about 6.2 million hectares or 17% of total arable land; the largest of them, UkrLandFarming, operates about 640,000 hectares.

In 2014, agroholdings produced about 22.5% of the gross agricultural output, including 19.6% of the total crop output and 28.1% of the total livestock output (UCAB, 2015).

Figure 3. Total stock market capitalization of Ukrainian publicly listed agroholdings in million USD (adapted from UCAB, 2015).

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4. Case studies of Ukrainian publicly listed agroholdings

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Given the limited empirical evidence about the process and outcomes of transparency management by large agricultural enterprises in transition and emerging market economies, we use a case study approach to develop inductively a number of implications. Where possible, we verify our case study results with the data from agroholdingsâ&#x20AC;&#x2122; corporate reports, financial statements and official websites.

We draw upon case studies of the following publicly listed Ukrainian agroholdings: MHP, Agroton, IMC, and Mriya. We select these four companies out of twelve publicly listed Ukrainian agroholdings because they are characterized by different founder ownership structures and dynamics as well as by different performance results (Table 3). These aspects may provide additional insights into the interrelationships between transparency, ownership structure and performance.

Table 3. Characteristics of studied agroholdings (adapted from data of stock exchanges, corporate reports and websites, and Ukrainian Agribusiness Club, 2016).1

Date of IPO Corporate governance Registered office

MHP S.A.

Agroton Public Limited

IMC S.A.

Mriya Agro Holding Public Limited

May 2008

November 2010

May 2011

July 2008

Luxembourg City, Nicosia, Cyprus Luxembourg London Stock Warsaw Stock Exchange Exchange

Stock market

Total number of board members Total number of independent directors Number of foreign independent directors Investor relations and ownership Financial statements reporting Independent auditor

Number of investment analysts Free float as of IPO date (%) Free float as of October 2013 (%) Performance Capital raised through IPO ($ million) Capitalization three months after IPO ($ million) Capitalization as of October 2013 ($ million) Share price three months after IPO ($) Share price as of October 2013 ($) Net profit three months after IPO ($ million) Net profit as of October 2013 ($ million) Operations Land use as of IPO (thousand ha) Land use as of October 2013 (thousand ha)

Luxembourg City, Nicosia, Cyprus Luxembourg Warsaw Stock Frankfurt Stock Exchange Exchange (delisted in 2014) 5 8 2 2 2 2

6 3 3

5 2 0

Quarterly Deloitte

Quarterly Baker Tilly

Semi-annual KPMG (replaced E&Y in 2015)

14 22.3 52.0

Semi-annual KPMG (replaced Baker Tilly in 2012) 4 42.4 44.6

6 24.0 26.3

n.a.

20.0 20.0

161.3 1,745.7

54.4 312.8

24.4 101.0

90.0 388.4

2,496.2

16.9

147.4

667.6

15.8 15.7 14.9

41.0 0.8 -18.9

9.2 4.7 14.8

3.7 6.3 75.0

162.0

-5.7

25.8

88.5

200 360

151 151

39 137

150 295 >>>

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Table 3. Continued.

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Specialization

Vertical integration and other production

MHP S.A.

Agroton Public Limited

IMC S.A.

Mriya Agro Holding Public Limited

Poultry meat; poultry meat and beef products and semi-products Oilseed and grain production and storage; milk production; fruit production; biogas production

Oilseed and grain production and storage

Oilseed and grain production and storage

Milk production; bakery products

Milk production; potato production

Grain and oilseed production and storage; sugar beet production Sugar production; seed production; potato production

CSR Main CSR areas

n.a.

Community Community development, development, employees animal welfare, employees, environment 1 IPO = initial public offering; CSR = corporate social responsibility; n.a. = not available.

Community development, employees

MHP S.A. The public joint stock company MHP (stands for ‘Myronivskyi Khliboprodukt’ which means ‘Bakery products from Myronivka’ in Ukrainian) was founded in 1998 by Mr. Yuriy Kosyuk who is also the Chief Executive Officer (CEO) and the major shareholder of MHP. The company is a strictly vertically integrated agroholding with main facilities located in Central Ukraine. The total farmland in use is about 360,000 ha although MHP is primarily specialized in chicken production. Its share in total chicken meat production in Ukraine accounts for about 55%. MHP has developed and owns a range of branded semi-processed and processed poultry products. Other operations involve grain and oilseed production, storage and trade, cattle breeding, meat processing, fodder production, and fruit production.

In 2008, MHP was listed on London Stock Exchange through an IPO in Global Depositary Receipts (GDRs) and attracted $161.25 million of outside capital. Free float amounted to 9.70% of the company’s issued ordinary share capital. Since then, the company has increased free float up to 51.95% through additional allotments.

The attracted funds were mainly used for expansion of the poultry business segment. MHP invested in the construction of a large poultry complex with the total annual capacity of 566.6 thousand tons of chicken meat in Vinnytsya region of Ukraine.

■■ Corporate governance transparency Given MHP’s involvement in international equity markets and a high degree of dependence on foreign investors, the company’s corporate governance is designed in the way to address the expected agency costs between shareholders and corporate managers. The board of directors is rather diverse. Along with the company’s three top managers who are also shareholders of MHP, the board additionally consists of three non-executive directors who participate in the company’s audit and remuneration committees. All three nonexecutive directors are foreign citizens and represent the agribusiness, commercial banking and investment sectors. MHP formally complies with Ten Principles of Corporate Governance approved by the Luxembourg Stock Exchange and voluntary corporate governance regime stated in the UK Corporate Governance Code.

The company holds annual general meetings every year in April and publishes articles of association on its International Food and Agribusiness Management Review

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website. The main aspects of the company’s corporate governance policy are described in the Corporate Governance Charter approved by the board of directors.

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■■ Ownership, share and financial transparency The IPO prospectus of MHP is publicly available on the company’s website whereas the results and structure of the offering are described both in the 2008 financial report and on the history page of the company’s website. MHP also publishes interim (quarterly) and annual corporate reports on its website. The reports contain information about the board of directors, audit and remuneration committees, top management compensation, ownership structure, share value, holding structure, financial results of the holding in general and each particular business segment in particular. Each of the reports is announced in a respective press release. The MHP website also provides a daily update of the company’s share and bond information. Along with presentations for investors, MHP informs its shareholders about annual meetings and other corporate events through its financial calendar which is also available on the company’s website. 14 investment analysts from both international and Ukrainian investment banks cover the company’s operations.

■■ Corporate social responsibility transparency MHP discloses its CSR policy on the corporate webpage. This policy captures a number of activities in the areas of human capital development, animal welfare, environmental protection, sustainable development, and biosecurity. Although all of these areas are considered important, the company’s managers emphasize that the main driver of CSR is the necessity to maintain the commitment of landowners. Given that farmland sales are prohibited in Ukraine, land lease is the only way to access land. Long-term investments of businesses in the leased-in farmland are thus insecure due to a threat that a significant number of lessors/landowners may get better lease price offers for their land plots from competing agroholdings. Therefore, the development of the landowners’ communities and binding the landowners is supporting the long-term interests of the company. For this matter, MHP has established a specific management position on landowner relations and founded a special social center designed as a separate NGO that addresses the needs of the communities in MHP’s business locations. The social center provides new equipment to schools and hospitals, makes donations to churches, invests in reconstruction of rural roads and realizes a number of other social projects.

■■ Best communication practices Communication practices of MHP are designed in the way to maintain interactions with a broad range of stakeholders. MHP publishes annually its stakeholder engagement plan for an upcoming year. The company has established a unified department of public relations and social responsibility which signifies the importance of external communication of CSR. MHP is also involved in government relations through membership to several business associations in Ukraine. In order to interact with its customers, MHP maintains special websites for each of its branded products. The company’s suppliers are also informed about fodder quality and purchase requirements on a separate webpage. Communication with investors is supported through the investor relations webpage that offers the possibility of conference calls. This webpage also provides personal contact details of the investment relations officer as well as a feedback form, website search and site map. Information on the webpage is presented in three languages while all corporate documents are downloadable in PDF format.

■■ Summary on MHP S.A. MHP is one of the most successful agroholdings in Ukraine. Executing a vertically integrated business model in the region with fertile black soils, it demonstrates high performance on international equity markets and is effective in diverting outside capital into expansion of its businesses. The company’s corporate governance and broad analyst coverage effectively preclude agency problems although its founder acts as a CEO and chairman of the board at the same time. MHP’s corporate communications address its stakeholders comprehensively.

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Information for investors is regularly updated whereas CSR programs are locally implemented in rural communities and communicated to a broader audience.

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Agroton Public Limited Agroton is a diversified vertically integrated agricultural producer in Eastern Ukraine. The company’s core business is production, storage and processing of sunflower seeds and wheat. In addition, the company is engaged in livestock production. In 2001-2009, Agroton tripled its harvested area from initial 41,000 hectares to almost 140,000 hectares. Today Agroton harvests about 151,000 hectares of ‘black soil’ arable land, operates storage facilities with a throughput capacity of 285,000 tons per year, and produces and sells high quality cattle.

The company was founded by Mr. Iurii Zhuravlov who is also the CEO of Agroton. In 2009, Agroton was listed in GDRs on the Open Market of the Frankfurt Stock Exchange (representing almost 25% of Agroton’s share capital) to finance further business growth. The company conducted IPO and has been listed on Warsaw Stock exchange since late 2010. However, in 2013, Agroton announced technical default on its bond obligations due to the crisis in the Bank of Cyprus where the company decided to keep the most part of its operating capital. This immediately led to a considerable drop of the company’s share price and ratings.

■■ Corporate governance transparency Since Agroton is incorporated in Cyprus, it has to comply with Cypriot law, as well as with provisions relating to corporate governance issues in in the company’s Articles of Association and the Companies Law. However, the company is not subject to the requirements of any national corporate governance rules, including the Cypriot Code on Corporate Governance, as it is not listed in Cyprus. The company’s board of directors consists of three top managers who are also shareholders of the company (including Mr. Zhuravlov as a chairman of the board) and two independent, non-executive directors who participate in the audit and remuneration committees. The non-executive directors are Ukrainian citizens with marginal linkages to international stock markets. One of them is the former deputy minister of agriculture whereas the other one is the top manager of the state-owned railway company.

■■ Ownership, share and financial transparency Agroton regularly publishes interim (semi-annual) and annual financial reports. Its annual reports contain the reports of the board of directors and independent auditor, information on financial positions, cash flows and changes in equity. Agroton’s ownership structure is disclosed both in the annual report and on the corporate webpage. The annual report does not cover the results of the company’s particular business segments but these results are described in presentations for investors. The prospectus and the offering structure are available on the company’s investor relations webpage while share information is regularly updated on the homepage. Personal contacts of the Agroton’s investment relations officer are also accessible on the investor relations webpage. At the same time, the company’s information about annual meetings often appears on the corporate website with larger delays. The operations of Agroton are followed by four investment analysts from both international and Ukrainian investment agencies.

■■ Corporate social responsibility transparency Agroton generally expresses little commitment and pays little attention to disclosure of its CSR activities.

Moreover, the company is criticized by local authorities for refusal to implement a diversified business model that would include a broader range of livestock products and create additional jobs. Another point of criticism is a strong focus of Agroton on production of sunflower that exhausts soil fertility if cultivated for

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several consecutive years in violation of the scientifically grounded crop rotation schemes3. The company thus often fails to address some important external pressures such as human capital development and environmental sustainability. At the same time, Agroton’s CSR activities are only visible through sporadic local mass media reports.

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■■ Best communication practices.

For the most part, the Agroton’s corporate website comprehensively addresses its investors and creditors while the information that might be considered interesting to other stakeholders applies only to the carriers’ webpage. The corporate website provides information in four languages, website search, and all corporate documents downloadable in PDF format. The possibility to arrange a conference call or leave any feedback information is missing.

■■ Summary on Agroton Public Limited Despite being accurate in addressing investors’ information needs, Agroton demonstrates poor results with regard to both stock market performance and transparency. The company’s technical default on financial obligations is exacerbated by insecurity arising from criticism of local authorities. One reason behind these problems is lack of capability to address relevant stakeholder groups that takes its roots in a low diversity of the board resources. The fact that the same person is simultaneously a founder, CEO and chairman of the board is not uncommon but corporate governance rules provide mechanisms that help bring other people with novel and valuable views to the board. However, the Agroton’s board of directors is rather undiversified with its independent directors being rather inside and having minor linkages to both rural community and international equity markets. Uniformity of board perspectives, coupled with a relatively high portion of shares in free float, causes high uncertainty for investors and affects credit ratings and financial performance.

It also precludes an adequate feedback to environmental pressure and recognition of the importance of (disclosure on) CSR. IMC S.A. IMC (Industrial Milk Company) was founded in 2007 by Mr. Oleksandr Petrov who is the chairman of the board and the main shareholder of IMC (68.66% of shares). 5.05% of the company’s share capital is owned by other investors while 26.29% is in free float. IMC is specialized in grain and oilseed production, storage and sales as well as in milk production. The total farmland in use is 136,700 hectares and the storage capacity accounts for 554,000 tons. In 2014, the company produced 22,500 thousand tons of milk. With these indicators IMC is among the top 10 Ukrainian agroholdings in terms of size. The main operation facilities of the company are located in Central and Northern Ukraine.

In May 2011, IMC raised $24.4 million through an IPO on Warsaw Stock Exchange. The additionally raised funds were directed to expand the company’s operations in terms of land use and grain storage. By the end of 2011, IMC established the third production cluster in the Sumy region after acquisition of 6 farms and the grain and oilseeds silo with the storage capacity of 34,000 tons.

■■ Corporate governance transparency IMC adheres to the Corporate Governance Rules of Warsaw Stock Exchange but, as a Luxembourg registered holding that is not listed on a stock exchange in Luxembourg, the company is not required to adhere to the Luxembourg corporate governance principles. The role of Mr. Petrov as the chairman of the board is supervisory whereas the company is managed by a hired CEO. Potential agency problems between shareholders and top managers are addressed through membership of two non-executive directors to the board. They lead the audit 3

http://tinyurl.com/hho7b8j.

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and remuneration committees of IMC. Both are foreign citizens and have a background in a Germany-based research institute and Poland-based investment agency.

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■■ Ownership, share and financial transparency IMC regularly publishes interim (quarterly) and annual corporate reports and supplements them with press releases. Share information and presentations for investors are regularly updated on the company’s website.

IMC informs its investors and shareholders about corporate events through its financial calendar which is available on the company’s website. Six analysts from international and Ukrainian investment banks follow the operations of IMC. Inside information is obtainable through the company’s investor relations officer whose contacts are accessible through the webpage. The IMC’s webpage also contains its IPO prospectus and the offering structure; information about owners and shareholders is presented on the website as well as in the annual report. Along with the shareholder structure, the annual report discloses statements of the board of directors, financial position and cash flow of the holding. The results of particular business segments are described in presentations for investors.

■■ Corporate social responsibility transparency IMC expresses commitment to CSR and implements its social program ‘IMC. Aid to People’ aiming to develop social infrastructure in the regions of its operations. The company reports about its CSR activities on the corporate website. These activities are implemented both ad hoc and within a range of support mechanisms developed in terms of the company’s social program. Single actions such as medical treatment support to rural individuals are combined with an ongoing sponsoring of schools and kindergartens, provision of villages with electricity and water supplies. Local community development is the primary dimension of the company’s CSR. The IMC managers are also members to the social committee of the business association ‘Ukrainian Agribusiness Club’ where relevant problems of rural areas are discussed with other agroholdings.

■■ Best communication practices Apart from reports, investor presentations, CSR programs and membership to business associations, IMC interacts with investors and public by means of its website. The company’s website contains information in four languages, website search, quick links and downloadable PDF-documents. At the same time, feedback forms and the possibility of direct conference calls are missing.

■■ Summary on IMC S.A. Despite a relatively small share of capital in free float, IMC continues to be transparent to both the investors and general public. Partial separation of ownership and control and presence of two foreign independent directors are likely to contribute to this result. The company’s management recognizes the importance of CSR for business survival whereas accuracy of financial and corporate reporting can be associated with sound stock market performance.

Mriya Agro Holding Public Limited In August 2014, one of the largest Ukrainian agroholdings Mriya reported its failure to make bonds interest payments and was delisted from the Frankfurt Stock Exchange (FSE). The company’s debt amounted to $1.28 billion at that time. In January 2015, the name of Mykola Huta, the co-owner of the defaulted Mriya, was placed on the Interpol’s list while the Ministry of Interior of Ukraine sought him for defrauding of over $100 million from foreign investment funds4.

4

http://bankwatch.org/node/11360.

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The story of this downfall is astonishing in the view of the fact that Mriya was a showcase of a familyowned business that became one of the largest agroholdings in Ukraine. Mriya was founded by the parents of Mykola Huta in 1992. From owning 50 hectares of arable land in 1992, Mriya grew to operate 320,000 hectares in six regions of Western Ukraine. In 2008-2014, the company was listed on the FSE with 20% of share capital being in free float. The company’s capitalization reached $1.1 billion at its peak in 2010.

Since 2010, the World Bank Group’s International Finance Corporation has provided Mriya with three loans amounting to $175 million that helped Mriya finance the commodities, land lease rights, storage capacities, and working capital. The European Bank for Reconstruction and Development (EBRD) supported Mriya’s pre-harvest and post-harvest production with a $24.1 million loan. Additionally, export credit agencies such as the Export-Import Bank of the United States and Danish EFK have provided credit and guarantees for Mriya to purchase machinery and equipment from the US and Danish companies5.

In pre-default times, the Mriya’s board of directors consisted of eight persons. Four of them were the Huta family members while the rest included two inside directors and two outside members to the board. The outside, non-executive directors had their backgrounds in the EBRD and international asset management agency, thus possessing strong connections with the international equity markets.

Along with business expansion and borrowing activity, Mriya invested in the development of rural areas and human capital. The company founded the first Ukrainian private school in agronomy where the post-graduates of agricultural universities improved their qualification in seed production, crop physiology, phytopathology, agricultural machinery and production technologies6. In cooperation with the Kyiv School of Economics and the Lviv Business School, the company launched an agricultural master of business administration program named ‘Mriya Leaders Academy’7.

After the default announcement, control over the company’s assets was transferred to its creditors – primarily European and American investors – who decided to preserve the agroholding and appoint a completely new crisis management team. Since then, the company closed most of its financial information for some time.

Only presentations for creditors with the updates on business optimization were made public. In 2015, the company started to disclose its semiannual and annual financial statements again. The new management team also reported that Mriya continues its CSR programs such as support to rural schools, churches and hospitals.

Today Mriya operates approximately 180,000 hectares of farmland and is specialized in sugar beet, wheat, potatoes, rapeseed, corn and soybeans. The company has its own seed production, agricultural and logistics equipment, silo complexes, granaries and potato storage facilities.

■■ Summary on Mriya Agro Holding Public Limited Mriya represents a striking example of how opportunism in top management can obviate advantages of the international listing, hamper the company’s reputation and deinstall effective feedback mechanisms.

Ineffective corporate governance and entwinement of ownership and control enabled cross-holdings and underreporting and finally led to the technical default and delisting.

The main results of the presented case studies are summarized in Table 4 and discussed in the subsequent section.

5 6 7

http://tinyurl.com/zxjz5ml. http://tinyurl.com/z32zepn. http://tinyurl.com/gr3ue58.

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Table 4. Summary of case studies.1

Corporate transparency Corporate governance disclosure Investor, share and financial disclosure CSR disclosure

MHP S.A.

Agroton Public Limited

IMC S.A.

Mriya Agro Holding Public Limited

High

High

High

High

High

High

High

High

Low

High

Low

Moderate

High after IPO Low after default High after IPO Moderate after default High after IPO Low after default

Declined

Adherence to best High communication practices Performance and operations Stock performance Stable Net profit

Increased

Declined significantly Net loss decreased

Land use

Increased

Stable

Increased

High Increased slightly after IPO

Low Increased slightly after IPO

Constantly low Delisted after default

Low

Low

n.a.

Low

High

Moderate

Low

Low Crisis management after default Moderate

Transparency-related characteristics Free float High Increased significantly after IPO Number of investment High analysts Board diversity High

Product differentiation/ vertical integration 1

High

Increased

Increased after IPO Delisted after default Increased after IPO Net loss after default Increased after IPO Declined after default

IPO = initial public offering; CSR = corporate social responsibility; n.a. = not available.

5. Discussion and conclusions This paper suggests that it is crucial to view the concept of corporate transparency holistically by considering the needs of both the investors and general public for firm-specific information. While prior research has mainly addressed different aspects of corporate transparency separately (Botosan, 1997; Bushman et al., 2004; Russo and Fauts, 1997), our results demonstrate that an integrated approach toward this issue may have a number of important implications for agroholdings and their non-owner investors.

For investors, the detailed information about the large corporate farms that operate in transition or emerging market economies is important due to a high level of uncertainty associated or even complicit with weak governance regimes in those economies. The investors also need to decide under which conditions it is safe to invest into an industry characterized by severe exposure to societal pressures and imperfect conditions in factor markets.

A showcase for a positive investment decision would be an agroholding that demonstrates best communication practices and comprehensively discloses information on its corporate governance, ownership, share performance, financial results and social responsibility. Disclosure on most of these information aspects is International Food and Agribusiness Management Review

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mandatory for publicly listed companies incorporated under the laws of developed economies. Ukrainian publicly listed agroholdings make no exception in this respect as their head offices are located in the EU countries. These agroholdings exhibit accuracy in presenting the most important pieces of investor information and are efficient in the use of modern communication technologies. However, irrespectively of the scope of mandatorily disclosed facts and figures, information may often be distorted or even false. This holds even if the firm characteristics that allegedly contribute to higher corporate transparency are in place. Institutional ownership and stock price performance (Healy and Palepu, 2001) are good signs of a transparent agroholding, but, as exemplified by Agroton and especially Mriya, these characteristics are not decisive when the need to prevent top management’s opportunistic behavior arises.

Our findings suggest that the effective board diversity has to be achieved in order to preclude opportunism of an agroholding’s top managers that act simultaneously as members to the agroholding’s board. Following the logic of Bushman et al. (2004), we maintain that the significance of governance-related transparency in explaining the investor decisions is high. However, wide representation of a ‘stronger’ governance regime, i.e. presence of a number of international directors on an agroholding’s board, is a positive signal that reinforces reliability of the declared high level of transparency.

To this effect, our results suggest that some closely held agroholdings, especially those that have developed from small family farm businesses, may exhibit a higher penchant for opportunism than do companies with more widespread ownership. This happens because closely held firms fail to recognize that an international listing implies strategic change for them, requiring adaptive actions such as expansion of the circle of individuals involved in decision-making and monitoring (Brunninge et al., 2007). To fully appreciate this point, recall Mriya where a half of the board members were founder family members whereas a high level of disclosure to both the investors and general public was not yet indicative of the company’s creditworthiness.

For agroholdings, an integrated approach toward corporate transparency is important because it is conducive to preserving access to international equity markets as a source of additional capital on the one hand. On the other hand, the holistic view on transparency is even more viable in transition and emerging market economies where it is likely to help publicly listed companies to reduce uncertainty that arises from existing path dependencies and imperfect factor markets.

The examples of MHP and IMC give evidence that highly transparent agroholdings are more likely to attain stable stock performance even during crisis times. Fulfillment of investor requirements, compliance with corporate governance rules and best communication practices are generally likely to contribute to the improved competitive position of an agroholding. However, the real-world pursuit of competitive advantage by agroholdings takes place in the context of transition and emerging market economies. In these economies, existing rules and regulations are often lagging behind not only those applicable to internationally listed companies but also those necessary to alleviate the effects of disruptive agricultural technologies.

Their enormous size and improved access to capital notwithstanding, agroholdings are part of the process neatly captured by Willard Cochrane’s agricultural treadmill (Cochrane, 1958). According to this concept, aggravation of farming’s terms of trade as well as growing farmland prices compel agricultural producers to constantly introduce new technologies in order to survive rather than to be profitable in a long run. Inducing high social costs discernible in the declining numbers of farmers and absentee land ownership, this process particularly proliferates in the situation when most farmers are renting their land (Levins and Cochrane, 1996).

In Ukraine, where most farmland is being rented by agricultural enterprises, one of the effects of Cochrane’s treadmill is a growing societal pressure on agroholdings evidenced by an ongoing political debate on the possibility to increase farmland rent prices and agricultural taxes. This way CSR of agroholdings gains in importance because care of local communities helps to achieve landowners’ and employees’ loyalty and relieve pressure from the society. CSR of agroholdings is thus essentially instrumental and serves as a license to operate in an opportunistically disposed environment. However, the remaining pressure from International Food and Agribusiness Management Review

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local authorities, NGOs, and national and international media underscores the role of CSR disclosure that was stressed by organizational theorists some time ago (Branco and Rodrigues, 2006; Teece et al., 1997).

Our findings suggest, in turn, that CSR transparency is important not only for highly product-differentiated firms that are generally expected to be more transparent (e.g. Nehrt, 1996) but also for the commodityspecialized companies that compete primarily on the basis of price and are thus exposed to the agricultural treadmill’s effects.

Overall, our results provide empirical evidence that the concept of corporate transparency captures the ostensibly non-concurrent postulates of transaction cost economics, agency theory, business ethics and competitive advantage theories. In other words, corporate transparency is an instrument that helps firms to solve information and agency problems, obtain environmental justice and gain competitive advantage simultaneously. Firms that strive to capitalize on higher transparency would be compelled to adhere to best practices that are synonymously envisaged by different literature streams. These firms would need to implement stakeholder management (Jones, 1995), move away from compliance models to strategic models of environmental management (Miles and Covin, 2000) or engage into strategic philanthropy instead of cause-related marketing (Porter and Kramer, 2002).

In conclusion, we argue that a significant (positive) side-effect of the agroholdings’ listings in international financial markets is that they are forced to be transparent with respect to their activities as well as results.

As farming is particularly controversial nowadays, this higher transparency may contribute to more public trust whereas agroholdings may benefit substantially in the long run if they provide more evidence that they contribute positively to social responsibility and rural development.

Supplementary material Supplementary material can be found online at https://doi.org/10.22434/IFAMR2016.0055.

Table S1. Characteristics of Ukrainian publicly listed agroholdings.

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