Agricultural value chains hold the primary characteristics of a “Principal-Agent” relationship. Therefore, I argue whether the failure of these value chains can be explained in terms of a Principal-Agent Problem. Explaining an issue using economic terms does not help much therefore I am also proposing ways that the problem can be resolved. The Principal-Agent Problem can be best explained in a contract farming setting.
Contract farming is a form of vertical integration within agricultural commodity chains, such that the firm has greater control over the production process, as well as the quantity, quality, other characteristics and the timing of what is produced. The crop contracting relationship can be modeled as a principal-agent problem where the agent (farmer) is growing a specialty crop that will be owned and exclusively used by the principal (processor).
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