Problems and Countermeasures in Benefit Linkage between Agricultural Leading Enterprises and Farmers

Rao CHEN, Weimin YANG,2*, Zhenghe ZHANG

1. Economics and Management School, Beijing University of Agriculture/Beijing New Socialist Countryside Construction Research Base, Beijing 102206, China; 2. Library of Beijing University of Agriculture, Beijing 102206, China; 3.Economics and Management School, China Agricultural University, Beijing 100083, China

Abstract The agricultural leading enterprises and farmers have formed a mutual linkage, mutual restraint, and interdependent benefit linkage mechanism. This paper mainly analyzes the existing problems in the benefit linkage between the agricultural leading enterprises and farmers, and draws on the successful domestic benefit linkage model, and comes up with policy recommendations to provide an effective approach for agricultural leading enterprises to promote development of farmers.

Key words Agricultural leading enterprise, Farmers, Benefit linkage, Linkage model

1 Introduction

No.1 document of central government of 2019 clearly proposes a policy to support the organic linkage between farmers and the development of modern agriculture, while the linkage between agricultural leading enterprises and farmers is an effective means to effectively overcome the weak position of farmers and accelerate the development of modern agriculture. At present, studies on the benefit linkage of agricultural leading enterprises and farmers are mainly related to the analysis of specific research cases, but few of them discuss the obstacles to the benefits of both parties from a macro perspective. In this research, we analyzed the problems of the benefits of agricultural leading enterprises and farmers from the perspective of game, and drew on the successful models, and discussed the effective measures of the benefits of agricultural leading enterprises and farmers, so as to provide effective reference for relevant departments in decision-making.

2 Problems in benefit linkage between agricultural leading enterprises and farmers

2.1 Opportunism becoming a stumbling block to cooperation"Mutual benefit and win-win" is the original intention of cooperation between agricultural leading enterprises and farmers, but from the point of view of the benefits of both parties, there is a natural difference: farmers want high yield and increase income, but because of the disturbance of the Cobweb Theory, farmers often obtain high yield but fail to obtain high income. In case of high yield, agricultural products will be put onto market in a concentrated time. In the event of homogenization of products, a certain time or region may cause a relative surplus of agricultural products, and product prices will fall. In consequence, farmers are facing the dilemma of higher yield but fail to obtain higher income. By contrast, enterprises (especially agricultural product processing enterprises) just "like" the year of high yield, because at this time the agricultural products are of good quality, the raw material supply is sufficient, and the price is low, they can go into full production. Therefore, there is a conflict of benefit between the two parties, it is a natural barrier.

According to the survey, for the cooperation form that leading enterprises rent land for planting, once the enterprises transfer the land in, all planting processes can be controlled, including seeds, fertilizers, agricultural films, pesticides, diesel, watering irrigation, harvesting and other field management activities,etc. Their one challenge is the employment and remuneration, especially during the peak period of planting and harvesting. It is difficult to hire skilled migrant workers, and high labor price increases the production costs of enterprises. Besides, insufficient labor has caused a decline in harvest quality. Among workers they hire, some farmers use inferior materials and turn out substandard goods. Such egoistic behavior has also seriously damaged the foundation of cooperation.

2.2 Weak legal binding force of contractContract farming is a popular form of cooperation between agricultural leading enterprises and farmers, but due to the weak legal binding force of the contract, in other words, the default cost is low, leading to the occurrence of default. For example, in order to encourage farmers to plant, enterprises sign the contract price and prepay the deposit. However, some farmers have spent the deposit in advance, agricultural leading enterprises basically have no guarantee. When performing a contract, due to the natural attributes of agricultural production, there are indeed differences in the quality of agricultural products, which are divided into several levels, and it is difficult to purchase at a standard price, so there is a phenomenon of substituting defective goods for qualified goods. In addition, when the market price is higher than the price of the contract signed before planting, some farmers will do something possible to break the contract. Instead of promptly providing agricultural products in high quality and full amount to leading cooperative enterprises, they just find other purchasers who give them higher price; when the price is lower than the signed contract, farmers will send a large amount of agricultural products (even purchased at low prices) to the cooperative enterprises. Since the future market cannot be accurately predicted when the contract is signed, such uncertainty poses hidden risks to both parties. Since this kind of contract is not binding enough on both parties, whether they will go through legal procedures depends on the benefits of the two parties and the cost of safeguarding the rights.

2.3 Quality of farmers to be improvedFarmers, as a partner, due to their own qualities, it is difficult for them to match the modern enterprise system of agricultural leading enterprises. Under normal circumstances, some farmers have low education and often have "short-sighted behaviors", and smallholder and its economy and consciousness seriously harms the basis of cooperation. For the sake of self-interest in the cooperation, some farmers do not hesitate to subsume the good, which dampened the enthusiasm of the enterprise and brought harm to the continued cooperation between the two parties. Since the mode of economic development of small peasant economy is still the main mode of agricultural development. Farmers have risk appetite, and the opportunistic tendency to commit breach of contract is more serious. Therefore, the ideology, morality, knowledge, law, and skills of farmers are directly related to the willingness, attitude, and effect of cooperation with agricultural leading enterprises.

2.4 Cooperation environment between agricultural leading enterprises and farmers to be optimizedIn addition to the main responsibility of both parties, the environment in which agricultural leading enterprises cooperate with farmers is also very important. Therefore, improving a fair environment is necessary conditions for long-term cooperation between leading enterprises and farmers.

3 Experience of the benefit linkage model between agricultural leading enterprises and farmers

The research on the effective practices and applicability of some outstanding agricultural leading enterprises has reference significance for the benefit linkage and mechanism formed between the leading enterprises and farmers in the current agricultural industrialization practice.

3.1 "Company+farmer" modelThe "company+farmer" production and management model has incorporated farmers into the company’s industrial chain and jointly built a shared system, cultivating the family farm, a new type of agricultural management entity. Its success lies in that it can solve the problems of shortage of funds, lack of technology and market risks faced by farmers from the beginning. It has the advantages of easy start-up, good sales, and small risks, so it is popular with the government and farmers[1].

3.2 "Company+cooperative+farmer" modelThe "company+cooperative+farmer" model, providing assistance in product standard setting, production facility construction and technical services, and realized the bundling of interests among the entities. Cooperatives are composed of farmers with common interests. By increasing the purchase price and the return of surpluses, farmers enjoy more benefits, and the benefit distribution mechanism is reasonable.

In the "cooperative+farmers" model, since cooperatives are a community of benefits composed of farmers who are engaged in the same or similar industries, they can establish a stable benefit linkage mechanism. While enjoying the services provided by the cooperative, farmers can obtain the income from the products and return the surplus of the transaction volume to ensure the benefits of farmers. Through adopting the "company+cooperative+farmer" business model, that is, the poverty-stricken farmers join in the cooperative through transferring the land, the company provides production tools, fertilizers and seedlings, the cooperatives unify the production materials, technology and management, the products are uniformly recovered by the company, It solved the difficulty of poverty-stricken farmers in selling, and let high-quality resources such as advanced technology and management experience flow to the countryside, turning "blood transfusion" into "blood making"[2].

3.3 "Company+base+farmer" modelThe basic content of "company+base+farmer" model includes a three-level economic association of companies, agricultural production bases and farmer households, with a technologically advanced and well-funded company (mainly agricultural products processing and distribution enterprises) as the leader, establish agricultural product bases around large-scale leading enterprises, connecting the farmers with the base, integrating production, supply, and marketing, and integrating agriculture, industry, trade and technology. Through the similar "virtual alliance", the "company", "base" and "farmer" in the development of characteristic agricultural industry have "clear powers and responsibilities, shared risks, and shared benefits." The main benefit linkage mechanism is to give full play to the advantages of three parties, and at the same time make up for the deficiencies of the three parties, and jointly pursue the maximization of benefits. The main form of cooperation is the signing of contracts for the production and marketing of agricultural products between "farmers", "bases" and "companies", and their respective rights and responsibilities are defined in legal form such as contracts. "Farmer" are responsible for production and transferring market risks to "bases" and "companies". "Base" and "farmer" sign a purchase contract, stipulating the price, quantity and quality of agricultural products. The base focuses on expanding production, improving production technology, and forming scale and specialization. "Company" purchases agricultural products for processing in accordance with the contract concluded, ensuring that "farmer" benefits are not lost, and ultimately realizes the market value of agricultural products[3].

4 Policy recommendations for benefit linkage between agricultural leading enterprises and farmers

4.1 Exploring a reasonable benefit linkage modelIn order to innovate the form of benefit linkage between farmers and agricultural enterprises, it is necessary to deepen and consolidate the benefit linkage between agricultural enterprises. Through investigation, it is found that few vegetable growing enterprises choose the joint-stock cooperative operation model. Therefore, it is necessary to build on the basis of contractual and cooperative development to enable farmers to use land, funds or other forms of property rights to participate in agricultural leading enterprises to ensure the real benefits of agricultural leading enterprises and farmers. Agricultural enterprises can use the market mechanism to attract farmers with strong production management capabilities agricultural cooperatives, so that they can use land, capital, technology, labor and other production factors to buy shares, forming a relatively close benefit linkage community with united property rights.

4.2 Giving full play to the role of intermediary platform

Agricultural cooperative organizations have gradually become a chain connecting enterprises and farmers, and occupy an important carrier position in promoting the linkage between agricultural enterprises and farmers. Only by promoting the development of the small gear of agricultural cooperatives can the integrated decentralized family business be driven by this gear, and the small-scale decentralized management of each family can be transformed into a more concentrated large-scale operation, so that the conversion from low-efficiency production to planned high-efficiency production will turn disadvantaged farmers into competitive groups, thereby fundamentally ensuring the benefits of farmers. Relevant agricultural departments should actively encourage, guide and support the development of agricultural business entities and other agricultural cooperative organizations, insist on taking farmers as the central entity, and give full play to their initiative and enthusiasm. On the premise of attracting more farmers to join the cooperative, it is necessary to verify the farmer member accounts one by one, establish and improve the articles of association, improve the internal management system, and strengthen the management of internal funds and information. Only in this way can the operations of agricultural leading enterprises be smoother, and can the contacts and deep integration of stakeholders be promoted.

4.3 Improving the market position of farmersAgricultural leading enterprises and farmers are the main players in the market. They are independent and interconnected. Their interaction of benefits should be equal. The weak position of farmers’ actual benefit distribution should be changed, and their right to speak should be increased to match their position. Firstly, it is necessary to clarify the status of farmers as the mainstay of the market. Farmers and agricultural leading enterprises must realize that farmers occupy the main market position and should create opportunities for farmers to "speak". Secondly, it is recommended to encourage farmers to participate in the industrialization of agricultural production, and increase the frequency of farmers’ autonomy and right to speak. Only when they really participate and feel the atmosphere of market competition, may they speak. Finally, it is recommended to improve the comprehensive quality of farmers, so that leading agricultural enterprises can understand farmers in depth. Farmers should also learn management knowledge and technical methods from enterprises, actively participate in the cooperation of leading enterprises, understand the production characteristics of enterprises, and make farmers become new farmers with knowledge, professional technology and management capabilities.

4.4 Effectively restraining farmers’ breach of contract(i) Introducing credit institutions and establishing external constraints. Farmers sign a purchase and sales contract with the enterprise through a broker, and use the order as a guarantee to obtain a third-party guarantee from the enterprise, thereby successfully obtaining loans from credit institutions such as rural credit cooperatives. Farmer brokers take village groups as a unit and have certain local financial strength, prestige and credibility. They have a better understanding of the credit status of farmers, which are helpful for selecting farmers with good credit to sign orders and supervise their performance. Through such arrangement, it has established a risk prevention and control chain for enterprises to provide guarantees for credit contracts and orders to provide guarantees for guarantee contracts, thus incorporating the performance of orders into the three-party framework of "farmer/farmer broker-company-credit institution".

(ii) Setting a certain amount of liquidated damages. In order to prevent opportunism and moral hazard from causing farmers not to sell products in accordance with the agreement, the company may consider setting a certain amount of "deposit", once the farmer violates the contract, the deposit will not be returned. If the farmer performs the contract normally, after the transaction is completed, the deposit can be deducted for the same amount of goods. Here, it should be noted that the amount of the "deposit", if it is too high, and the farmers may not accept it. If it is too low, it will not play the role of restricting the farmers. These measures can reduce but not completely eliminate the default risk of farmers. When the default gain is greater than the default cost, there still exists default risk. However, with the development of agricultural industrialization, the "company+intermediary+farmers" model is also an effective way to reduce the default risk.

(iii) Extend the time of price settlement. Farmers can freely choose the price at a certain time point for settlement within a certain period of time after delivery, which can eliminate the farmers’ fear of selling at a low price; the enterprise can obtain the ownership of agricultural products when receiving the goods and can directly put them into production, saving the capital cost of agricultural leading enterprises.

(iv) Guaranteed price order. Farmers pay a certain amount of option fees to agricultural leading enterprises, and purchase rights from enterprises that when the market price of agricultural products is lower than the guaranteed price, the enterprise purchases at the guaranteed price; when the market price is higher than the guaranteed price, the enterprise purchases at the market price. Using such kind of order, farmers can control the risk of falling prices of agricultural products while still retaining the benefits of rising prices, which fundamentally eliminates the default motivation of farmers.

(v) Collecting performance bond from farmers. Through the "order+farmer deposit+futures market" business model, enterprises use the futures market price as a reference for business decision-making, determine the order price more reasonably, attract farmers to participate, and collect a certain percentage of performance bond; at the same time, through participating in the futures market, they can avoid the risk of price fluctuations of agricultural products and obtain stable profits.

4.5 Determining a reasonable benefit concession mechanism

The benefit linkage between agricultural leading enterprises and farmers is a community of benefits with common development goals. Farmers need to rely on leading enterprises to improve market response capabilities and increase economic income. Enterprises need to use farmers’ resources (including human resources) to reduce transaction costs. Such kind of element input formed by the development demand orientation can establish an organic link. In the event of a breach of contract that causes harm to benefits, if such harm is tolerable by one party, it may be considered to proceed from the overall situation and maintain the existence of the benefit alliance through orderly concession of benefits.