Big in Ukraine a harbinger for the Netherlands?

The war in Ukraine also brought farmers into the picture. Some in tank towing, and Kees Huizinga in current affairs columns advocating for the Ukrainian cause and highlighting the implications for the food supply in the Middle East – another crisis in the making. Huizinga farms more than 15.000 hectares and has hundreds of employees: an agricultural company with a character that we do not know in Western Europe. I imagine a company with its own administration and bookkeeper, with a workshop that is not inferior to that of a mechanization company. So less specialization than here.

Why does a farmer actually do certain activities under his own management and buy others through the market? You can think of many reasons for this and that is why economists are discussing it. I reread 'The Nature of the Farm' by Douglas W. Allen and Dean Luck from 2002, which examines contracts, risk, and organizational form in American agriculture. The title of their book is taken from a 1937 article by student Ronald Coase, "The Nature of the Firm," for which he was awarded the Nobel Prize 54 years later. He asked the same question: if the market is so blissful, why doesn't an entrepreneur outsource everything to freelancers instead of taking on staff? His answer: the market is efficient, but sometimes there are so many transaction costs in outsourcing that it is cheaper to buy the machines yourself and hire staff. Not a contractor but own combine, not an accountancy firm but own bookkeeper.

Moral danger: service provider is getting sidetracked
These transaction costs are not only the costs of finding a supplier and concluding the contract, but also the costs of monitoring whether someone is doing what you expect of them. Sometimes you can't specify that at all in the contract in advance and you'd better play the boss or stay small as a family business. Biological processes, according to Allen and Lueck, are particularly prone to this problem. There is a moral hazard: the hired service provider is unknowingly cutting corners, because he is in a hurry when paying per hectare. A poor performance can easily be attributed to, for example, the weather conditions. Complicated contracts will not help with that and that is why they are often simple, according to the authors.

Ultimately, it is therefore the most risky, biological processes that the farm carries out its own management with staff, the rest can be outsourced to specialists. Not because they are risky, Allen & Lueck argue, because then you can get them through a large size of the company or by means of insurance: it never rains too much everywhere. But because they are difficult to manage and you are not sure that a hired specialist will do exactly as well or badly as you want as an entrepreneur. As soon as that becomes manageable, the seasonality disappears and transaction costs go down, the activity of the company disappears to specific companies or is outsourced to a service provider. Ultimately, the family business is no longer there, because everything is manageable. Larger companies are then created, such as in horticulture or pig farming, in which specialization can take place between (temporary) employees. The Ukrainian MHP is the prime example.

Optimal bundling of activities within companies
Over the past decades, we have seen transaction costs in the economy fall as a result of the internet and the rise of the self-employed, but Allen & Lueck have not yet won the discussion in agriculture. It doesn't help that transaction costs are much harder to measure than, say, risk. Many colleagues think that the organizational form can also be explained by economies of scale (smaller companies use contractors, large ones do not), by risk (the food chain likes to leave risky activities to the small man), taxation, labor market policy (CAO wages and weekend work). ) or history. The latter explains a lot in Ukraine: large companies from the communist era, few available entrepreneurs, missing markets for service providers such as contractors and agricultural accountancy firms.

If Ukraine remains somewhat afloat in this war and moves economically to the West, the markets will work even better. That means a different optimal bundling of activities within companies. A large arable farmer in the Netherlands recently predicted that precision farming is going in the direction of Ukraine: you want to achieve top yields with all the data on your own farm and be in control of all processes yourself. Instead of outsourcing some matters to the contractor: that will become too complicated compared to a few of your own employees and machines. Time will tell.

Krijn J. Poppe

Krijn Poppe worked for almost 40 years as an economist at LEI and Wageningen UR and now holds a number of advisory and management positions. For Boerenbusiness he dives into his bookcase and discusses current developments on the basis of studies that have become classic.

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