Conflicts from definition of institutional arrangements between growers and processor industries are pervasive in Agribusiness System literature. Frequently, conflicts solutions suggest modifications in coordination mechanisms (private solutions) and/or institutional changes (legal rules). In Sugarcane Agribusiness System, the mitigation of conflicts by contractual modifications are clearly observed, inasmuch the payment methods were developed following new demands in sugarcane pricing. However, there are cases that these conflicts are persistent in time without any solutions, as we can observe in the Orange Juice Agribusiness System, which can be characterized by Antitrust System interventions, lawsuits, and failures of coordination. The aim of the paper is to discuss the persistency of conflicts in institutional arrangements as well as the determinants of contractual changes: why are there contract changes in one while in the other not?

Theoretical Framework

The theoretical framework is based on Barzel’s economic analysis of property rights and Zylbersztajn’s property rights index. According to Barzel, we can distinguish economic property rights and legal property rights. Transaction costs are those costs related to protecting property rights and when they are positive, property rights cannot be perfectly defined and strategic actions of rent appropriation become possible. The possible configurations of property rights allocation is represented in the Property Rights Index, in which assets attributes are distributed along three dimensions: legal rights, economic rights and public domain. Assets have multiple attributes. For instance, the orange with two main attributes, weight and soluble solids concentration (Brix), can be transacted with different payment method. The choice of measure weight or Brix will influence the allocation of property rights. Assuming a contract power as the ability to unilaterally impose contract terms, the coordinator of a transaction can induce the contract design in order to influence the property rights structure and appropriate rents. In other words, the coordinator can choose the payment method and internalize the variability of any attribute. The non-measured attribute remains unpriced and the economic rights of them are freely exploited.

Illustrative Case: Brazilian’s Sugarcane and Orange Juice Chain

The Sugarcane chain in Brazil is marked by changes in contracts between sugarcane growers and sugar and alcohol processing industry. The transactions were initially done through standard contracts and the payment method was the weight. The first change was the modification of the standard contract in 1983, in which the payment method becomes sucrose content. In 1998, a final change occurred and the payment of the sugarcane is now done by total recoverable sugars. The transaction of oranges, in turn, is characterized by the maintenance of the same payment method, the box 40.8 kilograms. There are several conflicts, and no solutions for better coordination are attained. There are ongoing negotiations for the creation of new coordination mechanism and payment method in order to decrease conflicts in contracts. One of the alternatives for the orange juice system is the payment based on Brix, however, disagreements have impaired the change.

Discussion

We explore the role of contract power that impair the contract change in the Orange Chain and the lack of contract power that allow contract change in Sugarcane Chain. We suggest that orange processor industry appropriate rent from the transaction through the contract design (imposing the payment method) and the conflicts are persistent as the conflicts costs are smaller than the value captured. We suggest empirical investigations to identify the main factors that create and sustain these institutional arrengements. We expect that the results highlight implications for private policy of strategy in organizations and public policy for antitrust actions.