Risk Sharing in Broiler Contracts: A Welfare Comparison of Payment Mechanisms

Previous research has found that a significant part of risk from poultry grow-out farm operations is due to market price of broilers. This risk is transferred to the integrator when the grower enters a production contract with the integrator. This follows from the absence of a market price variable in determining compensation in such contracts. In more recent contracts a market price clause is included in calculating compensation. We conduct welfare comparison of the old and new contracts and find that while including the market price clause increases the variability of grower income, it also raises grower expected return. Overall, under assumptions of fixed flock size and constant percentage mortality, which enables payment per-pound comparison, new contracts are welfare superior relative to the old contracts. However, when analysis is conducted on a total per-flock payment rather than on a per-pound payment, we find that welfare superiority of new contracts depends on the grower attitude towards risk. It turns out that with higher measures of risk aversion, growers prefer the old contracts relative to the new contracts, while those with lower measures of risk aversion prefer the new contracts.