The Role of Contracts

in the Organic Supply Chain: 

2004 and 2007

Carolyn Dimitri

Lydia Oberholtzer

Michelle Wittenberger

Economic

Research

Service

Economic

Information

Bulletin

Number 69

December 2010

United States 

Department of 

Agriculture
The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs 

and activities on the basis of race, color, national origin, age, disability, and, where 

applicable, sex, marital status, familial status, parental status, religion, sexual 

orientation, genetic information, political beliefs, reprisal, or because all or a part of an 

individual's income is derived from any public assistance program. (Not all prohibited 

bases apply to all programs.) Persons with disabilities who require alternative means 

for communication of program information (Braille, large print, audiotape, etc.) should 

contact USDA's TARGET Center at (202) 720-2600 (voice and TDD). 

To file a complaint of discrimination write to USDA, Director, Office of Civil Rights, 1400 

Independence Avenue, S.W., Washington, D.C. 20250-9410 or call (800) 795-3272 

(voice) or (202) 720-6382 (TDD). USDA is an equal opportunity provider and employer.

Recommended citation format for this publication: 

Dimitri, Carolyn, Lydia Oberholtzer, and Michelle Wittenberger. The 

Role of Contracts in the Organic Supply Chain: 2004 and 2007, 

EIB-69, U.S. Department of Agriculture, Economic Research Service, 

December 2010.

Cover photos: Thinkstock©

www.ers.usda.gov

Visit Our Website To Learn More!

For more information on the 

organic supply chain, see http://

www.ers.usda.gov/Briefing/Organic

www.ers.usda.gov/Briefing/Organic/Retailing.htm
United States

Department

of Agriculture

www.ers.usda.gov

A Report from the Economic Research Service

Abstract

Organic food products are excellent candidates for contract production and marketing 

because they are produced using a distinct process and are in high demand. This report 

summarizes survey data on contracting in the organic sector, addressing the extent of 

contracting, the rationale for using contracts, and contract design for select commodities. 

The central survey data were collected from certifi ed organic handlers (intermediaries) 

in the United States who marketed and procured organic products in 2004 and 2007. 

Contracting is widespread in the organic sector, and, in 2007, fi rms used contracts most 

frequently to secure organic products essential to their business and to source products 

in short supply. Large fi rms were more likely to use contracts for procurement, and 

these fi rms contracted for a larger share of their procurement needs. Nearly all contracts 

required suppliers to provide evidence of organic certifi cation. Firms using contracts 

rarely assisted suppliers with obtaining organic certifi cation or the transition to organic. 

Most contracts include provisions regarding quality, and quality verifi cation was an essential component of these contracts. Prices were determined in a variety of ways and, in 

some cases, depended on delivered quality.

Keywords: Organic supply chain, contracts, organic marketing, organic procurement, 

intermediaries, certifi ed organic handlers, contract design, certifi ed organic 

Acknowledgments

The authors extend thanks to Economic Research Service’s Don Blayney, Gary Lucier, 

Agnes Perez, and Susan Pollack for their insights into the milk, vegetable, and fruit 

sectors. The authors are also grateful for Brent Hueth (University of Wisconsin-Madison) 

and Ethan Ligon’s (University of California, Berkeley) assistance with developing the 

Carolyn Dimitri, cdimitri@ers.usda.gov

Lydia Oberholtzer

Michelle Wittenberger

The Role of Contracts

in the Organic Supply Chain: 

2004 and 2007

Economic 

Information 

Bulletin 

Number 69

December 2010
ii

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

survey instrument. Thanks is also extended to USDA’s Risk Management 

Agency (Virginia Guzman) for its fi nancial support. We appreciate the 

helpful comments and feedback from Sharon Hestvik (USDA’s Risk 

Management Agency), Enrique Ospina (USDA, Agricultural Marketing 

Service) and three anonymous reviewers. The survey was authorized by 

Offi ce of Management and Budget control number 0563-0078. Thanks 

also go to our editor, Angela Anderson, and to Wynnice Pointer-Napper for 

graphic design and layout.

About the Authors

Carolyn Dimitri is an economist with USDA’s Economic Research Service 

(ERS). Lydia Oberholtzer is a senior research assistant at Penn State’s 

Department of Agricultural Economics and Rural Sociology. Michelle 

Wittenberger is an agricultural economist at USDA’s Foreign Agricultural 

Service, who was formerly employed with ERS.
iii

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Contents

Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Survey Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Moving Products Through the Organic Supply Chain . . . . . . . . . . . . . . 4

Functions, Suppliers, and Marketing Outlets 

 for Organic Handlers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Contract Use in the Organic Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

The Economics of Contract Design: 

Quality, Verifi cation, and Pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

 Contracting for Quality Is Essential for the Organic Sector . . . . . . . . . . 13

 Quality Verifi cation in Contracts With Organic Suppliers . . . . . . . . . . . 15

 Pricing and Compensation in Contracts With Organic Suppliers. . . . . . 17

Conclusions: Contracts in the Organic Sector . . . . . . . . . . . . . . . . . . . . 19

References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Appendix: Contract Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
iv

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Summary

Contracts are widely used for marketing agricultural products, particularly 

when buyers seek products with specifi c attributes. Economic research indicates that, under certain circumstances, both suppliers and buyers can benefi t 

from using contracts. The production, handling, and marketing of organic 

products follow a distinct process, as specifi ed by the National Organic 

Standards. For products to carry an “organic” label, their production and 

handling processes must be certifi ed by an accredited third-party inspector. 

Retail sales of organic products have been increasing rapidly, and the market 

has faced periodic shortages of some organic products. 

What Is the Issue?

Contracts can be designed to provide suppliers with incentives to deliver 

products with attributes desired by buyers. Conditions in the organic sector 

suggest that organic handlers (i.e., processors, distributors, manufacturers, 

repackers), as well as their suppliers (i.e., producers or other handlers), 

may potentially benefi t from contracts, given growth in demand for organic 

products, short supplies, and the need for certifi cation. Previous research, 

however, has not investigated the use of contracts in the organic sector. Data 

from two Economic Research Service (ERS) surveys of certifi ed organic 

handlers (or intermediaries) provide insight into the extent of contracting in 

the organic sector, the rationale for using contracts, and reasons for contract 

termination. Other key questions relate to specifi c terms of contracts, 

including whether buyers offer suppliers assistance, how quality is specifi ed in contracts and then measured, how prices are determined, and the 

frequency of contract termination. 

What Did the Study Find?

In 2007, contracts were used chiefl y to procure needed products, particularly 

those in short supply. The next factor leading to contract use is the desire 

to source products with specifi c quality attributes. Large fi rms were more 

likely to use contracts for procurement. Assistance offered by contractors 

to suppliers typically included transportation or technical advice on organic 

standards. Contractors rarely assisted suppliers with obtaining organic certifi -

cation or with the transition to organic. 

Exploring contract use for a group of 13 commodities, the analysis examines provisions on quality, organic certifi cation verifi cation, and pricing. 

Nearly all contracts required fi rms to provide evidence of organic certifi cation. Most contracts included provisions regarding quality, with the most 

common provision being minimum quality standards. Best management 

practices, which can have a signifi cant impact on fi nal product quality, are 

specifi ed in some contracts for nearly all products (except for nuts). Some 

contracts impose a penalty for low quality (typically in corn, soybean, 

and seed contracts, such as those used by farmers for raising crops), while 

others offer a premium for high quality (typically in milk, coffee, and 

wheat contracts). 
v

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Quality verifi cation was an essential component of contracts, and the 

verifi cation method depended largely on whether quality was observable. 

Grain quality has both observable and unobservable attributes, so verifi cation consists of both physical observation and testing for specifi c attributes. 

Because the quality attributes for coffee and milk are largely unobservable, 

nearly all quality verifi cation is done through testing.

The methods for determining contract-specifi ed prices paid to suppliers vary 

by product. The market price for organic products was specifi ed most often in 

contracts for apples/pears, coffee, and seeds. Quantity discounts were part of 

contracts for nearly all products, except for berries, and were most common 

in seed, wheat, rice, and tomato contracts. Flat prices were specifi ed most 

often for onions/garlic, poultry, and grains. Flat prices that depended on the 

supplier’s past performance were most prominent for seeds, coffee, apples/

pears, berries, grapes, onions/garlic, and tomatoes.

How Was the Study Conducted?

The analysis is based on data collected when ERS conducted nationwide 

surveys of certifi ed organic processors, manufacturers, and distributors for 

2004 and 2007 practices. The surveys were funded by a cooperative agreement with USDA’s Risk Management Agency and were developed in conjunction with a group of organic stakeholders. 

Top reasons handlers use contracts

Issues critical for handlers in 2004 became even more so in 2007

Percent of firms 

Secure products Consistent quality Secure products

in short supply

Stabilize input

prices

0

20

40

60

80

100

2004

2007

Source: USDA, Economic Research Service.

1

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Introduction

Much of the production and marketing of agricultural products relies on 

contracts to facilitate sales between buyers and sellers. In 2005, contracts 

covered approximately 40 percent of the value of agricultural production 

in the United States, with the remaining share sold on the spot market via 

auctions, wholesale markets, or direct negotiation between buyers and sellers 

(MacDonald and Korb, 2008; MacDonald et al., 2004). Contract usage varies 

across products, with contracting occurring more often for some products, 

such as poultry, eggs, sugar beets, fruit, and dairy, and less frequently for 

others, such as corn, wheat, and soybeans (MacDonald and Korb, 2008). 

Most researchers agree that contracting for agricultural products occurs 

when spot markets fail to produce enough of the commodity with attributes 

consumers desire, particularly in markets experiencing short supply or 

increased demand for a distinct process (MacDonald et al., 2004). In such 

cases, to ensure that the correct quality and quantity of agricultural inputs 

are received, manufacturers and other intermediaries directly contract with 

suppliers (Drabenstott, 1994). 

Several characteristics of organic food products make them prime candidates for agricultural contracts, as they satisfy the criteria spelled out by 

MacDonald et al. (2004): (1) Organic food is produced using a distinct 

process; (2) consumer demand for organic products has increased, resulting 

in an expansion of retail sales from $3.5 billion in 1997 to $22.2 billion in 

2009; and (3) organic products have also experienced periodic supply shortages. These shortages may be due to the fact that certifi ed organic cropland, in comparison with retail sales, has not grown quickly enough (fi g 1). 

Shortages have resulted in empty supermarket shelves for some products —

milk in particular—due, in part, to processor unwillingness to raise prices 

high enough to clear markets (Oberholtzer et al., 2008). While past organic 

milk shortages were largely eased by the end of 2008, industry reports 

suggest that scarcity of organic livestock feed and grains still persists (Oliver, 

2006; Weinraub and Nicholls, 2005; Organic Valley, 2009; Clarkson, 2009).

1997 2000 01 02 03 04 05 06 07

0

500

1,000

1,500

2,000

2,500

3,000

0

5

10

15

20

Figure 1

Growth of retail sales and certified organic cropland, 1997-2007

1,000 acres

*Excludes certified organic pasture land.

Sources: USDA, Economic Research Service, 2010; Nutrition Business Journal, 2010.

Bil. dollars

Sales

Cropland*
2

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

The analysis reported here is the fi rst systematic exploration of contract use in 

the organic sector. The fi ndings rely on data obtained from a national survey 

that was administered twice to collect data for the years 2004 and 2007 of 

fi rms certifi ed to handle (i.e., process, distribute, manufacture, or repack) 

organic products in accordance with National Organic Standards. In addition to addressing the extent of contracting in the organic sector, we explore 

handlers’ reasons for using contracts in order to understand the benefi ts of 

contracts to the organic sector. The study’s fi ndings further provide insight 

into the design of typical contracts for a number of organic products, with 

an emphasis on how contracts are designed so that handlers receive products 

with attributes suited to their needs.1 The products covered in this analysis 

include produce (apples/pears, onions/garlic, grapes, berries, and tomatoes), 

grains (corn, rice, soybeans, and wheat), and other products (coffee, nuts, 

poultry, seeds, and milk). This selection of commodities is representative of 

the products purchased by organic intermediaries and includes those most 

often procured via contract.

1MacDonald et al. (2004) provides an 

economic discussion of contracting in 

agriculture, including the risk-sharing, 

transaction cost, and market power of 

contract use.
3

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Survey Methodology 

To gain a deeper understanding of the supply chain for organic products, 

ERS studied how organic products are marketed and procured, including 

contracting, by fi rms certifi ed as “handlers” in accordance with the National 

Organic Standards (see http://ers.usda.gov/Briefi ng/Organic/Certifi cation.

htm for more information on organic certifi cation). Organic handlers process 

and distribute organic products, playing an intermediary role between the 

farm and retail levels. We also collected primary data from fi rms holding 

certifi cates to handle organic products in 2004 and 2007. 

Two Nationwide Surveys of Organic Processors, Manufacturers, and 

Distributors were funded through a cooperative agreement with USDA’s 

RMA and authorized by the U.S. Offi ce of Management and Budget (control 

number 0563-0078). The survey instrument was developed by ERS with 

stakeholder input and collaboration with the Social and Economic Sciences 

Research Center at Washington State University (WSU).2 The methodology 

followed Dillman’s Tailored Design Method (TDM) and, in accordance with 

the TDM procedure, all fi rms holding certifi cates to handle organic products 

were prenotifi ed of the survey by postcard (Dillman, 1999). This communication was followed by a letter from Administrators at USDA’s ERS and 

RMA (dated September 2005 for the 2004 survey and February 2008 for the 

2007 survey) and support letters from the Organic Trade Association and the 

Organic Farming Research Foundation. The survey was sent by fi rst-class 

mail with a $5 incentive and was followed up by additional mail and phone 

communication. For 2007, $5 incentives were sent to approximately half the 

population.

Different techniques were used to identify the population of fi rms holding 

certifi cates to handle organic products for the 2 years covered. In 2004, 

2,790 certifi ed organic handling facilities were identifi ed by contacting 56 

domestic accredited certifi ed agents. Because most fi rms are certifi ed at the 

facility level, each facility was surveyed separately, regardless of whether it 

belonged to a larger company or was independent. Of the total 2004 population, 1,393 certifi ed organic fi rms completed the 16-page survey, representing 

a 63-percent return rate of eligible facilities. In 2007, the population increased 

to 3,225 certifi ed organic handling facilities. Identifi cation of the fi rms in the 

population relied primarily on the list of certifi ed entities available through 

USDA’s National Organic Program (NOP), but was then modifi ed using lists 

supplied by domestic accredited certifying agents, as well as with lists kept 

by the researchers. Of the total 2007 population, 1,408 facilities completed 

the 16-page survey, representing a 44-percent return rate of eligible facilities.

While the entire population of handlers was surveyed for 2004 and 2007, 

there is no way to link each fi rm’s responses over the two periods. As a result, 

tracking changes in handler behavior by individual fi rm over the period is not 

possible. Characterizing nonrespondents is also not possible, which prevents 

us from making conjectures about the direction of nonresponse bias. 

2For more detail on the survey methodology and for a report of the baseline 

fi ndings for 2004, see http://www.ers.

usda.gov/Publications/ EIB36/.
4

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Moving Products Through 

the Organic Supply Chain 

In many ways, the organic food supply chain is consistent with that for 

conventionally produced food products. Both conventional and organic 

food products pass through many hands as they move from the farm to 

the consumer. Organic products, however, are produced and distributed 

according to the National Organic Standards, which, in addition to specifying 

production and handling practices, require that organic and conventional 

products do not commingle. The standards for organic products are promulgated by the Government and administered by USDA’s NOP. By late 2010, 97 

third-party certifi ers had been accredited by USDA to certify, to the NOP’s 

standards, farmland and handling facilities across the world (USDA, AMS, 

2010). 

The organic supply chain consists of certifi ed organic farms, which produce 

organic commodities; certifi ed organic handlers, who distribute, manufacture, 

and process organic products; and retailers, who sell organic food products to 

consumers. With the exception of direct sales, farm products generally move 

along the supply chain with the assistance of a handler (fi g. 2). 

As agricultural products are produced, processed, manufactured, distributed, 

and retailed, buyers and sellers incur costs and face risks (fi g. 3). Some of 

these costs and risks are common to all agricultural products. Farm-level risk 

results from uncertainty regarding the amount of output a given plot of land 

will yield, as well as the fi nal quality of output. Separate from production 

decisions and outcomes, there are costs buyers and sellers incur each time 

they exchange an agricultural commodity. These “transaction costs” result 

from searching for products or buyers, locating products with specifi c quality 

attributes, measuring the quality of the good being exchanged, establishing a 

price, and enforcing the agreement. 

For conventional and organic agricultural products, many risks begin at the 

farm level and are transmitted along the supply chain. Farm-level risk has a 

Figure 2

The organic food supply chain

Products travel along the supply chain with the assistance of wholesalers, distributors, and brokers

Source: USDA, Economic Research Service.

Imported

commodities

Domestic

commodities

Manufacturer/processor

Retail

Restaurant

Food service

Institutions

Schools

Consumer

Direct to consumer

Direct to retail

Direct to restaurants

Direct to schools

Packer

Manufacturer/processor

Ingredient manufacturer

Ingredient processor
5

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

common component, or systemic risk, which affects many producers (e.g., a 

drought, freeze, or pest infestation that can adversely impact all producers in 

a region), and an idiosyncratic component (e.g., managerial skill or onfarm 

soil quality) that affects just one producer. Farmers can affect product 

quality and quantity of output from their land, given certain inputs, by using 

best management practices and undertaking a suffi cient amount of effort 

(Milgrom and Roberts, 1992). Onfarm output uncertainty may translate into 

price uncertainty for farmers. 

Organic commodities face unique challenges related to maintaining organic 

integrity along the supply chain, and thus may have higher transaction costs 

than those for conventional products. At the intermediary level, because 

organic products make up a small percentage of total agricultural production, search costs for organic products are relatively high. These costs may 

increase along with growth in demand for organic products. As organic products move along the supply chain, they must be handled in accordance with 

organic regulations to maintain their organic status. For example, handlers 

are required to keep organic products from commingling with conventional 

products. Thus, certifi ed organic handlers incur additional transaction costs. 

Buyers, such as retailers, processors, and other intermediaries, incur costs to 

ensure that purchased products satisfy the requirements of the organic regulation. While organic standards likely reduce many of these transaction costs, 

the standards do not eliminate all transaction costs associated with marketing 

organic products. 

Available data on the organic sector provide only a partial understanding 

of the structure of the organic supply chain. At the farm level, 10,903 farms 

and 4.1 million acres of crop and pastureland were certifi ed as organic in 

the United States for 2008 (USDA, NASS, 2010). The data suggest that 

the composition of farm-level sales of organic products differs from that of 

conventional products. For example, organic produce and milk account for a 

higher share of farm-level sales than conventional produce and milk, while 

organic grains and livestock account for a smaller share (table 1). 

Figure 3

Risks and transaction costs associated with buying and selling agricultural products

Source: USDA, Economic Research Service.

Distribution transactions 

costs and risks

Search for needed products

Search for specific quality

Search for organic product

Search for seller

Organic integrity

Ex ante price uncertainty

Quality uncertainty

Product perishability

Transactions costs

and production risks

Cost of transitioning

Adherence to organic standards

Organic integrity

Ex ante output uncertainty

Quality uncertainty

Systemic risk

Idiosyncratic risk

Farmer Buyer
6

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Once the products leave the farm, they are either sold direct to consumers or 

other entities, or they enter distribution/processing/manufacturing channels. 

Data from the 2008 Organic Production Survey (USDA, NASS, 2010) and 

the 2007 Census of Agriculture (USDA, NASS, 2009) reveal differences here 

as well. In 2008, approximately 7 percent of organic farm sales went direct to 

consumers, 10 percent went direct to retailers, and approximately 83 percent 

went into wholesale markets. In the conventional sector, only 0.4 percent of 

the value of agricultural commodities went direct to consumers. 

Organic products that enter the distribution channel are most likely to be 

handled by a certifi ed organic handler (3,225 domestic handlers in 2007). 

Findings from the Nationwide Survey of Organic Manufacturers, Processors, 

and Distributors make it possible to estimate the proportion of organic products fl owing through the fi rms that sit in the middle of the supply chain. 

Based on the responses to the 2007 survey, approximately $3 billion worth of 

organic products were handled by the certifi ed organic handlers, an increase 

of 17 percent over the amount handled in 2004. Because the survey did 

not have a 100 percent response rate, sales values are a lower bound on the 

amount handled by intermediaries. Of this amount, manufacturing made up 

62 percent of the value of sales; 18 percent of sales moved through wholesalers, distributors, and brokers; 13 percent of sales were handled by packers 

and shippers; restaurants accounted for 2 percent of sales; and the remaining 

5 percent were classifi ed as other. 

The next stage of the supply chain consists of food service or retail venues. 

While organic food is available in restaurants, schools, hospitals, and other 

food service establishments, there are no estimates indicating the value of 

these sales. Ultimately, however, retail outlets are where most organic products 

are purchased. Industry estimates suggest that organic food was available in 

82 percent of retail food stores in 2007 (Food Marketing Institute, 2008), and 

retail sales brought in $21.1 billion in 2008 (Nutrition Business Journal, 2010). 

Table 1

Farm-level sales of organic and conventional products

 Organic Conventional 

Category 2008 2007

Percent

Vegetables and melons 22 5

Fruits and tree nuts 13 6

Grains, oilseeds, dry beans, and peas 16 26

Livestock 3 27

Poultry and eggs 12 12

Milk from cows 24 11

Other 10 12

Sources: USDA, National Agricultural Statistics Service, 2010; USDA, National Agricultural 

Statistics Service, 2009. 
7

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Functions, Suppliers, and Marketing Outlets 

for Organic Handlers

The middle of the organic supply chain, like the conventional supply chain, 

has largely been unexplored by researchers. The lack of research in this 

area could be due to proprietary data that describe product fl ow. Results 

from the 2004 and 2007 surveys characterized the fi rms that are certifi ed 

to handle organic products. According to respondents, most organic intermediaries are “split operations” that handle both organic and conventional 

products. In 2007, 39 percent of fi rm sales came from organic products, a 

signifi cant increase3 from the 34 percent reported for 2004. In both 2004 

and 2007, approximately 20 percent of fi rms were exclusively organic. Most 

fi rms converted or expanded their businesses to include organic products, 

although a declining share converted from conventional. In 2007, 62 percent 

of fi rms reported that their roots were in the conventional sector, a signifi cant 

decrease from the 73 percent reported for 2004. 

Most certifi ed organic handlers manufacture or process certifi ed organic 

products; between 2004 and 2007, the percent of fi rms that manufactured 

or processed increased from 65 to 73 (table 2). Further, organic products 

comprised a larger percent of their total sales, increasing from slightly more 

than half to 64 percent, suggesting that organic products are a growing part 

of their businesses. While the percent of fi rms distributing organic products increased from 20 to 26 percent, the organic portion of their businesses 

decreased, as exemplifi ed by the decline in their share of organic sales from 

20 percent in 2004 to 16 percent in 2007. 

Organic handlers, as “middlemen” in the organic supply chain, both procure 

and market organic products. As buyers, organic handlers purchase from a 

wide range of suppliers, including growers and other intermediaries. In 2007, 

an average of 10 growers and 4 manufacturers/processors supplied product to 

the handlers who responded to the survey (table 3). The number of suppliers in 

3All statistical tests of signifi cance 

were conducted by applying t-test to 

the sample estimate of the difference 

between the two means.

Table 2

Percent of facilities and sales, by function

 2004 2007

 Share Share

 Percent of sales that Percent of sales that 

All facilities of facilities1 is organic2 of facilities1 is organic2

Manufacturer/processor 65 51 73 64

Distributor, broker, and wholesaler 20 20 26 16

Packer and shipper 15 11 14 10

Restaurant and retailer3 NA NA 9 4

Other 11 12 9 7

NA = Not available.

Note: Sample size 1,371 in 2004 and 1,333 in 2007. 

1Refers to the share of facilities reporting sales in the corresponding function. Many facilities 

reported more than one function; thus, the percent of facilities column sums to more than 100 

percent. 

2Refers to the share of sales that is organic; the two columns do not sum to 100 percent due to 

respondent error in fi lling out the surveys. 

3Data were not collected for restaurants and retailers in 2004; these fi rms reported their functions as “other.”

Source: USDA, Economic Research Service.
8

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

each category for 2004 does not statistically differ from those in 2007, where 

they increased or decreased, on average, by only one or two per category.

After packing, manufacturing, and processing organic products, handlers 

sell their products to fi rms in the next level of the supply chain. The unique 

nature of this section of the supply chain is made evident by the range of 

marketing outlets available to organic intermediaries, where handlers can sell 

their products (such as cheese) direct to a consumer at a farmers’ market or 

to a large conventional supermarket. Handlers market most of their products 

to three types of outlets: manufacturers/processors, distributors, and retailers 

(table 4). Retailers encompass a wide range of venues, including natural 

product chains (e.g., Whole Foods), independent natural product stores 

(e.g., My Organic Market in the DC metropolitan area), conventional chains 

(e.g., Safeway), and club/discount stores (e.g., Costco). In 2004, distributors 

accounted for the largest average share of sales, followed by retailers (when 

considering all types), and then manufacturers. In 2007, retailers accounted 

for the largest average percent of sales, followed by wholesalers and 

distributors. Between 2004 and 2007, the share of sales made to club stores 

increased, while the percent of sales made to distributors decreased. 

Table 3

A handler’s average number of suppliers, by type

Type of supplier 2004 2007

Number

Growers 12 10

Marketing or grower cooperative 3 2

Manufacturer/processor 3 4

Wholesaler/distributor 2 3

Agent/broker 2 2

Source: USDA, Economic Research Service.

Table 4

Organic handler sales to different market outlets

Market outlet 2004 2007

Percent of sales

Retailers:

Natural product chains 14 9

Natural product independents 7 10

Conventional grocery 10 13

Club/discount stores 2 7

Total retailing 33 39

Wholesale/distribution 45 32

Manufacturers/processors 15 16

Other outlets:

Direct to consumer 3 4

Restaurants and institutions 2 2

Growers and producers NA 1

Other 2 6

NA=Not available.

Notes: Use of growers as a marketing outlet was included in the 2007 survey but not the 2004 

survey; in 2004, respondents listed growers in the “other” category. Respondents that fi lled in 

“other” indicated a wide range of outlets, including mail order, Internet sales, gift shops, and 

other categories. 

Source: USDA, Economic Research Service. 
9

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Contract Use in the Organic Sector

As products move from one level of the supply chain to another, transactions are either made in the spot market (e.g., via wholesaler or a broker) 

or arranged in advance by contract. In general, informal contracts, which 

may be written or verbal, may be used when it is less critical for the “quid 

pro quo” to be immediate (Hart and Holmstrom, 1987). Formal contracts, 

which are written negotiated agreements, often impose costs or penalties on 

growers or fi rms who fail to honor contract terms. Informal contracts usually 

persist over time because fi rms have repeated interactions, have developed 

reputations, and/or desire long-term relationships. Contract sales result from 

various arrangements, including those agreed upon between farmers and 

intermediaries; farmers and retailers; ingredient suppliers and processors; 

wholesalers and retailers; or manufacturers and retailers. With the exception 

of those made directly between farmers and retailers, a contract typically 

has an intermediary or handler as one party to the agreement. In most cases, 

contracts help reduce transaction costs and/or risk (MacDonald et al., 2004).

Survey fi ndings suggest that handlers rely on contracts to procure organic 

ingredients and commodities. In 2007, 67 percent reported using verbal or 

written contracts for procurement, a signifi cant decrease from 76 percent in 

2004. The percent of the volume of organic products under contract, however, 

remained largely unchanged between 2004 and 2007 (table 5). In 2007, an 

average of 46 percent of organic products purchased was obtained by written, 

negotiated contracts; 24 percent were procured through verbal agreements or 

ongoing implicit relationships between suppliers and handlers. The remaining 

27 percent of organic products were acquired through spot markets; these 

shares are largely unchanged from 2004. 

Research on contracting in the conventional sector has shown that large 

farms are most likely to contract, and that larger farms produce and market 

a greater share of their output under contract (MacDonald et al., 2004). 

Handlers responding to the survey indicated that this relationship also holds 

true for organic intermediaries. Large handlers (i.e., those with more organic 

sales) were more likely to use contracts than small fi rms (fi g. 4) and use 

contracts to procure a greater portion of their input needs. The smallest fi rms 

in the organic sector had sales of less than $500,000 per year, and those 

using contracts procured approximately 50 percent of their supply through 

contracts. Intermediate sized fi rms had organic sales in the $5 million to $15 

million range, and those using contracts procured an average of 70 percent 

via contract. Similar results were reported by organic handlers in 2004.

Table 5

Percent of volume of commodities, by procurement method

 2004 2007

Percent of volume

Written contract 46 43

Verbal contract 24 22

Spot market 27 29

Other 3 6

Note: Sample size 1,393 for 2004 and 1,408 for 2007.

Source: USDA, Economic Research Service.
10

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Handlers may provide their contract suppliers with resources, including 

physical goods (e.g., seeds or chicks) or services (e.g., labor for harvesting 

or packaging or transportation). In conventional farming systems, for 

example, broiler processors provide growers with fl ocks; hog processors 

provide feed; and fl oriculture wholesalers provide seedlings and technical 

advice (MacDonald et al., 2004). According to survey fi ndings, organic 

handlers provided a broad range of assistance to their suppliers (table 6). 

Transportation assistance, while the most common form of contract supplier 

assistance in both years, was offered less in 2007 than in 2004. Suppliers or 

intermediaries were least interested in providing organic contract suppliers 

with labor or organic certifi cation in either period. 

Contracts may promote long-term relationships between buyers and suppliers. 

For a multitude of reasons, however, buyers may decide to terminate rather 

than renew a contract (table 7). The survey responses regarding contract 

termination indicated essentially no changes in the sector between the two 

periods, and overall, more than half of handlers had not terminated contracts. 

For those who did terminate contracts, it was typically due to quality and 

supplier performance. 

Handlers have a variety of reasons for using contracts. Survey respondents were asked to indicate which factors infl uenced their decision to use 

contracts. Risk management is one rationale for contracting, and terms are 

intended to ameliorate the effects of risk by lowering procurement costs and 

stabilizing input prices and suppliers’ prices. In 2007, 62 percent of handlers 

reported that stabilizing input prices was a very important reason for the use 

of contracts, while half indicated that lowering procurement costs was a very 

important reason for using contracts (fi g. 5). The percent of handlers using 

contracts to stabilize input prices signifi cantly increased between 2004 and 

Figure 4

Percent of handlers using contracts and average percent of volume 

procured by contract, by firm size, 2007 

Percent

Notes: The percent of volume under contract is for firms that use contracts; N=653. The sales 

categories represent total organic sales of firms. The sizes reported contain a fairly large 

number of categories in order to reflect the range of sizes for different handler types in the 

organic sector. 

Source: USDA, Economic Research Service.

< $500,000 >$100 

million

$25-100

million

$15-25

million

$5-15

million

$1-5 

million

$500,000-

$1 million

0

20

40

60

80

100

Firms

Average volume under contract

Firm size, by sales
11

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

2007, suggesting that price volatility likely became a greater issue between 

2004 and 2007. 

Transaction cost factors are related to search costs, enforcement costs, and 

product quality. In 2007, 87 percent of fi rms using written or verbal contracts 

stated that securing essential organic products was a very important reason 

for contracting, which is a signifi cant, albeit slight, increase over 83 percent 

in 2004. Seventy-seven percent of fi rms in 2007 reported using contracts to 

procure products that are limited in supply, which is a signifi cant increase 

from 69 percent in 2004. In 2007, 76 percent of respondents reported that 

procuring products of consistent quality was a very important reason for 

using contracts, essentially unchanged from 2004. Procuring products that 

meet specifi c quality standards in order to meet a company mission such 

as “fair trade” “or socially responsible” was a very important reason for 

contracting to approximately 40 percent of fi rms in both 2004 and 2007. 

Firms were much less likely to use contracts to encourage growers to transition to organic agriculture. 

Table 7

Stated reasons for contract termination, 2004 and 2007

 2004 2007

Percent of handlers

Unsatisfactory quality 22 19

Inability to deliver 17 15

Supplier unreliability 17 17

Failure to produce certifi cation 8 9

Other 5 5

Have not terminated contracts 55 57

Notes: The data refer to the percent of handlers who use contracts; N=729 in 2004 and 653 

in 2007.

Source: USDA, Economic Research Service.

Table 6

Assistance provided to organic contract suppliers by handlers, 

2004 and 2007

 2004 2007

Percent of fi rms

Transportation 45 38

Technical advice on organic standards 29 28

Onfarm production advice 24 24

Inputs 19 16

Assistance/incentives with transition to organic 14 11

Labor 11 9

Organic certifi cation 14 9

Notes: The data refer to the percent of handlers who use contracts; N=729 in 2004

and 653 in 2007.

Source: USDA, Economic Research Service. 
12

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Figure 5

Reasons handlers use contracts, 2004 and 2007

Notes: This chart reflects the share of handlers who use contracts that stated these were 

“very important” reasons for contracting. N=620 in 2004 and 653 in 2007.

Source: USDA, Economic Research Service.

Percent of firms

Encourage farmer transition

to organic

Meet industry standards

Meet company’s mission

Stabilize prices for suppliers

Lower procurement costs

Stabilize input prices

Secure products in limited supply

Ensure consistent quality

Secure essential products

0 20 40 60 80 100

2004

2007
13

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

The Economics of Contract Design: 

Quality, Verifi cation, and Pricing

Once buyers and sellers decide to enter into a contract, the specifi c form 

of the contract is negotiated. In practice, the actual form of an agricultural 

contract, such as the length, complexity, and provisions, may vary widely by 

the company offering the contract, by product, and by geography. Underlying 

the specifi c structure of all contracts is an information problem between the 

buyer and the seller, which takes one of two forms (or a combination of the 

two). In the fi rst case, the seller knows the quality of the product being sold 

and the buyer does not (i.e., the classic adverse selection problem). In the 

second case, the buyer wants the seller to undertake a specifi c action that is 

unobservable to the buyer, but affects the buyer’s profi ts (i.e., the standard 

moral hazard problem) (Salanié, 1997). An optimal contract addresses these 

information problems in two ways. First, the terms of the contract must be 

at least as good as the supplier’s other available opportunities. Otherwise, 

the supplier will not agree to the contract (participation constraint). The 

second aspect of an optimal contract is designed so that the seller will truthfully reveal quality or will exert the level of effort the buyer specifi es in the 

contract (incentive compatibility). 

Contract terms usually address some of the following aspects: quality, 

quantity, best management practices, time and date of delivery, prices and 

payment, and actions taken if the contract provisions are not met. The survey 

questioned handlers about these aspects of the typical contract for the product 

they most often procure via contract. The selected commodities include 

produce (apples/pears, onions/garlic, grapes, berries, and tomatoes), grains 

(corn, rice, soybeans, and wheat), and other products (coffee, nuts, poultry, 

seeds, and milk). In the following sections, the data are explored with regard 

to select commodities to study more closely quality and verifi cation of 

quality, as well as pricing and compensation mechanisms, of contracts in the 

organic sector. Select data are also included in the appendix, with additional 

data concerning contracting in the organic sector available at www.ers.usda.

gov/Data/OrganicHandlers. 

Contracting for Quality Is Essential 

for the Organic Sector

The relationship between price and quality is often a key component in 

contracts, given that sales and prices of agricultural products are typically 

contingent on quality (Waugh, 1928). This relationship creates a confl ict 

between buyers and sellers because, while buyers are generally willing to pay 

higher prices for higher quality, producers (all else equal) usually must incur 

greater costs to produce higher quality products. Quality verifi cation is essential, because when buyers cannot observe quality, producers are unwilling 

to undertake needed activities to sell high-quality products, resulting in 

low-quality merchandise being sold in the marketplace (Akerlof, 1970). This 

phenomenon has been observed repeatedly in agricultural markets and has 

led to the legislation of Federal grades, standards, and quality inspections for 

fruits, vegetables, and grains (Dimitri, 2002). Two separate contracting issues 

are related to quality: how to structure incentives so that the desired quality 

will be produced; and how to observe or measure quality. 
14

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Encouraging suppliers to deliver high-quality products can be done by 

linking price with delivered quality, by placing production and handling 

requirements on suppliers, or by a combination of both. The importance of 

quality to organic buyers is readily apparent by the dominance of quality 

provisions in contracts; nearly all contracts include quality provisions (table 

8). Minimum quality standards for delivered quality, which set a lower bound 

on quality so that anything delivered below this level will be rejected by the 

buyer, appear with the greatest frequency. In 2007, grain contracts specifi ed a 

minimum quality standard most often. Over three-quarters of handlers indicated that their seed, milk, onions/garlic, wheat, soybeans, corn, and grape 

contracts specifi ed minimum quality standards.

In addition to setting a minimum quality, contract provisions often tie 

price and quality by offering incentives for high quality or penalties for 

low quality. Incentives for high quality typically take one of two forms: a 

premium for high quality output; or a two-part price, where the price has a 

fi xed component and a component that increases with quality. In the organic 

market, buyers tend to offer a price premium for high quality. Other contracts 

penalize a supplier for delivering a low-quality product. Some products are 

more likely to be penalized for low quality (e.g., corn, soybeans, and tomatoes), while others are more likely to offer a premium for high quality (e.g., 

milk, coffee, and wheat). Nearly all survey respondents indicated that their 

contracts did not explicitly set prices as a fi xed price plus a variable component that explicitly depends on quality. 

Table 8

Quality provisions in contracts with organic suppliers, select commodities, 2004 and 2007

 Minimum quality Premium Penalty Best management

 standards for high quality for low quality practices

Product 2004 2007 2004 2007 2004 2007 2004 2007

 Percent of handlers that use contracts

Produce:

Apples/pears 72 46 31 15 37 19 19 23

Berries 73 64 9 21 18 21 20 14

Grapes 64 79 22 26 42 26 37 37

Onions/garlic 100 85 17 38 67 31 40 15

Tomatoes 75 67 27 33 30 50 17 17

Grains:

Corn 78 80 26 10 39 39 30 22

Rice 77 71 21 18 21 12 23 24

Soybeans 87 84 27 19 36 30 13 19

Wheat 85 85 54 41 44 15 13 11

Other:

Coffee 73 54 38 38 11 * 16 15

Nuts 81 71 24 21 30 25 25 *

Poultry 50 64 22 * 33 14 44 21

Milk 73 78 34 43 21 30 23 17

Seeds 88 80 24 27 52 33 30 20

All products 78 67 27 21 29 20 23 18

* Indicates that less than 10 percent of handlers reported using a specifi c clause or term.

Source: USDA, Economic Research Service.
15

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Some contracts include stronger provisions intended to control quality 

through adoption of best management practices. While exact practices 

vary by region and crop, best management practices cover many aspects of 

farming, including soil, water, and pest management, to increase output, 

reduce costs, minimize environmental pollution, or increase quality (Hassell 

et al., 2005; Daane et al., 2005). From a contracting perspective, contracts 

that provide a large amount of risk-sharing often remove farmer incentives 

to undertake good management practices, and specifying best management 

practices may be an effort to offset this effect (MacDonald et al., 2004). 

According to survey fi ndings, best management practices were part of all 

contracts for all commodities except those for nuts, but were used most often 

in contracts for grapes and rice, followed by apples/pears, corn, and poultry. 

Quality Verifi cation in Contracts 

With Organic Suppliers

Verifi cation of quality ensures that the delivered product meets the standards specifi ed in the contract and is an essential part of contracts. Thus, 

contracts that contain provisions relating to quality also stipulate the method 

of verifi cation. The timing of quality measurement, as well as the verifi cation 

method, varies widely in the organic sector. In many cases, buyers observe or 

measure quality prior to paying for a delivery. Even when quality is observable, however, ascertaining quality of an entire delivery is cost prohibitive. 

While most fi rms test a sample of the delivered product, this method is prone 

to measurement error (Hueth et al., 1999). At times, when quality characteristics are not perceivable until the commodity has traveled farther downstream, 

quality measurement occurs after delivery (Hueth and Ligon, 1999).

The quality measurement technique depends on how suppliers and handlers 

defi ne quality. For some products (e.g., apples), quality is defi ned by size, 

color, and freedom from visible blemishes. When attributes of quality can be 

observed, the buyer can evaluate samples at the time of delivery. Quality of 

wheat and specialty grains, however, maybe be defi ned by moisture, protein, 

or fat content. In such cases, quality is unobservable, so quality verifi cation 

requires that samples of the product be tested. Some products may have qualities defi ned by both observable and unobservable attributes, so quality verifi -

cation may require a combination of observation and testing. In other cases, 

when attributes cannot be measured even with testing, (e.g., cocoa labeled 

“fair trade,” tuna labeled “dolphin friendly,” or products labeled “organic”), a 

buyer may require third-party certifi cation of the supplier’s process to ensure 

quality standards are satisfi ed. 

The most commonly used quality measurement provisions are presented 

in table 9 for select commodities. Nearly all contracts specify that the 

supplier provide the buyer with a copy of an organic inspection certifi -

cate. The organic certifi cate ensures that the seller and the buyer are 

exchanging a product that satisfi es the national organic standards and 

means that the product was produced on a farm that was certifi ed organic 

by a USDA-accredited certifying agent and processed and distributed by 

an organic handler with similar certifi cation. Handlers may also request 

third-party certifi cation for other quality attributes, such as for “fair 

trade” or “kosher” attributes. 
16

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

USDA grading standards, which provide a shorthand defi nition for quality, 

were used more frequently for some crops in 2007 (e.g., rice, onions/garlic, 

apples/pears, nuts, and poultry) than for others, refl ecting the importance of 

their usage for conventional crops. Conventional rice sales, for example, often 

rely on USDA grades. 

For most agricultural products (including those raised and handled under 

organic management), quality verifi cation relies on both observation and 

testing. Fresh produce relies equally on observing quality and testing quality, 

likely because many quality attributes for fruits and vegetables can be readily 

observed. Grain quality has both observable and unobservable attributes of 

quality. As a result, the defi nition of grain quality is complex, where verifi cation consists of observation for some attributes and testing for others. Wheat 

quality, for example, depends on a number of visible attributes, such as the 

amount of shrunken and/or broken kernels and heat-damaged kernels, the 

presence of foreign material, smut damage, insect damage, frost damage, 

germ damage, and mold damage. Unobservable quality attributes, such as 

moisture, protein content, weight, and kernel hardness, can also be tested 

using equipment developed specifi cally for this purpose. Contracts often 

include specifi cations for such attributes (U.S. Wheat Associates, 2007). 

Because quality attributes for coffee and milk are largely unobservable, 

nearly all quality verifi cation is done through testing. Coffee bean quality is 

tested at both the green stage and the roasted stage. Quality tests include a 

cup test, which considers brewed coffee aroma and fl avor; a roast test, which 

Table 9

Verifying quality for select commodities in contracts with organic suppliers, 2004 and 2007

 Third-party Organic

 Observation Testing certifi cation USDA grades certifi cate

Product 2004 2007 2004 2007 2004 2007 2004 2007 2004 2007

 Percent of handlers that use contracts

Produce:

Apples/pears 67 50 55 46 9 31 21 42 71 65

Berries 45 71 73 57 27 21 18 29 82 79

Grapes 17 37 61 58 0 21 26 21 77 89

Onions/garlic 50 62 33 46 17 15 17 46 83 85

Tomatoes 57 44 43 56 13 22 35 17 91 83

Grains:

Corn 57 59 61 76 37 27 46 29 88 93

Rice 64 47 50 82 21 35 36 47 85 82

Soybeans 71 68 83 70 36 35 24 24 89 95

Wheat 39 59 78 78 22 30 36 30 97 85

Other:

Coffee 66 46 78 85 36 27 11 * 83 75

Nuts 64 46 45 46 27 17 50 38 73 88

Poultry 38 57 38 43 13 29 50 36 75 86

Seeds 50 53 65 80 15 53 19 13 71 87

Milk 33 22 69 74 24 * 11 13 78 87

All products 56 52 62 63 26 24 25 23 84 82

* Indicates that less than 10 percent of handlers that use contracts reported using a specifi c clause or term.

Notes: Third-party certifi cation differs from providing an organic certifi cate. Third-party certifi cation covers attributes of quality other than 

“organic,” while the organic certifi cate covers only the attribute “organic.” 

Source: USDA, Economic Research Service. 
17

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

indicates whether the coffee was roasted at the proper temperature; and a 

measure for moisture content (Coffee Quality Institute, 2009). Assessing 

milk quality involves analyzing the milk for fat and nonfat milk solids, gathering somatic cell counts, and testing for various residues (FDA, 2009). Milk 

quality tests are based on samples taken on farm or from milk products after 

they have been processed or manufactured. 

Pricing and Compensation in Contracts 

With Organic Suppliers

A crucial part of the contract is supplier compensation, which includes how 

prices are determined and the timing of payment. An appropriately set price 

will keep the buyer and the seller from breaking the contract and using the 

spot market to buy or sell their products. Optimal contract theory indicates 

that, at a minimum, a contract needs to compensate a supplier by at least as 

much as the next best alternative. In some cases, buyers will try to cultivate 

long-term relationships with growers through the contract and price specifi -

cation. While some prices are fi xed at a fl at rate in advance, pricing can be 

more complex and can be calculated in a variety of ways, such as equal to 

market prices or dependent on a supplier’s past performance. Past performance generally infl uences current prices when the buyer and seller have 

an established long-term relationship or when it is costly for the supplier to 

switch from one crop to another (Fama, 1990). Performance-based pricing 

provides the supplier with some risk sharing and, by basing current prices on 

past performance, a supplier will not be severely punished for a bad crop in 

the current year.

Pricing can be structured in many ways, and there is no dominant method 

of price determination in the organic sector. Contracts between different 

pairs of suppliers and buyers, even for the same product, likely specify prices 

in several ways. The timing of payment varies, as well, with the two most 

common provisions specifying that the supplier is paid on delivery or after a 

specifi ed number of days. In 2007, prices were negotiated at the time of transaction (versus in advance when the contract is signed) most often for organic 

soybeans, wheat, berries, and nuts. The provision that suppliers receive the 

market price for organic products at the time of delivery is specifi ed most 

often in contracts for apples/pears, coffee, and seeds (table 10). By committing in advance to the market price, the supplier does not have an incentive to 

breach the contract and sell the product in the market. Quantity discounts—

receiving a lower price in exchange for the purchase of a large quantity—are 

part of contracts for nearly all products except for organic berries and are 

most common in organic seed, wheat, rice, and tomato contracts. 

Flat prices (i.e., those that do not explicitly vary with quantity or quality) 

are specifi ed most often in contracts for organic onions/garlic, poultry, and 

grains. The least frequently used price mechanism is one linking prices to 

the supplier’s past performance, which rewards suppliers for consistently 

delivering high-quality products to the handler. This provision most often 

covers organic seeds, coffee, apples/pears, berries, grapes, onions/garlic, 

and tomatoes. These products have characteristics that encourage long-term 

relationships between suppliers and buyers. For example, coffee, berry, grape, 

and apple/pear production occurs on perennial plants or trees and represents 
18

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

a long-term investment for growers. In such cases, growers often prefer longterm relationships with buyers. Prices that consider a supplier’s production 

history will encourage that relationship. While onions/garlic and tomatoes 

are annual crops, their production requires a high level of skill, particularly 

for processing varieties, so buyers are willing to compensate their long-term 

providers based on past performance. 

Nearly all contracts specify that payment be made to suppliers after a specifi ed number of days for all products, except for soybeans and poultry when 

payment is made at the time of delivery.

Table 10

Handlers’ use of compensation clauses in contracts with organic suppliers 

for select commodities, 2004 and 2007

 Organic Negotiated at time Prices based on Quantity

 Flat price market price of transaction past performance discount

Product 2004 2007 2004 2007 2004 2007 2004 2007 2004 2007

 Percent of handlers that use contracts

Produce:

Apples/pears 16 12 NA 65 44 * * * 22 15

Berries 36 14 NA 29 64 36 * 14 * *

Grapes 43 26 NA 21 17 21 11 26 10 *

Onions/garlic 33 54 NA 15 17 15 * 23 33 15

Tomatoes 35 22 NA 33 35 22 * 17 23 33

Grains:

Corn 56 39 NA 32 27 24 14 * 36 24

Rice 43 47 NA 24 29 29 * * 21 35

Soybeans 45 32 NA 27 35 41 17 * 28 11

Wheat 38 33 NA 30 41 37 13 * 12 44

Other:

Coffee 18 13 NA 47 40 24 15 10 30 18

Nuts 32 29 NA 13 27 33 * * 19 25

Poultry 25 43 NA 29 13 * 11 * 11 21

Seeds 67 * NA 40 11 27 21 13 20 47

Milk 44 22 NA 17 23 13 * * 16 *

All products 40 30 NA 30 32 23 11 * 26 22

NA=Not available.

* Indicates that less than 10 percent of handlers who use contracts reported using a specifi c clause or term.

Note: The 2004 survey instrument did not ask handlers to report whether contracts included a price clause for organic market price. 

Source: USDA, Economic Research Service.
19

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Conclusions: Contracts in the 

Organic Sector 

This report provides the fi rst systematic exploration of contract use in the 

organic sector, assessing the extent of contracting in the organic sector and 

providing insight into contract design for different organic commodities. The 

fi ndings indicate that there is widespread use of contracting in the organic 

sector and that securing supplies of a highly differentiated product is less 

costly when using contracts than when relying on the spot market. Most 

contracts include quality standards and specifi c quality testing protocol; 

these provisions are similar to those included in contracts for conventionally 

produced agricultural commodities. 

This report does not address the controversy over contract use in the 

conventional sector, where processor market power over suppliers is an 

issue, particularly in the livestock sector. While the source of tension 

between processors and suppliers in some conventional sectors is not fully 

understood, economic research suggests that the link between contracts 

and market power is weak (MacDonald et al., 2004). At the time this report 

was written, evidence did not indicate such concerns in the organic sector. 

Nontheless, the research and survey instrument did not directly address 

market power in the organic sector. 

While there was a decline in the percent of handlers using contracts between 

2004 and 2007, the average percent of volume procured under contract 

remained constant. We hypothesized that as the market grows and competition for scarce products increases, more handlers would rely on contracts and 

a greater share of volume would be procured under contract. This contradiction could be the result of respondent bias in the data, but also that suppliers 

may be less willing to agree to contracts if selling their products will be 

more profi table on the spot market. Missing data on prices and product availability would allow for analysis of this question, as would information on 

why organic suppliers use contracts, providing a comparative analysis that 

identifi es which factors lead to the use of contracts in general, and whether 

measurable differences exist between the factors leading to contract use in 

the organic and conventional sectors. Future research might also examine 

sectors, such as poultry, where contracts dominate the conventional sector but 

are rarely used in the organic sector. Information on the use of contracts by 

intermediaries in the conventional sector is not currently available—nearly 

all research focuses on contracting from the producer’s perspective. 

Whether the share of certifi ed organic handlers using contracts continues to 

decline will depend on the interplay of many factors. First, the industry is 

adapting to the recent slowing of demand growth. For nearly 15 years, the 

industry has operated on a model that anticipates approximately 20 percent 

growth per annum, with periodic severe product shortages. The organic market 

now appears—for the fi rst time—to be affected by the same cyclical conditions 

that face the entire agricultural sector. Growth in retail sales between 2007 

and 2008 was 12 percent, and growth between 2008 and 2009 was even lower, 

at 5 percent (Nutrition Business Journal, 2010). As growth in the organic 

market slows in response to changing macroeconomic conditions, handlers 

and suppliers must adapt their business strategies, including procurement and 
20

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

contracting, to remain profi table through downturns in the business cycle. 

Changing expectations about future supply needs may result in changes in the 

frequency of contract usage, as well as different contract terms. Such changes 

are visible in the terms of organic milk contracts, which were subject to temporary mandatory quota reductions in early 2010, which have since eased. These 

changes in contract terms were implemented by one major milk processor 

specifi cally to reduce supply to prevent a decline in organic milk prices. 

However, the impact of these changes on the use of contracts in the organic 

sector is not predictable. Handlers may increase their reliance on contracts, 

in order to ensure they secure an adequate supply of top quality products. It 

is equally plausible that handlers may seek to contract for fewer products and 

rely on the spot market instead. Whether these changing market realities in 

the organic sector result in a widespread increase or decrease in contracting is 

an empirical question that can only be answered over time. 
21

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

References

Akerlof, George. “The Market for “Lemons:” Quality Uncertainty and 

the Market Mechanism,” Quarterly Journal of Economics Vol. 84, 

No. 3, 1970.

Clarkson, Lynn. President of Clarkson Grain Company, personal communication with author, 2009.

Coffee Quality Institute, 2009, www.coffeeinstitute.org. 

Daane, Kent E., Rhonda J. Smith, Karen M. Klonsky, and Walter J. Bentley. 

“Organic vineyard management in California,” Organic-Research.com, 

CAB International, 2005.

Dillman, D. Mail and Internet Surveys: The Tailored Design Method, John 

Wiley & Sons, New York, 1999.

Dimitri, Carolyn. “Contract Evolution and Institutional Innovation: Marketing 

Pacifi c-Grown Apples from 1890 to 1930,” Journal of Economic History, 

March 2002. 

Drabenstott, M. “Industrialization: Steady Current or Tidal Wave?” Choices, 

pp. 4 – 8, 1994.

Fama, Eugene F. “Contract Costs and Financing Decisions,” The Journal of 

Business Vol. 63, No. 1, Part 2, 1990.

Food and Drug Administration (FDA). Milk Safety, 2009, http://www.

fda.gov/Food/FoodSafety/ProductSpecificInformation/MilkSafety/

default.htm.

Food Marketing Institute. U.S. Grocery Shopper Trends 2008, Arlington, 

VA, 2008.

Hart, Oliver. Firms, Contracts, and Financial Structure, Oxford: Clarendon 

Press, 1995.

Hart, Oliver, and Bengt Holmstrom. “Theory of Contracts,” Advances in 

Economic Theory Fifth World Congress (T. Bewley, editor), Cambridge: 

Cambridge University Press, 1987. 

Hassell, A.G., P. Kristiansen, and A. Taji. “Investigation of management practices and economic viability of vineyards for organic wine production,” 

presented at IFOAM, 2005.

Hueth, Brent, and Ethan Ligon. “Producer Price Risk and Quality 

Measurement,” American Journal of Agricultural Economics Vol. 81, 

No. 3, pp. 512-24, 1999.
22

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Hueth, Brent, Ethan Ligon, Steven Wolf, and Steven Wu. “Incentive 

Instruments in Fruit and Vegetable Contracts: Input Control, Monitoring, 

Measuring, and Price Risk,” Review of Agricultural Economics Vol. 21, 

No. 2, pp. 374-89, 1999.

MacDonald, J., and P. Korb. Agricultural Contracting Update, 2005, EIB-35, 

U.S. Department of Agriculture, Economic Research Service, p. 37, 

April 2008.

MacDonald, J., J. Perry, M. Ahearn, D. Banker, W. Chambers, C. Dimitri, 

N. Key, K. Nelson, and L. Southard. Contracts, Markets, and Prices: 

Organizing the Production and Use of Agricultural Commodities, AER-837, 

U.S. Department of Agriculture, Economic Research Service, 2004.

McBride, William D., and Catherine Greene. “The Profi tability of Organic 

Soybean Production,” paper for the AAEA meeting, Orlando, Florida, 2008.

Milgrom, Paul, and John Roberts. Economics, Organization and Management, 

Englewood Cliffs: Prentice Hall, NJ, 1992.

Nutrition Business Journal. “U.S. Organic Food Sales ($Mil) 1997-2010e,” 

chart 22 (online data chart), Penton Media, Inc., 2010.

Oberholtzer, Lydia, Carolyn Dimitri, and Catherine Greene. “Adding value 

in the organic sector: characteristics of organic producer–handlers,” 

Renewable Agriculture and Food Systems Vol. 23(3): pp. 200-7, 2008.

Oliver, H. “Organic Dairy Demand Exceeds Supply,” Natural Foods 

Merchandiser, August 2006.

Organic Valley. Letter to CROPP Cooperative members, May 15, 2009.

Salanié, Bernard. The Economics of Contracts, 1st edition, The Massachusetts 

Institute of Technology Press, 1997. 

Siemon, G. “Options and Opportunities for Producers in Organic 

Agriculture,” proceedings from Organic Agriculture: Innovations in 

Organic Marketing, Technology, and Research Symposium, October 

2-7, 2005, www.plantmanagementnetwork.org/pub/cm/symposium/

organics/Siemon/.

U.S. Department of Agriculture, Agricultural Marketing Service. National 

Farmers Market Manager Survey, 2006.

U.S. Department of Agriculture, Agricultural Marketing Service, National 

Organic Progam. USDA Accredited Certifying Agents (ACAs), 2010, 

www.ams.usda.gov/nop/. 

U.S. Department of Agriculture, Economic Research Service. Organic 

Production, 2010, http://www.ers.usda.gov/Data/Organic/.

U.S. Department of Agriculture, National Agricultural Statistics Service. 

Organic Production Survey (2008), Volume 3, Special Studies, Part 2, 

2007 Census of Agriculture, 2010.
23

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

U.S. Department of Agriculture, National Agricultural Statistics Service. 

2007 Census of Agriculture, 2009.

U.S. Wheat Associates. Overview of Wheat Inspection, 2007, www.uswheat.org. 

Waugh, Frederick V. “Quality Factors Infl uencing Vegetable Prices,” Journal 

of Farm Economics Vol. 10, No. 2, pp. 185-96, 1928.

Weinraub, J., and W. Nicholls. “Organic Milk Supply Falls Short,” 

Washington Post, p. F01, June 1, 2005. 
24

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Appendix: Contract Data

Appendix table 1 

Wheat contract terms between handlers and suppliers, 2004 and 2007

2004 2007

Percent of contracts

Contract form:

Written 77 67

Verbal 23 33

Contract length:

Seasonal 35 19

Yearly 47 59

Pricing terms:

Flat price 38 33

Organic market price NA 30

Negotiated at time of transaction 41 37

Quantity discount 12 44

Quality premium 54 41

Penalty for low quality 44 15

Prices depend on past performance 13 *

Fixed price plus quality premium NA 11

Measurement of delivered quality:

Observe quality 39 59

Test quality 78 78

Third-party certifi cation 22 30

USDA grades 36 30

Payment terms:

Payment on delivery 85 44

Payment after specifi ed number of days NA 59

Standard clauses:

Verifi cation of certifi cation 97 85

Minimum quality standards 85 85

Output of specifi ed number of acres 36 33

Reject if contract terms not met 79 74

Automatic contract renewal 15 *

Other action if terms not met 61 59

Delivery place 81 78

Delivery time 64 59

Best management practices 13 11

Exclusive supply 17 *

NA= data were not collected in 2004. 

* Indicates that less than 10 percent of handlers reported using a specifi c clause or term. 

Source: USDA, Economic Research Service.
25

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Appendix table 2

Corn contract terms between handlers and suppliers, 2004 and 2007

2004 2007

Percent of contracts

Contract form:

Written 82 87

Verbal 18 13

Contract length:

Seasonal 40 44

Yearly 38 46

Pricing terms:

Flat price 56 39

Organic market price NA 32

Negotiated at time of transaction 27 24

Quantity discount 36 24

Quality premium 26 10

Penalty for low quality 39 39

Prices depend on past performance 14 *

Fixed price plus quality premium NA 10

Measurement of delivered quality:

Observe quality 57 59

Test quality 61 76

Third-party certifi cation 37 27

USDA grades 46 29

Payment terms:

Payment on delivery 61 41

Payment after specifi ed number of days NA 59

Standard clauses:

Verifi cation of certifi cation 88 93

Minimum quality standards 78 80

Output of specifi ed number of acres 34 34

Reject if contract terms not met 72 71

Automatic contract renewal * *

Other action if terms not met 55 39

Delivery place 84 76

Delivery time 76 61

Best management practices 30 22

Exclusive supply 21 *

NA= data were not collected in 2004. 

* Indicates that less than 10 percent of handlers reported using a specifi c clause or term. 

Source: USDA, Economic Research Service.
26

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Appendix table 3

Soybean contract terms between handlers and suppliers, 

2004 and 2007

2004 2007

Percent of contracts

Contract form:

Written 72 66

Verbal 28 34

Contract length:

Seasonal 32 26

Yearly 54 51

Pricing terms:

Flat price 45 32

Organic market price NA 27

Negotiated at time of transaction 35 41

Quantity discount 28 11

Quality premium 27 19

Penalty for low quality 36 30

Prices depend on past performance 17 *

Fixed price plus quality premium NA *

Measurement of delivered quality:

Observe quality 71 68

Test quality 83 70

Third-party certifi cation 36 35

USDA grades 24 24

Payment terms:

Payment on delivery 67 49

Payment after specifi ed number of days NA 38

Standard clauses:

Verifi cation of certifi cation 89 95

Minimum quality standards 87 84

Output of specifi ed number of acres 36 32

Reject if contract terms not met 72 68

Automatic contract renewal * *

Other action if terms not met 50 43

Delivery place 71 73

Delivery time 68 70

Best management practices 13 19

Exclusive supply 23 *

NA= data were not collected in 2004. 

* Indicates that less than 10 percent of handlers reported using a specifi c clause or term. 

Source: USDA, Economic Research Service.
27

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Appendix table 4

Milk contract terms between handlers and suppliers, 2004 and 2007

2004 2007

Percent of contracts

Contract form:

Written 68 70

Verbal 32 30

Contract length:

Seasonal * *

Yearly 43 48

Pricing terms:

Flat price 44 22

Organic market price NA 17

Negotiated at time of transaction 23 13

Quantity discount 16 *

Quality premium 34 43

Penalty for low quality 21 30

Prices depend on past performance * *

Fixed price plus quality premium NA 30

Measurement of delivered quality:

Observe quality 33 22

Test quality 69 74

Third-party certifi cation 24 *

USDA grades 11 13

Payment terms:

Payment on delivery 49 *

Payment after specifi ed number of days NA 87

Standard clauses:

Verifi cation of certifi cation 78 87

Minimum quality standards 73 78

Output of specifi ed number of acres 13 *

Reject if contract terms not met 66 70

Automatic contract renewal 36 26

Other action if terms not met 32 43

Delivery place 59 57

Delivery time 47 48

Best management practices 23 17

Exclusive supply 28 13

NA= data were not collected in 2004. 

* Indicates that less than 10 percent of handlers reported using a specifi c clause or term. 

Source: USDA, Economic Research Service.
28

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Appendix table 5

Tomato contract terms between handlers and suppliers, 

2004 and 2007

2004 2007

Percent of contracts

Contract form:

Written 35 56

Verbal 43 25

Contract length:

Seasonal * *

Yearly 43 48

Pricing terms:

Flat price 35 22

Organic market price NA 33

Negotiated at time of transaction 35 22

Quantity discount 23 33

Quality premium 27 33

Penalty for low quality 30 50

Prices depend on past performance * 17

Fixed price plus quality premium NA *

Measurement of delivered quality:

Observe quality 57 44

Test quality 43 56

Third-party certifi cation 13 22

USDA grades 35 17

Payment terms:

Payment on delivery 49 *

Payment after specifi ed number of days NA 61

Standard clauses:

Verifi cation of certifi cation 91 83

Minimum quality standards 75 67

Output of specifi ed number of acres 25 22

Reject if contract terms not met 75 61

Automatic contract renewal 10 *

Other action if terms not met 40 28

Delivery place 70 56

Delivery time 57 56

Best management practices 17 17

Exclusive supply * *

NA= data were not collected in 2004. 

* Indicates that less than 10 percent of handlers reported using a specifi c clause or term. 

Source: USDA, Economic Research Service.
29

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Appendix table 6

Nut contract terms between handlers and suppliers, 2004 and 2007

2004 2007

Percent of contracts

Contract form:

Written 70 87

Verbal 30 13

Contract length:

Seasonal 50 25

Yearly 32 63

Pricing terms:

Flat price 32 29

Organic market price NA 13

Negotiated at time of transaction 27 33

Quantity discount 19 25

Quality premium 24 21

Penalty for low quality 30 25

Prices depend on past performance * *

Fixed price plus quality premium NA *

Measurement of delivered quality:

Observe quality 64 46

Test quality 45 46

Third-party certifi cation 27 17

USDA grades 50 38

Payment terms:

Payment on delivery 41 33

Payment after specifi ed number of days NA 50

Standard clauses:

Verifi cation of certifi cation 73 88

Minimum quality standards 81 71

Output of specifi ed number of acres 19 13

Reject if contract terms not met 48 67

Automatic contract renewal 15 17

Other action if terms not met 35 33

Delivery place 70 58

Delivery time 67 46

Best management practices 25 *

Exclusive supply * *

NA= data were not collected in 2004. 

* Indicates that less than 10 percent of handlers reported using a specifi c clause or term. 

Source: USDA, Economic Research Service.
30

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Appendix table 7

Apple/pear contract terms between handlers and suppliers,

2004 and 2007

2004 2007

Percent of contracts

Contract form:

Written 55 67

Verbal 45 33

Contract length:

Seasonal 45 23

Yearly 33 55

Pricing terms:

Flat price 16 12

Organic market price NA 65

Negotiated at time of transaction 44 *

Quantity discount 22 15

Quality premium 31 15

Penalty for low quality 37 19

Prices depend on past performance * *

Fixed price plus quality premium NA *

Measurement of delivered quality:

Observe quality 67 50

Test quality 55 46

Third-party certifi cation * 31

USDA grades 21 42

Payment terms:

Payment on delivery 39 19

Payment after specifi ed number of days NA 38

Standard clauses:

Verifi cation of certifi cation 71 65

Minimum quality standards 72 46

Output of specifi ed number of acres * *

Reject if contract terms not met 33 50

Automatic contract renewal 24 31

Other action if terms not met 36 31

Delivery place 57 38

Delivery time 46 27

Best management practices 19 23

Exclusive supply * *

NA= data were not collected in 2004. 

* Indicates that less than 10 percent of handlers reported using a specifi c clause or term. 

Source: USDA, Economic Research Service.
31

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Appendix table 8

Coffee contract terms between handlers and suppliers, 2004 and 2007

2004 2007

Percent of contracts

Contract form:

Written 84 81

Verbal 16 19

Contract length:

Seasonal 41 41

Yearly 18 22

Pricing terms:

Flat price 18 13

Organic market price NA 47

Negotiated at time of transaction 40 24

Quantity discount 30 18

Quality premium 38 38

Penalty for low quality 11 *

Prices depend on past performance 15 10

Fixed price plus quality premium NA 19

Measurement of delivered quality:

Observe quality 66 46

Test quality 78 85

Third-party certifi cation 36 27

USDA grades 11 *

Payment terms:

Payment on delivery 75 44

Payment after specifi ed number of days NA 48

Standard clauses:

Verifi cation of certifi cation 83 75

Minimum quality standards 73 54

Output of specifi ed number of acres * *

Reject if contract terms not met 73 51

Automatic contract renewal * *

Other action if terms not met 36 16

Delivery place 54 44

Delivery time 64 49

Best management practices 16 15

Exclusive supply * *

NA= data were not collected in 2004. 

* Indicates that less than 10 percent of handlers reported using a specifi c clause or term. 

Source: USDA, Economic Research Service.
32

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Appendix table 9

Poultry contract terms between handlers and suppliers, 

2004 and 2007

2004 2007

Percent of contracts

Contract form:

Written 67 62

Verbal 33 38

Contract length:

Seasonal 22 14

Yearly 44 57

Pricing terms:

Flat price 25 43

Organic market price NA 29

Negotiated at time of transaction 13 *

Quantity discount 11 21

Quality premium 22 *

Penalty for low quality 33 14

Prices depend on past performance 11 *

Fixed price plus quality premium NA *

Measurement of delivered quality:

Observe quality 38 57

Test quality 38 43

Third-party certifi cation 13 29

USDA grades 50 36

Payment terms:

Payment on delivery 89 50

Payment after specifi ed number of days NA 36

Standard clauses:

Verifi cation of certifi cation 75 86

Minimum quality standards 50 64

Output of specifi ed number of acres 22 *

Reject if contract terms not met 44 64

Automatic contract renewal 13 14

Other action if terms not met 56 50

Delivery place 100 57

Delivery time 75 36

Best management practices 44 21

Exclusive supply 22 *

NA= data were not collected in 2004. 

* Indicates that less than 10 percent of handlers reported using a specifi c clause or term. 

Source: USDA, Economic Research Service.
33

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Appendix table 10

Seed contract terms between handlers and suppliers, 2004 and 2007

2004 2007

Percent of contracts

Contract form:

Written 76 87

Verbal 24 13

Contract length:

Seasonal 41 31

Yearly 48 54

Pricing terms:

Flat price 67 *

Organic market price 40

Negotiated at time of transaction 11 27

Quantity discount 20 47

Quality premium 24 27

Penalty for low quality 52 33

Prices depend on past performance 21 13

Fixed price plus quality premium NA 13

Measurement of delivered quality:

Observe quality 50 53

Test quality 65 80

Third-party certifi cation 15 53

USDA grades 19 13

Payment terms:

Payment on delivery 54 20

Payment after specifi ed number of days NA 73

Standard clauses:

Verifi cation of certifi cation 71 87

Minimum quality standards 88 80

Output of specifi ed number of acres 55 47

Reject if contract terms not met 83 47

Automatic contract renewal * 13

Other action if terms not met 40 33

Delivery place 81 53

Delivery time 62 53

Best management practices 30 20

Exclusive supply 26 13

NA= data were not collected in 2004. 

* Indicates that less than 10 percent of handlers reported using a specifi c clause or term. 

Source: USDA, Economic Research Service.
34

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Appendix table 11

Grape contract terms between handlers and suppliers, 2004 and 2007

2004 2007

Percent of contracts

Contract form:

Written 90 89

Verbal 10 11

Contract length:

Seasonal 41 31

Yearly 48 54

Pricing terms:

Flat price 43 26

Organic market price NA 21

Negotiated at time of transaction 17 21

Quantity discount 10 *

Quality premium 22 26

Penalty for low quality 42 26

Prices depend on past performance 11 26

Fixed price plus quality premium NA 16

Measurement of delivered quality:

Observe quality 17 37

Test quality 61 58

Third-party certifi cation * 21

USDA grades 26 21

Payment terms:

Payment on delivery 22 26

Payment after specifi ed number of days NA 74

Standard clauses:

Verifi cation of certifi cation 77 89

Minimum quality standards 64 79

Output of specifi ed number of acres 55 68

Reject if contract terms not met 62 53

Automatic contract renewal 41 32

Other action if terms not met 39 42

Delivery place 64 79

Delivery time 40 53

Best management practices 37 37

Exclusive supply 12 *

NA= data were not collected in 2004. 

* Indicates that less than 10 percent of handlers reported using a specifi c clause or term. 

Source: USDA, Economic Research Service.
35

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Appendix table 12

Berry contract terms between handlers and suppliers, 2004 and 2007

2004 2007

Percent of contracts

Contract form:

Written 70 57

Verbal 30 43

Contract length:

Seasonal 45 43

Yearly 45 29

Pricing terms:

Flat price 36 14

Organic market price NA 29

Negotiated at time of transaction 64 36

Quantity discount * *

Quality premium * 21

Penalty for low quality 18 21

Prices depend on past performance * 14

Fixed price plus quality premium NA *

Measurement of delivered quality:

Observe quality 45 71

Test quality 73 57

Third-party certifi cation 27 21

USDA grades 18 29

Payment terms:

Payment on delivery 91 36

Payment after specifi ed number of days NA 43

Standard clauses:

Verifi cation of certifi cation 82 79

Minimum quality standards 73 64

Output of specifi ed number of acres 20 14

Reject if contract terms not met 80 57

Automatic contract renewal 11 21

Other action if terms not met 44 43

Delivery place 82 64

Delivery time 70 36

Best management practices 20 14

Exclusive supply * *

NA= data were not collected in 2004. 

* Indicates that less than 10 percent of handlers reported using a specifi c clause or term. 

Source: USDA, Economic Research Service.
36

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Appendix table 13

Rice contract terms between handlers and suppliers, 2004 and 2007

2004 2007

Percent of contracts

Contract form:

Written 86 94

Verbal 14 6

Contract length:

Seasonal 21 24

Yearly 57 65

Pricing terms:

Flat price 43 47

Organic market price NA 24

Negotiated at time of transaction 29 29

Quantity discount 21 35

Quality premium 21 18

Penalty for low quality 21 12

Prices depend on past performance * *

Fixed price plus quality premium NA *

Measurement of delivered quality:

Observe quality 64 47

Test quality 50 82

Third-party certifi cation 21 35

USDA grades 36 47

Payment terms:

Payment on delivery 62 35

Payment after specifi ed number of days NA 59

Standard clauses:

Verifi cation of certifi cation 85 82

Minimum quality standards 77 71

Output of specifi ed number of acres 31 24

Reject if contract terms not met 69 65

Automatic contract renewal * *

Other action if terms not met 42 41

Delivery place 85 76

Delivery time 54 41

Best management practices 23 24

Exclusive supply * *

NA= data were not collected in 2004. 

* Indicates that less than 10 percent of handlers reported using a specifi c clause or term. 

Source: USDA, Economic Research Service.
37

The Role of Contracts in the Organic Supply Chain: 2004 and 2007 / EIB-69

Economic Research Service/USDA

Appendix table 14

Onion/garlic contract terms between handlers and suppliers, 

2004 and 2007

2004 2007

Percent of contracts

Contract form:

Written 100 75

Verbal 0 25

Contract length:

Seasonal 100 50

Yearly 0 50

Pricing terms:

Flat price 33 54

Organic market price NA 15

Negotiated at time of transaction 17 15

Quantity discount 33 15

Quality premium 17 38

Penalty for low quality 67 31

Prices depend on past performance * 23

Fixed price plus quality premium NA 15

Measurement of delivered quality:

Observe quality 50 62

Test quality 33 46

Third-party certifi cation 17 15

USDA grades 17 46

Payment terms:

Payment on delivery 50 *

Payment after specifi ed number of days NA 69

Standard clauses:

Verifi cation of certifi cation 83 85

Minimum quality standards 100 85

Output of specifi ed number of acres 67 62

Reject if contract terms not met 80 62

Automatic contract renewal * *

Other action if terms not met 67 46

Delivery place 100 85

Delivery time 67 62

Best management practices 40 15

Exclusive supply 20 23

NA= data were not collected in 2004. 

* Indicates that less than 10 percent of handlers reported using a specifi c clause or term. 

Source: USDA, Economic Research Service.