Stability of contracts in the Brazilian wine industry

Abstract

A variety of contracts between wineries and grapegrowers can be observed in the Brazilian principal production area. This study addresses the concept of coordination of food chains, particularly the stability of contractual relationships. A qualitative analysis of contracts between the industry and farmers is presented, followed by a quantitative analysis testing transaction cost economics-based hypothesis. Scale, location, age of vineyard, and the cooperative organizational form are addressed in terms of the effect of the stability of contracts. Vertical and horizontal coordination are addressed. A sample of 139 grapegrower and the 10 most important wineries provided the data. The results show that more stable contracts or vertical integration are characteristic of high quality wine production, where the need for strict contractual coordination is more relevant, i.e. risk of hold up losses is larger. Site specificity and quality-related investments are associated with more stable contractual poorer performance but tend to hold more stable relationships with their members. Adverse selection is present since specialized farmers prefer to maintain contracts with investor-owned wineries, operatives. Conclusions are presented in the final part.