Agroindustrial project analysi

102 AGROINDUSTRIAL PROJECT ANALYSISFirms might accompany contract pricing with ancillary benefitssuch as the provision of technical assistance or advances of workingcapital to suppliers. Working capital requirements for purchasesof raw material and for storage are an important dimension ofprocurement operations and should be given special attention inproject analysis.Project analysts should also consider the length of the contract.Long-term contracts based on fixed prices may be convenient toproducers and processors because they increase economic certaintyand facilitate financial planning, but both the benefits and the risksof variability under spot pricing are avoided by this kind of contracting.Long- or short-term, contracting is effective only as long asexternal conditions do not significantly alter the underlying economicsof the contracts. Such alterations affected the cottonindustry of a Central American nation in 1973. In May 1973 manycotton farmers had sold forward contracts to Japanese buyers forapproximately $39 per hundredweight of lint cotton. By January1974, however, world prices had soared to $86 per hundredweight,and farmers refused to honor the contracts because their input costshad risen because of higher agrochemical costs and because theywanted a share in the higher world prices. The government finallyintervened with a compromise whereby the farmers had to deliver70 percent of their contracts at the original prices but could receivethe world prices for the remaining percentage. 1 8The value of contracts ultimately depends on the goodwill of theparties involved. Legal enforcement is often not feasible becauseof the costs and delays of adjudication, and contracts may need to beflexible enough to presume the benefits as outside conditionschange.JOINT FARMER-PROCESSOR VENTURES. Another method of achievingreasonable costs for raw material is to invite producers to investin the industrial plant, thus giving them a vested interest in thesuccess of the processing operation. This may not, however, alwaysbe the result. In one dairy plant the suppliers, who were also shareholders,maintained their producer interests by demanding higherprices for their raw milk. Because they perceived the processing18. For more details on this case, see Kenneth L. Hoadley, "The NicaraguanCotton Case" (Managua: INCAE, 1974).