In the food business, corporate identity is beginning to merge with production standards, and contract law is the bridge that often binds the two together.

Via my lovely wife, Iowa Public Radio brings us more news of the phase-out of gestation crates within the hog industry. Sysco, the largest commercial food distributor in the world, has agreed to phase-out pork produced using gestation crates. Changing food culture has precipitated the new policy. Money quote from the president of the American Restaurant Association, David Maloni:

“Food seems to … need to have a story to it. And whether that’s non-stalled pork, whether that’s Angus beef, whether that’s organic vegetables, or free-range chicken,” Maloni says. “One thing that’s very interesting is that it helps a restaurant change [sic] differentiate themselves.”

It’s tough to get the industry to change its story because of the way most livestock is raised. The big meat producers, like Tyson, don’t really do the farming part of the business. They are “integrators”, companies which encompass the functions of production, marketing, logistics, and distribution under one roof. The livestock part is done under contract with independent growers. The integrator provides the genetics and the feed to small, family owned farms who raise the livestock in exchange for a set price. In order to be eligible for each contract, farmers must equip their facility to conform with the production standards of the integrator, and they make these investments on their own credit or at their own expense. The contracts now in place are binding agreements which need to either run their course or be voluntarily abandoned by farmers and their affiliated integrators.

Eliminating gestation crates will have two consequences in the contract production system. First, it will destroy the capital investment farmers have made in the equipment they needed to solicit the old contracts. Secondly, new production contracts will mandate the purchase of different equipment to accommodate the more humane methods of production. Hence the lag in implementation of the policy, and a transition cost between $1.87 billion and $3.24 billion as estimated by the University of Minnesota study. It’s not a cop-out to say that this switch will have real financial consequences for farmers. They march to the beat of the integrator.

Contracts have created systemic inelasticity in the production system that now prevent agricultural producers from telling the story that consumers want to hear. But as these changes pulse through the production system, contracts will be also be the means by which the more humane production standards are implemented.