Market opening is being expanded due to the DDA negotiation and the FTAs, Therefore, the competition between domestic livestock products and imported goods is expected to be intensified. The claim to increase the competitiveness of livestock industry by vertical linkage in order to respond to market opening has been raised. The purpose of this study is that the performance and problems of vertical linkage in livestock industry is diagnosed and then, the policy direction and measures to promote vertical linkage are presented.
Highlights of this study can be summarized as follows.
First, in this study, vertical linkage implying the form of various economic activities and transactions in a comprehensive concept is defined as follows. Vertical linkage is "economic activity for linking each step of vertical flow such as input, production, processing, distribution, and consumption". The type of vertical linkage is classified according to the degree of ownership and control. At the lowest level is marketing contract. In the following order are production contract, partnership, and vertical integration.
Second, the strengths of the relative performance scheme are as follows. It effectively reduces risks that are common to all farms. A big incentive for technological development improves the performance of vertical linkage. The transaction costs such as the renewal of contracts incurred by technological advances are reduced. Also, the room for the integrator to act opportunistically is reduced. The disadvantage is that uncertainty increases since individual farm's income is affected by other farms' performances and changes depending on evaluated group which individual farm belongs to.
Third, the problems of vertical linkage in broiler industry are as follows. Since integrators have not made sufficient investment for improving breeders' productivity, farmers complain about the quality of cheeks. Depending on the origin of feed ingredients and crop quality, the quality of feed is various. Because there are not proper counter-measures for bankrupt companies, much damage has occurred to farmers. Since consumers usually buy the form of a whole chicken for household consumption, the development of various chicken products is insufficient.
Fourth, the problems of vertical linkage in pork industry are as follows. In the step before fattening, improper control of diseases, inappropriate distribution system of good sows, the difficulty to secure uniformity of feed quality, and the difficulty of unification of a breeding pig and feed are pointed out. In the step of fattening, the lack of contract fattening farms, too small and aged farm facilities, low farm productivity, and conflict between integrators and contract fattening farms appear as problems. In the step of slaughtering and processing, slaughtering facilities have limited spaces and poor sanitation. The problems in the step of distribution and consumption are the difficulty in developing and expanding integrators' sales channel and seasonal supply and demand imbalance.
Fifth, the results of a survey of broiler farms were as follows. The main motives for broiler farms to contract with integrators are 'to secure stable destination of broilers', 'the reduction of income risk due to decreasing broiler price volatility,' 'stable securing of inputs such as feed, chicks, and production materials'. The items required for the development of broiler industry are 'to enhance disease management in breeder farms and hatcheries', 'the commitment of standard contracts', and 'to guarantee fees for raising broilers'. The results of analysis on the productivity of broiler farms show that the productivities of contract farms are higher than those of independent farms. In order to improve the productivities, facility improvement, risk management, and participation in consulting and training program are required.
Sixth, the results of a survey of pig farms show that the productivities of contract farms are higher than independent farms but are very low compared to major exporting countries. Pig Farms make contracts with integrators in order to secure the destination of grown pigs and minimize the risk of price volatility.
Seventh, the major results of empirical analysis on the issues of vertical linkage in livestock industry are as follows. The result of expected profit maximization model shows that input quality, broiler farms' performance, and an integrator's profit with relative performance scheme are higher than those with absolute performance scheme. We analyze the claim that relative performance scheme to evaluate farms' performance except the upper and lower 10% are disadvantageous to the remained farms by using real data. The result shows that farmers' claim seems to be valid. Also we show that low investment problem exists when market structure is not competitive and farms have experience that an integrator requires certain conditions for contract extension
Finally, the development directions of vertical linkage in livestock industry are as follows. Confidence-building between integrators and contract farms should take precedence. Based on this confidence. integrators should increase productivity by developing Korean breeding stock. Also, integrators should increase bargaining power and expand consumption by producing high value-added and high quality livestock products and developing various processed meat products. Also, contract farms' income should get stabilized. To do this, first, the government should make the legal basis for policy measures to promote vertical linkage in livestock industry. Second, integrators and contract farms should to build win-win cooperative relationship and need to make written standard contracts. Third, balanced development between private companies' vertical linkage and cooperative vertical linkage should be made. Fourth, integrators should expand investment and strengthen bargaining power. Lastly, development plan for each livestock industry should be put into practice.

Researchers:Min-kook Jeong, Myeong-Ki Lee, Hyun-Joong Kim, and Hyung-Woo Lee
E-mail address: mkjeong@krei.re.kr