Abstract

Prices are highly volatile in the South African potato industry and the marketing of potatoes are associated with high transaction costs. Most potatoes produced for the processing industry in South Africa are still under short-term contracts. The processors of frozen fries in South Africa want producers to enter into long-term contracts in order to reduce uncertainty and transaction cost. The aim of this paper was to investigate the factors that prevented South African potato producers to enter into long-term contracts. Producers identified advantages and disadvantages of the processing industry and consequently a price setting model was designed. Well established processing companies with large capacity were listed as an advantage. The main disadvantage was the high transaction cost due to uncertainty and asset specificity associated with producing potatoes for processing. The price setting model was used to convert some disadvantages into advantages and opportunities. Processors may use the information regarding perceived advantages and disadvantages, as well as, the price setting model to draw up long-term contracts that are more viable for producers. The model can also serve as a marketing tool since risk associated with different qualities of potatoes and premiums paid for higher qualities are evaluated.

Key words: Asset specificity, long-term contracts, potato industry, pricing model, transaction costs.