Abstract

Typically, potato production has a high level of asset specificity and uncertainty, which are the major causes of transaction cost. The South African table potato market is associated with the spot market governance whereas the processing potatoes mainly make use of the more hybrid format of contracting. The aim of this study was to assist potato processing companies in South Africa to establish long-term relationships with producers and also to reduce producers’ transaction costs. Questionnaires were used to determine the magnitude of transaction costs within the potato industry. Interviews were held with the managers of five successful alliances within the potato industry in order to establish if the alliance assisted in overcoming market obstacles and what elements should be in place in order to build a successful long-term relationship with their buyer. The spot market and the contract market within the potato industry were compared in terms of transaction costs. The results indicated that the contract market had the lowest transaction costs. The results indicated that by forming an alliance, producers were able to overcome the obstacles they faced and the elements which should be in place were sound administration, trust and loyalty, market research, marketing and traceability.

Key words: Transaction cost theory, potato marketing, contracts, marketing power, farmer alliances.