This reports considers how closer vertical coordination in agricultural value chains can affect farm performance, and the implications for industry and government. There is a trend toward more closely specified marketing arrangements between farmers and other businesses in agricultural value chains, such as through the use of supply contracts and alliances. While the main incentive stems from the opportunity to increase profit, consumer demand for greater quality and choice, new technologies, and consumer protection regulation are also important to the extent that they are driving increased product differentiation and information needs. This is because closer vertical coordination can reduce the costs of guaranteeing product quality by improving information flows along value chains. For some farmers, closer coordination with buyers can lead to improved farm performance through access to better market intelligence, exclusive technologies or technical information, lower transaction costs, and the opportunity to smooth income. Closer vertical coordination may also increase productivity where it creates an operating environment more conducive to investment and innovation. However, in industries characterised by greater use of contracts, possible anti-competitive behaviour by buyers is a concern for farmers. The report argues that there are limited grounds for government involvement in value chains beyond ensuring policy settings encourage innovation in business practices and marketing, securing access for Australian products to overseas markets, and reducing transaction costs that act as a barrier to farmers participating in value chains. This is because government has, at most, a small role in off-farm research. On the other hand, while farmers can benefit from off-farm research and promotion, industry research funding should reflect the relative payoffs from farm and off-farm investments