Economics of Agricultural Supply Chain Design: A Portfolio Selection Approach

12 Pages Posted: 16 Apr 2020

See all articles by Xiaoxue Du

Xiaoxue Du

University of California, Berkeley

Liang Lu

University of California, Berkeley

Thomas Reardon

Michigan State University

David Zilberman

University of California, Berkeley - Department of Agricultural & Resource Economics

Date Written: October 2016

Abstract

Agrifood firms in a globalizing and competitive market, both in developing and developed countries, often undertake innovations in products and technologies. Innovators such as firms and other agents develop supply chains to accommodate the nature of the innovations. In this article we analyze an innovator's supply chain design problem. The design of the supply chain involves three sets of decisions. The first is how much to produce. The second involves how to undertake production, and how many resources to allocate to the production of feedstock (agricultural products that are inputs for processing), processing, and marketing. The third set involves deciding on the amount of feedstock to be obtained through contracts with farmers. We show that the innovator determines its overall level of production by taking advantage of its monopoly power, derived from the innovation in the output market, and behaves as a monopsony in buying feedstock from contractors. These decisions are constrained by the marginal cost of capital and the properties of production and marketing technologies. When the innovator is risk averse, risks in farm production, processing, and marketing will affect both processed output and the share of feedstock bought through contracts.

Keywords: Agricultural contracts, innovation, supply chain

Suggested Citation

Du, Xiaoxue and Lu, Liang and Reardon, Thomas and Zilberman, David, Economics of Agricultural Supply Chain Design: A Portfolio Selection Approach (October 2016). American Journal of Agricultural Economics, Vol. 98, Issue 5, pp. 1377-1388, 2016, Available at SSRN: https://ssrn.com/abstract=3577020 or http://dx.doi.org/10.1093/ajae/aaw074

Xiaoxue Du (Contact Author)

University of California, Berkeley

310 Barrows Hall
Berkeley, CA 94720
United States

Liang Lu

University of California, Berkeley

310 Barrows Hall
Berkeley, CA 94720
United States

Thomas Reardon

Michigan State University ( email )

David Zilberman

University of California, Berkeley - Department of Agricultural & Resource Economics ( email )

Berkeley, CA 94720
United States

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