Advanced Search
MyIDEAS: Login to save this paper or follow this series

The Effects of Uncertainty and Contract Structure in Specialty Grain Markets

Contents:

Author Info

  • Paulson, Nicholas D.
  • Babcock, Bruce A.

Abstract

The increase in vertical integration in agriculture has been motivated by many factors including the evolving demand of consumers as well as factors specific to agricultural markets (i.e. production and price uncertainty and farm policy). The literature on agricultural contracts has focused more on contracting in the livestock sector relative to crop production under contract, most likely due to the fact that contracting in livestock production has been historically more prevalent. However, crop production under contract has also realized extensive growth, especially in the markets for crops with specialty traits. This paper provides a theoretical model of a contracting relationship between a risk-neutral monopsonistic processor of a specialty crop and risk-neutral producers. The processor induces farmers to accept production contracts, based on acreage or total bushels, to grow the specialty crop by offering a premium above the commodity price for contracted production. It is commonly assumed in the literature that acreage contracts will be the preferred structure due to producers being relatively more risk average than processors. However, this paper presents a market environment in which the opposite result is found. It is shown that a bushel contract exists which Pareto dominates the optimal acreage contract, although that bushel contract may not be the processor’s optimal bushel contract, and that both the processor and producers will be able to achieve higher expected profits by using a bushel contract structure. While explicit analytic solutions for the model do not exist, a numerical example is provided to illustrate effects of farm level yield volatility and the spatial correlation of farm yields on expected profits, premium levels, and farmer participation for the acreage and bushel contract equilibriums.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://purl.umn.edu/9856
Download Restriction: no

Bibliographic Info

Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN with number 9856.

as in new window
Length:
Date of creation: 2007
Date of revision:
Handle: RePEc:ags:aaea07:9856

Contact details of provider:
Postal: 555 East Wells Street, Suite 1100, Milwaukee, Wisconsin 53202
Phone: (414) 918-3190
Fax: (414) 276-3349
Email:
Web page: http://www.aaea.org
More information through EDIRC

Related research

Keywords: Marketing;

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Anderson, John D. & Harri, Ardian & Coble, Keith H., 2009. "Techniques for Multivariate Simulation from Mixed Marginal Distributions with Application to Whole-Farm Revenue Simulation," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 34(1), April.
  2. Larson, James A. & English, Burton C. & He, Lixia, 2008. "Risk and Return for Bioenergy Crops under Alternative Contracting Arrangements," 2008 Annual Meeting, February 2-6, 2008, Dallas, Texas 6842, Southern Agricultural Economics Association.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ags:aaea07:9856. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.