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Economics of Agricultural Supply Chain Design: A Portfolio Selection Approach

Author

Listed:
  • Xiaoxue Du
  • Liang Lu
  • Thomas Reardon
  • David Zilberman

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.

Suggested Citation

  • Xiaoxue Du & Liang Lu & Thomas Reardon & David Zilberman, 2016. "Economics of Agricultural Supply Chain Design: A Portfolio Selection Approach," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 98(5), pages 1377-1388.
    • Handle: RePEc:oup:ajagec:v:98:y:2016:i:5:p:1377-1388.
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    File URL: http://hdl.handle.net/10.1093/ajae/aaw074
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    Cited by:

    1. A. Ford Ramsey & Barry Goodwin & Mildred Haley, 2021. "Labor Dynamics and Supply Chain Disruption in Food Manufacturing," NBER Chapters, in: Risks in Agricultural Supply Chains, National Bureau of Economic Research, Inc.
    2. Guang Tian & Xiaoxue Du & Fangbin Qiao & Andres Trujillo-Barrera, 2021. "Technology Adoption and Learning-by-Doing: The Case of Bt Cotton Adoption in China," JRFM, MDPI, vol. 14(11), pages 1-13, November.
    3. Masoud Rahiminezhad Galankashi & Farimah Mokhatab Rafiei & Maryam Ghezelbash, 2020. "Portfolio selection: a fuzzy-ANP approach," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 6(1), pages 1-34, December.
    4. Palatnik, Ruslana Rachel & Freer, Mikhail & Levin, Mark & Golberg, Alexander & Zilberman, David, 2023. "Algae-Based Two-Stage Supply Chain with Co-Products," Ecological Economics, Elsevier, vol. 207(C).
    5. Xiaoxue Du & Hernan Tejeda & Zhengliang Yang & Liang Lu, 2022. "A General-Equilibrium Model of Labor-Saving Technology Adoption: Theory and Evidences from Robotic Milking Systems in Idaho," Sustainability, MDPI, vol. 14(13), pages 1-17, June.
    6. Dániel Fróna & János Szenderák & Mónika Harangi-Rákos, 2019. "The Challenge of Feeding the World," Sustainability, MDPI, vol. 11(20), pages 1-18, October.
    7. Lu Feng & Wei Yang & Yan Jin & Yan Zhang & Bo Li, 2025. "Integrating the Cross-Border Industrial Chain: An Exploring of Key Configuration of Agricultural Investment in Lancang-Mekong River Region," Sustainability, MDPI, vol. 17(8), pages 1-19, April.
    8. Zilberman, David & Lu, Liang & Reardon, Thomas, 2019. "Innovation-induced food supply chain design," Food Policy, Elsevier, vol. 83(C), pages 289-297.
    9. Liang Lu & Ruby Nguyen & Md Mamunur Rahman & Jason Winfree, 2021. "Demand Shocks and Supply Chain Resilience: An Agent-Based Modeling Approach and Application to the Potato Supply Chain," NBER Chapters, in: Risks in Agricultural Supply Chains, pages 107-132, National Bureau of Economic Research, Inc.
    10. Umakanta Mishra & Abu Hashan Md Mashud & Ming-Lang Tseng & Jei-Zheng Wu, 2021. "Optimizing a Sustainable Supply Chain Inventory Model for Controllable Deterioration and Emission Rates in a Greenhouse Farm," Mathematics, MDPI, vol. 9(5), pages 1-23, February.
    11. Xiufan Zhang & Decheng Fan, 2024. "Can agricultural digital transformation help farmers increase income? An empirical study based on thousands of farmers in Hubei Province," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 26(6), pages 14405-14431, June.
    12. Heiman, Amir & Gordon, Ben & Zilberman, David, 2019. "Food beliefs and food supply chains: The impact of religion and religiosity in Israel," Food Policy, Elsevier, vol. 83(C), pages 363-369.
    13. Thomas Reardon & Ben Belton & Lenis Saweda O. Liverpool‐Tasie & Liang Lu & Chandra S. R. Nuthalapati & Oyinkan Tasie & David Zilberman, 2021. "E‐commerce's fast‐tracking diffusion and adaptation in developing countries," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 43(4), pages 1243-1259, December.
    14. Bellemare, Marc F. & Bloem, Jeffrey R., 2018. "Does contract farming improve welfare? A review," World Development, Elsevier, vol. 112(C), pages 259-271.
    15. Shi, Daojin & Chen, Lunsong & Wang, Xiaoli & Xu, Xiuying & Yang, Lixia, 2022. "Rural venture investments with credits mortgaged on farmer's forests—A case study of Zhejiang, China," Forest Policy and Economics, Elsevier, vol. 143(C).
    16. Bellemare, Marc F. & Lee, Yu Na & Novak, Lindsey, 2021. "Contract farming as partial insurance," World Development, Elsevier, vol. 140(C).

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