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Simulating The Impacts Of Contract Supplies In A Spot Market-Contract Market Equilibrium Setting

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  • Jaenicke, Edward C.
  • Wang, Yanguo

Abstract

This paper embeds a principal-agent model of producer-processor equilibrium within a market equilibrium model of contract and cash markets to analyze the impact of contracting on the spot market for hogs. The principal-agent model incorporates both quality differentiation in the contract market and an endogenously determined cash market price to account for processor-producer relationships in equilibrium. For five types of contracting scenarios, market equilibrium conditions are derived, and results are presented for a numerical example. Contrary to previous results, the paper finds that the increased supply of hogs under typical formula-price contracts can increase the cash market price and reduce its variance.

Suggested Citation

  • Jaenicke, Edward C. & Wang, Yanguo, 2004. "Simulating The Impacts Of Contract Supplies In A Spot Market-Contract Market Equilibrium Setting," 2004 Annual meeting, August 1-4, Denver, CO 20313, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  • Handle: RePEc:ags:aaea04:20313
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    File URL: http://purl.umn.edu/20313
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    References listed on IDEAS

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    1. John D. Lawrence & Ted C. Schroeder & Marvin L. Hayenga, 2001. "Evolving Producer-Packer-Customer Linkages in the Beef and Pork Industries," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 23(2), pages 370-385.
    2. Buhr, Brian L. & Kunkel, Phillip L., 1999. "A Guide To Swine Marketing Contracts," Staff Papers 13358, University of Minnesota, Department of Applied Economics.
    3. Theofanis Tsoulouhas & Tomislav Vukina, 2001. "Regulating Broiler Contracts: Tournaments Versus Fixed Performance Standards," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(4), pages 1062-1073.
    4. Rachael E. Goodhue, 2000. "Broiler Production Contracts as a Multi-Agent Problem: Common Risk, Incentives and Heterogeneity," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(3), pages 606-622.
    5. Brent Hueth & Ethan Ligon, 1999. "Producer Price Risk and Quality Measurement," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(3), pages 512-524.
    6. Martin, Laura L., 1997. "Production Contracts, Risk Shifting, and Relative Performance Payments in the Pork Industry," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 29(02), pages 267-278, December.
    7. Ted C. Schroeder & Rodney Jones & James Mintert & Andrew P. Barkley, 1993. "The Impact of Forward Contracting on Fed Cattle Transaction Prices," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 15(2), pages 325-337.
    8. Martin, Laura L., 1997. "Production Contracts, Risk Shifting, And Relative Performance Payments In The Pork Industry," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 29(02), December.
    9. Azzeddine Azzam, 1998. "Captive Supplies, Market Conduct, and the Open-Market Price," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(1), pages 76-83.
    10. Ward, Clement E. & Koontz, Stephen R. & Schroeder, Ted C., 1998. "Impacts From Captive Supplies On Fed Cattle Transaction Prices," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(02), December.
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    Marketing;

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