Optimal Market Contracting in the California Lettuce Industry
This study examines various market contracting combinations for Salinas Valley Head Lettuce Producers to determine the optimal combination. Currently 65% contracting is the industry standard. A stochastic farm simulation model is developed for a representative head lettuce producer in Salinas Valley, California. Five different market combinations are simulated: 40% contract-60% cash market, 50% contract-50% cash market, 65% contract-35% cash market, 80% contract-20% cash market, and 100% contracted production. Simulated Net Income, Cash Flow, and Net Present Value for 2006-2010 are analyzed to determine the optimal market combination that maximizes a produers net returns. Net Income and Cash Flow are analyzed in percent probabilities. To determine the stochastically dominate market combination for Net Present Value, Stochastic Efficiency with Respect to a Function (SERF) method is used. Results indicate 100% contracting is optimal. However, industry sources indicate its nearly impossible to contract 100% production.
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