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Optimal Market Contracting in the California Lettuce Industry

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  • Donnelly, Kallie
  • Noel, Jay E.

Abstract

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.

Suggested Citation

  • Donnelly, Kallie & Noel, Jay E., 2006. "Optimal Market Contracting in the California Lettuce Industry," 2006 Annual meeting, July 23-26, Long Beach, CA 21461, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  • Handle: RePEc:ags:aaea06:21461
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    1. Anton, Jesus & Giner, Celine, 2005. "Can Risk Reducing Policies Reduce Farmer's Risk and Improve Their Welfare?," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24578, European Association of Agricultural Economists.
    2. J. Brian Hardaker & James W. Richardson & Gudbrand Lien & Keith D. Schumann, 2004. "Stochastic efficiency analysis with risk aversion bounds: a simplified approach," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 48(2), pages 253-270, June.
    3. McCarl, Bruce A. & Bessler, David A., 1989. "Estimating An Upper Bound On The Pratt Risk A Version Coefficient When The Utility Function Is Unknown," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 33(01), April.
    4. Blackman, Allen & Albers, Heidi & Batz, Michael & √Āvalos-Sartorio, Beatriz, 2005. "Shade-Grown Coffee: Simulation and Policy Analysis for Coastal Oaxaca, Mexico," Discussion Papers dp-05-61, Resources For the Future.
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    Keywords

    Marketing;

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