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Procurement Strategies: Impacts Of Quality Risks In Hard Wheat

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  • Wilson, William W.
  • Dahl, Bruce L.
  • Johnson, D. Demcey

Abstract

Development and organization of procurement strategies have escalated in importance with maturity of the food processing industry, as well as with the prospect of greater choice attributable to variety development and information technology. Conventional alternatives for procurement range from spot purchases with specifications for easily measurable characteristics, to varying forms of strategies with pre-commitment. In the case of grains these choices are complicated by two factors. First, there is intrinsic uncertainty associated with end-use qualities that are not easily measurable. Second, grain prices and therefore procurement costs vary spatially due to competing market regions. Thus, shifting origins may involve higher cost due to having to bid grain away from its next best market. We posed three procurement strategies and developed analytical models to evaluate the risks and costs among these alternatives in the case of hard red spring (HRS) wheat. The first involves no commitment. The second involves some form of irrevocable commitment and the third entails less commitment. Stochastic simulation models were developed for each with an objective of cost minimization subject to different levels of risk. The results indicate that the naive strategy has the lowest expected cost, but a fairly high probability of not conforming to end-use requirements. The constant share strategies result in higher probabilities of meeting requirements, but at substantially higher costs. The opportunistic strategy results in a higher probability of meeting requirements than either of the other two alternative strategies at a comparable cost.

Suggested Citation

  • Wilson, William W. & Dahl, Bruce L. & Johnson, D. Demcey, 2000. "Procurement Strategies: Impacts Of Quality Risks In Hard Wheat," Agricultural Economics Reports 23214, North Dakota State University, Department of Agribusiness and Applied Economics.
    • Handle: RePEc:ags:nddaer:23214
    DOI: 10.22004/ag.econ.23214
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    1. Bruno Larue & Harvey E. Lapan, 1992. "Market Structure, Quality and World Wheat Market," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 40(2), pages 311-328, July.
    2. Jill E. Hobbs & Linda M. Young, 1999. "Increasing Vertical Linkages in Agrifood Supply Chains: A Conceptual Model and Some Preliminary Evidence," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 47(4), pages 478-478, December.
    3. William W. Wilson & Bruce L. Dahl, 1999. "Quality Uncertainty in International Grain Markets: Analytical and Competitive Issues," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 21(1), pages 209-224.
    4. Alan Barkema & Michael L. Cook, 1993. "The changing U.S. pork industry: a dilemma for public policy," Economic Review, Federal Reserve Bank of Kansas City, vol. 78(Q II), pages 49-65.
    5. Wilson, William W., 1986. "Competition in the International Wheat Market," Agricultural Economics Reports 23326, North Dakota State University, Department of Agribusiness and Applied Economics.
    6. Dahl, Bruce L. & Wilson, William W., 1998. "Consistency Of Quality Characteristics In Hard Red Spring Wheats; Summary," Agricultural Economics Reports 23305, North Dakota State University, Department of Agribusiness and Applied Economics.
    7. Larue, Bruno & Lapan, Harvey E., 1992. "Market Structure and the World Wheat Market," Staff General Research Papers Archive 10807, Iowa State University, Department of Economics.
    8. Bruce L. Dahl & William W. Wilson & Wesley W. Wilson, 1999. "Factors Affecting Spring Wheat Variety Choices: Comparisons between Canada and the United States," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 47(3), pages 305-320, November.
    9. Dahl, Bruce L. & Wilson, William W., 1998. "Consistency Of Quality Characteristics In Hard Red Spring Wheats," Agricultural Economics Reports 23455, North Dakota State University, Department of Agribusiness and Applied Economics.
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