Sustainable Governance of Organic Food Production When Market Forecast Is Imprecise

Abstract

During the past few years, the market for organic food has been experiencing rapid growth. However, the market demand for organic food typically fluctuates due to its seasonal nature and customized characteristics, and it remains fairly difficult to precisely forecast market demand prior to the selling season. Forecast bias usually creates inefficiency in an organic food producer’s production plan and results in a substantial amount of waste. Thus, this paper studies how much an organic food producer is likely to lose with a certain level of forecast bias and investigates whether forecast bias necessarily results in an improper production plan. Finally, we calculate the maximum potential profit loss rate when the organic food producer determines how much to produce based on his forecasted demand, which we believe will be instructive for organic food producers in making production decisions. The target problem is formulated by a newsvendor model and solved using a tolerant analysis approach. We find that an organic food producer can still find the optimal solution only if his forecast bias is under a certain threshold. However, if the organic food producer’s forecast bias is beyond the threshold, he will probably make a sub-optimal production decision and potentially experience a profit loss. Subsequently, we analytically calculate an organic producer’s maximum potential profit loss rate for any given level of forecast bias. Examples are employed to numerically illustrate the main findings.