Risk-averse Producers Research Articles

Competition of pricing and service investment between iot-based and traditional manufacturers

This paper develops a multi-period product pricing and service investment model to discuss the optimal decisions of the participants in a supplier-dominant supply chain under uncertainty. The supply chain consists of a risk-neutral supplier and two risk-averse manufacturers, of which one manufacturer can provide real-time customer service based on the Internet of Things (IoT). In each period of the Stackelberg game, the supplier decides its wholesale price to maximize the profit while the manufacturers make pricing and service investment decisions to maximize their respective utility. Using the backward induction, we first investigate the effects of risk-averse coefficients and price sensitive coefficients on the optimal decisions of the manufacturers. We find that the decisions of one manufacturer are inversely proportional to both risk-averse coefficients and its own price sensitive coefficient, while proportional to the price sensitive coefficient of its rival. Then, we derive the first-best wholesale price of the supplier and analyze how relevant factors affect the results. A numerical example is conducted to verify our conclusions and demonstrate the advantages of the IoT technology in long-term competition. Finally, we summarize the main contributions of this paper and put forward some advices for further study.

Investment Analysis of Cover Crop and No‐Tillage Systems on Tennessee Cotton

Core Ideas Investment into no‐till reduces risk.Risk averse producers prefer no‐till over tillage.Cover crops increased risk compared to no cover crops. Upland cotton (Gossypium hirsutum L.) fields have minimal amounts of soil surface crop residue after harvest, exposing soil and increasing the risk of erosion. This is especially challenging in the Mid‐South United States where cotton is commonly grown on soils naturally prone to soil erosion. Winter cover crops and no‐till planting are two practices that can mitigate soil erosion by increasing soil surface biomass, but there is uncertainty on how these practices impact producer profits and risk. The objective of this study was to determine the profitability and risk of winter cover crop (no cover crop, winter wheat [Triticum aestivum L.], and hairy vetch [Vicia villosa L.]) treatments and tillage (no‐till and till) treatments in cotton production. Simulation models were developed to generate net present value (NPV) distributions of investing into the long‐term use of cover crop and tillage systems. Data were collected from a 29‐yr cotton N fertilizer, tillage, and cover crop experiment in West Tennessee. Profit‐maximizing N rates and yields varied across cover crop and tillage combinations. Risk neutral, profit‐maximizing producers would prefer till planting and not planting a cover crop. Risk averse producers prefer no‐till planting with no cover crops. These results indicate that no‐till planting can reduce cotton producers’ exposure to risk. The NPV approach and the long‐term dataset provides unique insight into the economic benefits from investing into continuous cover crop and no‐till systems in cotton production.

Reassessing cotton pricing policy in Burkina Faso: How important is price stabilization?

This paper focuses on the parastatal marketing of cotton in Burkina Faso. The parastatal companies have bought cotton at a guaranteed price, announced prior to planting, reducing a key element of risk for producers. The cotton sector reforms in the late 1990s and early 2000s have significantly improved the share of international price received by local producers. However, a number of problems must still be solved to improve the living conditions for rural agricultural producers. The purpose of this paper is to reassess parastatal cotton pricing in Burkina Faso by factoring the implicit benefit that producers have obtained from guaranteed prices which reduces the price variability risk. A mean-variance economic risk model was developed to measure the price risk that would have been associated with selling cotton on international markets rather than selling to parastatal companies at a guaranteed price. Results suggest that risk is often a significant factor in producers’ decision making, particularly over the past decade, when price volatility would have driven risk averse producers out of international markets. The viability of the parastatal markets, contrary to the prevailing literature which suggests that future policy shifts towards increased privatization, needs to consider price stabilization and the price variability risk associated with the international cotton market. Key words: Cotton, price risk, mean-variance model, risk premium, certainty equivalent.

The role of business insurance in managing a manufacturer’s product quality risk

We consider a risk-averse manufacturer that decides whether to accept an order from a retailer and can purchase a business insurance contract. Once the order is delivered to the retailer, a random part of it would turn out to be defective associated with external failure cost. We find that business insurance can substitute and complement with an operational strategy that shares external failure cost or reduces the probability of product defects occurring.

On the multiplicity of solutions in generation capacity investment models with incomplete markets: a risk-averse stochastic equilibrium approach

Investment in generation capacity has traditionally been evaluated by computing the present value of cashflows accruing from new equipment in a market with globally optimized capacity mix. The competition and risk that now prevail in the sector may require a more refined analysis. We consider a competitive market with agents investing in some mix of capacities: the risk exposure of a plant and the attitude towards risk of the owner depend on the plant and the portfolio of its capacities. They may also depend on hedging contracts acquired by the investor on the market if such contracts exist. We represent these effects through equilibrium models of generation capacity in incomplete markets. The models come in different versions depending on the portfolio of physical plants and hedging contracts. These modify the long-term risk of the plants, the attitude of the owners towards risk, and hence the incentive to invest. The models involve risk-averse producers and consumers, and their behavior is represented by convex risk measures. We use degree theory to prove existence and explore multiplicity of equilibrium solutions.

BEEF CATTLE RETAINED OWNERSHIP AND PROFITABILITY IN TENNESSEE

AbstractThe effect of animal characteristics and placement decisions on retained ownership profitability of Tennessee cattle from 2005 to 2015 was determined using a mixed model regression. Ex post simulation analysis examined retained ownership profitability by placement season under different animal characteristic and corn price scenarios. Regression results indicate that placement weight, placement season, days on feed, animal health, and animal sex affect retained ownership profitability. Simulation results indicate that winter placement of cattle in feedlots had the highest expected retained ownership profits. Results provide risk-averse producers information regarding the profitability of retained ownership.

Cooperative advertising and ordering policies in a two-echelon supply chain with risk-averse agents

This paper considers a cooperative advertising and ordering issue in a two-echelon supply chain in which a risk-averse manufacturer sells a product through a risk-averse retailer. We assume that demand for the product is a random variable influenced by the manufacturer's global advertising and the retailer's local advertising. To stimulate demand for the product, the risk-averse manufacturer induces the risk-averse retailer to increase local advertising expenditure through cooperative advertising contracts. With the objective of maximizing conditional value-at-risk, models for determining the retailer's optimal order quantity and both agents’ advertising investments are developed for both centralized and decentralized settings. We reveal the effect of demand uncertainty and two agents’ risk aversion on both agents’ optimal advertising/ordering policies. Through both theoretical and numerical analyses, we find that: 1) the centralized scenario may perform worse than the decentralized one in many cases if the decision-maker of the centralized supply chain is more risk averse than its two participants; 2) whether the risk-averse manufacturer is willing to share the retailer's local advertising expenditure depends significantly on the degree of two agents' risk aversion; and 3) in the decentralized setting, it will be more beneficial for both agents that the leader is more risk averse than the follower. These new findings are further supplements to the results in the existing related literature.

Diversification strategy with random yield suppliers for a mean–variance risk-sensitive manufacturer

We consider the diversification strategy for a mean–variance risk-sensitive manufacturer with unreliable suppliers. We first analyze the linear model and find that the suppliers are selected according to the descending order of their contributed marginal expected profit, and increasing the manufacturer’s risk-averseness leads to a more even allocation of demand across the suppliers. Then, we study the general newsvendor model. By approximating the leftover inventory with a normal distribution, we establish the general properties of the active supplier set and show that the supplier selection rule is similar to that under the risk-neutral setting when the demand uncertainty is large. Moreover, we conjecture that the selection rule also applies when the demand uncertainty is low, which we verify with an extensive numerical study. Our paper makes two contributions: First, we establish the properties of the optimal diversification strategy and develop corresponding insights into the trade off between cost and reliability under the mean–variance framework. Second, we perform comparative statics on the optimal solution, with a particular emphasis on investigating how changes in the supplier’s cost or reliability affect the risk-averse manufacturer’s ordering decisions and customer service level.

Economic performance and comparative riskiness of different management practices for control of botrytis fruit rot in florida strawberry

Florida strawberry farmers usually rely on weekly calendar fungicide applications to prevent yield loss from Botrytis fruit rot (BFR). The Strawberry Advisory System (SAS), which helps optimize the timing of fungicide applications, is an additional tool in the farmers' arsenal of disease control options. This study uses data from two-year production trials in Florida combined with historical strawberry prices to measure the economic performance of the Calendar and SAS-based BFR management practices under output price risk and producers' risk preferences. We use Monte Carlo simulation to model the effect of the variability in weekly output prices on farm returns. Results reveal that the traditional calendar-based system is not the least risky BFR management option as growers expected to be. SAS-based options such as SAS-Switch and SAS-Luna would be preferred by both risk-neutral and risk-averse producers and are recommended under high disease pressure conditions.

Optimal combined purchasing strategies for a risk-averse manufacturer under price uncertainty

Purpose: The purpose of our paper is to analyze optimal purchasing strategies when a manufacturer can buy raw materials from a long-term contract supplier and a spot market under spot price uncertainty. Design/methodology/approach: This procurement model can be solved by using dynamic programming. First, we maximize the DM’s utility of the second period, obtaining the optimal contract quantity and spot quantity for the second period. Then, maximize the DM’s utility of both periods, obtaining the optimal purchasing strategy for the first period. We use a numerical method to compare the performance level of a pure spot sourcing strategy with that of a mixed strategy. Findings: Our results show that optimal purchasing strategies vary with the trend of contract prices. If the contract price falls, the total quantity purchased in period 1 will decrease in the degree of risk aversion. If the contract price increases, the total quantity purchased in period 1 will increase in the degree of risk aversion. The relationship between the optimal contract quantity and the degree of risk aversion depends on whether the expected spot price or the contract price is larger in period 2. Finally, we compare the performance levels between a combined strategy and a spot sourcing strategy. It shows that a combined strategy is optimal for a risk-averse buyer. Originality/value: It’s challenging to deal with a two-period procurement problem with risk consideration. We have obtained results of a two-period procurement problem with two sourcing options, namely contract procurement and spot purchases. Our model incorporates the buyer’s risk aversion factor and the change of contract prices, which are not addressed in early studies.

Enhancing Decision Support through Calculating Utility Weighted Contract Prices

Worldwide, table (fresh) and processing potatoes represent major marketing channels. In South Africa, uncertainties influence marketing and production decisions. Producers need to decide on the channel most suited to their needs based on its characteristics. A decision support system (DSS) developed in this study provides producers with relevant price-related information. It evaluates gross production values (GPVs), risk quantifications and utility weighted premiums for both channels. The processing market had the highest GPV in a cumulative distribution function. For South Africa, the processing market had the highest probability of better price based on price and yield risk. Stochastic efficiency with respect to a function (SERF) was used to calculate a utility break-even price, incorporating different risk aversion levels. A utility break-even price of R1,618/ton creates indifference between the two channels for a neutral risk-averse producer. The DSS provides a valuable tool for producers and processors and may be replicated for other commodities and global markets with similar challenges.

The effects of spring versus summer calving on beef cattle economic performance in western Canada

Khakbazan, M., Durunna, O. N., Sirski, T. K., Brewin, D. G., Huang, J., Berry, N., Iwaasa, A. D., Scott, S. L., Robins, C. D., Block, H. C. and Lardner, H. A. 2015. The effects of spring versus summer calving on beef cattle economic performance in western Canada. Can. J. Anim. Sci. 95: 475–486. The choice of calving date influences the net revenue of a calving operation as it affects the number of days that calves spend in each feeding phase and when they are subsequently marketed. These two factors determine the costs, revenue, and risk (variance) of each calving system for the calving phase of a beef system. The majority of cow–calf producers in western Canada have adopted early calving (EC) in spring due to management factors. However, late calving (LC) in the summer is an alternative beef calving system associated with higher returns due to lower system costs and higher beef prices. It may offer a better match between cow nutritional requirements and pasture availability. The objective of this study was to compare the revenues and risks for a traditional EC system and an alternative LC system at three sites in western Canada. Biological and economic data from three field experimental sites in western Canada (Brandon Research Centre in Manitoba, Western Beef Development Centre in Lanigan, Saskatchewan and Semi-Arid Prairie Agriculture Research Centre in Swift Current, Saskatchewan) were used to determine the costs and benefits of the alternative beef calving system. The results showed that even though the EC has higher cost than the LC, the EC is slightly better than LC in terms of higher net revenue potential, but it comes at a greater risk due to higher revenue variances. The EC system is usually more preferable for risk-neutral producers, whereas the LC system is more preferable for risk-averse producers.

Research on closed-loop supply chain network equilibrium with two-type suppliers, risk-averse manufacturers and capacity constraints

Purpose: the aim of this paper is to investigate the closed-loop supply chain (CLSC) network equilibrium wiht the consideration of three practical factors: two complementary types of suppliers, risk-averse character of the manufacturer and capacity constraints of the suppliers. Design/methodology/approach: The equilibrium of various decision makers including the suppliers, the manufacturers, the retailers, the collectors and the demand markets are modeled via finite-dimensional variational inequality, respectively. Then the governing CLSC network equilibrium model is established. The logarithmic-quadratic proximal prediction-correction algorithm is designed to solve the variational inequality model. Numerical examples are given to analyze the impact of return rate, risk-averse degree and capacity constraints on the network equilibrium under different product BOMs. Findings: with the increase of return rate, the profits of various channel members and the performance of the CLSC system will improve. There is a contradiction between profit maximization and risk minimization for the manufacturers. Moreover, the economic behavior of the CLSC is likely to be limited by the capacity constraints of the suppliers. Originality/value: Prior to this paper, few papers have addressed with the CLSC network equilibrium considering some practical factors. They assume all the suppliers are identical and all the decision-makers are risk neutral. Furthermore, the production capacities of all suppliers are assumed to be infinite or large enough. To fill the gap, this paper examines the influences of two-type suppliers, risk aversion and capacity constraints upon the CLSC network equilibrium.

Role of economics in developing fertilizer best management practices

To reduce agricultural water quality impacts, many US states and other countries rely on agricultural best management practices (BMPs). Although fertilizer BMP rates are supposed to ensure the economic viability of agricultural production, BMPs are frequently based on agronomic, rather than economic, research; moreover, some producers resist BMP adoption, citing profit reductions. In this study, we examine the effect of production and market risks, as well as producers’ risk aversion, on producers’ fertilizer rate and BMP adoption decisions. We focus on potato production in the Lower St. Johns River Basin, northern Florida. Using historical data, we estimate the linear stochastic plateau production function that explicitly incorporates production risks related to weather. We develop a financial model and use Monte Carlo simulation and empirical fertilizer and potato sale price distributions to estimate the distributions of ten-year net present values (NPVs) for alternative fertilizer rates. The results show that the preferred fertilizer rate depends on the assumption about potato sale prices and producers’ risk aversion levels. Risk-neutral producers prefer lower fertilizer rates than do risk-averse producers to avoid the downward risk caused by the high fertilizer expense and low yields. BMP adoption can also lead to profit loss when the BMP is designed for a low price scenario while market conditions are favorable. Hence, BMP development should be based on comprehensive analysis of production and market risks, as well as producers’ risk perceptions. It should also be recognized that to achieve water quality targets, BMP adoption may lead to reductions in profits if a subset of possible production and/or market conditions are realized. Insurance-type policies to compensate agricultural producers for the profit losses may be developed.

The management of price risk in Iranian dates: An application of futures instruments

AbstractEffective risk management is an important aspect of farming. Risk management involves choosing among alternatives that reduce the financial effects of the uncertainties of weather, yields, prices, government policies, and other factors that can cause wide swings in farm income. To deal with price uncertainty, this paper focuses on futures markets and calculates hedge ratio for dates. A bivariate BEKK GARCH model is used to determine time-varying hedge ratios. The results show that the average BEKK BGARCH hedge ratio for dates is .7. Also in this paper, the hedge ratio, which takes into consideration the producers’ risk-averse parameter, is estimated [Extended mean Gini hedge ratio (EMGHR)]. Results of EMGHR recommended that risk-averse producers, who have risky parameter equal to 50, could reduce their price risk to 60% by attending futures markets.

Distribution Design of Two Rival Decenteralized Supply Chains: a Two-person Nonzero Sum Game Theory Approach

We consider competition between two decentralized supply chains network under demand uncertainty. Each chain consists of one risk-averse manufacturer and a group of risk-averse retailers. These two chains present substitutable products to the geographical dispensed markets. The markets’ demands are contingent upon prices, service levels, and advertising efforts of two supply chains. We formulate the distribution design problem of two rival chains as a two-person nonzero sum game. Since strategic decisions of distribution designs often have priority over tactical ones, we first calculate the equilibrium of tactical decisions for each pair of distribution design scenarios. Then, according to the presented methodology, we find Nash equilibrium solutions of distribution network scenarios for two rival chains. Eventually, the research has concluded with a numerical example in order to illustrate the real applications of the methodology.

Pricing and product line strategy in a supply chain with risk-averse players

We study the pricing and product line strategy of a risk-averse manufacturer who sells her products through a risk-averse retailer. We identify the conditions under which the manufacturer extends her product line or replaces the old product with a new product, and find that (i) a higher retailer׳s risk aversion decreases the retail price but increases the unit wholesale price; (ii) the manufacturer extends the product line if the price caps for both products are sufficiently high, both her risk aversion and product substitutability are sufficiently low; (iii) the manufacturer discontinues the old product if the relative price cap of the new product to the old product is sufficiently high, her risk aversion is medium, and product substitutability are sufficiently high. Further, we find that (i) the decentralization of supply chain may increase product line length if the retailer׳s risk aversion, and product substitutability are sufficiently high, otherwise, it may decrease product line length; (ii) the endogenization of quality design increases the motivation to introduce a new product; and (iii) the manufacturer extends or replaces the product line if quality cost is not too high.

A whole-farm profitability analysis of organic and conventional cropping systems

Previous studies have found that organic crop production in the midwestern United States can be more profitable than conventional crop production. However, these studies have failed to consider potential differences in farm size between the two systems. If an organic crop rotation cannot be managed on as large an area as a conventional rotation given the same resources, a per-hectare profitability advantage for the organic system would not necessarily translate into a whole-farm profitability advantage.This paper uses management data from a long-term cropping systems trial to estimate the maximum farm size for a conventional corn–soybean rotation and an organic corn–soybean–oat/alfalfa–alfalfa rotation, subject to appropriate yield penalties for management delays and three different machinery complement scenarios. Using these farm size results we estimate whole-farm net returns for each system and then compare the estimated distributions of net returns using stochastic dominance criteria.The results of the farm size model show that under the two largest machinery complement scenarios the conventional corn–soybean rotation can be managed on a larger area than the organic rotation, given equal labor endowments. The smallest machinery complement scenario results in equal farm sizes for both systems. Estimated machinery costs per hectare are lower and whole-farm net returns are higher for larger farms under both cropping systems. However, for each machinery complement scenario, average whole-farm net returns are higher for the organic system than the conventional system, despite the larger farm size under the conventional system for the two largest machinery complements.Stochastic dominance analysis for a baseline scenario with full organic price premiums and no reductions in observed organic yields indicates that risk averse farmers would prefer the organic rotation over the conventional rotation for each of the three machinery complements. Sensitivity analysis shows that reductions in organic yields from those achieved in the experimental trial and reductions in price premiums received for organic crops make the conventional rotation more competitive but still not dominant for all risk averse producers.

Net returns and risk for cover crop use in Alabama tomato production

AbstractTomato (Solanum lycopersicumL.) producers are faced with uncertain yields and prices, and utilizing a production system that will reduce risk while maintaining yield may keep tomato producers economically sustainable into the future. A conservation tillage production system with high biomass cover crops may be an economically viable alternative for tomato producers in Alabama. The objective of this study was to compare the economics of alternative production systems using different cover crops, such as cereal rye (Secale cerealeL.) and crimson clover (Trifolium incarnatumL.), and different subsoiler shanks for fresh-market tomato production relative to a commonly used plastic mulch system to determine the preferred treatment. Gross revenues and net returns from tomato production using a rye cover crop were higher than tomato production using plastic mulch in 2 of the 4 years. For the clover cover crop, gross revenues and net returns were higher in 1 out of the 4 years. Under tomato prices and weather conditions observed during 2005–2008, the preferred treatment for a risk neutral producer was planting tomatoes into a rye cover crop with a wide shank. For a strongly risk averse producer, all cover crop treatments were preferred to plastic mulch. The use of a cover crop in tomato production has the potential to be an equally profitable, less risky alternative to plastic mulch in Alabama.

Capacity expansion and forward contracting in a duopolistic power sector

The surge in demand for electricity in recent years requires that power companies expand generation capacity sufficiently. Yet, at the same time, energy demand is subject to seasonal variations and peak-hour factors that cause it to be extremely volatile and unpredictable, thereby complicating the decision-making process. We investigate how power companies can optimise their capacity-expansion decisions while facing uncertainty and examine how expansion and forward contracts can be used as suitable tools for hedging against risk under market power. The problem is solved through a mixed-complementarity approach. Scenario-specific numerical results are analysed, and conclusions are drawn on how risk aversion, competition, and uncertainty interact in hedging, generation, and expansion decisions of a power company. We find that forward markets not only provide an effective means of risk hedging but also improve market efficiency with higher power output and lower prices. Power producers with higher levels of risk aversion tend to engage less in capacity expansion with the result that together with the option to sell in forward markets, very risk-averse producers generate at a level that hardly varies with scenarios.