The Influence of Yield-Dependent Trading Costs on Pricing and Production Planning under Supply Uncertainty

Burak Kazaz, Scott Webster

Research output: Chapter in Book/Report/Conference proceedingChapter

Abstract

We examine the role of the yield-dependent trading cost structure on the optimal decisions regarding the selling price and production quantity for an agricultural firm that operates under supply uncertainty. The firm leases farm space, but its realized crop yield fluctuates due to weather conditions, diseases, etc. After harvest, the firm has three options: convert its crop supply to the final product, purchase additional supplies from other growers, and sell some (or all) of its crop supply in the open market without converting to the finished product. We examine the problem both from a risk-neutral and from a risk-averse perspective. The chapter makes three sets of contributions: (1) the use of a static cost exaggerates the initial investment in the farm space and the expected profit significantly, and the actual value gained from a secondary purchase option is lower under the yield-dependent cost structure, (2) a sufficiently risk-averse firm can benefit from the presence of a fruit futures market when it does not purchase fruit futures under static costs. Thus, fruit futures can add value in the presence of yield-dependent trading costs, and (3) contrary to earlier findings, the firm does not always commit to a lower initial quantity (leased farm space) under risk aversion and it might lease a larger farm space under risk aversion.

Original languageEnglish (US)
Title of host publicationSpringer Series in Supply Chain Management
PublisherSpringer Nature
Pages87-102
Number of pages16
DOIs
StatePublished - 2022
Externally publishedYes

Publication series

NameSpringer Series in Supply Chain Management
Volume12
ISSN (Print)2365-6395
ISSN (Electronic)2365-6409

Keywords

  • Fruit futures
  • Pricing
  • Risk aversion
  • Supply uncertainty
  • Yield-dependent trading costs

ASJC Scopus subject areas

  • Management of Technology and Innovation
  • Management Science and Operations Research
  • Control and Optimization

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