Agricultural Supply Chains in Emerging Markets: Competition and Cooperation Under Correlated Yields

Abstract

Problem definition: We model the development of effective agricultural supply chains (agri-chains) in emerging economies for better utilization of land and intermediate processing resources for harvested export-oriented goods. We study decisions made by farmers, intermediate processors, and government officials in agri-chains. The structure and management of supply chains and government minimum guarantee prices to farmers affect the performance of these chains and are in the domain of our study. Methodology/results: We develop models of agricultural supply chains in which yields are correlated across regions, and, farmers sell to competing capacitated-processors. The models have two types of fundamental decisions: determining how much land to allocate for planting before the start of a growing season, and, determining the prices offered by competing processors that purchase the harvest. We develop analytical results and algorithmic approaches for finding resulting equilibria that depend on the nature of decision-making and on the structure of yield uncertainty. In particular, for all-or-nothing yields we characterize the ranges of minimum guarantee prices that lead to farmers' no-production, under-production, full-production and over-production equilibria. Analytical results supported by numerical experiments allow us to conclude that appropriately setting minimum prices guarantee at intermediate levels, with the exact definition of such ranges dependent on ownership structure, can lead to first-best supply-chain solutions. Managerial implications: The analysis also suggests that some farmer co-operation in land allocation or regional integration of farmer-processing assets, together with moderate minimum guarantee prices, might be implementable pathways for achieving agri-chain efficiency in emerging economies. In an interesting result, farmlands with yields of positive correlation tend to inhibit over-production while negative correlations tend to induce over-production.

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