The Economics of Agricultural Supply Chain Design: A Portfolio Selection Approach
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Agrifood firms in the modernizing/globalizing world, both in developing and developed countries,
regularly need to undertake innovations. They develop supply chains to accommodate
the nature of the innovations. In this paper we analyze an innovator’s supply chain design
problem. The design of the supply chain may include allocating resources between production
of feedstock (agricultural products) and processing and marketing, and determining
the amount of feedstock to be obtained through contracts. We show that the innovator
determines its overall level of production taking advantage of its monopoly power in the
output market, and behaves as a monopsony in buying feedstock from contractors. These
decisions are constrained by the marginal cost of capital and the properties of production
and marketing technologies. When the innovator is risk averse, risk considerations in production
processing and marketing and the correlation between risks will affect both overall
production and share of input purchased through contracts.