Measuring the impacts of alternative coordination mechanisms on the pork industry

Michael Charles Poray, Purdue University

Abstract

Consumers are demanding a greater diversity of products with specific characteristics that challenge the ability of traditional systems to respond. Flow and quality controls necessary to satisfy consumers' suggest a possible role for closer coordination from genetics through processing and retailing than in the past. Previous research has only described structural changes occurring in the production-packing sub-sector, changing nature of information flows, linkages between stages in the pork supply chain, drivers of change, and the potential impact of changes on consumers, producers, processors and system performance. This research seeks to expand the literature by quantifying the risks and rewards of alternative coordination systems in the hog producer/packer sub-sector. A dynamic decision-making model is developed to estimate impacts of different information flows on product and financial flows between producers and packers. Empirical models for feeder pig supply, live hog prices, and primal cut prices are parameterized with state-space time series methods and are used to simulate the market environment for three different decision-making models. The three decision-making models are designed to optimize margins for the primary decision maker. In the first decision-making model the producer makes optimal marketing decisions based on expected live hog prices and marginal production costs and the packer receives all marketed hogs. In the second model, the packer uses information available in the packed product market to exercise a call option with producers where the packer determines the delivery of hogs based on final product values and the cost of procuring live hogs. In the third model, the packer owns the production sector and determines optimal hog deliveries based on final product values and live hog production costs. The results indicate that more coordination can result in a statically significant reduction in the variability of the quantity and quality of pork produced. In addition, the results show that the choice of coordination mechanism does not alter total system margins but does affect how the risks and rewards are shared in the system. The primary financial result from increased coordination is risk reduction and the potential for negotiating the sharing of risks and rewards in coordinated systems.

Degree

Ph.D.

Advisors

Boehlje, Purdue University.

Subject Area

Agricultural economics

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