Agricultural Partnership for Dairy Farming

Vernon N. Hsu, Guoming Lai and Guitian Liang

Production and Operations Management, 2019, vol. 28, issue 12, 3042-3059

Abstract: This paper studies an innovative agricultural partnership model in the dairy industry. In developing regions, farmers are constrained by limited resources, while it is costly for an enterprise to set up new facilities and raise dairy animals all on its own. Under the partnership model, dairy animals are raised by individual farmers during the maturing stage and then by the enterprise during the milking stage. This can lower the enterprise’s investment cost, ensure milk quality, and also expand the farmers’ capacity given that a new batch can be raised when the old batch goes to the enterprise’s facilities. We find that from the enterprise’s perspective, the performance of this model depends on the farmers’ original capacity and capacity expansion ratio (i.e., how much it can expand under partnership). The profitability of the enterprise can either increase in the farmers’ original capacity if the expansion ratio is small or decreases otherwise. Compared with the conventional decentralized model and the independent integrated model, the partnership model is particularly preferred when the enterprise’s market size is intermediate. Several extensions of our model show that the government quality subsidy offered to the farmers may sometimes lower dairy product quality as well as the enterprise’s profit; when the enterprise aims to maximize the total profit of the partnership, it will contract with more farmers and produce more dairy products; and if the farmers have more bargaining power, the partnership model will benefit the farmers more but be less preferable to the enterprise.

Date: 2019
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