Determining Efficient Seasonal Grain Inventories: An Application of Quadratic Programming

Richard G. Heifner

American Journal of Agricultural Economics, 1966, vol. 48, issue 3_Part_I, 648-660

Abstract: The problem of managing seasonal grain inventories at farms and elevators is viewed here as a special case of the general problem of resource allocation under risk. The similarities between this problem and the stock portfolio problem treated by Markowitz are noted. By employing the concept of E,V efficiency we are able to apply a technique Markowitz developed for portfolio analysis to the seasonal grain inventory problem. The technique involves the use of quadratic programming to select combinations of grain storage activities and futures trading activities that minimize revenue variance for various levels of expected storage revenue. Solutions are presented for combinations of up to 20 activities involving the storage of three different grains in Michigan. The solutions illustrate that unhedged seasonal grain inventories and nondiversified inventories are inefficient relative to fully hedged diversified inventories.

Date: 1966
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