PROCUREMENT RISKS AND STRATEGIES TO IMPROVE QUALITY CONSISTENCY IN WHEAT SHIPMENTS

William Wilson and Bruce L. Dahl

No 23498, Agribusiness & Applied Economics Report from North Dakota State University, Department of Agribusiness and Applied Economics

Abstract: Consistency of functional characteristics in wheat is a concern confronting buyers and sellers. This research analyzes the cost and risk of different procurement strategies for importers. A stochastic simulation model is used to determine the probability of a functional characteristic being satisfied subject to quality targets and costs for alternative purchase strategies (purchase by protein only, variety, location, variety by location, or functional tests). Joint probabilities of meeting specifications and costs were determined for the alternative purchase strategies. Stochastic dominance was used to determine which purchase strategies dominate others, and stochastic efficiency was utilized to determine the degree of preference. Results indicate that, as more specific characteristics are incorporated into a contract, the probabilities of meeting end-use requirements increase. Requirements of specific characteristics come with a higher cost, due to increased testing costs related to identity preservation. Risk premiums for alternative strategies were derived.

Keywords: Crop Production/Industries; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 40
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:ags:nddaae:23498

DOI: 10.22004/ag.econ.23498

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