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An analysis of partially-guaranteed-price contracts between farmers and agri-food companies

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  • Tang, Christopher S.
  • Sodhi, ManMohan S.
  • Formentini, Marco

Abstract

Global agri-food companies such as Barilla and SABMiller are purchasing agricultural products directly from farmers using different types of contracts to ensure stable supply. We examine one such contract with partially-guaranteed prices (PGP). Under a PGP contract, around sowing time, the buying firm agrees to purchase the crop when harvested by the farmer, offering a guaranteed unit price for any fraction of the produce and offering the commodity market price prevailing at the time of delivery for the remainder. The farmer then chooses the fraction. By analyzing a Stackelberg game, we show (1) how the PGP contract creates mutual benefits when the firm’s purchase quantity is taken as being exogenous. We also analyze how the PGP contract is robust in creating value for both the firm and the farmer (2) when the firm’s purchase quantity is endogenously determined; (3) when the firm provides advisory services to the farmer; and (4) when the firm offers a price premium as an incentive for farmers to exert efforts to comply with ‘sustainable’ agricultural practices.

Suggested Citation

  • Tang, Christopher S. & Sodhi, ManMohan S. & Formentini, Marco, 2016. "An analysis of partially-guaranteed-price contracts between farmers and agri-food companies," European Journal of Operational Research, Elsevier, vol. 254(3), pages 1063-1073.
    • Handle: RePEc:eee:ejores:v:254:y:2016:i:3:p:1063-1073
    DOI: 10.1016/j.ejor.2016.04.038
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    4. Nayeli Hernandez-Martinez & Nevin Mutlu & Jan C. Fransoo, 2021. "Social equity in supplier–buyer relationships in smallholder agri-food supply chains," Flexible Services and Manufacturing Journal, Springer, vol. 33(4), pages 1027-1089, December.
    5. Xu Jing & Yao Guanxin & Dai Panqian, 2020. "Quality Decision-Making Behavior of Bodies Participating in the Agri-Foods E-Supply Chain," Sustainability, MDPI, vol. 12(5), pages 1-18, March.
    6. Assa, Hirbod & Sharifi, Hossein & Lyons, Andrew, 2021. "An examination of the role of price insurance products in stimulating investment in agriculture supply chains for sustained productivity," European Journal of Operational Research, Elsevier, vol. 288(3), pages 918-934.
    7. Hongyong Fu & Kok Loy Teo & Yujie Li & Lei Wang, 2018. "Weather Risk–Reward Contract for Sustainable Agri-Food Supply Chain with Loss-Averse Farmer," Sustainability, MDPI, vol. 10(12), pages 1-25, December.
    8. Kamble, Sachin S. & Gunasekaran, Angappa & Gawankar, Shradha A., 2020. "Achieving sustainable performance in a data-driven agriculture supply chain: A review for research and applications," International Journal of Production Economics, Elsevier, vol. 219(C), pages 179-194.
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    15. Palsule-Desai, Omkar D., 2021. "Multi-product supply networks: Implications of intermediaries," European Journal of Operational Research, Elsevier, vol. 292(3), pages 909-929.
    16. Hezarkhani, Behzad & Demirel, Guven & Bouchery, Yann & Dora, Manoj, 2023. "Can “ugly veg” supply chains reduce food loss?," European Journal of Operational Research, Elsevier, vol. 309(1), pages 117-132.
    17. Vera Sadovska & Lena Ekelund Axelson & Cecilia Mark-Herbert, 2020. "Reviewing Value Creation in Agriculture—A Conceptual Analysis and a New Framework," Sustainability, MDPI, vol. 12(12), pages 1-22, June.
    18. Xu, Tiantong & Mo, Lipo & Liu, Diyi, 2024. "Feed-in tariff or sheep farming subsidy? Implications of promoting photovoltaic energy by solar sheep raising," Energy Policy, Elsevier, vol. 184(C).
    19. Pagare, Dewang & Biswas, Indranil & Agrahari, Amit & Ghosh, Sriparna, 2023. "A small farmer’s market choice in the presence of multiple markets: The Indian case," European Journal of Operational Research, Elsevier, vol. 311(2), pages 739-753.
    20. Nilanjan Dutta & Arshinder Kaur, 2023. "Enabling socially responsible operations: A decision-making model for a firm contracting with decision-biased smallholders," Annals of Operations Research, Springer, vol. 320(1), pages 509-533, January.
    21. Nur Ayvaz‐Çavdaroğlu & Burak Kazaz & Scott Webster, 2021. "Incentivizing Farmers to Invest in Quality through Quality‐Based Payment," Production and Operations Management, Production and Operations Management Society, vol. 30(10), pages 3812-3830, October.
    22. Ranjeet Rajput & Sri Vanamalla Venkataraman, 2022. "A violent market price contract for agribusiness supply chain," Annals of Operations Research, Springer, vol. 315(2), pages 1971-1996, August.

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