IDEAS home Printed from https://ideas.repec.org/a/oup/apecpp/v38y2016i4p632-654..html
   My bibliography  Save this article

Optimal Mix of Vertical Integration and Contracting for Energy Crops: Effect of Risk Preferences and Land Quality

Author

Listed:
  • Xi Yang
  • Nicholas D. Paulson
  • Madhu Khanna

Abstract

Long-term contracts are likely to be critical to induce the production of perennial energy crops as a feedstock for the emerging cellulosic biofuel industry. This paper develops a framework to analyze the determinants of landowner choice among a land-leasing contract, a fixed-price contract, and a revenue-sharing contract for energy crop production. We examine the effect of heterogeneous landowners' risk and time preferences and land quality on the optimal mix and equilibrium terms of these contracts, which jointly maximize the net benefits of the refinery and landowners in a region; this has implications for the extent to which energy crop production is likely to be vertically integrated or independently contracted by a biorefinery. We find that the refinery can potentially earn a higher profit by offering a choice of these three types of contracts rather than a single type of contract only; by allowing self-selection of contract type based on landowner risk and time preferences, the contractual terms needed to induce production of energy crops are reduced. Although it is optimal for vertically-integrated and contracted production to co-exist, we find that the share of the former is predominant across a range of assumptions about the distribution of risk preferences, time preferences, and relative riskiness of conventional and energy crop production. We also find that the impact of having multiple contract types to choose from on landowners' welfare is ambiguous.

Suggested Citation

  • Xi Yang & Nicholas D. Paulson & Madhu Khanna, 2016. "Optimal Mix of Vertical Integration and Contracting for Energy Crops: Effect of Risk Preferences and Land Quality," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 38(4), pages 632-654.
    • Handle: RePEc:oup:apecpp:v:38:y:2016:i:4:p:632-654.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/aepp/ppv029
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Babcock, Bruce A. & Choi, E. Kwan & Feinerman, Eli, 1993. "Risk And Probability Premiums For Cara Utility Functions," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 18(1), pages 1-8, July.
    2. Anderson, John D. & Lacy, Curt & Forrest, Charlie S. & Little, Randall D., 2004. "Expected Utility Analysis of Stocker Cattle Ownership Versus Contract Grazing in the Southeast," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 36(3), pages 719-730, December.
    3. Zheng Xiaoyong & Vukina Tomislav & Shin Changmock, 2008. "The Role of Farmers' Risk aversion for Contract Choice in the US Hog Industry," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 6(1), pages 1-22, June.
    4. Li, Haoyang & Ross, Brent R., 2014. "Farmers’ Switchgrass Adoption Decision Under A Single-Procurer Market: An Agent Based Simulation Approach," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170502, Agricultural and Applied Economics Association.
    5. Miao, Ruiqing & Khanna, Madhu, 2014. "Are Bioenergy Crops Riskier than Corn? Implications for Biomass Price," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, vol. 29(1), pages 1-6.
    6. Halter, A.N. & Mason, Robert, 1978. "Utility Measurement For Those Who Need To Know," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 3(2), pages 1-12, December.
    7. Schurle, Bryan W. & Tierney, William I., Jr., 1990. "A Comparison of Risk Preference Measurements with Implications for Extension Programming," Staff Papers 118185, Kansas State University, Department of Agricultural Economics.
    8. Miguel Carriquiry & Bruce A. Babcock, 2002. "Can Spot and Contract Markets Co-Exist in Agriculture?," Center for Agricultural and Rural Development (CARD) Publications 02-wp311, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    9. Vukina Tomislav & Shin Changmok & Zheng Xiaoyong, 2009. "Complementarity among Alternative Procurement Arrangements in the Pork Packing Industry," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 7(1), pages 1-24, March.
    10. MacDonald, James M. & Korb, Penelope J., 2011. "Agricultural Contracting Update: Contracts in 2008," Economic Information Bulletin 101279, United States Department of Agriculture, Economic Research Service.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:ags:aaea22:335923 is not listed on IDEAS
    2. Huashu Wang & Zhenyi Li & H. Holly Wang, 2022. "Does Backward Integration Improve Food Safety of the Tea Industry in China in the Post-COVID-19 Era?," Sustainability, MDPI, vol. 14(4), pages 1-15, February.
    3. Deepayan Debnath & Madhu Khanna & Deepak Rajagopal & David Zilberman, 2019. "The Future of Biofuels in an Electrifying Global Transportation Sector: Imperative, Prospects and Challenges," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 41(4), pages 563-582, December.
    4. Mohit Anand & Ruiqing Miao & Madhu Khanna, 2019. "Adopting bioenergy crops: Does farmers’ attitude toward loss matter?," Agricultural Economics, International Association of Agricultural Economists, vol. 50(4), pages 435-450, July.
    5. Clark Lundberg & Tristan Skolrud & Bahram Adrangi & Arjun Chatrath, 2021. "Oil Price Pass through to Agricultural Commodities†," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(2), pages 721-742, March.
    6. Sant’Anna, Ana Claudia & Bergtold, Jason S. & Shanoyan, Aleksan & Caldas, Marcellus M. & Granco, Gabriel, 2022. "Biofuel feedstock contract attributes, substitutability and tradeoffs in sugarcane production for ethanol in the Brazilian Cerrado: A stated choice approach," Renewable Energy, Elsevier, vol. 185(C), pages 665-679.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fausti, Scott W. & Gillespie, Jeffrey M., 2006. "Measuring risk attitude of agricultural producers using a mail survey: how consistent are the methods?," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 50(2), pages 1-18, June.
    2. Niemi, Jarkko K. & Liu, Xing & Pietola, Kyosti, 2011. "Price volatility and return on pig fattening under different price- quantity contract regimes," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114614, European Association of Agricultural Economists.
    3. Max Zongyuan Shang & Ken McEwan, 2021. "The make‐or‐buy decision of feed on livestock farms: Evidence from Ontario swine farms," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 69(3), pages 353-368, September.
    4. repec:ags:aaea22:335923 is not listed on IDEAS
    5. Ahearn, Mary Clare & Collender, Robert N. & Diao, Xinshen & Harrington, David H. & Hoppe, Robert A. & Korb, Penelope J. & Makki, Shiva S. & Morehart, Mitchell J. & Roberts, Michael J. & Roe, Terry L. , 2004. "Decoupled Payments In A Changing Policy Setting," Agricultural Economic Reports 33981, United States Department of Agriculture, Economic Research Service.
    6. Jason R.V. Franken & Joost M.E. Pennings & Philip Garcia, 2017. "Risk attitudes and the structure of decision†making: evidence from the Illinois hog industry," Agricultural Economics, International Association of Agricultural Economists, vol. 48(1), pages 41-50, January.
    7. Bard, Sharon K. & Barry, Peter J., 2001. "Assessing Farmers' Attitudes Toward Risk Using The "Closing-In" Method," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 26(1), pages 1-13, July.
    8. Fausti, Scott W. & Gillespie, Jeffrey M., 2000. "A Comparative Analysis Of Risk Preference Elicitation Procedures Using Mail Survey Results," 2000 Annual Meeting, June 29-July 1, 2000, Vancouver, British Columbia 36469, Western Agricultural Economics Association.
    9. Miao, Ruiqing & Khanna, Madhu, 2015. "Costs of Meeting the Cellulosic Biofuel Mandate with an Energy Crop with Establishment Cost and Yield Risk: Implications for Policy," 2015 Conference, August 9-14, 2015, Milan, Italy 212458, International Association of Agricultural Economists.
    10. Niemi, Jarkko K., 2012. "Designing coordination contracts to support efficient flow-scheduling in pork chain," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 125208, Agricultural and Applied Economics Association.
    11. Miao, Ruiqing & Khanna, Madhu, 2017. "Costs of meeting a cellulosic biofuel mandate with perennial energy crops: Implications for policy," Energy Economics, Elsevier, vol. 64(C), pages 321-334.
    12. Stefano Ciliberti & Simone Del Sarto & Angelo Frascarelli & Giulia Pastorelli & Gaetano Martino, 2020. "Contracts to Govern the Transition towards Sustainable Production: Evidence from a Discrete Choice Analysis in the Durum Wheat Sector in Italy," Sustainability, MDPI, vol. 12(22), pages 1-14, November.
    13. Young, Douglas & Lin, William & Pope, Rulon & Robison, Lindon & Selley, Roger, 1979. "Risk Preferences Of Agricultual Producers:Their Measurement And Use," Risk Management in Agriculture: Behavioral, Managerial, and Policy Issues, January 25-26, 1979, San Francisco, California 271459, Regional Research Projects > W-149: An Economic Evaluation of Managing Market Risks in Agriculture.
    14. Miao, Ruiqing & Hennessy, David A. & Feng, Hongli, 2016. "The Effects of Crop Insurance Subsidies and Sodsaver on Land-Use Change," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 41(2), May.
    15. Merlone, Ugo & Lupano, Matteo, 2022. "Third party funding: The minimum claim value," European Journal of Operational Research, Elsevier, vol. 296(2), pages 738-747.
    16. He, Xi, 2018. "Bigger Farms and Bigger Food Firms-The Agricultural Origin of Industrial Concentration in the Food Sector," 2018 Annual Meeting, August 5-7, Washington, D.C. 274206, Agricultural and Applied Economics Association.
    17. Esposito, Federico, 2022. "Demand risk and diversification through international trade," Journal of International Economics, Elsevier, vol. 135(C).
    18. Rachael Goodhue & Leo Simon, 2016. "Agricultural contracts, adverse selection, and multiple inputs," Agricultural and Food Economics, Springer;Italian Society of Agricultural Economics (SIDEA), vol. 4(1), pages 1-33, December.
    19. Buchholz, Matthias & Musshoff, Oliver, 2014. "The role of weather derivatives and portfolio effects in agricultural water management," Agricultural Water Management, Elsevier, vol. 146(C), pages 34-44.
    20. Chueh-Yung Tsao & Ya-Chi Huang, 2018. "Revisiting the issue of survivability and market efficiency with the Santa Fe Artificial Stock Market," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 13(3), pages 537-560, October.
    21. Paulson, Nicholas D. & Babcock, Bruce A., 2010. "Readdressing the Fertilizer Problem," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 35(3), pages 1-17, December.

    More about this item

    Keywords

    Contract farming; energy crops; risk preferences; vertical integration;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:apecpp:v:38:y:2016:i:4:p:632-654.. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/aaeaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.