Capacity Management for Commodity Processors
Abstract
This paper studies the capacity investment portfolio of a commodity processor that uses a single primary input to produce two outputs in fixed proportions. The input and one of the outputs are commodities and are traded on the spot markets whereas the other output is a non-commodity product. The processing of input and each output require dedicated production capacities, and constitute to the capacity investment portfolio of the processor. The fixed proportions technology and commodity input-output features are relevant for several agricultural commodity markets. For example, in the palm industry, palm fresh fruit bunches are processed at palm oil mills to produce crude palm oil and palm kernel in fixed proportions. Both fresh fruit bunches and crude palm oil are commodities and are traded on the spot markets. Other relevant applications of the model in the agricultural business include, but not limited to the processing of corn to produce ethanol and animal feed and processing of soybean to produce soybean oil and soybean meal.