Capacity management in agricultural commodity processing

Publication Type

Book Chapter

Publication Date

1-2022

Abstract

This chapter examines the capacity investment decisions of an agricultural processing firm that produces a commodity output and a byproduct using a commodity input. We model the firm’s problem as a finite-horizon stochastic dynamic program where the firm makes one-time input processing capacity and output storage capacity investment decisions—in addition to periodic processing and inventory decisions—when facing uncertainty in both input and output spot prices as well as output yield. We characterize the optimal capacity investment portfolio in closed form. Using a model calibration based on the palm industry, we compare the performance of the optimal investment policy against capacity investment heuristics that are commonly used in practice and/or academic literature. We find that if the yield uncertainty is ignored in capacity planning, then basing capacity investment decisions on the average yield is preferable to basing them (as often occurs in practice) on the maximum yield possible. We also find that although byproduct revenue constitutes a small portion of total revenues, ignoring it during capacity planning significantly reduces the firm’s profitability.

Keywords

Capacity management, Multi-product firm, Commodity risk management, Spot market, Agriculture, Dynamic programming, Processing, Storage

Discipline

Agribusiness | Operations and Supply Chain Management

Research Areas

Operations Management

Publication

Agricultural supply chain management research

Volume

12

Editor

Onur Boyabatlı, Burak Kazaz, & Christopher S. Tang

First Page

103

Last Page

122

ISBN

9783030814236

Identifier

10.1007/978-3-030-81423-6_7

Publisher

Springer

City or Country

Cham

Additional URL

https://doi.org/10.1007/978-3-030-81423-6_7

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