Reputations, Market Structure, and the Choice of Quality Assurance Systems in the Food Industry

Many food traits desired by consumers are costly to provide and difficult to verify. A complicating factor is that delivered quality can only be affected stochastically by producers and imperfectly observed by consumers. Markets for these goods will emerge only if supplying firms can be trusted. We develop a repeated purchases model to explore how quality discoverability, market structure, nature of reputations, market premiums, and discount factors drive firm choice about the stringency of quality assurance systems designed to gain consumer trust. Reputation protection is key incentive for firms to invest in high-quality goods and quality assurance systems.

Reputations, Market Structure, and the Choice of Quality Assurance Systems in the Food Industry

A repeated-purchases model is developed to explore the fundamental economic factors that lie behind the choice of different quality assurance systems and their associated degrees of stringency by firms. Differences in the quality discoverability of a sought-after attribute, market structure, attractiveness of a market, nature of reputations, and the value placed in the future are among the factors contributing to the implementation of widely diverse systems across participants in different markets. Close attention is paid to the role of reputations in providing the incentives for firms to deliver high-quality goods. We model three different scenarios - monopoly, duopoly with firm-specific reputations, and duopoly with industry-wide reputations - and compare the resulting welfare of processors and their customers. We also provide a rationale for the branding efforts of many firms to distinguish their products along the supply chain.quality assurance, reputations, repeated purchases, product quality, supply chain, value-added agriculture, imperfect information, Marketing,

Index Insurance, Production Practices, and Probabilistic Climate Forecasts

The failure of the development of commercially viable traditional crop insurance products and innovations in financial markers has fed a renewed interest in the search for alternatives to help producers in developing countries manage their risk exposure. Salient among these is the proposal of several index insurance schemes against weather events. Among the basic tenets are that the presence of index insurance allows producers to intensify their operations and reduce the risks of default and hence may induce creditors to offer loans at affordable rates. The two factors combined are touted as key to help producers in developing countries escape poverty traps. Improvements in seasonal climate forecasts create challenges for the design and effective functioning of the insurance against climate risks. However, very little is known about potential synergies or conflicting impacts of these two institutions, and the interactions between them and input management decisions by producers. We find that insurance and forecast may have synergistic or conflicting effects on input decisions. In the presence of (state contingent) actuarially fair insurance, producers may prefer the forecast information not to be available, especially if the management options available do not result in sufficient changes in profitability. Perhaps surprisingly, we find that forecast information may induce producers to increase the amount of insurance purchased.Climate forecast, Index insurance, Input Decisions, Risk Management, Weather risks, Risk and Uncertainty,

Second-generation biofuels : economics and policies

Recent increases in production of crop-based (or first-generation) biofuels have engendered increasing concerns over potential conflicts with food supplies and land protection, as well as disputes over greenhouse gas reductions. This has heightened a sense of urgency around the development of biofuels produced from non-food biomass (second-generation biofuels). This study reviews the economic potential and environmental implications of production of second-generation biofuels from a variety of various feedstocks. Although second-generation biofuels could significantly contribute to the future energy supply mix, cost is a major barrier to increasing commercial production in the near to medium term. Depending on various factors, the cost of second-generation (cellulosic) ethanol can be two to three times as high as the current price of gasoline on an energy equivalent basis. The cost of biodiesel produced from microalgae, a prospective feedstock, is many times higher than the current price of diesel. Policy instruments for increasing biofuels use, such as fiscal incentives, should be based on the relative merits of different types of biofuels.Energy Production and Transportation,Renewable Energy,Climate Change Mitigation and Green House Gases,Crops&Crop Management Systems,Transport Economics Policy&Planning

Global Biofuel Expansion and the Demand for Brazilian Land: Intensification versus Expansion

We use a spatially disaggregated model of Brazilian agriculture to assess the implications of global biofuel expansion on Brazilian land usage at the regional level. This Brazilian model is part of the FAPRI agricultural modeling system, a multimarket, multi-commodity international agricultural model, used to quantify the emergence of biofuels and to analyze the impact of biofuel expansion and policies on both Brazilian and world agriculture. We evaluate two scenarios in which we introduce a 25% exogenous increase in the global demand for ethanol and one scenario in which we increase global ethanol demand by 50%. We then analyze the impact of these increases in terms of land-use change and commodity price changes particularly in Brazil. In the first scenario, we assume that the enforcement of the land-use reserve in Brazil remains at historically observed levels, and that abundant additional land can be readily incorporated into production. The second scenario involves implementing the same exogenous biofuel demand shock but with a different responsiveness in area expansion to price signals in Brazil, reflecting varying plausible assumptions on land availability for agricultural expansion. The third scenario, which is similar to the first scenario but with a larger increase in global ethanol demand, is run to check whether increasing volume of ethanol requires the incorporation of additional quantities of land per unit of ethanol. We find that, within Brazil, the expansion occurs mostly in the Southeast region. Additionally, total sugarcane area expansion in Brazil is higher than the increase in overall area used for agriculture. This implies that part of the sugarcane expansion displaced other crops and pasture that is not replaced, which suggests some intensification in land use. The lower land expansion elasticities in the second scenario result in a smaller expansion of area used for agricultural activities. A higher proportion of the expansion in sugarcane area occurs at the expense of pasture area, which implied land intensification of beef production. This explains the small change in commodity prices observed between the first and second scenarios. These results suggest that reducing the overall responsiveness of Brazilian agriculture may limit the land-use changes brought about by biofuel expansion, which would in turn reduce its environmental impacts in terms of land expansion. Additionally, the impacts on food prices are limited because of the ability of local producers to increase the intensity of land use in both crop (by double cropping and raising yields) and livestock production (by increasing the number of heads of cattle per hectare of pasture or stocking rate) releases area that can be used for crops. In scenario three, we find that larger ethanol volumes did not require more land per unit of ethanol. Doubling the demand for ethanol does not change the results, which indicates that the limit for intensification is beyond the 50% expansion assumed in Scenario 3. In this range, the same amount of land is incorporated into production per additional unit of ethanol.Biofuels, Brazil, land use, Land Economics/Use,

The Impact of Transportation Costs on Spatial Competition of Grain Buyers: An Iowa Case Study

Hotelling's classic model of spatial competition is adapted to estimate the impacts on grain price of the closure of one of three grain buyers on the Mississippi River in the vicinity of Scott County, Iowa. The customers of the buyer who is closing (River Gulf Grain Company) in Davenport, Iowa, are assumed to deliver their grain to a buyer in either Buffalo, Iowa, to the south or to a buyer in Clinton, Iowa, to the north. Calibration of Hotelling's framework to this situation leads to an estimated decline in grain bids of 1.5¢ per bushel for the buyer located in Clinton and by 2.5¢ per bushel for the buyer located in Buffalo. These estimates are based on an incremental transportation cost of 0.15¢ per mile between the seller's farm and the buyer. This price decline would reduce gross receipts of the farmers who currently deliver to Davenport by approximately $264,000 per year. The effect of lower price bids on gross receipts of all area farmers would be approximately$750,000 per year. Transportation costs would increase by an estimated $75,000 for those farmers who would have to haul their grain farther because of the closure

The Impact of Transportation Costs on Spatial Competition of Grain Buyers: An Iowa Case Study

Hotelling's classic model of spatial competition is adapted to estimate the impacts on grain price of the closure of one of three grain buyers on the Mississippi River in the vicinity of Scott County, Iowa. The customers of the buyer who is closing (River Gulf Grain Company) in Davenport, Iowa, are assumed to deliver their grain to a buyer in either Buffalo, Iowa, to the south or to a buyer in Clinton, Iowa, to the north. Calibration of Hotelling's framework to this situation leads to an estimated decline in grain bids of 1.5¢ per bushel for the buyer located in Clinton and by 2.5¢ per bushel for the buyer located in Buffalo. These estimates are based on an incremental transportation cost of 0.15¢ per mile between the seller's farm and the buyer. This price decline would reduce gross receipts of the farmers who currently deliver to Davenport by approximately $264,000 per year. The effect of lower price bids on gross receipts of all area farmers would be approximately$750,000 per year. Transportation costs would increase by an estimated $75,000 for those farmers who would have to haul their grain farther because of the closure