Long term contracts and farm inflexibility premium in the production of cellulosic ethanol

Farmers will supply the raw ingredients for the emerging cellulosic ethanol industry. The long-term relationship between a farmer and a processing firm is expected to be contractual. A processing firm has an incentive to sign long-term contracts to ensure a cost-efficient level of raw ingredient supply. However, farmers generally prefer to operate with either no contract or a short-term contract in order to maintain options for adjustments in future acreage allocations due to changes in relative prices. Of interest in this research is to understand the incentives of farmers and calculating the efficient level of the “inflexibility premium”, which a processing firm must provide to a farmer when a long term contract is signed. A stochastic dynamic programming model is solved and with the help of Microsoft Excel numerically evaluated to illustrate the marginal inflexibility premium is increasing with contract length and the level of price variability, and is decreasing with the size of acreage adjustment costs.

Name thesis:degree_name

Master of Science - MSc

Level thesis:degree_level

master's

Discipline thesis:degree_discipline

Agricultural Economics

Grantor dc:publisher

University of British Columbia

Year dc:date

2008

Author dc:creator

• Jalili, Rozita

Statement dc:rights

• Attribution-NonCommercial-NoDerivatives 4.0 International

Licence

• http://creativecommons.org/licenses/by-nc-nd/4.0/

Language dc:language

eng

Handle dc:identifier

http://hdl.handle.net/2429/706

OAI identifier oai:identifier

oai:circle.library.ubc.ca:2429/706