Monday, August 22, 2011

Integrating Long-term and Short-term Contracting in Beef Supply Chains Management Science 57, 10 (2011) 1771-1787

This paper analyzes the optimal procurement, processing, and production decisions of a meat-processing company (hereafter, a “packer”) in a beef supply chain. The packer processes fed cattle to produce two beef products, program (premium) boxed beef and commodity boxed beef, in fixed proportions, but with downward substitution of the premium product for the commodity product. The packer can source input (fed cattle) from a contract market, where long-term contracts are signed in advance of the required delivery time, and from a spot market on the spot day. Contract prices are taken to be of a general window form, linear in the spot price but capped by upper and lower limits on realized contract price. Our analysis provides managerial insights on the interaction of window contract terms with processing options. We show that the packer benefits from a low correlation between the spot price and product market uncertainties, and this is independent of the form of the window contract. Although the expected revenues from processing increase in spot price variability, the overall impact on profitability depends on the parameters of the window contract. Using a calibration based on the report by the GIPSA (Grain Inspection, Packers, and Stockyards Administration. 2007. GIPSA livestock and meat marketing study, Vol. 3: Fed cattle and beef industries. U.S. Department of Agriculture, Washington, DC), this paper elucidates for the first time the value of long-term contracting as a complement to spot sourcing in the beef supply chain. Our comparative statics results provide some rules of thumb for the packer for the strategic management of the procurement portfolio. In particular, we show that higher variability (higher spot price variability, product market variability, and correlation) increases the profits of the packer, but decreases the reliance on the contract market relative to the spot market. 

Multi-period Portfolio Policies for Hedging Carbon Costs in Electricity Supply Journal of Regulatory Economics (2011)

The energy business is in transition from a cost structure based on fuel and capital to a business that also accounts for the carbon footprint of energy production, transmission and end use. In the European Union (EU), this is already the case, with a liquid and functioning carbon emissions trading market, and with full subscription to the Kyoto Protocol, including use of additionality offsets from projects certified under the Clean Development Mechanism (CDM) and the Joint Implementation (JI) process. Under the cap and trade system implemented in the European Union, and under any of the similar plans envisaged in various bills under discussion in the US Congress, the value of an energy investment will be the joint product of its cash flows (evaluated in the normal fashion) and the implied value/cost of carbon emissions or reductions associated with the investment. Valuation and risk management for energy projects will therefore involve hedging for both energy, inputs and outputs, as well as for carbon outputs. The objective of this paper is to provide an overview of the practicality of extending the normal portfolio problem in electricity supply to encompass the new markets for carbon, and hedging instruments defined on these