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Modeling the Market and Welfare Effects of Mexico's “Agriculture by Contract” Program
Author(s) -
Lence Sergio H.
Publication year - 2016
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1093/ajae/aav052
Subject(s) - subsidy , welfare , intermediary , agriculture , futures contract , government (linguistics) , business , economics , contract farming , market power , agricultural economics , microeconomics , market economy , finance , production (economics) , monopoly , linguistics , philosophy , ecology , biology
“Agriculture by contract” (A × C) is the main Mexican government program aimed at mitigating price risks for agricultural producers in Mexico. A × C has unique features involving forward contracts and the provision of basis subsidies and subsidized exchange‐traded futures options for both producers and intermediaries. A simulation model is developed to analyze the market and welfare effects of A × C. When applied to corn, results show that A × C exerts substantial impacts and causes large transfers across sectors. Even if A × C reduced intermediaries' market power to the largest extent feasible, results indicate that it would still cause important losses in aggregate welfare.