The bulk agricultural processing industry has garnered increasing attention in operations management research due to its unique operational characteristics and associated challenges. Compared to traditional manufacturing sectors, this industry exhibits three distinctive features:

1. Dual Commodity Nature: Both raw agricultural inputs (e.g., fresh palm fruit, soybeans, sugarcane) and processed outputs (e.g., palm oil, soybean oil, white sugar) are tradable commodities with active spot markets.

2. Price Volatility: Spot prices for both inputs and outputs demonstrate high uncertainty and strong correlation.

3. Hybrid Sourcing: Processors typically combine spot market purchases with long-term contracts to secure raw materials.

Research Focus
Dr. Li Bin's study addresses the multi-source contract procurement strategies of bulk agricultural processors, specifically examining how price correlation between input and output commodities influences:

• Optimal procurement decisions

• Profitability

• The value of contractual hedging

Methodological Innovation
The research develops a two-stage stochastic programming model :

1. Planning Stage: The processor determines reservation quantities under two Quantity Flexibility Contracts (QFCs), each defined by reservation and execution costs.

2. Execution Stage: After spot price realization, the processor decides:

• Contract execution levels

• Processing volumes

• Output sales quantities

• Spot market transactions

Key Findings 

1. Procurement Behavior:

• As spot price correlation increases, processors:
  ↗ Raise total contract reservations
  ↗ Favor contracts with lower execution costs

2. Hedging Effectiveness:

• Without contracts: Higher correlation reduces expected profits

• With contracts: Procurement provides effective (though partial) correlation risk hedging

3. Industry Validation:

• Calibration using Malaysia's palm oil industry data confirms:
  • Contracts cannot fully offset correlation-induced profit declines
  • Contract adoption nevertheless delivers significant profit improvements

Practical Implications
The study offers actionable insights for:
✓ Designing flexible contract terms in volatile markets
✓ Balancing spot/contract procurement portfolios
✓ Managing cross-commodity price risks

Publication Details

• Journal: Naval Research Logistics (December 2024, Online)

• Author: Li Bin (Sole Author)

  
  

  

• Associate Researcher, Department of Management Science and Engineering, Wuhan University

• Funding: National Natural Science Foundation of China

• DOI: 10.1002/nav.22236

Office of Scientific Research and Discipline Development
Edited by: Song Lan
Reviewed by: Liu Yanqing