Strategic Options for the Virginia Peanut Industry After the 2002 Farm Bill: a Linear Programming Model

The passage of the 2002 Farm Bill and the removal of the peanut quota system revealed underlying fundamental problems in the Virginia peanut industry. Lower yields and high costs plague producers at the farm level, acreage levels continue to decline and it is doubtful that peanut production in Virginia will continue at levels seen in the past. The structured market due to the quota system has provided little incentive in the past for technological investment. Investment in technology such as high oleic peanuts and capturing value at the consumer level are seen as ways to improve the situation in Virginia. In particular increased coordination at all levels of the supply chain would be needed to ensure that the consumer is brought a product with characteristics they desire.The literature provides ample information regarding the formation of alliances and coordination in general. According to Cozzarin and Barry (1998), vertical integration, similar to vertical alliances are set up for the following reasons: mitigating transactions costs, taking advantage of output or input price differentials of a competitor, and reducing uncertainties in costs and/or prices. Cozzarin and Barry (1998) also note that there is an increasing move toward vertical coordination in many agriculture sectors, the reasons cited for the current trend include: a) the growing influence of consumers in controlling the agri-food agenda; b) the increasing marketing power of large food companies; and (c) technological changes that necessitate coordination. Of these three reasons, the peanut industry falls under the first two.Vertical coordination is seen to be a solution when two or more entities are able to accomplish more efficiently their objectives than they are able to on their own. For the peanut industry, the agency theory and in particular principal-agent theory is the most applicable to the peanut industry. A linear model is used to examine the effects of increased coordination along the supply chain. The linear model also provides a snapshot of how decisions made at the farm level reverberate through the entire supply chain. The linear model includes the comparison of increased profits due to premiums at the consumer level.Results of the linear model indicate that the Virginia peanut industry will have difficulty maintaining current production levels without investment in the sector, without changing the way the supply chain operates. Principal-agent theory and specifically the work done on contracts in the pork and poultry industries provide a framework within which the peanut industry could avoid asymmetric information and moral hazard. This study attempts to identify underlying problems along with possible solutions or the Virginia peanut industry.