Enhancing Decision Support through Calculating Utility Weighted Contract Prices

Abstract

Worldwide, table (fresh) and processing potatoes represent major marketing channels. In South Africa, uncertainties influence marketing and production decisions. Producers need to decide on the channel most suited to their needs based on its characteristics. A decision support system (DSS) developed in this study provides producers with relevant price-related information. It evaluates gross production values (GPVs), risk quantifications and utility weighted premiums for both channels. The processing market had the highest GPV in a cumulative distribution function. For South Africa, the processing market had the highest probability of better price based on price and yield risk. Stochastic efficiency with respect to a function (SERF) was used to calculate a utility break-even price, incorporating different risk aversion levels. A utility break-even price of R1,618/ton creates indifference between the two channels for a neutral risk-averse producer. The DSS provides a valuable tool for producers and processors and may be replicated for other commodities and global markets with similar challenges.