Modeling the Market and Welfare Effects of Mexico's "Agriculture by Contract" Program

Author

Sergio Lence

American Journal of Agricultural Economics, 2016, vol. 98, issue 3, pages 925-945

Abstract: "Agriculture by contract" ($\hbox {A}\times \hbox {C}$) is the main Mexican government program aimed at mitigating price risks for agricultural producers in Mexico. $\hbox {A} \times \hbox {C}$ 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 $\hbox {A}\times \hbox {C}$. When applied to corn, results show that $\hbox {A}\times \hbox {C}$ exerts substantial impacts and causes large transfers across sectors. Even if $\hbox {A}\times \hbox {C}$ reduced intermediaries' market power to the largest extent feasible, results indicate that it would still cause important losses in aggregate welfare.

Date: 2016
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