Analytic and agent-based approaches: mitigating grain handling risks
Date
2013-04-25
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Degree Level
Doctoral
Abstract
Agriculture is undergoing extreme change. The introduction of new generation agricultural products has generated an increased need for efficient and accurate product segregation across a number of Canadian agricultural sectors. In particular, monitoring, controlling and preventing commingling of various wheat grades is critical to continued agri-food safety and quality assurance in the Canadian grain handling system.
The Canadian grain handling industry is a vast regional supply chain with many participants. Grading of grain for blending had historically been accomplished by the method of Kernel Visual Distinguishability (KVD). KVD allowed a trained grain grader to distinguish the class of a registered variety of wheat solely by visual inspection. While KVD enabled rapid, dependable, and low-cost segregation of wheat into functionally different classes or quality types, it also put constraints on the development of novel traits in wheat.
To facilitate the introduction of new classes of wheat to enable additional export sales in new markets, the federal government announced that KVD was to be eliminated from all primary classes of wheat as of August 1, 2008. As an alternative, the Canadian Grain Commission has implemented a system called Variety Eligibility Declaration (VED) to replace KVD. As a system based on self-declaration, the VED system may create moral hazard for misrepresentation. This system is problematic in that incentives exist for farmers to misrepresent their grain. Similarly, primary elevators have an incentive to commingle wheat classes in a profitable manner. Clearly, the VED system will only work as desired for the grain industry when supported by a credible monitoring system. That is, to ensure the security of the wheat supply chain, sampling and testing at some specific critical points along the supply chain is needed.
While the current technology allows the identification of visually indistinguishable grain varieties with enough precision for most modern segregation requirements, this technology is relatively slow and expensive. With the potential costs of monitoring VED through the current wheat supply chain, there is a fundamental tradeoff confronting grain handlers, and effective handling strategies will be needed to maintain historical wheat uniformity and consistency while keeping monitoring costs down. There are important operational issues to efficiently testing grain within the supply chain, including the choice of the optimal location to test and how intensively to test. The testing protocols for grain deliveries as well as maintaining effective responsiveness to information feedback among farmers will certainly become a strategic emphasis for wheat handlers in the future.
In light of this, my research attempts to identify the risks, incentives and costs associated with a functional declaration system. This research tests a series of incentives designed to generate truthful behavior within the new policy environment. In this manner, I examine potential and easy to implement testing strategies designed to maintain integrity and efficiency in this agricultural supply chain.
This study is developed in the first instance by using an analytic model to explore the economic incentives for motivating farmer’s risk control efforts and handlers’ optimal handling strategies with respect to testing cost, penalty level, contamination risks and risk control efforts. We solve for optimal behavior in the supply chain assuming cost minimization among the participants, under several simplifying assumptions. In reality, the Canadian grain supply chain is composed of heterogeneous, boundedly rational and dynamically interacting individuals, and none of these characteristics fit the standard optimization framework used to solve these problems. Given this complex agent behavior, the grain supply chain is characterized by a set of non-linear relationships between individual participants, coupled with out of equilibrium dynamics, meaning that analytic solutions will not always identify or validate the set of optimized strategies that would evolve in the real world. To account for this inherent complexity, I develop an agent-based (farmers and elevators) model to simulate behaviour in a more realistic but virtual grain supply chain.
After characterizing the basic analytics of the problem, the grain supply chain participants are represented as autonomous economic agents with a certain level of programmed behavioral heterogeneity. The agents interact via a set of heuristics governing their actions and decisions. The operation of a major portion of the Canadian grain handling system is simulated in this manner, moving from the individual farm up through to the country elevator level. My simulation results suggest testing strategies to alleviate misrepresentation (moral hazard) in this supply chain are more efficient for society when they are flexible and can be easily adjusted to react to situational change within the supply chain.
While the idea of using software agents for modeling and understanding the dynamics of the supply chain under consideration is somewhat novel, I consider this exercise a first step to a broader modeling representation of modern agricultural supply chains. The agent-based simulation methodology developed in my dissertation can be extended to other economic systems or chains in order to examine risk management and control costs. These include food safety and quality assurance network systems as well as natural-resource management systems.
Furthermore, to my knowledge there are no existing studies that develop and compare both analytic and agent-based simulation approaches for this type of complex economic situation. In the dissertation, I conduct explicit comparisons between the analytic and agent-based simulation solutions where applicable. While the two approaches generated somewhat different solutions, in many respects they led to similar overall conclusions regarding this particular agricultural policy issue.
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Keywords
supply chain risks, moral hazard, complex system dynamics, agent-based modeling, simulation, agricultural policy
Citation
Degree
Doctor of Philosophy (Ph.D.)
Department
Bioresource Policy, Business and Economics
Program
Agricultural Economics