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

Sergio H. Lence, Iowa State University

This article is published as Lence, Sergio H. "Modeling the Market and Welfare Effects of Mexico's “Agriculture by Contract” Program." American Journal of Agricultural Economics 98, no. 3 (2015): 925-945. doi:10.1093/ajae/aav052 Posted with permission.

Abstract

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