A trading decision support model to maximize the sustainability of a self-financed guaranteed farmgate price program

Abstract

We study a non-government organization (NGO) program that supports the household livelihood of small farmers by committing to purchase a fixed quantity at a guaranteed farmgate price of a storable agri-product under price fluctuation. Since the World Trade Organization (WTO) disciplines its members to limit and reduce domestic support for the agriculture, storing and trading (selling) the product on the spot market at a favorable price generates revenue to cover the cost of the program. The objective of this study is to develop a stochastic dynamic trading decision model that maximizes the sustainability of the NGO's supporting program, measured as the survival probability, i.e. the probability that the program can continue operating after a predetermined period of time. The results of a numerical study, based on the tilapia aquaculture in Taiwan, show that our model yields higher survival probability (after 4 years) than the profit-maximization policy by close to 10% in average. Moreover, the trading decision optimization is particularly suitable for market environments with high price fluctuation, i.e. the most challenging circumstances for small farmers.