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United States Department of Agriculture

Agricultural Research Service

Title: Horticultural Import Diversification by Us Cucumber Processors: a Monte Carlo Risk Assessment

Authors
item Frenz, Byron - NATURAL TECH MADISON WI
item Staub, Jack

Submitted to: HortTechnology
Publication Type: Peer Reviewed Journal
Publication Acceptance Date: April 20, 1999
Publication Date: N/A

Interpretive Summary: The trend in agricultural trade in Latin American countries is a shift from concentrating on a single primary product to exporting a more diversified array of fruits and vegetables. Although Hispaniola (Haiti and Dominican Republic) has historically engaged in limited trade with the U.S., it possesses rich crop lands and is relatively close to the U.S. Based on these facts and the fact that Mexico is the sole raw product source for processing cucumber to the U.S. during the winter and early spring months, Hispaniola may provide a means of reducing single-sourcing risk. Therefore, a study was designed to use previously collected cucumber production and export data to construct an investment-risk model to assess investment risk for agro-business in the U.S. and Hispaniola. This model identified sources of cost variation which were then used to better characterize export risks derived from growing processing cucumbers on Hispaniola and how to manage these risks. It was determined that U.S. processors can reduce overall purchasing-risk by diversifying Mexican production to Hispaniola. The investment-risk model identified the allocation of 80% Mexico and 20% Haiti as the most favorable diversification strategy. This strategy offered less risk and greater potential long-term returns than purchasing cucumbers solely in Mexico. This study identified and measured factors which have potential for control of risk which can be used directly by U.S. processors to evaluate, the financing and investment risk of secondary production sources in the Caribbean.

Technical Abstract: Development projects in developing countries are generally considered speculative investments. Potentially significant returns on investment opportunities are often overlooked by incorrectly assuming that investment risks in developing countries are greater or less manageable than the risks of investment in developed countries. Although production and export analyses suggested that Hispaniola might not replace Mexico as the primary source of cucumbers for processing in the U.S. during November and April (companion article) Hispaniola affords the U.S. processing industry with an alternative investment option for reducing single-sourcing raw product risk. Therefore, an import diversification evaluation was conducted using Monte Carlo simulation to define a investment-risk model. Monte Carlo simulations of the means and variances of the components of cost and price were used to assess investment risk under various investment strategies. This model identified sources of cost variation which were then be used to better characterize export risks derived from growing procession cucumbers on Hispaniola and how to manage these risks (i.e., forecast export and import financing risk). It was determined that U.S. processors can reduce overall purchasing-risk by diversifying Mexican production to Hispaniola. Through the creation of a transportation strategic alliances the investment-risk model identified the allocation of 80% Mexico and 20% Haiti as the most favorable diversification strategy. This strategy offered less risk and greater potential long-term returns than purchasing cucumbers solely in Mexico.

Last Modified: 12/21/2014
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