Int. J.

Production Economics 142 (2013) 8997

Contents lists available at SciVerse ScienceDirect

Int. J. Production Economics

journal homepage: www.elsevier.com/locate/ijpe

Using market intelligence for the opportunistic shipping of fresh produce

Hector Flores, J. Rene Villalobos n
International Logistics and Productivity Improvement Laboratory, Arizona State University, 900 S McAllister Av, Tempe, AZ, United States

a r t i c l e i n f o abstract

Article history: The main goal of this paper is to develop an opportunistic shipment policy that increases a farmers
Received 10 March 2012 commercialization reach within a secondary market with minimal or no capital investment, once a base
Accepted 18 October 2012 market has been established. Basically, the operation would consist of sending fresh produce items into
Available online 10 November 2012
a secondary market (from the base) whenever momentary price differentials allows two-market
Keywords: transactions with a high probability of prot. A theoretical model is developed that maximizes
Opportunistic shipments potential operational revenues based on arbitrage opportunities existent within two-market structures.
Fresh produce Ultimately, the validity and applicability of this model is demonstrated through the application of a
Market integration case-study. The results of the case-study show that using the decision-making strategy dened by the
Perishable commodities
proposed theoretical model cannot only increase the long-term prots of two-market operations but
Agricultural marketing
can also lower the prot variability, in comparison to only commercializing in a single base market.
& 2012 Elsevier B.V. All rights reserved.

1. Introduction that maximizes potential operational revenues based on arbitrage

One of the primary issues facing agricultural producers in todays
market environment is the risk associated with revenues from their
crop sales. This is particularly true for fresh produce farmers whose
revenues are dependent on a variety of external factors that are
often outside of the farmers immediate control such as the
combination of market prices and weather variability. Furthermore,
due to the perishable characteristics of fresh produce and its
commodity-like nature, once the produce is sent to a particular
terminal market a buyer can wait and/or selectively choose among
the potential vendors offering the lowest price. Thus, perishability
results in a loss of leverage when it comes to negotiating prices for
the farmer or shipper that prepositions his/her product. Conse-
quently, the underlying situation is one in which the farmers
assume most of the risk associated with production variability and
in turn receive reduced margins over the nal revenues, estimated
at a 20% of the nal market price (Cook, 2010).
In the present paper, the main purpose is to develop an
opportunistic, shipment policy that increases a farmers commer-
cialization reach with minimal or no capital investment within
secondary markets once a primary or base market has been
captured. In this case, the basic operation consists of delivering
fresh produce items into a secondary market (from the base)
whenever momentary price differentials allows two-market
transactions with a high probability of a prot once the transaction
costs are subtracted. Ultimately, a theoretical model is developed
n
Corresponding author. Tel.: 1 480 727 6098.
E-mail addresses: hector.ores@asu.edu (H. Flores),
rene.villalobos@asu.edu (J.R. Villalobos).
opportunities existent within two-market structures. The metho-
dology developed in this paper extends previous studies aimed at
increasing the commercialization reach of Mexican fresh produce
farmers in the US. For instance, Sanchez (2007) analyzes the
implementation of logistic platforms that allow efcient distribu-
tion operations of fresh produce in an established US market
directly from Mexican farms.
The structure of the rest of this paper is divided into four parts.
First, a review of current literature details the current status of the
fresh produce industry, including the dynamics, characteristics and
trends within European and North American markets. The second
half of the review consists of literature related to price integration
of two-market structures and the arbitrage opportunities created
by inefcient price transmissions. Thirdly, a theoretical model
is derived from a proposed operational structure based on the
characteristics of two US fresh produce markets, specically
perishables market prices. Finally, the proposed theoretical model
is assessed through the application of a real-world case-study.
2. Related works and current state of industry
Based on our literature review, little to no research has been
dedicated to the development of operational shipment strategies
based on the arbitrage conditions of two spatially separated
markets. Most of the literature pertaining to commercialization
strategies within the fresh produce industry has been focused on
current and future developments within European and North
American markets. Most of these developments have been a
direct result of food retailing expansions, either as a deliberate

0925-5273/$ - see front matter & 2012 Elsevier B.V. All rights reserved.
http://dx.doi.org/10.1016/j.ijpe.2012.10.012
90 H. Flores, J.R. Villalobos / Int. J. Production Economics 142 (2013) 8997
and rational process, or as an emergent and non-intentional one
(Borklakis and Bourlakis, 2001).
No other fresh produce industry is as advanced as European.
Over the past few decades, the complexity and competitiveness of
its food market industry has slowly consolidated the value chain
of the products at both the producer and the retail side. For
example, up until the early 1970s, multiple food retailers in
Britain each had combined market share of 20%, trailing both
the co-operative and independent sectors (Morelli, 1999). How-
ever, by 1971, the multiple sectors had overtaken the co-
operative and independent sectors with 44% of the food market
(Morelli, 1999). As of 2009, the four largest food retailers in
Britain accounted for 75.6% of total grocery sales (Garner, 2009).
At this stage in Europes food retail industry, increased
marginal market share can only be created through erce com-
petition for small gains now held by small, independent retailers.
As a result, food retail strategy has transformed from the initial
growth strategies of the 1980s to strategies based on differentia-
tion with own label, in which fresh produce (and meat) plays a
key role (Fearne and Hughes, 1999). This erce competition at the
retail level for higher product differentiation has transferred over
to the source of fresh produce. Producers are facing serious
pressure from retailers, government, and consumers to not only
adhere to product standards but also to improve their manage-
ment practices to conform to evolving process standards (Palma
et al., 2010). This has also created a consolidation process at the
producer level towards greater control of the value chain struc-
ture in order to provide better goods.
In the Dutch fresh produce industry, this consolidation has
taken place in the form of farmer co-operatives that have slowly
evolved from small farming communities to important, interna-
tional organizations. For example, in 1970, the number of growers
and co-operative auctions in the Dutch fruit and vegetable
industry was approximately 57,284 and 88, respectively; by the
year 2000, those same numbers shrunk to 14,197 and 6, respec-
tively (Bijman and Hendrikse, 2003). In this transition, smaller
farmers without the capacity to innovate or offer branded
quality products cannot compete with the larger farmer organiza-
tions; thus, these small farmers have little connection to the nal
client and are often bought or put out of business.
For the US farmer, the playing eld within the industry is still
in a maturation stage but it is progressively growing more
complex. This is due to the increased number of players within
the value chain which has increased the distance between the
farmer and the nal client. In part, this has made it difcult for
single entities to control operations within the supply chain and
provide unchanged quality and volume of perishable items over
time, thus limiting the ability for differentiation and product
branding of any one entity (Cook, 2001). As a result, the dynamics
of the fresh produce markets has remained largely commodity-
like, with most rms acting as price-takers (Cook, 2001).
With regards to the operations, the common growershipper
often sells below total costs given the risk associated with
weather and product perishability. In this case, planting tends
to err on the side of excess planting, which creates a tendency for
excess supply (Cook, 2001). Additionally, the price volatility
common to fresh produce markets has contributed to a heavy
reliance on daily spot market sales, as opposed to forward
contracting between shippers and buyers (Cook, 2001). These
characteristics of the fresh produce industry are the basis for
developing the proposed operational structure in this paper.
2.1. Arbitrage within spatially integrated markets
The topic of this paper indirectly relates to arbitrage and its
existence within two spatially separated fresh produce markets;
topic which has received some attention in published literature.
It is assumed by spatial market integration research that two
regions are in the same economic market for a homogenous good
if their price differential is equal to the transaction cost related to
trade (Sexton et al., 1991). On the other hand, for markets farther
away from their production source, there is a lower incidence of
market equilibrium and increasingly inefcient price transmis-
sion across regions (Padilla-Bernal et al., 2003). In general, less
perfect competitive behavior in these markets suggest higher
levels of risk and uncertainty, which may also be evidence of
strategic market shipments and price discrimination (Padilla-
Bernal et al., 2003).
Econometric modeling is an alternative approach to analyze
price relationships of commodity products within two-market
systems. Several papers use co-integration testing as a way to
analyze these price relationships and assess the level of integra-
tion of two markets for a particular product. Co-integration is a
statistical framework to test for short-run and long-run or steady-
state equilibrium relationships among several non-stationary
series (Liang et al., 1997). Granger (1969) introduced the inves-
tigation of Granger Causality to investigate the effectiveness of
one-time series to forecast another. However, Grangers causality
test does not measure the relative strength of the relationships;
neither can it distinguish between relationships that are real and
those that are spurious (Ziemer and Collin, 1984). Blank and
Schimiesing (1988) apply causality and path analysis to test for
spatial relationships between two markets.
New empirical approaches have considered the important role
that transaction costs have on spatial market integration. Liang
et al. (1997) and Goodwin and Piggot (2001) use established
methods to analyze the level of integration between two markets.
Baulch (1997) uses the parity bounds model mentioned above as
a way to test for the integration of food markets. The author
argues that conventional methods for analyzing co-movement of
food prices rely solely on price data and fail to capture the true
transfer costs of the products.
One should note that this paper does not seek to estimate the
level of integration between two markets but rather to simply use
the inefcient temporary price transmissions to develop prot-
able, commercialization strategies.
2.2. Objectives of the study
As described earlier, the growing complexity of the fresh
produce industry can reduce the visibility of the farmer in relation
to the nal consumer. As a result, the growing complexity of the
industry pressures the farmer to seek additional marketing
strategies that can help maintain his/her competitive position.
In this case, farmers may want to seek new commercialization
strategies within markets that have relatively low economies of
scale and ease of entrance. In the US, wholesale markets can
provide such an opportunity, since for the most part, the produce
industry has remained largely commodity-like and competition is
based mostly on pricing. Additionally, the volatility of wholesale
market prices can allow farmers to design strategies that can
diversify their operations in an opportunistic manner.
The objective of the study reported in this paper is to develop
a strategy from which a farmer with limited operations may
increase the commercialization reach of his/her perishable
products within wholesale markets. The basic strategy is to
continuously monitor two-market price differentials of fresh
produce items with the purpose of uncovering potential arbitrage
opportunities. This arbitrage opportunity will be in the form of
time-lagged price-differentials large enough to allow protable
two-market transactions.
 H. Flores, J.R. Villalobos / Int. J. Production Economics 142 (2013) 8997
Fig. 1. Proposed operational structure.
The main assumption of this operational structure is that the
base (primary) market has continuous and established operations,
while those in the secondary market are intermittent (Fig. 1). In
this case, one assumes that the production dedicated to the
continuous operations at the established market will be large
enough to fulll sudden opportunistic surges in demand within
the secondary market. As a result, it is assumed that that farmer
will always have enough inventory at the primary market to
take advantage of favorable price differentials as determined by
the model. Therefore, for all practical purposes, the inventory at
the established market used to supply the secondary market is
assumed innite.
Additional assumptions for the operational structure include:
(1) availability of daily wholesale price information at markets
(currently reported daily by the US Department of Agriculture),
which will be used to calculate the threshold level of the
shipment strategy, (2) an accessible secondary market due to
the relative ease through which a farmer can access wholesale
markets, and (3) a third-party transportation system for which a
per item transportation cost is incurred to move the products.
The motivation for this research comes from the current market-
ing practices for fresh produce observed along the USMexico
border, in which Mexican farmers sell their product FOB at the
installation of brokers and shippers on the US side of the border.
These brokers and shippers send the product to the markets in the
interior of the US. In this case, the underlying question is if the
farmers can increase their current prots by engaging in opportu-
nistic marketing of their products as a complement to their current
activities.
We believe that there is an opportunity to take advantage of
the characteristics of fresh produce markets through commercia-
lization strategies that can improve the revenues and reduce the
risk exposure of a particular farmer. As previously mentioned,
little to no research exists that attempts to develop commercia-
lization strategies based on the inefciencies of price transmis-
sion between markets. This paper looks to ll this gap.
3. Theory
The operational study developed by this study depends on an
arbitrage identication system whose primary goal is to max-
imize a farmers operational prots in a secondary market. The
key is to determine the optimal existing two-market price
91
differential at a point of time that would maximize the revenue
of a shipment at the time of its arrival at the secondary market.
The positive or negative outcome of that shipment decision will
be based on the lagged price differential when the product is sold
at the secondary market. Thus, the shipment decision will be
based on the future expectation of prot based on present two-
market conditions.
The basic approach is to determine the specic two-market
conditions that maximize the long-run expected prots of one-
time shipment decisions. To do this, an expected prot model is
developed that consists of four main components: lagged and
non-lagged price differentials, transaction costs, and a threshold
level to trigger a shipment from the base to the secondary market.
The decision to send a shipment is based on the non-lagged price
differential, and the actual prot is the lagged differential. The lag
is the transaction time of moving the product from the primary to
the secondary market. The transaction costs, assumed to be
constant, include transportation and all other costs associated
with selling the product in the secondary market.
For simplication purposes, the model considers a set transac-
tion cost between markets, as well as an acquisition cost of the
product at the base market.
The following parameters form part of the model:
Pi,t Product Price per pound at market i at time t
Cij Transaction cost between market i to market j
STime lag for performing the transaction between market I
and j
The lagged and non-lagged price differentials of the two-
market structure are dened as random variables, as shown by
the following:
x Pi,t P j,t 1
y P i,t s Pj,t 2
variable x depicts the price differential between markets i and j at
present time; that is, the differential with no lag in time. On the
other hand, the y variable depicts the lagged price differential,
which includes transaction time. The combination of these two
variables forms a two-variable density function f(x,y). We note
that x and y are correlated, since the actual prots captured
(lagged price differential) depend on the non-lagged differential.
92 H. Flores, J.R. Villalobos / Int. J. Production Economics 142 (2013) 8997

The decision component in the model is the non-lagged price Table 1

differential that triggers the shipment to the secondary market.
This decision variable, which dictates the expected prot model,
is dened as follows:
K non-lagged price differential. Thus, the expected prot
model is represented as:
Maximize:
ZZ 11
 
EPk P j,t s P i,t C ij nf x,ydydx 3
K1
ZZ 11
 
yC ij nf x,ydydx
K1
Thus, the objective is to nd the value of K that maximizes
the expected prot of a shipment based on present time condi-
tions. From this model, one can observe that the nal prot of the
shipments is the price differential between the secondary market,
j, at time t s and the price at the base market, i, at time t, minus
the transaction cost, Cij. This value is then multiplied by the
corresponding value of the joint probability density function (pdf)
of x and Y. In the previous model, a shipment is triggered based
on a preexisting price differential between the two markets, but
once the shipment is triggered it cannot be recalled and the actual
realization of the prot is determined by the conditions of
the secondary market when the shipment arrives, and that prot
can be positive or negative (we assume  N-N over the y
variable). In this case, the farmer cannot lose more than the value
of the shipment at the base market.
In order to nd the price differential that maximizes the
expected prot, the model is differentiated with respect to
the decision factor K. The resulting equation is then set to zero.
With some model manipulation, the nal optimal decision is
depicted in terms of the expected value of the y variable, or
the lagged differential, conditioned on the value of x, in this case,
the desired threshold level, K.
Z 1 Z 1
@ EPK f K,y f XY nK,y
 yn XY dy C ij dy 0 5
@K 1 f X K 1 f X K
Ey 9 x K C ij 0
Based on the structure of Eqs. (5) and (6), the expected prot
of a shipment is maximized whenever the conditional expected
value of the lagged differential is set to equal the transaction cost.
One should note that the conditional expectation on the non-
lagged differential in reality would be represented by the inequal-
ity x 4K. For simplication purposes, and without loss of general-
ity, we use the condition xK for the computation of the integral.
4. Results
To test the methodology, six important US consumer markets
were selected based widely on their geographical location
(Table 1). In order to fully capture the long-term behavior
of the two-market structure, a 10-year period of information
was used, which included daily terminal wholesale market prices
from January 2000 to December 2009 for different terminal
markets (USDA, 2012). These values were corrected for ination
by the Consumer Price Index; a time-dependent index that
measures the changes in the price level of consumer goods
(Department of Labor, Consumer Price Index, 2010).
The long-run average prices for those markets considered
suggest that continuous shipment operations in these structures
are not protable (Table 2). In order to capture the opportunities
that are present within the market price differentials, one has
to search for specic opportunity windows in which one might
be able to observe from gains from engaging in a two-market
Two-market structure characteristics.
Structure (transportation costlag time) Products
Dallas, TXAtlanta, GA ($0.01248/lb2 days) Tomato
Dallas, TXChicago, IL ($0.01845/lb2 days) Cucumber
Dallas, TXBoston, MA ($0.05516/lb3 days) Eggplant
Dallas, TXWashington D.C. ($0.02983/lb3 days) Squash
Dallas, TXNew York, NY ($0.05589/lb3 days) Bell pepper
4
Table 2
Long-term average prices over 10-year period.
Dallas ($) Boston ($) Atlanta ($) Chicago ($) DC ($) NYC ($)
Tomato 0.70 0.76 0.70 0.71 0.72 0.66
Squash 0.58 0.46 0.49 0.50 0.53 0.46
Eggplant 0.94 0.86 0.57 0.83 0.55 0.77
Cucumber 0.39 0.37 0.33 0.39 0.31 0.36
Bell pepper 1.07 0.67 0.99 0.97 1.01 0.84
trade. For this, one needs to inspect a bit deeper into the market
price differentials, in order to identify the specic opportunity
windows that indicate potential arbitrage in a two-market trans-
action. One should note that ample daily market price informa-
tion exists from the USDA Market News Report for each market
and that the application of the methodology described by this
study is applicable to any two-market structure. For purposes
of presenting a case-study for the methodology, an arbitrary two-
market structure was selected. In this case, the DallasBoston
two-market structure was arbitrarily selected.
Fig. 2 presents an in-depth glimpse of the tomato market price
differentials for an arbitrary selected year in the DallasBoston
two-market structure. The values observed in this gure account
for the non-lagged differentials between these markets during
2005. In this gure, each point above the zero marker represents a
potential arbitrage opportunity for the decision maker. The
encircled points at the left side of the gure represent opportu-
6 nities that may be a bit riskier given the high variability in
the differentials. On the other hand, those points encircled on
the right would mean more stable prot opportunities. The lagged
price differentials would represent the potential earnings
of shipments sent from the base to the secondary market condi-
tioned on positive non-lagged differentials.
One can gain additional information regarding the behavior
of these differentials over the 10-year period by summarizing
their statistical characteristics through a tted theoretical dis-
tribution. If one considers a stricter shipment condition (or
threshold level) on the non-lagged differentials for the Dallas
Boston structure, the observed mean and variance of the lagged
differentials become increasingly positive, as shown from
the histogram distribution in Fig. 3. In the right hand side of this
gure summarizes a tted logistic distribution (based on a
Pearsons Chi-Square Goodness of Fit Test) for each observation
histogram on the left, under various threshold levels.
As demonstrated, the mean prot of a single, one-time ship-
ment is increased as the threshold condition for the non-lagged
differential becomes stricter. However, as the threshold becomes
stricter, the number of opportunities also decline greatly. There-
fore, a strategic tradeoff between the number of opportunities
and the expected prots has to be determined in order
to maximize revenues. The model in this study indirectly solves
this problem. In this case, the DallasBoston market structure
is chosen arbitrarily to explain the applicability of the model.
For simplication purposes, a bivariate normal distribution
is assumed to represent the general behavior of the lagged and
 H. Flores, J.R. Villalobos / Int. J. Production Economics 142 (2013) 8997 93

Fig. 2. Lagged price differentials: DallasBoston.

Fig. 3. Histogram distribution under various thresholds.

non-lagged differentials of the DallasBoston market structure. prot model. Eq. (7) presents the conditional expectation of
This assumed distribution represents the joint probabilty function a bivariate normal distribution plus the transaction cost. This
that is used to evaluate the differentiated expected prot model expression represents the simplied version of the optimized
Eq. (6). Fig. 4 presents the visual representation of the adjusted expected prot model in Eq. (6).
bivariate normal distribution for the x and y values. As one can  
  xmx
observe, this bivariate function follows the general behavior E y9x K C ij my rsy C ij 0 7
of the lagged vs. non-lagged differentials scatter plot on the left
sx
part of the gure. Conditioning x on the value of K, one can evaluate the model
Assuming a normal joint probabilty function of the x and y, one and approximate the optimal threshold. As it was explained
can solve for the threshold value that optimizes the expected earlier, this solution is an approximation to optimality, since x
94 H. Flores, J.R. Villalobos / Int. J. Production Economics 142 (2013) 8997

Fig. 4. Assumed bivariate distribution for x and y.

is assumed equal to K, instead of the inequality (x 4K). The

additional parameters of the expected prot model are estimated
based on a normal distribution of emprircal data on x and y
(sx $0.1227/lb, sy $0.1301/lb, mx $0.0521/lb, my $0.0518/lb,
Cij $0.0552/lb, and r 0.8576).
 
  Kmx
E y9x K C ij my rsy C ij 0 8
sx
 
C ij my sx
K mx 9
r sy
 
0:05520:0518 0:1277
K 0:1227 10
0:8576 0:1301

K 0:05605
After substituting the indvidual values for each component,
one arrives at the solution K $0.05605/lb. Again, one must note
that in the decision process one would use the inequality K 4$ Fig. 5. Total and avg. prots per shipment vs. threshold value.
0.05605 as the optimal shipment criteria.

5. Validation and case study Table 3

Total and avg. prot per threshold value.
5.1. Validation
Threshold Cij Total Prot (in $1000s) Avg. Prot ($/lb)

The results of the model are assessed by a pragmatic applica- 0.0452 5395.584 0.0784
tion methodology. Under this approach, the long-run prots of 0.0502 5438.908 0.0836
one-time shipments are summed for different threshold condi- 0.0552 5502.928 0.0880
tions based on empirical market price data. The ultimate goal is to 0.0602 5522.660 0.0921
0.0652 5512.480 0.0972
identify the threshold that maximizes the sum of the shipment
0.0702 5487.104 0.1008
prots. In Fig. 5, the total historical prots are presented as a 0.0752 5490.544 0.1055
function of of the threshold (presented in the x-axis). The total 0.0802 5448.264 0.1113
historical prots are shown on the primary vertical y-axis, while
the average prots per shipment are shown on the secondary. The
total prots shown is in thousands of dollars assuming that a full
container (40,000 lbs of product) is sent whenever an opportunity
is presented. On the other hand, the average prots are presented Overall, one can conclude that the empirical results of this
in dollars per pound in a shipment. simple example tests the validity of the theoretical prot model.
As one can observe, the sum of the prots increase as the value Based on the results of this example, a farmer could potentially
of the threshold, K, is increased. The prots hit a maximum value expand his/her tomato operations into Boston by sending ship-
for some value of K and then start to decrease for higher threshold ments whenever the price differential with Dallas is above $0.065
values. Table 3 presents the actual values that are represented by per pound. Nonetheless, one also has to verify the applicability of
Fig. 5. In this table, one can see more clearly that the local maxima this model to an actual real-world situation. To do this, an
observed actually falls within the interval $0.0502/lboK o operational framework is developed based on more realistic
$0.0602/lb, which matches the results obtained from the theoretic market conditions. In this case, one would need to consider an
value. This means that the optimal price differential (without operational framework similar to that of Fig. 1, in which a farmer
considering transaction cost) that maximizes the long-term prot has base operations at a primary market but also aims to extend
models is above approximately K 4$0.06505/lb. the commercialization reach within a secondary market.
 H. Flores, J.R. Villalobos / Int. J. Production Economics 142 (2013) 8997
Fig. 6. Case-study of proposed operational framework.
5.2. Case-study
A potential representation to the framework developed in this
paper is the current situation of farmers from the northern
Mexican state of Sinaloa, who supply approximately 30% of the
fresh tomatoes consumed in the US during their winter harvest-
ing season (USDA Economic Research Service, 2010). And while
the vast majority of their commercialization operations are based
from the border town of Nogales, AZ, (mainly through brokers and
shippers) previous studies have shown a potential commerciali-
zation opportunity for a direct continuous operation in more
distant markets such as Dallas, TX, and Boston, MA, due to their
large average price differential (Fig. 6) (Villalobos et al., 2010).
These studies have also demonstrated the possibility of using
Dallas as a platform to reach secondary markets, such as Boston.
The real-world application of this paper uses Dallas as the base
market (continuous operation), while Boston is assumed to be the
secondary market. Also, the main product considered for com-
mercialization is tomato from the Mexican farmers in the state of
Sinaloa. In this case, Nogales, AZ, is considered the source of the
product, since it is currently the main entry point for Sinaloan
products into the US. The analysis of the case-study compares the
protability of operating under the two-market structure against
the estimated prots obtained from only commercializing in
Dallas. The analysis also compares the estimated prot variability
of both strategies.
5.2.1. Case-study assumptions
Before demonstrating the applicability of the methodology, it
is important to dene the assumptions and parameters used for
the model. As mentioned earlier, the level of commercialization
for the farmer is limited by the tomato harvesting season in the
Mexican state of Sinaloa, which ranges from November to May.
Thus, the data set used to develop the shipment policy is con-
strained to two full harvesting seasons (November 2007May 2008
and November 2008May 2009). The data consists of daily price
information at the shipping point of Nogales and the terminal
markets of Dallas and Boston. The price information is collected
from databases reported by the USDA market news report
(USDA Economic Research Service, 2010).
The estimated number of daily tomato containers crossing the
Nogales international border during the harvesting period is 68.
95
Table 4
Assumed transaction and perishable costs.
Perishability costs 3% loss per day in transit
In transit inventory cost 10%ndays in transit/196nvalue
Final margin captured 90% of Lagged Differential
Since the case-study considers the situation of a small farmer, one
assumes that the farmer can only capture 15% of this daily tomato
supply. This means that the farmer will only send 10 container
shipments each with a capacity of 40,000 lbs of tomato, whenever
there is an opportunity in the base market. Once the shipment
arrives, the decision maker will decide whether to send one
container from the initial shipment to the secondary market or
to sell the full shipment at the base market. When a one container
shipment is sent to the secondary market, the rest of the contain-
ers will remain in Dallas and sold at its market price.
For purposes of the case-study, additional transaction and
perishable costs are considered in order to better represent the
real-world situation (Table 4). The cost associated to the products
loss in value due to its perishable characteristics is assumed to be
3% loss per additional day in transit. In other words, the tomato
shipment is assumed to lose 3% of its original value (price at its
source in Nogales, AZ) each additional day in transit. Added to this
cost will be the in transit inventory cost of the product (In transit
inventory cost Value at source  10%  (days in transit/days in
season)). Additionally, one assumes that the farmer will only
receive 90% of the nal lagged price differential, since there may
be hidden miscellaneous transaction costs between the source,
base and secondary markets. Finally, the transportation cost and
transportation lag are assumed to remain the same as those
reported in Table 1.
5.2.2. Model results
Empirical price data of Nogales, Dallas, and Boston, and their
respective differentials, are used to dene the parameters of the
model. Based on these parameters, the optimal threshold values
for NogalesDallas and DallasBoston are calculated using the
proposed theoretical model (Table 5). For the NogalesDallas
structure, the calculated threshold level for the shipment policy
is $0.006/lb. This relaxed shipment policy is to be expected given
96 H. Flores, J.R. Villalobos / Int. J. Production Economics 142 (2013) 8997

Table 5 Table 7
Model Parameters/Output. Protability summary with two container shipments.

Model components Nog to Dal Dal to Bos Two-market Only Dallas Difference
structure (7 )
Observed non-lagged diff (mx) $0.402/lb $0.141/lb
Observed lagged diff (my) $0.401/lb $0.124/lb Number of containers 776 776 0
Assumed transaction cost (Cij) $0.061/lb $0.126/lb To Dallas 623 776  153
Standard deviation (sy) 0.166 0.159 To Boston 153 0 153
Standard deviation (sx) 0.153 0.161 Avg. prot per container $14,247 $13,191 $1056
Correlation (r) 0.933 0.790 Avg. cost per container $22,046 $20,835 $1211
Standard deviation 10,532 11,328
Theoretical K (model) $0.006/lb $0.143/lb Coefcient of variation 0.371 0.429  0.058
Actual K (data-based) $0.006/lb $0.150/lb (s/m)
Error (%) 4.54% Total prots $11,055,839 $10,236,154 $819,685

Table 6
Protability summary with 10 container shipments.
Two-market Only Dallas Difference(7 )
structure
Number of containers 3880 3880 0 size.
To Dallas 3727 3880  153
To Boston 153 0 153
Avg. prot per $13,402 $13,191 $211
container
Avg. cost per container $21,077 $20,835 $242
Total prots $52,000,456 $51,180,771 $819,685
the large average price differential between the two markets. In
this case, the theoretical value of the optimal threshold matches
the actual differential that maximizes long-term prots on the
shipments.
On the other hand, the calculated theoretical value for the Dallas
Boston structure is much higher at $0.143/lb, due to the smaller price
differential between markets and the higher transaction cost. This
means that commercialization in this market is intermittent and
depends on the availability of arbitrage opportunities. For this
market structure, the actual threshold that maximizes long-run
prots based on a pragmatic approach is $0.150/lb, which is
obtained by manually varying the shipment threshold until the
long-term prot is maximized. This means there is a 4.54%
difference (or error) between the theoretical and actual value,
further conrming the validity of the proposed model.
If one follows this shipment policy, 388 shipments (3880
containers) are sent to the base market out of the 392 available
times during the two harvesting seasons. Out of the 388 ship-
ments, 153 one container shipments are sent to the secondary
market when there is an opportunity. The rest of the containers
are sold in Dallas (approximately 3727 containers). A summary of
these results are presented in Table 6, including the average prot
and cost per container. Also, in this table is a comparison between
the protability of entering Boston, as opposed to only commer-
cializing in Dallas.
As one can observe, the total prots are much higher for
operating under the two-market structure. The difference in
prots over the two harvesting season is estimated to be approxi-
mately $819,685. Also, the average prot per container is approxi-
mately $211 more under the two-market structure, while the
costs per container are $242 higher. Nonetheless, it is also
important to compare the prot variability of diversifying the
farmers operations within two markets, as opposed to only using
Dallas.
Since we are interested in comparing the variability under
both strategies, one would like to remove any dependence on the
shipment size. Thus, one assumes that only two containers are
shipped from the source in Nogales. When the shipment reaches
Dallas and an opportunity is observed in the secondary market, a
single container is sent to Boston and the other is kept at the base
market. For both instances, the shipment threshold calculated
earlier remains unchanged, since it is independent of shipment
To calculate the prot variability, one has to consider the
percentage of the time that an opportunity is identied at the
secondary market. As mentioned earlier, an opportunity was
observed in Boston 153 times out of the total 388 shipments
made to Dallas, which is approximately 39.43% of the time.
Furthermore, the variability of the structure should also include
the variance at both markets during times of opportunity, as well
as when there is no opportunity.
The following details the variables used for calculating this
variability:
p Percentage of time there is an opportunity in
secondary market
X1 Prot in base market only (without considering
opportunity)
X2 Prot in base market (including opportunity)
Y Prot in secondary market (including opportunity)
X1 is the prot data set observed only at the base market, if no
shipment is sent to the secondary market. On the other hand, X2 is
the prot data set observed at the base market including the
times when there is an opportunity in the secondary market. Also,
Y is the prot strictly from selling at the secondary market. Lastly,
both X2 and Y occur p % of the time, while X1 occurs (1 p)% of
the time.
Using this terminology, then one is able to describe the steps
taken to estimate the variance of the two-market structure:
Var1pX 1 pX 2 Y  11
Var1pX 1 pX 2 pX 3  12
1p2 Var X 1 p2 Var X 2 p2 VarY
21ppCovX 1 ,X 2 21ppCovX 1 ,Y 2p2 CovX 2 ,Y 13
Based on the calculation of variance, the estimated standard
deviation of the prots under the two-market structures is
approximately 10,532. On the other hand, the standard deviation
of only commercializing in Dallas is estimated to be 11,328.
Table 7 presents a summary of the prots under this scenario.
This table also includes the Coefcient of Variation (std. deviation/
mean prot per shipment) for each strategy, in order to compare
their variability.
As one can observe, the Coefcient of Variation of the two-
market structure is approximately 0.371 which is slightly lower
 H. Flores, J.R. Villalobos / Int. J. Production Economics 142 (2013) 8997
compared to the 0.429 of only commercializing in Dallas. This
occurs due to the diversication of the operations and the less risk
observed in two markets, as opposed to only using Dallas. This
also serves as further encouragement for a farmer with limited
resources to participate in the secondary market, in addition to
the extra $819,685 in estimated prots.
5.3. Discussion
The results of the case-study show that the protability of
opportunistically sending one container shipments to a secondary
market is much more protable than only commercializing in a
single base market, even when the long-run conditions do not
permit continuous operations. Most importantly, the results of
this case-study demonstrate the validity and applicability of the
proposed theoretical model, which would allow a farmer with
limited resources to extend his/her commercialization reach,
increase prots, and lower the variability of his/her operations.
The results of this paper indirectly extend current research
regarding inefcient market price transmission and opportunities
in highly volatile markets of perishable items. Specically, this
paper provides a practical approach to beneting from the
economic opportunities derived from market price inefciencies.
6. Final conclusions and future research
This paper developed an operational framework from which a
farmer with limited operations may increase the commercializa-
tion reach of his/her perishable products. The key component of
this framework is an optimal threshold model that demonstrates
the protability of operating within two fresh produce markets
that under normal conditions would not allow continuous pro-
duct transaction, either due to small price differential or high
transaction cost. The model calculates the optimal price differ-
ential that would maximize long-run prots within two-market
transactions by identifying arbitrage opportunities caused by
market price variability inherent to the fresh produce industry.
The application of the methodology would potentially allow mid-
to-low level farmers with limited investment capability to max-
imize the protability of their operations and extend their
commercialization reach in distant markets. The validity and
applicability of this model is demonstrated through the applica-
tion of a case-study.
Since the model attempts to develop commercialization stra-
tegies based solely on market opportunities created by momen-
tary price conditions, there are some limits to its application.
Future research could incorporate additional features into the
model, such as dynamic transaction costs, that may improve its
reliability when making shipment decisions. One could also
enhance the models application to strategic decision-making by
considering different inventory policies at the base market.
Finally, one should note that the application of the model can
only be applied to perishable items that observe uctuating
terminal market prices that may result in arbitrage opportunities.
The strategy may not perform well for products or markets that
do not observe these characteristics.
Opportunities for extending the scope of the developed meth-
odology include the development of risk assessment and risk
management strategies that could hedge against potential prot
97
loss due to wrongly identifying an opportunity. Also, one can
consider a higher resolution on the transaction costs, which for
purposes of this model was kept constant. Finally, one could
develop short-term strategies similar to binomial lattices, in
which one can estimate short-term probabilities of prots and
losses per individual shipments.
Acknowledgment
This material is based upon work supported by the National
Science Foundation under Grant No. IIP-0839969.
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