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Impact of Climate Change On Agricultural Production Decisions

We analyze the optimal production and inventory assortment decisions of a seed manufacturer facing increased yield variability triggered by extreme weather conditions in addition to long supply lead times as well as supply and demand uncertainty. We also investigate the limits of operational flexibility in the form of postponement using simulation models that are calibrated through field data. Our analysis shows that a minor increase in future yield variability leads to a large increase in the optimal seed production quantities. Such a rise would not only significantly increase the seed manufacturer’s working capital requirements, but may also make its current supply capacity inadequate to fulfill its optimal production plans. We also show that the value of postponement decreases with higher yield variability, which also renders low-margin seeds more susceptible to this volatility.