Uncertainty effects on production mix and on hedging decisions: The case of Brazilian ethanol and sugar

A robust optimization model to define production, storage and hedging strategies is proposed. Uncertainty sets on returns are constructed based on a state space model (Kalman Filter). The presented model was applied to Brazilian ethanol and sugar markets in different economic scenarios. The study analyses efficient frontiers and optimal strategies and the results indicate that, even adopting good price forecast models, the optimal strategies can be deeply affected by uncertainty.