Coordination for contract farming supply chain with stochastic yield and demand under CVaR criterion

Abstract

This paper analyzes the optimal production and pricing decisions in an agricultural supply chain formed by contract farming scheme consisting of an agribusiness firm and multiple risk-averse farmers. The effects of yield and demand uncertainties and the farmer’s risk aversion on the optimal decisions of the production quantity, wholesale price and retail price are analyzed. Our analyses provide managerial insights on the contract terms of the agricultural supply chain. We show that the production quantity decreases as the farmer is more risk-averse and faces higher yield uncertainty, while the retail price subsequently increases. However, the wholesale price is influenced by the interaction effect of the farmer’s risk aversion and yield uncertainty. The retail price is influenced by the interaction effect of demand uncertainty and price elasticity. In particular, we show that the loss due to the decentralized decisions increases as the farmer is more risk-averse and yield uncertainty is higher. Thus, a RPG (Revenue sharing + Production cost sharing + Guaranteed money) mechanism is developed to facilitate the coordination of the agricultural supply chain under uncertainty environment with risk-averse agents based on contract farming practices. The cost allocation ratio of the RPG mechanism borne by the agribusiness firm increases in the yield and market demand uncertainties and decreases in the farmer’s risk aversion. Specially, if the farmer is extremely risk averse, as well as the yield and demand becomes extremely higher, the RPG mechanism cannot achieve perfect coordination of the agricultural supply chain.