Demand information sharing in a contract farming supply chain

Abstract

Contract farming is vital to protecting small farmers against market price fluctuations, and has grown rapidly. Demand information plays an important role in balancing supply and demand. However, most previous studies have overlooked demand information sharing by for-profit companies in contract farming. In this study, we present a stylized model of a for-profit company signing a contract with one farmer or two farmers. In the case of two farmers, due to the different transportation costs, the company first orders from farmer 1 and then from farmer 2. The order quantities are constrained by the farmers’ actual outputs. We analyze the company's demand information-sharing strategies and obtain interesting results: (1) the company prefers to share positive demand information and withhold negative demand information with all farmers if the production cost is low. Surprisingly, when the production cost is high, the company only shares demand information with farmer 2. (2) When information is withheld from farmer 1, farmer 2 is more responsive to information. This is caused by farmer 1’s advantage of being the preferred supplier. Additionally, farmer 1 always obtains its maximum profit, but farmer 2 does not always achieve optimal profits under the company's optimal strategies. (3) We find that maximizing social welfare is not the most beneficial strategy for each farmer. Finally, we use Wens’ sales data to conduct a case study and provide several new management insights for partners in contract farming.