Abstract
The risk management for agricultural products supply chain is more complex than that for typical manufacturing supply chain. Agricultural production is vulnerable to severe weather such as heavy rain, cyclones, and cold wave, which challenges the matching of random output with random demand for agricultural products supply chains. The goal of this paper is to design an effective risk transfer mechanism for managing severe weather risks so as to ensure the stable operation of the agricultural products supply chain. We study the coordination of two‐level agricultural products supply chain with a single company and a single farmer under the influence of severe weather. Taking rainstorm weather as an example, this paper designs a risk transfer mechanism based on weather index (rainfall) insurance: “rainfall index insurance + revenue sharing + risk transfer fee.” It is found that this risk transfer mechanism can overcome distortion of the farmer’s agricultural investment level under the influence of severe weather. When the contract parameters meet certain conditions, using the risk transfer mechanism can achieve the supply chain coordination and a win‐win situation. More importantly, weather change does not affect the Pareto improvement of the company and the farmer under the risk transfer mechanism. In addition, we also find that the company can incentivize the farmer to purchase weather index insurance and use the insurance market to shift the severe weather risk encountered during the agricultural production to protect the company’s and farmer’s income and the stable operation of the supply chain.
Highlights
Agriculture is one of the most weather-sensitive industries
Based on the application of weather index insurance in agricultural practice and the characteristics of agricultural production in developing economies, this paper studies the two-level agricultural products supply chain system consisting of a single company and a single farmer
We focus on the design of a decentralized agricultural products supply chain coordination contract by the risk transfer mechanism based on weather index insurance
Summary
Agriculture is one of the most weather-sensitive industries. There is a clear coupling between agricultural production and weather changes, and it is complex and special in developing economies [1]. In response to the weather risk encountered in agricultural production activities, some experts studied the design of the corresponding contract mechanism from the dimension of supply chain operational hedging in order to minimize the losses caused by weather risk [5,6,7]. The development of the financial derivative market in developing economies lags behind These make it difficult to transfer disastrous weather risk during agricultural production through weather option in agricultural practice. This paper, taking rainstorm disastrous weather as an example, aims to design a risk transfer mechanism based on weather index (rainfall) to reduce the impact of severe weather on agricultural products supply chain to improve the company’ s and the farmer’s income.
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