Production promotion versus liquidity constraints: Agricultural production loans and farmers' staple crop storage behavior

Abstract Extensive research has documented the benefits of agricultural production loans, yet limited studies address the impacts of liquidity constraints during harvest season due to loan repayment obligations. This study examines how agricultural production loans influence farmers' crop storage decisions. Based on a theoretical two‐period household model, we demonstrate that the net effect of such loans on grain storage behavior is ambiguous, contingent upon the relative dominance of liquidity constraint relief versus production enhancement incentives. Utilizing data from the China National Fixed‐Point Survey (2004–2014), our empirical analysis using fixed‐effect models corroborates the theoretical predictions. Specifically, we find that agricultural production loans negatively affect wheat storage and the storage‐to‐output ratio for wheat. Conversely, these loans positively correlate with storage levels and storage‐to‐output ratios for maize and soybeans. Additionally, our results indicate a negative impact on rice storage but no significant effect on the rice storage‐to‐output ratio. Further analysis reveals that, compared with wheat and rice, maize and soybeans have a higher output return of capital input. Furthermore, we find agricultural production loans raise household income and consumption.