Supply chain coordination in contract farming under yield uncertainty and alternative agricultural subsidy policies

Food grain subsidies and contract farming are two important institutional arrangements for stabilizing agricultural production and improving farmers' incomes. However, the effectiveness of these policies and organizational arrangements depends critically on the interaction between subsidy mechanisms and supply chain contracts. To examine this interaction, we develop a Stackelberg game model of the operational decisions and coordination of a contract farming supply chain under two major agricultural subsidy programs: the Target Price (TP) program and the Producer Direct (PD) program. Our analysis yields several important insights. First, both subsidy schemes increase the company's profit relative to the no-subsidy benchmark. For farmers, however, the TP scheme does not always yield higher profits than the no-subsidy case. When the farmer's production cost coefficient is relatively low, the subsidy induces substantial expansion of planted acreage. As the Stackelberg leader, the company responds by substantially reducing the wholesale price. This adjustment redistributes part of the benefits generated by the target-price subsidy from farmers to the company. Second, the traditional wholesale-price contract fails to coordinate the contract farming supply chain in the presence of government subsidies. To address this issue, we propose a “wholesale price + fixed transfer” contract that effectively coordinates the supply chain. Third, our analysis reveals an important welfare implication: despite double marginalization, the wholesale-price contract may generate higher social welfare than the coordinating contract under the PD program when the subsidy level exceeds a certain threshold. These findings enrich the literature on agricultural subsidy policies and contract farming supply chains. They also offer useful guidance for designing subsidy mechanisms and coordination contracts that improve economic efficiency and social welfare in agricultural systems.