Financing an agricultural supply chain with a capital-constrained smallholder farmer in developing economies

Abstract

We consider an agricultural supply chain consisting of a capital-constrained smallholder farmer and an intermediary platform. The smallholder farmer sells agricultural products through the intermediary platform but lacks financial resources for planting. In addition to traditional bank financing (provided by a bank), the creditworthy intermediary platform can provide loans directly to the farmer (known as direct financing) or serve as a guarantor if the farmer's creditworthiness is insufficient to access bank loans (known as guarantor financing). We show that under guarantor and direct financing, the smallholder farmer's production level can be even higher than that in a centralized system. The farmer prefers direct financing when the production cost is low but the unit commission fee is sufficiently high. Otherwise, he prefers guarantor financing. The intermediary platform will encourage the farmer to resort to bank financing when the farmer's production cost is sufficiently high and the commission fee is low. Otherwise, it will provide direct financing. Guarantor financing makes the platform weakly worse off than direct financing and will be adopted only when the platform is also capital-constrained. The involvement of the intermediary platform significantly improves the welfare of the farmer and the total profit of the supply chain. Moreover, the increased concern for social responsibility of the intermediary platform can lead to a win-win-win outcome for the farmer, the platform, and the whole supply chain.