New mechanism of credit risk control in order agriculture
by Dongwei Shi
International Journal of Industrial and Systems Engineering (IJISE), Vol. 44, No. 4, 2023

Abstract: The bilateral default rate of farmers and companies is usually high in contract farming. Inspired by the rule of 'mark-to-market' in futures market, this paper proposes a new 'mid-term mark-to-market' model of contract farming to avoid the bilateral default risk. We design of the contract farming coordination mechanism under the new model and give the explicit expressions of the optimal decision-making as well as the incomes of companies and farmers. Taking soybean production as an example, empirical study is conducted to compare the bilateral expected return and default probability of the new model compared to the traditional order model. The research results show that the new proposed model can increase the total expected return and reduce the bilateral default rate of farmers and companies. Among them, the inhibitory effect on default rates of the new model is particularly significant.

Online publication date: Wed, 09-Aug-2023

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