Financing and production decisions of capital-constrained agricultural cooperatives under risk mitigation in China

Abstract

Abstract

This paper studies financing and production decisions in a capital-constrained, risk-averse agricultural cooperative, where farmers participate through land-based equity contributions. The cooperative finances its operations through a risk-averse bank and contracts with a processing company to ensure stable product distribution. Facing volatile market prices and risk aversion of both the cooperative and the bank, we develop a constrained optimization model to characterize farmers’ optimal land contributions and the cooperative’s production input decisions. The results show that the cooperative can effectively attract farmers’ participation through rational financing and production decisions. The cooperative’s degree of risk aversion plays a critical role in shaping farmers’ land contribution choices, which are further influenced by the cooperative’s revenue-sharing arrangement and the scale of farmers’ production. Moreover, bank lending constraints weaken the cooperative’s optimal production and financing decisions. Finally, excessively high or low dividend ratio allocated to the cooperative, and fixed per-unit land returns, may generate adverse incentive effects. This research quantifies the critical trade-offs among farmer income security, cooperative operational efficiency, and bank credit risk control within the context of contract farming. The findings provide implications for the design of cooperative profit-sharing contracts, rural credit mechanisms, and risk-based lending policies in agricultural supply chains.