Optimization of the Biofuel Supply Chain With Capital-Constrained Farmers Under Government Subsidies

Abstract

China's biofuel industry faces the problem of insufficient supply of biomass feedstock because farmers lack the funds to carry out their planting plans. Moreover, natural disasters can easily expose farmers to bankruptcy risks, making it difficult for farmers with limited capital to obtain financing from banks. This paper studies the government's subsidy programmes for helping farmers obtain financing: a poverty alleviation programme (PAP) and a social welfare programme (SWP). We construct a biofuel supply chain model including the government, the bank, farmers, and companies, which optimizes the biomass feedstock production and the government subsidy in different subsidy programmes. We find that high planting efficiency leads to a lower subsidy interest rate for farmers in PAP, while in SWP, high planting efficiency can promote the government to set higher subsidy interest rate when the competitive intensity between bioenergy companies is weak. Furthermore, the total biomass feedstock planting area and the optimal subsidy interest rate in SWP are larger (smaller) than those under PAP when the planting efficiency is higher (lower) than a certain threshold. An extension of our model shows that the government's subsidy policy for the farmer with financial constraints will reduce the benefits of the farmer who does not need to borrow from the bank. The government's failure to implement subsidy programmes can sometimes lead to a higher total income for farmers.

Keywords

• Supply chain finance
• biofuel supply chain
• yield uncertainty
• government subsidy