Government Subsidy Strategy Considering Weather Options under Adverse Weather Conditions

Abstract

Under the joint impact of adverse weather and demand uncertainty, fresh agricultural product supply chains (FAPSCs) face significant challenges, including yield volatility, quality deterioration, and price instability. To address these issues, this paper develops a two-echelon supply chain model consisting of an agricultural cooperative and a retailer. A weather index is introduced to capture the joint effects of weather conditions on both yield and product quality, while weather options are incorporated as financial instruments for risk hedging. We consider three policy scenarios: no government subsidy, subsidies to the agricultural cooperative, and subsidies to the retailer. A Stackelberg game framework is established to analyze the optimal decisions of supply chain members and evaluate their economic performance under different subsidy schemes. The results show that adverse weather reduces agricultural input investment and leads to higher wholesale and retail prices, thereby decreasing supply chain profits and social welfare. Government subsidies can effectively mitigate the negative impacts of weather uncertainty. Moreover, different subsidy schemes have heterogeneous effects, and subsidizing the agricultural cooperative is more effective in reducing wholesale prices, increasing input investment, and improving overall social welfare. In addition, weather options significantly enhance the supply chain’s ability to hedge weather risks and improve system stability. his study provides theoretical insights for optimizing government subsidy policies and integrating financial derivatives into agricultural risk management.