Research Article: Impacts of external shocks on the decisions of hog supply chains under liquidity constraints from the perspective of commercial credit

Date Published: March 4, 2019

Publisher: Public Library of Science

Author(s): Jiamei Wang, Xinhui Wang, Hongshu Li, Yuxuan Liu, Gangyi Wang, Stefan Cristian Gherghina.

http://doi.org/10.1371/journal.pone.0212707

Abstract

Certain attributes of the hog industry increase the production risk in nodal enterprises of the hog supply chain, leading to high financing costs and eventually resulting in liquidity constraints. When the hog supply chain node enterprises are subjected to external shocks, on the basis of the commercial credit relationship in the supply chain, the entire supply chain generates liquidity risks and systemic risks. We analyze the input and output of the hog supply chain node enterprises under the constraint of liquidity, construct the mathematical model, discuss the dynamic differences of liquidity constraints in different situations, and measures the commercial credit risk and anti-risk ability of the pig supply chain node enterprises. If the external shock is less than a certain value, the current profits of the hog enterprise can entirely make up for the loss caused by external shocks, and the production of the firm will return to its state of equilibrium. If the external shock is large enough, liquidity constraints will seriously restrict the production input of the enterprise, which then leads to a deceleration of production input and may ultimately result in bankruptcy. We believe that the structure of the hog industry supply chain should be constantly adjusted to optimize the industrial upgrading and organizational form of the hog supply chain.

Partial Text

The hog industry has been an important part of China’s agricultural sector; the consumption of pork accounts for over 60% of China’s total meat consumption. The hog industry features a few dominant large enterprises and most are small and medium-sized enterprises, the most representative of which are hog-breeding companies. The main body of the culture is still dominated by retail investors, accounting for up to 70%. As a result of asymmetric information and agency costs, investment in and financing of hog-breeding enterprises often face severe liquidity constraints. Traditional lending cannot fully meet the capital needs of industrialized agriculture, and small-scale private enterprises face serious credit rationing and credit discrimination in the present bank credit system [1]; thus, liquidity constraints are still a serious problem faced by hog enterprises.

Inputting the values above into formulas (1), (2), and (3) yields the following results: σ1 = 8.51, σ2 = 12.15, σ3 = 53.5 (the unit is ten thousand yuan). According to these results, we can arrive at the following basic results:

With serious information asymmetry and credit rationing in the capital market, liquidity constraints inevitably appear in firms of different sizes. Furthermore, nature restricts the production operations of firms and thus affects the strategic decisions regarding investment and financing. The liquidity constraints hypothesis considers that the investment level of a company depends on the level of profit or anticipated profit as a result of imperfect capital markets. Commercial credit has increased in the financial market due to its financial function, the stabilizing order, the quality of inventory and other advantages; it effectively eases liquidity constraints for a company as a type of alternative financing [2–4]. Recent data indicate that the cost of hog breeding is becoming increasingly high and that the demand for funds in the hog industry is becoming increasingly great, whereas the supply of funds available from the financial markets remains seriously inadequate. Moreover, defects and high risks associated with hog breeding, abnormal fluctuations in market prices, epidemic diseases, natural risks, and other external shocks dramatically affect the hog industry such that a liquidity shortage increases the liquidity risk of firms. The contractual relationship involved with commercial credit causes the negative effects of external shocks acting on other firms in the hog supply chain to generate a systemic risk that contributes to liquidity constraints in the whole hog supply chain.

 

Source:

http://doi.org/10.1371/journal.pone.0212707

 

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