The impact of financial institutions on exchanges in the agricultural commodity supply chain: An information economics perspective

Abstract

Recent advances in supply chain research point to the vital but often overlooked role of financial institutions, such as banks and financial markets, in the execution of supply chain activities. We extend this incipient research stream by drawing on information economics and Penrose's resource-based view of the firm to theorize about how financial markets act as a source of information and influence exchange activities in the agricultural commodity supply chain. We test our hypotheses in the U.S. agricultural commodities context, specifically the U.S. rice industry, using a novel data set that combines financial market data with proprietary data on exchanges between farmers and customers. Time series econometric analyses reveal that information from financial markets influences exchanges between farmers and customers, but it has asymmetric effects depending on exchange dynamics and local market conditions. Overall, our analyses support our hypotheses and advance supply chain research by building theory about market-based exchange dynamics and by broadening the scope of mechanisms through which financial institutions impact exchange activities. For practice, we offer quantitative insights that can be leveraged by farmers and purchasing managers. For policymakers, we offer timely guidance related to the provision of information and the ‘real’ implications of financial markets.