Abstract: Contract farming supply chain is one of the popular research areas in recent years, which can use different financial instruments to fundamentally relieve the financial pressure of agricultural production, and ensure the balance of supply and demand in the market. However, the risk-averse characteristic of farmers curbs their willingness to finance when they face with financing and interest rates. In order to relieve the pressure on farmers' interest rates and increase farmers' willingness to finance, the government has been implementing some subsidy policies. Based on this, this paper considers a contract farming supply chain consisting of a company, a farmer and the government. In this model, the company signs a contract with the farmer, agreeing to purchase all of the farmer's agricultural products at the end of the production period. At the same time, the company provides the farmer who is limited capital production financing aimed to help the farmer purchase agricultural materials such as seeds and fertilizers. In addition, the government provides interest subsidy at the end of the production period to relieve the pressure on the farmer's interest rates (i.e., a subsidy is paid to the farmer based on the amount of the financing after the production period). Different from the company's perspective in many literatures, this paper aims to explore how government influences the quantity planted by farmer and purchasing price of company to improve the supply chain and social welfare by formulating loan subsidies in the "company + farmer" mode of contract farming. And different from the simple assumption about farmers' initial capital in many literatures on supply chain financing, this paper classifies farmers based on the amount of their own capital. Specifically, we developed three decision models: no financing model (NF), financing model without government subsidy (FNS), and financing model with government subsidy (FS), in which production quantity, purchasing price, financing ratio, and government subsidy discount ratio were considered as decision variables. Given different initial capital scenarios, we compare the decisions made by the different participants and then propose a differentiated government subsidy policy. The main findings include:(1) government subsidy can improve social welfare, but the effects are affected by the amount of farmer's capital, which implies the necessity of setting differential subsidy ratio based on classification of production funds; (2) government subsidy is more significant for the first and second type of farmers to increase production and income and improve social welfare, but it is not suitable for the third type of farmers; (3) for the second type of farmers, the company would suppress the purchase price to limit the profit growth of farmers and capture the benefits of the subsidy. Based on this, we propose an improved government subsidy solution integrating the discount subsidy and a minimum purchasing price strategy. The range of key purchasing price parameters was offered, which can help the government adjust the profit proportion between company and farmer, and further guarantee the stability and development of the contract farming supply chain. This paper provides a decision reference for the government to formulate diversified and targeted agricultural policies.

Key words: contract farming supply chain, production materials financing, initial capital, government subsidy policy