Abstract
Agricultural production faces several types of risk, and risk management tools vary by place, season, and crop type. Most farmers use multiple risk-minimizing tools to reduce the effects of various hazards. However, previous research has overlooked the potential connections between different risk management tool utilization decisions. This study examines farmers’ decisions of adopting risk management tools (contract farming and precautionary savings) and investigates the impacts of various factors on farmers’ risk management decisions by using bivariate and multinomial probit models. The study was carried out in four different agro-ecological regions of Bangladesh with 350 farmers chosen through multistage stratified random sampling procedures. The findings revealed that the farmers’ decisions towards adopting risk management tools are correlated, and the adoption of one risk management tool may induce farmers to adopt other risk management tools at that time. Moreover, the results revealed that age, education, income, and land ownership are the major factors affecting the adoption of risk management tools, and most farmers are risk-averse in nature. Both models provide interpretation and information for the development of a better understanding of the current situation of rural farm households, which may serve as a platform for policymakers who are anticipating appropriate risk management tools for the farmers.
Highlights
Risks and uncertainties are closely related to agricultural activities due to the uncertain economic and biophysical circumstances according to which farming operates [1]
For the two adoption choices for risk management (RM), the coefficient of correlation is the paired association among the error terms of the two equations in the bivariate probit model to infer the selection of probit models from either bivariate or individual probit models [55]
The outcomes of our study are in agreement with Cahyadi et al [56], Deressa et al [57], and Wencong et al [55], who discovered a positive influence of age on implementation of contract farming, though Wainaina et al [58] established a negative relationship between age and acceptance of contract farming
Summary
Risks and uncertainties are closely related to agricultural activities due to the uncertain economic and biophysical circumstances according to which farming operates [1]. Uncertainty, and agricultural production are inextricably related to income (variable returns) and have consequences for decision making in a specific time period [4]. It is important to be aware of risks, uncertainties, and the available options for mitigating these conditions [7]. Examples of risks and uncertainties include variations in frequency and intensity of rainfall, temperature fluctuations, crop diseases, and more. The prevalence of these risks makes the agriculture sector more risk-prone than other industries [8], and affects other sectors of the economy [9]. The common risk-reducing strategies include crop diversification, off-farm and on-farm diversification, forward hedging, contract farming, crop insurance, and precautionary savings, each of which has been used by farmers in Bangladesh for managing the risks and uncertainties of agriculture
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