An analysis of risk attitudes and risk management strategies among dairy farmers in Murang’a county, Kenya

Abstract

Kenya‟s dairy sector has been reported as a success story, with over 70 percent of the gross marketed output produced in smallholdings. Despite the celebrated success which has seen a number of processing plants established, and the export market opportunities coming up, the sector is not without problems. At the primary level, one of the biggest challenges among many is variations in milk supply attributable to over-reliance on foliage produced under uncertain rainfall conditions, exacerbated by climate change. These challenges and uncertainties bring about the element of risk in Kenya‟s dairy farming. Farmers‟ mitigation strategies, however, are not clear. This study therefore set out to determine the risk attitude of farmers, the risk management strategies that they use and the socio-economic factors affecting their choice of Risk Management Strategies (RMS). This is in a bid to understand how best to reduce the effects of the risks and in turn reduce the adverse agricultural output and income instabilities. The study was carried out in Murang‟a County where 212 households were interviewed. The Certainty Equivalent approach was used to determine the farmers‟ risk attitudes while descriptive analysis and factor analysis were used to assess the major RMS. Factor analysis was also used to assess farmers‟ perception of the most important RMS and Probit regressions were applied to evaluate socioeconomic factors that determine choice of RMS. Results indicate that 73 percent of the farmers were risk averse, 22 percent were risk loving while 5 percent were risk neutral. The major RMS used by dairy farmers were found to be income diversification, training and financial interventions. The 5 strategies the dairy farmers perceived as most important are financial strategies, training strategies, income diversification strategies, labour strategies and insurance strategies. The results further indicated that choice of income diversification RMS was determined by gender of the household head, distance to the v tarmac road, perception on financial strategies and perception on the importance of income diversification strategies. The choice of training RMS was found to be determined by membership to a farmer group, access to extension services, credit access, agro-ecological zone, household size, wealth index, distance to the tarmac road and perception on the importance of training strategies. The choice of using financial RMS was found to be significantly influenced by membership to a dairy cooperative, gender of the household head, credit access, risk attitude, total land size, perception on the importance of financial strategies and perception on the importance of labour strategies. The study recommends that extension officers together with financial service providers should develop women training programs aimed at disseminating information on good financial risk management strategies within the dairy industry. This will increase farmers‟ knowledge on risk management which will consequently increase farmers‟ uptake of the RMS. In addition, extension officers in collaboration with dairy cooperatives could help in establishing farmer groups through which the extension officers can use to disseminate agricultural information that is related to risk management. This will enable farmers have better access to information and will help influence the uptake of training RMS and financial RMS. Finally, the results indicate that majority of the farmers are risk averse therefore they would be potential clients for insurance packages whose uptake would help in stabilizing incomes. These recommendations would help the dairy farmers in managing risk which in the long run would lead to higher and more stable incomes as well as improved agricultural output that would serve to improve the food security status in the County