Risk Aversion Behavior of Farm Households and the Role of Credit Service in Kobbo District, North Wollo Zone of Ethiopia

Abstract

Risk and uncertainty in agricultural production is one of the factors that hinder efficient allocation of resources and investment decision under smallholder production system. This study was carried out with the objectives of examining the various sources of risk and management strategies of farm households in Kobbo district in two different agro-ecologies and examining possible risk-return trade off associated with various levels of risk aversion parameters for credit user and nonuser small framers. The study used the data collected from randomly selected 116 sample farmers during the 2004/05 production year. The descriptive statistics results showed that among the possible sources of risk identified by farmers, rainfall variability and livestock feed shortage problems were considered the first problem in their priority setting by a large proportion of framer. Though the number of farmer are few, weed infestation, pest incidence, crop disease, shortage of oxen (due to disease and death), price variability were also considered as most important sources of risk by the framers. Farmers adapt different management strategies to over come the impact of risk. This includes, planting early maturing crops, and small-scale irrigation, petty trading and labour selling (daily labour). In addition, to protect insect and pest attacks of crops, farmers used mainly traditional pest control measures and to some extent insecticides and pesticides chemicals. On the other hand, replanting (replacing), using own family labour and supports from relative and friends (social networking) were the strategies farmers used to protect weed infestation problems in the study area. Similarly, farmers practice maintaining leftover straw and crop residue, move their livestock to other areas and selling of animals to minimize feed shortage problem. Mean-variance (E, V) analysis using negative exponential utility function has been chosen as an appropriate methodological tool and used to determine the optimal production plan of the farmers under income risk. The results of the model indicated that farmers in the midland area are less risk averse as compared to farmers in the lowlands with a risk aversion parameter value (λ) of 0.00338 and 0.010, respectively. This indicates that farmers in the midland area are less risk averse than farmers in the lowland areas. On the other hand, the results indicate that credit user farmers are less risk averse in the lowland as compared to the nonuser farmers whereas credit user farmers are more risk averse than the nonusers in the midland area of the district. The risk aversion parameter of credit users is found to be 0.0075 and 0.001 in the midland and in the lowland, respectively. Similarly, the risk aversion parameter of non-credit users is 0.00455 and 0.040 in the midland and in the lowland areas, respectively. The result of this study also revealed that risk-bearing ability of farmers in different agro-ecologies is different, entailing area specific development programs based on the attitude of the farmers to ensure food security status of farm households in the region in general and in the study area in particular. The study has also shown that among the crops grown in the area, sorghum has an income risk stabilizing effect and less risky in the midland area of the district whereas teff and maize have contributed to stabilizing income risk in the lowland. On the other hand, in the midlands of the district teff and lentil are not optimally used under the farmers’ condition. Wheat and barley also contribute to income risk of the household. Livestock production in general was found to be optimal and showed income risk stabilizing effect to the farm households. One of the critical problems contributing to higher risk aversion values of lowland farmers in the district is moisture stress problem. In xviii this regard, regional and national research institutions should focus on drought tolerant crop varieties which stabilize the level of income of the farmers in the study area in particular and other moisture stress area in general. In addition, livestock production was found to play income risk stabilizing. Thus, research and extension activities that are geared to promotion of highly productive livestock technologies would have high chance of being accepted by the farmers. Non/off-farm activities show stabilizing effect to the total household income more importantly, in lowland areas where there are better communication network and marketing facilities. Thus, developing such type of infrastructure facilities promotes non-farming activities whereby farmers can supplement and stabilize their household income. Lastly, credit service was found to stabilize income in the lowland areas where farmers have access to marketing services and increases income risk in the midland where market and alternative income generating activities are lacking showing that credit service should be integrated with other rural development services to make use of it in most productive way.