RISK MANAGEMENT AMONG AGRICULTURAL HOUSEHOLDS AND THE ROLE OF OFF-FARM INVESTMENTS IN UASIN GISHU COUNTY, KENYA

Abstract

Farmers face many risks which arise from natural, economic and socio-political environments. Risk sharing institutions like national insurance and credit schemes that help reduce the burden of risk to society are weak in Uasin Gishu county. Private sector insurance products are still in their developing stages and this has prompted farmers to turn to self insurance strategies that include diversification and social mechanisms for coping with risk. Off-farm investment is one of the diversification strategies whose prevalence and effectiveness in risk management have not been evaluated. This study sought to determine risk attitudes of farmers, to identify the determinants of off-farm investments and to investigate the effectiveness of off-farm investments in risk management. Data was collected from 100 randomly selected farm households. The ELCE method was used and exponential utility functions fitted by the method of nonlinear least squares and used to estimate the coefficients of absolute risk aversion. A logit model was used to identify determinants of off-farm investments. Effectiveness of off-farm investments in risk management was assessed by simulating the effect of replacing the weight of off-farm income with that of farm income on the coefficient of variation of total income. Results indicated that the major risks of concern to farmers were drought, market/price, pests and diseases and institutional risks with prevalence rates of 59, 34, 4 and 3% respectively. All the farmers in the study were risk averse. Years of experience in farming, employment income, gender and farm income significantly determined off-farm investment decisions. Simulation results showed that off-farm investment income reduces risk. Government policies and institutional mechanisms that reduce risk (such as crop insurance and irrigation technologies) and those that facilitate farmers‟ access to assets like off-farm investments in order to manage risks in farming are required.