Resource-poor farmers in Africa are often deemed as being inherently risk averse as evidenced by the sub-optimal investment in risky yet profitable crop technologies. Indeed the adoption of profitable crop technologies such as high-yield seed varieties (HYVs) remains negligible in spite of their ability to boost agricultural productivity. Though profitable, these farming techniques are often associated with high income variation across farming seasons making them risky investments. Under-investment in these technologies has led some to suggest that resource-poor farmers in Africa have an inherent disposition towards risk aversion, seeking to mitigate income fluctuations at the expense of economic growth. This is indeed a contentious and pertinent issue given that food security continues to be a major development challenge in Africa.

The need for increased agricultural productivity has become particularly pertinent in the face of climate change which is estimated to halve food production in Africa by 2020.⁽²⁾ Resource-poor farmers will need to invest in high yield, drought resistant crops to cushion the impact of increased climate variability and climate change. However, if these farmers are naturally risk averse as has been suggested, then technology adoption will continue to stagger and farmers will be confined further in so-called poverty-traps. This article refutes the perception that resource-poor farmers are inherently risk averse in support of the alternative view that it is the inability of farmers to diffuse risk to third parties due to the unavailability of crop insurance and limited access to credit which engenders risk averse behaviour.

Production risks in Africa

Agricultural production is notoriously risky in Sub-Saharan Africa (SSA) where approximately 75% of the world’s low-income countries are found. There are several reasons why resource-poor farmers in this region face strikingly greater variability in agricultural yield than elsewhere in the world. Firstly, agricultural production in SSA is exposed to wide variability in both rainfall timing and rainfall level. Although the latter need not necessarily pose a threat to crop production, limited access to irrigation results in extreme crop yield risks. In addition, the region has seen an increase in climate variability over the past two decades with farmers reporting a significant decrease in annual rainfall and an increase in temperatures both of which are detrimental to agricultural productivity.

With the intensification of climate variability, the region is expected to experience an increase in the frequency of discrete climate events such as floods and droughts thereby further depleting the already minimal productive assets of resource-poor farmers. In addition to variability in the weather, in any given farming season resource-poor farmers are exposed to various crop diseases, pests and animal mortality due to infectious livestock diseases. Furthermore farmers are exposed to price uncertainty due to the high volatility of farming commodity prices. Frequent shifts in agricultural policy are an additional source of uncertainty for farmers in this region. As a result, the income stream of asset-poor farmers is highly variable.

Are resource-poor farmers naturally risk averse?

An individual is considered risk averse if s/he is willing to forego some expected returns if this also reduces the extent of variability in his/her income stream. The larger the amount an individual is willing to forego in order to mitigate income fluctuations, the more risk averse he/she is. It has often been argued that resource-poor farmers are burdened by extreme risk aversion given the apparent tendency to opt for farming techniques such as the use of traditional seeds which provide much lower but stable yields across farming seasons, relative to HYVs. The latter are a result of advances in agricultural biotechnology which has seen the development of seed varieties with an in-built mechanism to resist certain pests and diseases and which have a greater tolerance to abiotic stresses such as drought.

Given that pests, crop diseases and susceptibility to drought are the major impediments to increased crop yields in low-income countries, HYVs are potentially valuable to asset-poor farmers.⁽³⁾ However, HYVs are considered risky investments. While average yield will exceed that of traditional seeds, HYVs may return very low yields in some farming seasons resulting in a high degree of variance in the farmers’ income stream. Not surprisingly, this makes this type of seed less appealing to asset-poor farmers whose livelihood depends directly on crop output. Consequently, it has been argued that these farmers have risk preferences which are inconsistent with growth.

External constraints and technology adoption

While it is true that resource-poor farmers tend to avoid risky yet profitable crop technologies, it is inaccurate to conclude that the majority of these farmers are inherently risk averse. It is more likely that the observed under-investment is due to external constraints, particularly limited access to insurance and credit markets. There is great disparity between the agricultural risks which resource-poor farmers face and the available means for self insurance and risk diffusion. In addition, resource-poor farmers face extreme credit constraints mainly because they lack productive assets which are acceptable as collateral.

Several academic studies have cited credit constraints as a key barrier to technology adoption by resource-poor farmers in low-income countries. Sub-Saharan Africa in particular is characterised by underdeveloped rural credit markets which poses a major challenge to agricultural productivity as credit (needed to finance either intermediate inputs or fixed capital) is a crucial determinant of growth and technological innovation.⁽⁴⁾

Where farmers do not anticipate being able to borrow in the event of an economic shock or where there are no risk diffusion mechanisms they tend to manage risk through conservative production, for example through the use of traditional farming techniques or by reducing certain inputs. Fertiliser is one example of the latter, although farmers are aware that it is a highly productive input. In many resource-poor settings, the marginal product of fertiliser exceeds its price which indicates that farmers are not achieving profit maximisation. One study uses the observed level of fertiliser use as a measure of the underlying degree of risk aversion.⁽⁵⁾ Based on the low levels of fertiliser use among the farmers in that sample the study concludes that the farmers are generally risk averse. The short-comings of this study are immediately clear. To conclude that these farmers are risk averse based on their use of fertiliser is inaccurate. There are various reasons for the low adoption of fertiliser by resource-poor farmers, the major one being that they cannot afford it.
 

In the absence of extensive empirical studies we cannot conclude that the risk preferences of resource-poor farmers are distinctly different from those of commercial farmers. It is plausible that a risk-neutral resource-poor farmer might be deterred from using HYVs due to limited access to credit which reduces his/her ability to absorb risk in the event of an economic shock such as a drought.
 

Technology adoption and climate change adaptation

Technology adoption is particularly relevant to the discussion of climate change adaptation strategies. It is widely acknowledged that resource-poor farmers will be disproportionately affected by adverse climatic changes as they have minimal adaptive capacity. While some of the farm level mechanisms employed by resource-poor farmers in response to rainfall variability (e.g. the use of crop trash as mulch) can abate climate shocks to an extent, such cropping practices become insufficient in the face of protracted and severe droughts.⁽⁶⁾

Resource-poor farmers will need to employ effective farm-level adaptation measures such as the use of HYVs. It is worthwhile therefore to gain an understanding of the key determinants of technology adoption among resource-poor farmers. If we conclude that these farmers are indeed naturally risk averse, it follows that there is little that can be done to ‘nudge’ them to employ the various climate change adaptation strategies. The alternative view on the other hand suggests that relaxing the constraint sets which these farmers face is one way of facilitating technology adoption. In a cross-country survey on South Africa, Zimbabwe and Zambia, farmers cited lack of credit as a key barrier to using various adaptation measures.⁽⁷⁾

Concluding remarks

External constraints rather than risk preferences are the primary reason behind the observed under-investment in crop technologies by resource-poor farmers. Limited access to credit and insurance markets are a major deterrent to even moderately risk averse or risk-neutral farmers who may be willing to adopt risky crop technologies. Where farmers are unable to borrow and where there are no risk diffusion mechanisms farmers will tend to smooth their income through conservative production. Consequently they fail to achieve profit maximisation and are confined in poverty.

With hunger predicted to worsen in Africa due to increased climate variability and climate change the adoption of crop technologies and other climate change adaptation strategies will need to be facilitated by relaxing the constraint sets which resource-poor farmers face.

NOTES:

1. Contact Feri Gwata through Consultancy Africa Intelligence’s Enviro Africa Unit (enviro.africa@consultancyafrica.com)
2. Intergovernmental Panel on Climate Change (IPCC), 2007. Climate Change 2007: Synthesis Report.
3. Bhagavan, M.R. & Virgin, I., 2004. Agricultural Biotechnology in Developing Countries. A Briefing Paper for Sida.
4. Eswaran , M. & Kotwal, A., 1989. Credit as insurance in agrarian economies. Journal of Development Economics, 31(1), pp. 37-53.
5. Moscardi, E. & de Janvry, A., 1977. Attitudes toward risk among peasants: An Econometric Approach. American Journal of Agricultural Economics, 59(4), pp. 710-716.
6. Challinor, A., 2007. Assessing the vulnerability of food crop systems in Africa to climate change. Climate Change, 83, pp 381-399.
7. Nhemachena, C. & Hassan, R.M., 2007. Micro-level analysis of farmers’ adaptation to climate change in Southern Africa. International Food Policy Research Institute (IFPRI) Discussion Paper No. 714.

Written by Feri Gwata ⁽¹⁾