Adoption Of Risk Management Tools In Agriculture

Risk and uncertainty at farm level in developing countries are the important features of agricultural production and may cause major losses in the agricultural sector.The main reason for the huge risk in agriculture sector is due to its high exposure to the environmental conditions like temperature,rainfall,crop diseases and price variability due to instable marketing conditions.It is therefore important to study different types of risks for developing a better understanding and adopting the options available to mitigate their impacts.Moreover,these risk factors should not be viewed only from a farmer's perspective,but as a threat to the overall rural economies.Farmers have a number of options to manage risk at the farm level and many of them utilize these options simultaneously.However,previous studies have ignored the potential correlation among the risk management adoption decisions and assume that these decisions are independent of each other.Therefore,there is a dearth of literature on the simultaneous adoption of multiple risk-coping tools,i.e.,contract farming and off-farm diversification.Keeping in view the contemporaneous utilization of the two risk management tools for mitigating agricultural risks,the present research is therefore aimed to investigate the impact of various factors on farmers risk management adoption decisions using bivariate and multinomial probit models.Moreover,the study is designed to assess the different risks that farmers encounter during the tobacco cultivation in Pakistan and to generate ideas for managing these risks.A sample of 302 tobacco growers was interviewed for carrying out this research.The sampled respondents were selected from Khyber Pakhtunkhwa(FCV growing region)and Punjab(DAC growing region)provinces using a multistage sampling technique.Six districts(Swabi,Mardan,Charsadda,Mansehra,Nowshera,and Buner)were selected in Khyber Pakhtunkhwa province due to their major contributions in overall FCV tobacco production.Similarly,four districts(Okara,Sahiwal,Rajanpur,and Vehari)were selected in Punjab province due to their major contributions in DAC tobacco production.Based on the type of tobacco produced,the selected districts are further categorized into two regions.Region 1 includes FCV tobacco-growing districts.While region 2 consists of DAC tobacco-growing districts.Two risk management tools,namely contract farming,and off-farm diversification are considered for this study.The impact of socio-economic characteristics,farmers' risk perception for major risk sources and farmers' risk attitude are investigated on their decisions to adopt the two risk management strategies.In this study,farmers' perceptions of different risk sources for tobacco production are categorized into the risk of flood,heavy rains/hail storm,heavy winds,pest and diseases,fire(in curing furnace)and risk of drought.Data was collected from farmers to score the incidence and severity of each source of risk on a Likert scale from 1 to 5(very low-very high)to observe how significantly each source is considered in terms of its potential impact on the tobacco production.These scores were combined in a risk matrix and were categorized as low if ranges from 2 to 5 and as high if ranges from 6 to 10.Obviously,the risk categories located in the 'high risk'zone needs an immediate response and continuous surveillance to mitigate its severity.The risk attitudes of the farmers were figured out using utility function.The most commonly used method to elicit utility from an economic agent is the Equally Likely Certainty Equivalent(ELCE)model.The utility measured on an ordinal scale was transformed into a quantitative measure of risk aversion called absolute risk aversion.The coefficient of absolute risk aversion is positive if the individual is risk averse,negative if the individual prefers risk and zero if the individual is indifferent to risk.The socioeconomic and demographic factors included in this research are the age of respondent,education level,the farming experience of the respondent,monthly household income,family size and farm size of the household along with the land ownership status.Age,education and farming experience of the household are continuous variables representing number of years,the household income is the total monthly income of the household from farm and off-farm sources in Pakistani Rupee(PKR),the size of the family is measured as the headcount of family members in the household,the farm size is measured as number of hectares that a household operates,and the land ownership status is represented by 1,if the fanning household is owner of the land and 0,otherwise.The descriptive statistics of different variables have shown that seventy-seven percent of the farmers reflected a risk-averse nature,and majority of the farmers considered risk of heavy rains/hailstorm,heavy wind and risk of pest/diseases to be the major risk sources,while less than 50%of the sampled respondents farmers considered risk of flood,drought,and risk of fire in furnace to be the major risk sources for tobacco crop.Moreover,the information regarding the incidence and severity for each of the risk source was used to prioritize the different risk sources for different treatment options.Almost ninety percent of the farmers were cultivating tobacco under contract farming agreement,while less than half of the farmers used off-farm diversification as a risk management tool to avoid any type of negative shock arising from different risk sources related to tobacco production.Due to contract farming practices adopted by tobacco farmers,this study also estimated an ordered logit model to ascertain the association among tobacco growers regarding their perceived benefits from contract farming.Through ordered logit regression analysis different components of perceived benefits from contract farming were ranked.Price protection was the most important perceived benefit component in contract farming while the reduction in marketing cost is the least important perceived benefit component.Based on the risk attitude of the farmers,risk seeking farmers consider tobacco's production cost,quality improvement,increased sale price and reduction in marketing cost to be more important in comparison to risk averse farmers.Similarly,the emphasis for price protection and involvement of family labor in contract farming for the risk averse farmers are more than the risk seeker farmers.A probit model was used to assess various factors affecting the farmers' decision to adopt contract farming and off-farm diversification.The specific contributions of the study are(1)to assess the impact of farm and farm characteristics,farmers'perceptions of various risk sources related to tobacco crop and their risk attitude for making decisions on adoption of the above-mentioned risk management tools and(2)to analyse correlation between farmers' decisions for adoption of the two risk management tools.Richer insights can be drawn from our bivariate and multinomial models rather than two independent(individual)probit models that assume independence of adoption decisions.The results of both the individual and bivariate probit model analyzed that the household size of the tobacco farmers significantly encourages the adoption of contract farming practices.Similarly,the land ownership status of the tobacco farmers significantly discourages the adoption of contract farming.The other variables like age,education,farming experiences,farm size and tobacco farm size along with the risk averse attitude,risk of flood,risk of rains/hailstorms,risk of fire and risk of drought affect positively the adoption of contract farming practices but their effect is insignificant.As far as the adoption of off-farm diversification is concerned that,the results suggest that the tendency of an experienced farmer to adopt off-farm diversification is more in comparison to the farmer with less farming experience.Similarly,the farmers with a higher total monthly income significantly tend to use off-farm diversification for coping with any shocks to their agricultural enterprise.The age of farmer significantly discourages the adoption of off-farm diversification.The result further evaluated that an increase in farm size as well as well as tobacco farm size discourages the adoption of off-farm strategy.The other variables like education,household size,risk averse attitude,the risk of flood and risk of fire(in drying furnaces)positively affect the adoption of off-farm diversification but the parameter estimates for these variables are insignificant.The application of individual,bivariate and multinomial probit model provided an insight for better understanding regarding the simultaneous adoption of a combination of different risk management tools.These risk management strategies adopted by tobacco growers will not only have important consequences on farm performance and income but will also influence the structure of tobacco farming in the future.The information from this research will help the government to better understand farmers' behavior under risk and to anticipate their adoption behavior more accurately.The findings of this research will help in influencing all the stakeholders who need more information for adopting a combination of risk management strategies to minimize their risks at the farm level.This will also help future researchers to identify different risk sources related to agricultural crop generally and tobacco crop specifically as far as the incidence and its parallel severity for the individual risk source are concerned.The information presented in this research for prioritizing the different risk sources for different treatment options will help in the improvement of existing design of contract farming as well as the introduction of some other risk management tools such as insurance and financing scheme to mitigate the impact of each of individual risk source.The results will help in assisting the policy makers to evaluate farmers' behavior towards contract farming practices that influence the structure of tobacco farming in the on-going supply chain markets.Based on the findings of this study it is recommended that the government should focus on methods of production which may improve the quality of tobacco with a parallel decrease in production cost rather than concentrating only on price protection.Similarly,establishing convenient procurement mechanism at farm gate can help in decreasing the marketing cost.The suggested changes in the existing contract design will help increase the attractiveness of contracts and thus ensure the positive role of contract farming supporting inclusive growth for both the risk averse and risk seeking growers.