CHAPTER ONE 

INTRODUCTION 

1.1  Background to the Study. 

The knowledge of how subsistence farm households make economic decisions under risk is important in determining strategies and formulating policies for agricultural development.  With the return to democratic rule in 1999, Nigerian government has reaffirmed its commitment to increasing growth and reducing poverty, especially through a strong focus on the agricultural and rural sector. About 90 percent of the total agricultural output is accounted for by households, which on the average cultivate about 2 ha of land (NPFS Main Report, 2006). The level of poverty among these producers is high, and with the low contribution of the nonagricultural sector in rural economy, any strategy for increasing rural incomes has to focus on generating rapid growth in the agricultural sector. To this end, the Nigerian government has also launched a series of development and poverty reduction programs, such as the Special Programme for Food security (SPFS, 2001); National Programme for Food Security (NPFS, 2007); National Fadama Development Project-II (NFDP-II, 2003); National Fadama Development 

Project-III (NFDP-II, 2008); Community-Based Agriculture and Rural Development Programme (CBARDP, 2003) and Root and Tuber Expansion Programme (RTEP, 2000).  However, these programmes, which target the rural households, will only achieve their set out goal and purpose if knowledge of farm related risk attitudes among the rural households and the management strategies adopted to cushion the effects of threats are taken into consideration.   

 

Wolgin (1975) studied impact of risk on households‟ production, consumption and technology decisions,  and found out that high degree of risk is caused by erratic rainfall, poorly functioning or missing markets, pests and diseases and poor health situation. Other studies by Udry (1990, 1994), Townsend (1994) and Dercon (1996) analyzed risk coping management strategies and reported use of assets, savings, effective public safety nets and financial markets as  some of the sustainable mechanisms to manage and mitigate risk. Under conditions where insurance and credit markets are incomplete or do not exist, such financial strategies are typically weak or insufficient, and they represent only one element of small scale farming households‟ responses to risk. Farming households‟ savings may be too little to cope with the risk, hence there is need to devise sustainable mechanisms to manage and mitigate risk. 

 

A possibly more important strategy is small scale farmers‟ effort to diversify economic activities before shocks occur, or to re-adjust labor supply decisions after a shock has occurred. Here the importance of the presence and well functioning of a labor market is significant given that labor is the principal asset owned by the poor. The following researchers who had related works on risk studies had reported that there is strong evidence that poor farm households are risk-averse (Moscardi and de Janvry, 1977; Dillion and Scandizzo, 1978; Binswanger, 1980, 1981, 1982; Antle, 1983, 1987). These general conclusions and observations have stimulated considerable research into the effects of risk on farming households‟ economic decisions.  

 

Empirical evidence is still lacking on how rural households respond to shocks resulting from risks in non-dynamic and subsistence agricultural environments in contrast to more dynamic rural settings. It will be important for policy makers to understand the risk attitudes and management strategies of rural households. Small scale farming households‟ off-farm diversification, crops choice, socio-economic characteristics etc are important factors affecting their ability to smooth consumption during income shocks. To this end this study will focus on understanding the risk attitudes and strategies used by rural households in managing negative farm related risks using 

Federal Capital Territory as a case study. 

 

1.2.  Problem Statement  

There is a common perception that rural households are averse to modifications in their production, financial and marketing practices due to their risk aversion behaviour. A distinctive feature in the lives of rural farming households is the importance of risk. This is immediately apparent due to the fact that they depend upon farming for their livelihoods (NPFS, 2006). Differences/variations in climatic conditions, intensity and amount of rainfall, the incidence of diseases and pests, crop failure, fire outbreak, price fluctuations, unstable government policies, farmers ill-health etc, cause farm income to fluctuate unpredictably. The variations in climatic conditions, intensity and amount of rainfall are source of risk and uncertainty to production activities of the rural farming households. The crop production activities which are largely rain-fed and irrigated would be largely affected if the threshold variation in the rainfall distributions is either too high or low. This constitutes risk, which not only affects crop income; it has an indirect effect on off-farm income as well as the households‟ livelihood (Wolgin, 1975).   

 

The farmers ill-health coupled with high level of household poverty are factors which primarily affects downward income fluctuations, and may be very risky situation limiting the economic activities of the farmers. Furthermore, poor subsistence farming households tend to live furthest away from health facilities and in areas with poor infrastructure. Weak health and bad nutrition also affects labor supply for farming and wage market. In such health situations, households face extreme unfavorable trade-offs. 

They must engage in short term responses which provide an immediate gain in income and consumption smoothing.  

 

The problems of price fluctuation may constitute a risk to the farmers since government policies on price that are not farmers friendly could be a threat to the farming activities of the rural households. Also, incidence of diseases and pests, crop failure and fire outbreak as may be experienced in the dry session are factors that have impact on the rural household economic activities. Meanwhile, the risk attributed to the above mentioned factors, if not well managed will result in multiplier effects in negating the farmers‟ productivity, and rural households‟ livelihood improvement. To this end, the study attempted to answer the following research questions:- 

i. What are the major sources of risks to agricultural production in the study area? 

 

ii. How do households perceive magnitude of these risks? 

 

iii. What are risk attitudes of rural households in the study area? 

 

iv. Are risk attitudes influenced by households‟ socio-economic characteristics? 

 

v. What are the risk management strategies used by rural households? 

 

vi. What is the effectiveness of risk management strategies used? 

 

1.3  Objectives of the Study 

The main objective of the study is to examine farming households‟ risk attitudes and their management strategies toward risk. The specific objectives are to:- i identify the major sources of risks to agricultural production in the study area