ABSTRACT
The study examined risk, investment and productivity of smallholder arable crop agribusiness entrepreneurs in Akwa-Ibom State, Nigeria. Objectives of the study were to examine the socioeconomic characteristics of smallholder entrepreneurs, derive an index of risk attitude for the farmers and classify them into risk averse, risk neutral and risk takers; derive and compare investment and productivity indices of farmers based on their risk attitudes; examine risk management strategies used by farmers and examine the determinants of risk attitude, investment and productivity of agribusiness entrepreneurs. A multistage sampling technique was adopted in selecting 120 entrepreneurs for the study while structured questionnaire was used to elicit data from them. Data were analyzed using descriptive and inferential statistics such as Total Factor Productivity model, Ordinary Least Square (OLS), and multinomial logit models. Mean age of 47 years indicates that farmers were moderately young, innovative and able to take risks; men were predominantly in farming activities. Marital status of the respondents indicates that majority of the entrepreneurs (72%) were married. A risk index mean score of 2.41 strongly indicates that majority of the respondents were risk averse while the productivity distribution of farmers showed that as expected, risk takers were the most productive. The mean value of N36, 834 for risk-seeking farmers implies that this group of farmers invested more than other groups of farmers. The Multinomial result shows that gender, household size, farm size and total income were positively related to risk-averseness, while age, access to credit, level of education, land acquisition and labour cost were negative. On the other hand, access to credit, level of education, household size, farming experience, farm size, land tenure, labour cost and cooperative membership were positively related to risk-taking attitude of the farmers and negative for gender and income. Also, age, education, farm size, farming experience and gender were positively related to the farm productivity of risk-taking farmers and negatively related to household size, capital inputs and fertilizer. Results further showed that extension contacts and cooperative membership were positively related to the productivity of risk-averse while age of farmers, level of education of farmers, household size, farming experience, capital inputs and gender were negatively related. The result further showed that age, education, loan size, farming experience and nature of ownership were positively related to the amount of capital invested of risk-taking farmers and negatively related to interest rate. Age of farmers, education, loan size, farm size, source of investment capital and nature of ownership were inversely related to amount of capital invested while off-farm income was positive. Enterprise diversification, insurance against disaster and loans from cooperative societies were some of the risk-mitigating measures adopted. Policies that will encourage subsidizing of cost of inputs, provisions of cheap credit facilities to farmers, stability of agricultural product prices, and the use of improved technologies are recommended. Diversification should be encouraged to ensure that farmers’ assets are improved at regular farming seasons and intervals. Development programmes that aim at reducing farmers’ risks need to be tailored to specific characteristics of farmers.
TABLE OF CONTENTS
Cover page
Title page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Table of Contents vii
List of Tables xi
List of Figure xii
Abstract xiii
CHAPTER 1: INTRODUCTION
1.1 Background of the Study 1
1.2 Problem
Statement 5
1.3 Objectives of the Study 7
1.4 Hypotheses of the Study 8
1.5 Justification
of the Study 9
CHAPTER 2: REVIEW
OF RELATED LITERATURE
2.1 Concepts and Definitions 11
2.1.1 Concept
of risk 11
2.1.2 Classifications
of risk attitude of investors 17
2.2 Concept of Investment 19
2.3 Concept of
Productivity 20
2.3.1 Types of productivity 22
2.4 Concept of
Agribusiness 24
2.4.1 Smallholder arable crop agribusiness
25
2.4.2 Problems of smallholder arable crop
agribusinesses 27
2.5 Conceptual Framework 29
2.6 Theoretical
Framework 30
2.6.1
Investment theory 30
2.6.2 Investor behavior theory 30
2.6.3 Behavioral portfolio
theory 31
2.6.4 New investment theory 31
2.7 Risk Theories 33
2.7.1 Modigliani and miller's capital structure
theory of risk 33
2.7.2 Credit, economic and political risks theory 33
2.7.3 The economic utility theory of risk
34
2.8 Theory
of Productivity 35
2.9 Empirical Literature Review 38
2.9.1 Socioeconomic characteristics of smallholder
arable
Crop agribusiness
enterprise 38
2.10 Arable Crop Agribusiness Risk Attitudes of
Farmers 42
2.10.1 Risk attitude and welfare of farmers
42
2.11 Risk Management Strategies 44
2.12 Determinants
of Risk Attitude, Investment and Productivity 53
2.12.1 Risk attitudes of Smallholder Farmers
53
2.12.2 Determinants of
investment 57
2.12.3 Determinants of
productivity 59
2.13 Analytical
Framework 63
2.13.1 Simple
statistical tools 63
2.13.2
The total factor productivity (TFP) measure and index number approach 64
2.13.3 Five point likert
type scale 65
2.13.4 Multinomial
logistic regression (MLR) 66
2.13.5 The
method of ordinary least squares 69
2.13.6 Measurement
and classification of risk attitude of crop farmers 72
CHAPTER 3: RESEARCH METHODOLOGY
3.1 Study Area 74
3.2 Sampling Procedure 75
3.3 Data Collection 76
3.4 Method of Data Analysis 76
CHAPTER 4: RESULTS AND DISCUSSION
4.1 Socio-Economic Characteristics of the
Respondents 83
4.1.1 Age
distribution of the respondents 84
4.1.2 Sex
distribution of the respondents 85
4.1.3 Marital
status 86
4.1.4 Farm
size distribution of the respondents 87
4.1.5 Household
size distribution of the respondents 87
4.1.6 Primary Occupation distribution of the respondents
87
4.1.8 Years of education distribution of respondents 88
4.1.9 Years of farming experience distribution of
respondents 88
4.1.10 Method of land acquisition distribution of
respondents 89
4.2 Risk Status of the entrepreneurs 89
4.3 Productivity
and Investment Levels of the Entrepreneurs with Respect to their Risk Status 90
4.4 Risk Management
Strategies Used by Risk-Averse Farmers 91
4.5 Determinants of Risk Attitude, Investment
and Productivity of the Agribusiness Entrepreneurs 93
4.5.1
Determinants of Farmers’ Risk Attitude 93
4.5.2 Determinants
of Investment of Risk-Averse and Risk-Seeking Farmers 102
4.5.3 Determinants of Productivity of Risk-Averse
and Risk-Seeking Farmer 108
CHAPTER 5: SUMMARY, CONCLUSION AND
RECOMMENDATIONS
5.1
Summary 118
5.2 Conclusion
122
5.3 Recommendations
122
References 125
Appendices 155
LIST OF TABLES
4.1 Distribution
of respondents by their socio-economic characteristics 83
4.2
Distribution of the respondents by risk status
89
4.3 Productivity levels of the entrepreneurs
90
4.4 Investment levels of the entrepreneurs
91
4.5 Risk coping strategies employed by the risk-averse
farmers 92
4.6 Risk attitude multinomial logit log-likelihood test 93
4.7 Multinomial logit result for the determinants of farmers’ risk 94
4.8 Determinants of investment of risk-seeking
farmers in Akwa Ibom State 103
4.9 Determinants of investment of risk-averse
farmers in Akwa Ibom State 107
4.10 Determinants of productivity of risk-seeking
farmers in Akwa Ibom State 109
4.11 Determinants of productivity of risk-averse
farmers in Akwa Ibom State 115
LIST OF FIGURE
2.1
Conceptual framework of risk, investment and productivity of smallholder arable
crop agribusiness entrepreneurs 29
CHAPTER
1
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Risk is supposed
to play an important role in the investment decisions of individual farmers
(Isik and Khanna, 2003 and Knight, 2003). Risk in production is a strong
characteristic of agricultural production. Although risk is closely associated
with agricultural production, it can be controlled, to some degree, by farmers
through the use of modern inputs, such as chemical fertilizers and pesticides (Rabin,
2000; Rabin and Thale, 2001 and Knight et
al. 2003). Risk in agricultural production can be exogenously-caused or
endogenously-induced. According to Rabin (2000); Rabin and Thale (2001) and Knight
et al. (2003) exogenous risk, which
may arise from extreme weather conditions or threats of disease and pest
outbreaks, is independent of farmers’ production decisions while endogenous
risk is incurred solely by such production decisions. In other words, while the
pest outbreaks can be categorized as exogenously-caused, the change in risk
from the use of pesticide to control for pest outbreaks is endogenously-induced
by farmers’ decisions.
Productions
are conquered by large number of unorganized producers, many unskilled and therefore
little are able to absorb new technologies. Most farmers are small-scale with
little opportunity for diversification and insurance. Their attitudes to risk
are nevertheless major determinants of rate of diffusion of new technologies
among farmers and of the outcome of rural development program. Researchers have
established that risks cause farmers to be less willing to undertake activities
and investments that have higher expected outcomes, but carry with them risks
of failure (Adebusuyi, 2004 and Alderman, 2008).
Agriculture in Nigeria, as in most other developing
countries, is dominated by small farm producers (Oladeebo, 2004). Smallholder
farmers make up about 80% of the farming population in Nigeria (Awoke and
Okorji, 2004). These smallholder farmers although individually look insignificant
but collectively form an important foundation upon which the Nigerian
agriculture rests, several constraints and barriers, which appear impossible,
limit the overall farming activities and if this is anything to go by, the
destiny of a developing economy heavily rests on the shoulder of the small
producers.
Odoemenem et al. (2013) asserted that
agriculture is practiced at subsistent level and is characterized by numerous
farmers operating several scattered small and fragmented plots of land using traditional
methods such as land rotation, bush burning and crude implements. According to Oluwepo,
(2010), majority of the rural populace in Nigeria either depend entirely on
farming and farming activities for survival and generation of income, or depend
on other non-farming activities to supplement their main sources of income. The
validity of this statement becomes apparent when it is recognized that over
90.0% of the country’s local food production comes from small farms which are
usually not more than 10 hectares in size, while at least 60.0% of the population
earn their living from these small farms. It might then be seen that most
farmers have limited resources, a factor that limits their production output,
income, and investment.
Over the years, many farmers in Nigeria have increasingly not been
able to invest adequately on their farming activities. They have as such resorted
to forming cooperative movements to achieve a common goal through democratically
controlled business organizations. The most significant economic responsibility
of members of the cooperative society is savings. Farmers save a specified
amount of money daily, weekly, monthly or quarterly as it is convenient for the
group and the individuals. This type of savings is important for agricultural
production, because it allows farmers or members’ access to credit at the onset
of the farming season which could boost farm production and income of the
farmers. Odoemenem et al. (2013) were of the view that small scale
farmers invest their savings in two major areas. These are the agricultural and
non-agricultural divisions.
One of the basic problems confronting the development of
agricultural sector in Nigeria could be attributed to inadequate savings,
income and investment by the small scale farmers. In spite of this problem,
policy makers have not really drawn up adequate and comprehensive rural savings
scheme that will motivate the farmers to invest their capital productively
(Sunday et al., 2011 and Odoemenem et al., 2013). According to
Shitu (2012) capital accumulation is a major prerequisite of economic
development and if the volume of savings are inadequate to meet investment
requirements, major bottlenecks are likely to develop in the process of capital
formation and the drive for development. The volume of investment has been
found to depend on income, cost of procuring investible funds and
entrepreneur’s expectations on the trend of the business in future.
Agricultural production is subject to many
risks. Any farm production decision plan is typically associated with multiple
potential outcomes with different probabilities. Many risks directly affect
farmers´ production decisions and welfare. Agricultural producers face many
risks in their economic activity due to weather conditions, plant or animal
diseases, price volatility, and policies such as agricultural trade
liberalization and restrictions on the use of crop protection products (World
Bank, 2005). Weather, market developments and other events cannot be controlled
by the farmer but have a direct effect on the returns from farming (Baquet et
al., 1997). In this context, the farmer has to manage risk in farming as
part of the general management of the farming business.
The
spectrum of risks that affect the income of agricultural producers and
agribusinesses is quite broad. However, the two predominant risks are: price
risk, reflecting variations in market prices for agricultural commodities and
production inputs; and production risk, which encompasses variations in the
volume or quality of the commodity produced (Freshwater and Jette-Nantel,
2008). Weather is one of the most pervasive sources of production risks, and it
impacts all aspects of the agricultural supply chain, particularly in countries
that rely on rain-fed agriculture (Swiss-Re, 2007). Even with the introduction
of new crop varieties, production technologies such as irrigation, and new
management practices that offer the potential to increase yields and improve
resistance to weather perils, the majority of agricultural activities in
developing countries remain highly susceptible to extreme, uncontrollable
weather events that can severely impact both quality and yield of a crop. Such
events include excessive or insufficient rainfall and extreme temperatures. The
effects of weather risk are felt most acutely at the household level,
particularly by poor, vulnerable agricultural households, the majority of whom
are subsistence farmers.
Traditionally, farmers have managed risks by
using less risky technologies of lower but reliably yielding drought-resistant
crops; by seeking diversification both in terms of production activities
on-farm and income generating activities off-farm; and by devising informal and
formal risk sharing arrangements (Friedberg, 2003). While these mechanisms may
work well for low-magnitude losses, even if they are frequent, they often prove
to be inadequate for risk that is infrequent but severe (Hazell, et al.,
1986). There is the potential for these major risks to increase in the future -
price risk due to liberalization of trade and production risk due to the
effects of climate change (World Bank, 2005). The trend towards agricultural
specialization is likely to continue and this will increase risks as producers
rely on the production of a smaller range of crops and consequently cannot
diversify away risks effectively (Glauber, 2004).
Weather risks such as drought in particular
typically affect entire regions at once, rendering informal risk sharing
arrangements insufficient. Affected farmers are often forced to employ short
term coping strategies such as borrowing from money lenders or neighbors,
selling assets, or cutting already small expenditures on household goods and
services. In many cases, farmers could benefit from investing in agricultural
activities that require higher initial investments but ultimately would
generate higher income if the risks affecting these investments such as weather
could be managed.
1.2 PROBLEM
STATEMENT
Smallholder
farmers in Nigeria face many risks in their farming activities. For example, in
the past, the country has recorded drought, crop diseases and pests as well as
fluctuations in prices of both farm produce and inputs. As a result, there has
been variability in household income. Risk hinders farmers from pursuing their
farming as a business. The risk situation is complicated by the fact that they
operate in an environment with weak markets. They do not have access to
sufficient support institutions that can help them cope with risks.
Unlike Sub-Saharan
Africa, Nigerian agriculture (Akwa Ibom state inclusive) has not seen a substantial
increase in per capita value, it is rather a declining trend on average over
the last decades since the creation of the state with no considerable variation
over time (Food and Agricultural Organisation- FAO, 2008 cited in Wayo et al., 2011).
This declining
per capita food production has resulted in increasing rural poverty, rising
food prices, widespread famines and increasing food imports. Some of the
factors hindering agricultural development in Nigeria including Akwa Ibom State
includes, inadequate investment in
agriculture, limited access to credit by smallholder farmers, high cost and unavailability
of inputs such as fertilizers and improved seeds, inadequate use of modern
technologies, agricultural producers especially smallholder
arable crop agribusiness face many risks in their economic activity due to
weather conditions, plant or animal diseases, price volatility, and policies
such as agricultural trade liberalization and restrictions on the use of crop
protection products (World Bank, 2005). Weather, market developments and other
events cannot be controlled by the farmers but have a direct effect on the
returns from farming, inefficient
agricultural input markets, and the absence of a conducive policy environment.
According to Osondu et al. (2015) related
research works on analysis of risk, investment and productivity of smallholder
arable crop agribusiness entrepreneurs had revealed that farmers participating
in crop production and self-employed activities earn the largest total farm and
total off farm monthly income. Nevertheless, little or no similar work on
analysis of risk, investment and productivity of smallholder arable crop
agribusiness entrepreneurs has been done in Akwa-Ibom State. Thus, this
research vacuum has prompted the researcher to undertake this research work in
other to close the research vacuum by analyzing the risk, investment and
productivity of smallholder arable crop agribusinesses to know the types of
risk faced by the farmers, and also to find out their investment and
productivity level in Akwa Ibom State of Nigeria. Thus, the following questions
were asked with the aim of achieving the specific objectives of the study.
i. What
are the socio-economic characteristics of the smallholder arable crop agribusiness
entrepreneurs?
ii. In what way do you derive an index of risk
attitude and how do you classify them into risk averse, risk neutral and risk
takers as a farmers?
iii. In what way (s) do you compare investment
and productivity indices as a farmer base on risk attitudes (risk averse, risk
neutral and risk takers)
iv. What risk management strategies do the
farmers use?
v. What are the determinants of investment and
productivity of the agribusiness enterprise?
1.3 OBJECTIVES OF THE STUDY
The
broad objective of this study analyzed the risk, investment and productivity of
smallholder arable crop agribusiness entrepreneurs in Akwa-Ibom State, Nigeria.
The Specific
objectives were to:
i. examine the socio-economic characteristics
of the smallholder agribusiness entrepreneurs;
ii. derive an index of risk attitude for the
farmers and to classify them into risk averse, risk neutral and risk takers or
risk preference farmers;
iii. derive and compare the investment and
productivity indices of the farmers based on their risk attitudes (risk averse,
risk neutral and risk takers);
iv. examine risk management strategies used by the risk averse
farmers; and
v. examine the determinants of risk attitude,
investment and productivity of the agribusiness entrepreneurs.
1.4 HYPOTHESES
OF THE STUDY
The
following hypotheses were used to guide the study:
HO1: The Total factor productivity of the
arable farmers is positively related to the farmers’ age, level of education,
farm size, experience, amount of fertilizer and number of extension contacts
and negatively related to the farmers’ household size and capital inputs.
HO2: The risk preferring attitude of the
farmers is positively influenced by age, credit volume available, farming
status, educational attainment, years of farming, farm income, total investment
capital, labour employed and membership of cooperative societies and negatively
influenced by age, marital status and household size.
HO3: The amount of capital invested in arable
crop farming is positively related to farmers’ year of formal education, farm
size, farmers’ experience, amount of credit accessed, cooperative membership
and risk preferring attitude of the farmers and negatively related to age of
farmers, involvement in off-farm activities and risk averse attitude of the
farmers.
1.5 JUSTIFICATION
FOR THE STUDY
Risks,
investment and productivity in agribusiness enterprises have been a major issue
to scholars, policy makers and agribusiness entrepreneurs in Akwa Ibom State.
The importance of risk in agribusiness, investment and productivity cannot be
over emphasized following the importance that is attached to it. Agriculture
plays a vital role in the provision of food, employment to smallholders,
foreign earnings and raw materials for industries that depend on their
products. For Akwa-Ibom State to boost its national output like other states in
the country to meet her fast growing population, it is very vital to give high
regards to the sector. In the same observation Landes (2008) cited in Nto, (
2010) mentioned that the rate of investment in the economy has continued to
rise, while, on the other hand the rate of investment in agribusiness have
declined over the years.
Risk has
important implications to agriculture in that it affects the types of
investments that farmers make. Ultimately, it affects the level of farm output achieved
and economic growth especially in sub-Saharan African countries (Nigeria
inclusive) where agriculture contributes up to 24% of GDP. Information on the
analysis of risk, investments and productivity of smallholder arable crop
agribusiness represents important contributions to existing body of knowledge. Findings
from the study will enable government agencies, stakeholders, policy makers to
assist farmers cope with risks.
It will also serve as a veritable input into
the natural framework for agricultural development institutes. More so the
findings will enable development agencies to identify existing gaps and know
where to apply their interventions for a better investment and productivity of
smallholder arable crop agribusinesses to emerge, this research finding will
also be of great benefit to smallholder arable crop agribusinesses in Akwa-Ibom
State on how to manage risk whenever they are into arable crop production using
the management strategies and other findings the research hope to uncover. Most
importantly, it will assist policy makers and stakeholders to understand the
current situation and the needed policy support to reduce the effects of risk and
thus encourage farmers to gradually move away from subsistence farming to more profit-oriented
but higher-risk commercial farming. This will help to make the farm family food
secure and make the nation self-sufficient in food production thus bringing
about the needed transformation of the agricultural sector as a net exporter of
agricultural produce.
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