Economic analysis of smallholder agricultural production under conditions of risk: case of Vihiga and Kilifi district in Kenya.

Abstract

This study investigates how risk affects production decisions of smallholder farmers in Vihiga and Kilifi districts. t further explores the possibilities of raising farm production and income under existing conditions in the study sites. Knowledge of how these farmers make production decision under conditions of risk and uncertainly are important in the development of appropriate strategies necessary to drive agricultural intensification and development in the smallholder sector to match raising aggregate food demand. Gross margin analysis is done to establish the relative competitiveness of key enterprises and efficiency of resources use on the enterprises and efficiency of resource use on the surveyed farms. Coefficients of variation of yields, price and gross margins of the various enterprises are estimated to give an indication of the risks associated with the production of these enterprises. Linear programming analysis is used to identify optimal farm plans feasible with the given set of farm resources endowments and constraints. MOTAD analysis is done to generate a feasible set of risk-efficient farm plans that can be used as a guide to minimize production risks at farm level. Results indicate that the presence of yield and price risks, coupled with the desire for food self-sufficiency lead to sub-optimal resource allocation at farm level. The findings also show that there is scope to increase farm income and reduce risks through investing in high-value crop and livestock enterprises. In the absence of credit and insurance, livestock and non-farm income may offer a viable alternative in risk mitigation and overall farm development. Cash constraints and small land sizes are the two most important factors that inhibit realization of higher farm incomes and optimal production at farm level. There is need for policies that spur investment in public infrastructure, rural financial markets, private investment, and support institutions to address the problems of high transaction costs to investors, and reduce risks faced by farmers.