Risk analysis of smallholder farmers in central and north-east Thailand

Abstract

Agriculture contributes approximately nine per cent to both of Thailand’s GDP and exports. Thai farmers are basically smallholders and large numbers of them live in rural areas and below the poverty line. Pervasive and complicating risks cause a farmer’s income to fluctuate every year. The Thai government has tried to strengthen and enhance farmers’ ability to cope with risk and stabilize their farm income. These issues have been widely discussed in the 10th National Economic and Social Development Plan (2007-2011). The development of appropriate solutions to deal with risks has been impeded due to the lack of empirical studies on farmers’ responses to risk and the impacts of risk at the farm level in Thailand. This study investigates the farmers’ perceptions of risk and risk management strategies and examines whether the farmers’ characteristics can be influenced by those perceptions. The farmers’ risk aversion is also elicited using the equally likely certainty equivalent approach and four different utility functions are employed to analyse their performances in terms of risk preference classification. Stochastic efficiency with respect to a function (SERF) is applied to determine the risk efficient farming systems for the farmers in central and north-east regions of Thailand. The data for this study were obtained from a face-to-face survey of central and north-east region farmers together with the historical data of prices and yields at the provincial level (1998-2008) from the Office of Agricultural Economics for each individual crop and livestock in the study areas. The results indicate that marketing risks associated with the unexpected variability of input and product prices are considered as important sources of risk among the farmers in both regions. The production strategy related to the purchase of farm machinery to replace labour is perceived as an important strategy to manage risk by the central region farmers, whereas the north-east region farmers considered storing feed and/or seed reserves as an important strategy. The results also show that some farm and farmers’ characteristics (e.g. gender, education, off-farm work, farm size and farm location) significantly impact the risk perceptions of the farmers in both regions. The negative exponential utility function is performed to describe the farmers’ risk behaviour. This functional form classified all sampled farmers in both regions as risk averse. The SERF results show that maize followed by sorghum (CRFP4) is the most risk efficient farming system for the extremely risk averse rain-fed farmers in the central region. Intensive planting of wet rice and dry rice cultivation (CIFP1) is preferred by the extremely risk averse central region irrigated farmers. In addition, wet rice and cassava with raising small herd of cattle (NRFP5) is the most economically viable farming system for the extremely risk averse rain-fed farmers in the north-east region, while two rice crops with raising cattle (NIFP3) is preferred by the extremely risk averse north-east irrigated farmers.