Risk management by smallholder farmers in the Mangochi District of southern Malawi

Tani S Lee, Purdue University

Abstract

Smallholder farmers in Malawi comprise 80 percent of the country’s population and 90 percent of the country’s poor. They must confront high yield and price variability in addition to many resource constraints, including scarce arable land, lack of or inconsistent access to credit, improved inputs, adequate produce storage facilities, and input and output markets. This study examines these issues while considering risk as an important factor to better understand their household resource allocation decisions and find methods of improving their livelihoods, ideally to ensure food security and higher incomes. A linear programming model is developed to address these issues and risk is incorporated through the minimization of total absolute deviation (MOTAD) method. The results of the study reveal that current farmers’ production decisions are similar to the base model results at high risk levels. High risk causes farmers to increase the number of crop types produced to spread risk. If production variability is reduced to an average, consistent yield level, then the household can deal with price variability and modify its resource allocation and production decisions, while maintaining the household food security requirements. Policies such as a maize inventory-credit system and price floor reduce risk and profit in addition to increasing land allocated to maize and other crops that may require the need for more inputs such as cash crops. Reducing production variability and risk through inventory and price floor policies indicate the potential for adopting new technologies to maintain consistent production levels and the potential adoption of crops with higher value and return.

Degree

M.S.

Advisors

Lowenberg-DeBoer, Purdue University.

Subject Area

Economics|Agricultural economics

COinS