Farmer Willingness to Take Risks in Rondônia, Brazil

Research by Brenna Swinger, edited by Corrie Monteverde

Farmer in Rolim de Moura proud of the stream in the back of his lot: "this river is my greatest wealth. Water is pretty much everything”

MAIN RESULTS

• Farmers in Rondônia Brazil operate under both specialization and diversification strategies

• This research sample does not align with the general literature surrounding education and risk: people with lower education levels are less willing to take risks

• Completely specialized farmers are less willing to take risks

• Farmers who are operating with a low level of diversification are more willing to take risks

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The Connections between Water and Rural Production project (CAP) investigates whether and which farmers adapt their production systems when they experience changes in rainfall, what adaptations they make, and whether these adaptations reduce income losses expected when rainfall variability occurs. Improved understanding of these responses will inform efforts by government agencies and civil society to help farmers adjust to changes in water availability. This research memo explores the key characteristics and differences, different production strategies, and responses to a general risk question for smallholder farmers in Rondônia, a state in the Brazilian Amazon.

Farmers in Rondônia can adopt one of two practices, diversification, or specialization. Diversification refers to the practice of participating in more than one source of income whereas, under a specialization strategy, a farmer would only participate in the activity expected to bring in the highest level of income. To measure the level of diversification within the sample I use Simpson’s Diversification Index (SDI). The SDI ranges between 0 and 1, where 0 is complete specialization and 1 is an infinite number of activities. There are 30 potential sources of income for households in our sample: 23 crop varieties, milk, cattle, other livestock, fish, bees, off-farm activities, and other sources. The other source encompasses government payments such as pensions, and government programs.

The frequency chart of the SDI is shown in Fig. 1. A large portion of farmers in Rondônia is completely specialized (SDI = 0), while the rest are greater than 0 but less than one on the diversification scale. The average farmer falls somewhere in the middle, with a mean SDI of 0.44. Of the specialized households, most of that specialization is the production of milk (109 farms) and cattle (49 farms).

Fig. 1 Distribution of Simpson's Diversification Index

Farmers also responded to the statement: “Please tell me how much you would say you are or are not willing to take risks in general. To answer, use a scale from 0 to 10, where 0 means you are ‘not willing at all to take risks’ and 10 means that you are ‘very willing to take risks'”. 1,267 households responded to the risk question. The mean of the risk question responses is 3.24. Many farmers indicate that they are not very willing to take risks, with almost 500 farmers responding that they are not at all willing to take risks (response =0).

Fig. 2 shows the breakdown of responses to the risk question by different levels of education. The breakdown of the education categories is as follows: 0 (no education), 1 (between 1 -3 years of education), 2 (4-6 years of education), 3 (7-9 years of education), 4 (10-12 years of education), and 5 (13-14 years of education). The literature surrounding risk preferences and education states that people with lower education should in general be more willing to take risks than people with higher levels of education. This study, in contrast with previous literature, concluded that willingness to take risks actually rises in people with advanced education (over 6 years).

Fig. 2 Risk response by education level

Fig. 3 shows the breakdown of risk responses by the level of diversification. Category 0 includes farmers that are completely specialized, and categories 1 - 3 are farmers operating under a diversification strategy at varying cutoff levels. The figure shows that completely specialized farmers (category = 0) are less willing to take risks than the sample average of 3.24. Category 1 indicates that farmers who operate under diversification tend to be more willing to take risks. Categories 2 and 3 Indicate that the most diversified farmers are less willing to take risks. This initial analysis reveals that specialized farmers are less willing to take risks, in contrast with current literature. Future research will focus on regression analysis to identify a statistically significant relationship between individual risk attitudes and diversification for farmers in Rondônia, Brazil.

Fig. 3 Risk response by diversification level

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For more information regarding this research, contact Brenna Swinger at: brennaswinger23@gmail.com

Brenna Swinger is a Master's student in Economics at the University of Montana. She is interested in how people make decisions and how the factors that are hard to observe play a role in the decision-making process. She is a BRIDGES Fellow for the National Science Foundation and studies the connections between food, water, and energy.