Risk preference and optimal enterprise combinations in Kahuro division of Murang'a district, Kenya

Abstract

Financing smallholder farming has been one of the major concerns of Kenya's agricultural development efforts. Many credit programs have evolved over the years but with dismal performance. In a study that sought to find the best way to finance smallholder agriculture, it became necessary to analyze and document, in the first place, the farmers' preferred enterprise patterns. Any financial innovations would hence address the preferred patterns. Of particular interest was the effect of risk preference on such patterns, which had been ignored in many previous farm management studies. Murang'a district was chosen as a typical smallholder district. Sample farmers, obtained through cluster sampling, were visited and structured questionnaires administered to cover farm events and physical resources of short rains 1995 to long rains 1996. This formed a basis for formulating the farm patterns. A quadratic programming model was used to analyze observed farm plans. The model incorporates farmers' risk preferences, revenue fluctuations, and resource and subsistence restrictions. The results showed that: (1) changes in risk preference do affect the optimal crop combinations; (2) the typical cropping pattern is rational as the farmer meets both food and cash under modest variability of income; (3) insisting on producing most subsistence food requirements by the farmers reduces efficiency and limits the feasible plans. Copyright 2005 International Association of Agricultural Economics.