Effect of maize price risk on small holder agricultural production patterns: case of the greater Kakamega District

Abstract

Liberalization of agricultural commodity markets in Kenya introduced problems related to volatile and fluctuating prices, and thus market risks. Imperfect knowledge regarding commodity prices makes management of the farm more difficult, especially when selecting the range of profitable enterprise combinations. Furthermore, while policy reforms were supposed to ensure availability of food to all people at all times, cases of food shortages are still reported even in areas that were previously food secure, with the most affected being the small-holder farmers. Kakamega district in Kenya is among the regions that have been significantly affected. While this region was formerly a maize surplus area, it has been experiencing a decline in maize production, with farmers shifting productive resources to other competing enterprises. In addition, poverty level is reported to have increased in the region. Given the importance of farm income in the total household income in the region, the purpose of the study was to evaluate resource use efficiency given the commodity market risk and to suggest some recommendations to help increase maize production and farm incomes in the study area. This study focused on analyzing the effects of maize price risk on agricultural production patterns and farm incomes, among small-scale producers in the greater Kakamega district in Kenya. Following the declining maize output, there was need to ascertain maize price risk, analyze the production pattern trend over time and determine whether farms are operating optimally given the risk. The study used both primary and secondary data. A total of 208 farmers were interviewed in February 2004 using a single-visit survey approach. A combination of purposive sampling, multistage random sampling, and systematic sampling methods was used to select the farms. Secondary data was collected at the district level. A combination of analytical techniques was applied, including the F-ratio test, Correlation analysis, Trend analysis, Linear Programming (LP) and Mean variance (E-V) analysis. Results of the F ratio test showed that maize prices in the study area has been volatile in the post liberalization period (1994-2003). Correlation analysis indicated a negative and significant relationship between price risk and resource allocation to the maize enterprise. Trend analysis showed that maize acreage allocation and output have been declining in the post liberalization period, while sugarcane output and acreage allocation has been on an upward trend. The Mean Variance risk minimization model showed three out of the five model farms operate in a risk inefficient manner. The remaining two model farms, though not optimal, were found to operate within the relevant planning ranges of risk efficiency. Mean Variance analysis also identified the sugarcane and dairy enterprises to have the most stable and profitable incomes in the risk optimal plans for these model farms. These results can guide policy makers in formulating appropriate and effective policies to address market risks and the resulting low agricultural incomes faced, especially by the rural poor small-scale farmers. As a result of the need to improve maize production and marketing, to improve farm incomes, the study recommended that investment in modern maize storage structures and practices at the farm level be promoted in the study area, and that farmers be encouraged to spread maize sales over time. The government could also increase the number of major players in maize marketing by mandating the NCPB to operate on a commercial basis, while still retaining its core function of maintaining strategic reserves. These measures may increase the minimum producer prices and reduce the range within which maize prices fluctuate. Given the capital-intensive nature of sugarcane and dairy production, and the operating capital constraint that farmers face in the region, it was suggested that credit access be improved to these farmers to relax the capital constraint to enable them operate optimally. The study suggested opening of more branches of AFC in the rural areas and an increase of funds allocated to the corporation by the government. It also recommended the improvement of the management and operation of the sugar industry and to emphasize and re-orient agricultural extension to improve access to agricultural information in the liberalization era.