Policy Brief 

Risk and Sustainable Crop Intensification among Small-holder Rice and Potato Farmers in Uganda  

30th May, 2016 / By BJORN VAN CAMPENHOUT 

Motivation

Like many low income countries, especially in sub-Saharan Africa, Uganda is an overwhelmingly agrarian society, with 72 percent of the working population engaged in agriculture. Persistently high fertility and rapid urbanization means yields need to increase without further exhausting available resources. The use of modern inputs, such as synthetic nitrogen fertilizers and high yielding cultivars, together with access to appropriate technology, is often touted as the best way to increase crop yields. Farming in sub-Saharan Africa is a risky business because of its dependence on natural climatic conditions, and it is often argued that the use of such modern inputs exposes poor households to even more risk. Farmers already use a host of risk management and risk coping strategies to deal with this risk. Perceived risk associated with the use of modern inputs adds to this risk, and risk avoidance and inability to take on risk is key to understanding lack of sustained intensification.

Rice and potato growing in Uganda – the data

Mr. Nanfumba making a presentation on Rice findings

David presenting findings on Rice growing to MAAIF leaders

Between June and August 2014, we collected detailed socio-economic data from about 880 small-holder farmers in Uganda. Both the rice and potato sectors are quickly gaining importance in Uganda. Still, rice and potatoes are non-traditional crops, and thus grown by relatively better off households. This is reflected in our data, especially for rice. Rice growing households have a few large plots. Potato growing areas have many small plots. About one quarter of households are using some kind of fertilizer on at least one of their rice or potato plots. Almost half of the households report to be using pesticides, herbicides and/or fungicides.

Is there Potential for Intensification? Figure 1, showing yields of both potatoes and rice in our sample, suggests substantial room for crop intensification. Especially for potatoes, the gap between median and average yields on the one hand, and potential yields on the other hand are huge. We also find that intensification seems to work. Figure 2 shows that farmers that intensify through the use of modern inputs such as fertilizer and pesticides report yields that are between 65 and 200 percent higher. We also find that fertilizer and pesticide use is profitable. Figure 1 Yields

Figure 2: Effect of modern inputs for intensification on yield

Does Modern Inputs for Intensification Increase Risk?

Modern input use not only increases average productivity, it is also likely to increase its variance. Put differently, while the use of a certain input may increase the chance that one ends up with a higher quantity produced, it may at the same time increase the chance that one ends up with a lower outcome.  Figure 3 shows kernel density estimates for rice in the top panel and potatoes in the bottom panel. The use of fertilizers and pesticides shifts the distribution to the right, thereby slightly increasing the variance. Downside yield risk does not seem to increase with intensification.

Figure 3: Distribution of yields

Risk Management Farmers are faced with a myriad of risks, which they try to insure against using a host of risk management strategies. Ex-ante risk-management behaviour includes private investment in risk reducing technology and infrastructure, such as in storage to reduce post-harvest loss risk. Diversification, where income from different sources is preferred to specialization, and income skewing, where low-risk low-return activities or crops are preferred to more profitable but typically also more risky alternatives, are other ways in which households protect themselves. Savings and credit can also provide a cushion when things turn out badly. Obviously, insurance would be the most effective way to protect against risk, but problems related to asymmetric information appear difficult to overcome.

Risk Management and Intensification in Uganda                                                                                                 Using the data from potato and rice farmers in Uganda, we investigate if farmers that use risk management strategies are more likely to use fertilizer and/or pesticides. We first look at private investments in risk reducing technologies. One source of uncertainty for farmers is the price risk. Spatial price risk, stemming from uncertainty about the price in consumer markets, can be mitigated by reducing search costs. Recent research has looked at the potential of Information and Communication Technologies (ICTs), especially in the form of mobile phones, to reduce search costs. The two stacked bar charts on the left in Figure 4 look at the relation between private investment in information gathering technology and intensification behaviour. About 45 percent of household that report having a mobile phone do not use fertilizer or pesticides. Among the households that do not own a mobile phone, this is more than 60 percent.

Figure 4: Private investment in risk reduction

Farmers can also invest in improved storage facilities to reduce risk of post-harvest losses. We ask farmers whether they store their potatoes or rice in a special storage facility, as opposed to just on the floor. About 45 percent of households that have improved storage are not using any improved inputs. This share is about 64 percent for households that have no improved storage (Figure 4, right panel).

Diversification is also a very important risk management strategy that is used by individuals and households in risky environments. More than 60 percent of households in our sample report to be growing 3 or 4 crops in addition to potato or rice they grow. Using a measure that also incorporates the relative importance of each crop in the crop mix, we come to the same conclusion, namely that rice and potato farmers grow a moderately diversified crop mix. We then relate these indicators of diversification to sustainable intensification practices. The first panel in Figure 5 explores the relation between fertilizer use and the number of crops the household grows. The red line indicates that about 25 percent of households reports using fertilizer. However, this proportion seems to be higher for households that grow more than four crops. The second panel is similar, but looks at the use of pesticides. Here we see that about 43 percent of households are using pesticides/fungicides or herbicides. Here, we find that households that have only one or two crops next to potatoes or rice are less likely to be using improved inputs. Overall, the evidence is consistent with a situation where households that are better able to protect themselves against bad luck through diversification are also more likely to engage in intensification.

Figure 5: Diversification

In the absence of credit and insurance markets, precautionary savings, in the form of non-financial assets, especially livestock, is probably the most effective way to protect against common shocks. Figure 6 explores the link between savings in livestock assets and sustainable crop intensification among Ugandan potato and rice farmers. The figure plots a non-parametric regression curve and shows that the proportion of households that use fertilizer increases gradually, from virtually zero to about 30 percent, over a range of livestock assets between 0 and UGX500,000. For pesticides, there is a similar increase from about 20 to 45 percent. Once a household have more than UGX500,000 in livestock assets, the proportions seem to level out. From this we conclude that households that have more livestock are more likely to intensify.

Figure 6: Precautionary Savings

Access to credit is also often identified as a risk management strategy. Figure 7 shows that there is a clear link between intensification behaviour and access to credit among Ugandan rice and potato farmers. Among households that report not to have access to credit, about 75 percent state they are not using pesticides nor fertilizers. In the subgroup of households that report they do have access to credit, this proportion reduces to about 45 percent. We see that especially the proportion of households that uses both pesticides and fertilizers together increases substantially with access to credit.

Figure 7: Access to credit  

   Potato value chain actors that participated in the feedback workshop 

Policy Recommendations

Since agricultural risks are interrelated and farmers are managing risk through a system of interrelated strategies, agricultural risk management policies should take a holistic approach. While some policies or interventions may crowd out other risk management strategies, others may reinforce each other. Bearing this in mind, we propose a comprehensive agricultural risk management policy should pay attention to the following components:

  • Calamity insurance and social safety net: Large shock that affect entire areas are difficult to insure against and can have large and lasting consequences. Governments should be ready to deal with disasters and may temporarily need to support livestock markets and provide emergency aid.
  • Promote development of risk market: The government should create an environment in which a private market that insures against normal risk can develop and flourish. Since risk reducing instrument such as commodity futures and weather insurance are contract based, strong institutions are very important.
  • Agricultural price risk management: The government’s first concern should be to increase pass-through of prices. Therefore, policy makers should design policies that are likely to improve connections between remote villages and the world market. Limited price intervention may be justified for cases where market failures are responsible for the bulk price uncertainty
  • Risk reducing public investments: Just as individuals and households can invest in risk reducing technologies, governments can engage in the provision of public goods that are more or less likely to affect agricultural risk.
  • Contract farming: Contract farming can be a very good way to mitigate risk related to innovation in agriculture. The development of Zonal Investment Plans (ZIPs) within PASIC, which aims to develop investment blueprints showcasing investment opportunities in different zones in Uganda and public-private partnership is likely to increase small-holder outgrowing schemes.
  • Change farmer’s perceptions: Educate farmers about the risks associated with intensification. Design and test policies and instruments that, through positive reinforcement and indirect suggestion, guides farmers to take up more risk.