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Consumption Preferences, Risk and Production Choices – the Case of Ethiopian Farm Households

Consumption Preferences, Risk and Production Choices – the Case of Ethiopian Farm Households. Alemayehu Seyoum Taffesse. Objectives. Explore the impact of yield and price risk on Ethiopian farm household’s welfare in the context of incomplete markets;

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Consumption Preferences, Risk and Production Choices – the Case of Ethiopian Farm Households

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  1. Consumption Preferences, Risk and Production Choices – the Case of Ethiopian Farm Households Alemayehu Seyoum Taffesse

  2. Objectives • Explore the impact of yield and price risk on Ethiopian farm household’s welfare in the context of incomplete markets; • Assess the effect of the consumption preferences of Ethiopian farm households on their crop portfolio.

  3. Key Observations • Yield risks facing Ethiopian farm households are considerable;

  4. Key Observations • Price risks are also considerable;

  5. Key Observations • Output, Input, Credit, and insurance markets are either non-existent or highly incomplete and fragmented (even grain markets are not well integrated); • Consequently, the impact of yield and price risks on current and future welfare is huge;

  6. Key Observations • Households largely rely on a variety of household-level and collective ways of their own to cope with risk. including: • diversification of the portfolio of income generating activities, • preference for self-sufficiency (primarily food), • flexibility in resource use, • precautionary saving, • intergenerational co-residence, and • mutual insurance arrangements

  7. Key Observations • The literature on yield risk in Ethiopia and its impacts is substantial; • Little work on consumption price risk (volatility of prices of consumer goods including those they can themselves produce); • This presentation focuses on two issues: • The impact of preferences and endowments on production choices (non-separability) • the impact of consumption price risk on farmers’ crop choice.

  8. Methodology • A non-separable agricultural household model under yield and price risk is adopted (an inter-temporal asset portfolio choice model) • Land allocation and consumption levels are the choice variable • Household survey data (Economics at AAU/CSAE/IFPRI) and time series data (CSA) are used for estimating relevant parameters.

  9. Preferences, Endowments, and Production • Complete markets assumption implies that preferences and endowments do not affect production choices (separability); • A test: reduced-form model • Regress acreage shares on determinants of crop yield, consumption preferences, and endowments (risk bearing capacity); • Test the joint significance of preference and endowment variables – rejection means incomplete markets.

  10. Preferences, Endowments, and Production • Dependent variables: acreage shares of barley, maize, pulses, sorghum, teff, and wheat • Explanatory variables: • Productivity – no. of adults per hectare, years of schooling of household head, number of oxen, fertilizer application, fertility and slope of plots, round and village dummies; • Preferences – dependency ratio; • Endowments – non-crop income, no. of shoats, total acreage.

  11. Preferences, Endowments, and Production Data: • Five rounds of the Ethiopian Rural Household Survey of the Economics Department of AAU/CSAE/IFPRI; • Sample restricted to predominantly cereal producing villages Estimation: • Restricted least squares for individual acreage equations; and • SURE for the six equations jointly.

  12. Preferences, Endowments, and Production Wald test – SURE equations: Chi-squared[ 6] = 22.5736 *** Wald Test – individual acreage equations: F [1, 2950]

  13. Impact of Consumption Preferences on Crop Portfolio

  14. Estimates

  15. Results– Impact of Consumption Shares

  16. Implications • Poverty traps – risk can perpetuate poverty • Lack of specialization  low productivity  low income; • Low-return staple production  low income • Agricultural transformation • Preference for self sufficiency can induce slower adoption and innovation;

  17. Implications • Policy • Exclusive focus on on production-side factors such as yield risk may not be effective; • Consumption-side interventions can have considerable impact; • appropriate price stabilization interventions; • crop sales directly to farm households through outlets run by non-governmental organizations (NGOs) or government agencies; • provision of consumption credit to farm households by governmental and non-governmental agencies; • Research and development – innovations in storage

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