Risk management strategies are also affected by an individual’s ability to bear (or take) risk. Simply stated, risk-bearing ability is directly related to the solvency and liquidity of one’s financial position. Risk-bearing ability is also affected by cash flow requirements.

Cash flow requirements are the obligations for cash costs, taxes, loan repayment, and family living expenses that must be met each year. The higher these obligations as a percentage of total cash flow, the less able the farm firm is to assume risk. Based on attitudes toward risk, farmers can be classified into the following risk-taking categories:

Categories of Risk Attitudes of Farmers

On the basis of attitudes to risk, farmers can be classified into the following risk-taking categories:

Risk Averters
Risk Neutral
Risk Seekers
Risk Tolerant

1. Risk Averters

Risk averters, or “avoiders,” are individuals who take appropriate measures to avoid incurring risk or the outcomes of risky events. Risk-averse people are not comfortable with risks; they are willing to avoid risks, once identified, rather than taking them.

Therefore, being risk-averse implies that an individual is not willing to stake in excess of the expected return in exchange for some certainty about the future. For instance, a risk-averse farmer will not respond positively to new innovations such as new crop varieties, herbicides, or other agrochemicals. Such farmers will delay adoption until they have seen the profitability of such risk-taking by neighboring farmers. Risk averters are laggards in the adoption of innovation.

2. Risk Neutral

Risk-neutral people manage risks based on their expected value, that is, probability times impact. In other words, their decisions toward risks are not biased by any other factors except for the risks’ expected value. A person willing only to pay the average loss as a premium would be considered risk-neutral.

Risk-neutral people are also known as “calculators.” Calculators understand they must take some chances to get ahead, but they recognize that there are degrees of risk in every situation. Before making a decision or taking action, they gather information and analyze the odds.

Calculators try to be realistic, recognize the risks, and try to reduce risks to acceptable levels. Most farmers are calculators, at least in the majority of their decisions. This means that such farmers are not ready to assume risk and, at the same time, are not prepared to stake more than necessary in preventing risk or transferring the loss to an insurance company.

The pertinent issue at this juncture is: What makes one person more risk-averse than another? This issue borders on the realm of psychology, sociology, or anthropology. Nevertheless, it can be assumed that factors such as family and societal influences, genetics, and religious and philosophical beliefs all play an important role.

3. Risk Seekers

Risk-seeking people see risks as challenges and feel excited dealing with them. A farmer or farm manager who accepts risk at less than the expected average loss, perhaps even paying to add risk, is a risk seeker. Risk seekers are also known as adventurers. Adventurers are individuals who enjoy risks.

To adventurers, risks are challenging and exciting. Often, adventurers look for the chance to take risks. Adventurers differ in their mental outlook. Some risk seekers enjoy the excitement of risk-taking but keep the stakes to reasonable levels.

Many farmers may be in this category with respect to their marketing plans. As long as financial survival is not at stake, they may enjoy the adventure of playing the market. Many speculators are in this category. However, some adventurers may get in over their heads. This may be due to peer pressure or a change in external conditions.

4. Risk Tolerant

Risk-tolerant people are indifferent about risks. This means they do not pay much attention to risks until these risks become real problems. The level of comfort of these categories of farmers to risks is very near the line zero.

Determinants of Farmers’ Risk Attitudes

1. Age of the Farmers: Age has been found to be inversely related to risk-averse attitudes. This implies that the lower the age of the farmer, the more risk-averse they will be. Older farmers are more likely to have accumulated more wealth than younger farmers. Also, older farmers are more likely to have greater social capital and incentives, which can serve as a form of traditional insurance or fall-back strategies in the decision-making process.

2. Household Size: The larger the household size, the greater the total consumption needs of the farm family, and hence, the more risk-averse behavior a farmer would exhibit. This implies that household size tends to reduce the probability of risk neutrality despite the large family size. Studies have revealed a negative relationship between household size and risk-averse attitudes.

This implies that the majority of households might have household members assisting on the farm by supplementing its labor supply, especially during peak periods (e.g., weeding and harvest times) of labor requirement.

3. Educational Status: The willingness of farmers to take risks tends to increase with the level of education. In other words, education increases the risk neutrality of farmers and reduces risk aversion.

The positive correlation between the educational status of farmers and their willingness to bear risk is based on the knowledge acquisition that helps such farmers understand the nature of risk and the various technologies available to mitigate or cope with it. This knowledge is absent in illiterate farmers, hence most of them are risk averters.

4. Access to Credit: Access to credit by farmers is another determinant of risk attitudes in Nigeria and, by extension, in other less-developed countries. Access to credit is inversely related to risk attitudes. This implies that the more credit support is given to farmers, the less risk-averse the farmers will become.

This is because financial support enhances farmers’ access to technological learning and improved production inputs, leading to increased productivity. Thus, depriving farmers of access to micro-financial services will make them more prone to being risk-averse.

5. Family/Farm Income: The financial status of food crop farmers has a positive and significant relationship with the risk-averse attitude of food crop farmers. This stands to reason that the lower a household’s income or the poorer the household, the more risk-averse it will be.

Hence, all other things being equal, households whose incomes fall below the poverty line would be less willing to take risks than those whose incomes are higher.

6. Mode of Land Acquisition: Farmland can be acquired by inheritance, purchase, or leasing. The most common mode of land acquisition by farmers in developing countries is inheritance.

This mode of land acquisition (inheritance) increases the probability of risk-seeking among respondents. Since the land is not purchased, the farmer can afford to use it as surety or guarantee for any risky transaction.

7. Total Investment: A farm’s total investment is one of the factors that determine the willingness of a farmer to bear risks. Capital accumulation and an increase in farm assets attract higher risk, hence the farmer must indulge in certain risky enterprises. In such circumstances, a risk-seeking attitude is a natural course.

Risk-bearing ability is directly related to the solvency and liquidity of one’s financial position. The higher the net worth (or owner’s equity) of a farm/firm, the greater the ability of such a farm to bear risk.

Risk-bearing ability is also affected by cash flow requirements. Cash flow requirements are the obligations for cash costs, taxes, loan repayment, and family living expenses that must be met each year. The higher these obligations as a percentage of total cash flow, the less able the farm firm is to assume risk.

8. Membership of Cooperative Society: Membership in a cooperative society gives farmers access to credit at low interest rates. It is therefore expected that membership in a cooperative society should increase the risk-seeking ability of farmers.

It is thought that when farmers associate with members of similar social and economic status, the knowledge base for dealing with risks associated with the agricultural production environment is enhanced, thus boosting risk-seeking abilities.

However, the contrary has been the case. This might be due to the fear of investing acquired loans in risky enterprises, which could lead to default in payment, thereby losing their integrity.

The attitude toward risk differs from one individual to another. The different postures toward risk are determined by the socio-economic characteristics of the farmers as well as the farm’s characteristics. The risk attitude influences the rate of adoption of innovation vis-à-vis the farmers’ income.

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