Using both household and plot-level crop choices to examine farmers’ selec- tion of food and cash crops and diversification of crop portfolio, it is observed that household food consumption and risk preferences significantly influence crop choices. This result shows the importance of crop choices for farming households especially when household decisions are non-separable. One interpretation of this finding is that farmers can internalize food markets by producing crops needed for household consumption to reduce reliance on markets in balancing household food demand. Thus farmers producing several crops are on average expected to be less constrained by frictions which affect household consumption. These farmers are expected to rely less on markets and more on own-farm harvest to achieve food security and higher consumption. This implication of our result can be tested by examining the effect of crop diversity on household consumption overtime. Using measures of crop diversity and household real consumption per capita from data collected in five waves of the ERHS (rounds 2 through 6) over a 10-year period we examine the effect of diversity on household consumption using Pooled OLS and Fixed Effects Estimators.
Table 9: Gains from Diversification
Pooled OLS Fixed Effects
VARIABLES log (r.cons) log (r.cons) log (r.cons) log (r.cons)
Total crop diversity 0.325*** 0.417***
(0.100) (0.119)
Food crop diversity 0.249*** 0.360***
(0.0850) (0.0984)
rain deviation from avg. -0.000135 -0.000156 -0.000114 -0.000150 (0.000103) (0.000103) (0.000106) (0.000104) diversity*rain dev. 0.000304 0.000304 0.000230 0.000275
(0.000304) (0.000261) (0.000321) (0.000262) Livestock Units (Lagged) 0.0150*** 0.0147*** 0.00865 0.00816
(0.00432) (0.00434) (0.00665) (0.00663) land area (in hectares) 0.0220* 0.0210 0.0316* 0.0311*
(0.0131) (0.0131) (0.0167) (0.0167)
Constant 3.675*** 3.652*** 3.794*** 3.787***
(0.0565) (0.0604) (0.0440) (0.0447)
Time Dummies Yes Yes Yes Yes
Location Dummies Yes Yes
Hh. Fixed Effects Yes Yes
Observations 3,290 3,290 3,290 3,290
R-squared 0.230 0.229 0.062 0.062
Adj. R-squared 0.225 0.225 0.0592 0.0597
F 53.29 53.66 18.97 18.55
Note: The dependent variable is defined as log of household consumption per capita Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1
The results indicate that, all else equal diversification of crop portfolio in- creases household consumption. In both measures of crop diversity (total diversity- production of food and cash crops; and food crop diversity- production of several food crops) and using both pooled OLS and fixed effects estimators, household consumption increases with crop diversity. Increase crop diversity through the production of food and cash crops is associated with an increase of 41.7% increase in household consumption on average. Whereas an increase in food crop diversity is associated with a 36% increase in consumption on average. Although the effects in the OLS model are smaller in magnitude, they are statistically significant. The joint effect of crop diversity and rainfall variation is small and statistically insignif- icant. The motivation for the interaction of crop diversity and rain deviation from average overtime is to capture the transitory nature of crop output on consump- tion as done by Paxson (1992). In the specifications without this interaction, the effects are generally larger but remain positive and statistically significant. It is also important to highlight the differences in the effects of crop diversity (defined
as a producing food and cash crops) and food crop diversity (defined as producing several food crops) on household consumption. The effect of the former appears to be larger in magnitude in both the pooled OLS and Fixed Effects estimated mod- els. This perhaps illustrates the fact that by diversifying crop portfolio into food and cash crops, farmers are better able to minimize risk of consumption fluctua- tions. Although a combination of different food crops enables farmers internalize food markets, but this strategy might be limited by the lack of heterogeneity- the sensitivity of the individual crops to shocks such as pest invasion, rain variation etc. are likely to be correlated. On the other a portfolio comprising food and cash crops is likely to be less sensitive to shocks on one of the crop categories.
The positive effect of crop diversity on household consumption can be explained in several ways. In an environment where formal insurance is absent and frictions in output markets impose constraints on consumption decisions, diversifying crop portfolio constitutes an ex-ante coping strategy for idiosyncratic shocks (Dercon (2002)). Through crop diversity (supplemented by other strategies as reported by Dercon (1996)), farmers can be insured against consumption fluctuations due to yield and/or price risk. In a recent work, Mazunda et al. (2015) (Chap. 5 pp. 44-49) provide evidence of the effect of crop diversity on household consumption through food and nutrition security of farming households in Malawi. Hirvonen and Hoddinott (2016) also showed that crop diversity among Ethiopian farmers is associated with a significant increase in the nutritional diversity of children in households facing constraints in accessing food markets. These findings illustrate the non-separability of household production and consumption decisions through crop choices as strategies used to internalize food markets to ensure food security and facilitate household nutritional diversity.
In general, the results provide statistical evidence that through crop choices, farm- ers have incentives to internalize food markets. It appears, through the produc- tion of several crops, constraints on farmers’ ability to balance household food consumption can be relaxed. Therefore, non-separability of household decisions among farming-households as indicated by the effect of household food consump- tion and risk attitude on crop choices can be interpreted as a constrained-optimal response to existing market conditions. In this chapter, we considered these effects
using different definitions of crop choices- selection between food and cash crops at household and plot level; and diversity of crop portfolio through the production of multiple food and cash crops.