MADDA WALABU UNIVERSITY

POSTGRADUATE PROGRAMME

Source of Risk and Risk Management Strategies of Tomato Producing

Households in Dugda District, East Shewa Zone, Oromia, Ethiopia

M.Sc. Research Proposal:

By: Genemo Fitala

College: Business and Economics

Department: Economics
Program: Agricultural Economics
Advisor: DR .Semenie Bessie (PhD)

Bale Robe Ethiopia.

January 2019
 Source of Risk and Risk Management Strategies of Tomato
Producing Households in Dugda District, East Shewa Zone,
Oromia, Ethiopia

A Research proposal Submitted to Department of Economics,

Madda Walabu University in Partial Fulfillment of the
Requirements for the Degree of Masters of Science in
Development Economics

By: Genemo Fitala

Advisor: Semenie Bessie (PhD)

January 2019
Bale Robe, Ethiopia
 ACRONYMS /ABBREVIATIONS

ATA Agricultural Transformation Agency of Ethiopia

AVCPO Agricultural Value Chains Project in Oromia

CSA Central Statistics Agency of Ethiopia

EEA Ethiopian Economic Association

EIA Ethiopian Investment Agency

FAO Food and Agriculture Organization of the United Nations

FFV Fresh Fruits and Vegetables

GDP Gross Domestic Product

IFAD International Fund for Agricultural Development

IFPRI International Food Policy Research Institute

IPCC Intergovernmental Panel on Climate Change

MoFED Ministry of Finance and Economic Development

NIE New Institutional Economics

OBoFED Oromia Bureau of Finance and Economic Development

OECD Organization for Economic Cooperation and Development

OIA Oromia Investment Authority
OLS Ordinary Least Squares

PCA Principal Component Analysis

PSM Propensity Score Matching
SFP Safety Fisrt Principle

TCE Transaction Cost Economics

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 TLU Tropical Livestock Unit

UNISDR United Nations International Strategy for Disaster Reduction

LIST OF FIGURES.

Figure 1 Risk Management Process.............................................................................................13

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 TABLE OF CONTENTS

Contents Page
ACRONYMS AND ABBREVIATIONS............................................................................................i
LIST OF FIGURES.........................................................................................................................ii
TABLE OF CONTENTS...............................................................................................................iii
1. INTRODUCTION.......................................................................................................................1
1.1. Back ground of the study......................................................................................................1
1.2. Statement of the problem......................................................................................................3
1.3. Research question.................................................................................................................4
1.4 .Objective of the study...........................................................................................................4
1.4.1. General Objective of the study....................................................................................4
1 .4.2 Specific Objective of the study...................................................................................4
1.5. Significance of the Study......................................................................................................4
1 .6. Scope and Limitation of the study.......................................................................................5
2.LITERATURE REVIEW.............................................................................................................6
2.1. Overview...............................................................................................................................6
2.1.1. Basic concepts.............................................................................................................6
2.2 Risks in Crop production.......................................................................................................7
2.2.1. Production or Yield Risk.............................................................................................8
2.2.2. Price Risk or Market Risk...........................................................................................9

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 2.2.3.Institutional Risk..........................................................................................................9
2.2. 4. Financial Risk...........................................................................................................10
2.3. Risk management process...................................................................................................10
2.3.2.Risk identification......................................................................................................11
2.3.3.Risk analysis...............................................................................................................11
2.3.4. Risk assessment.........................................................................................................11
2.3.5.Risk management.......................................................................................................12
2.3.6.Monitoring and review...............................................................................................12
2.4. Risk Management Strategies...............................................................................................14
2.4.1. Ex-ante Strategies......................................................................................................15
2.4.2. Ex-post Risk Strategies.............................................................................................15
2.5. Theoretical Frame work......................................................................................................15
2.5.1, Psychometric Paradigm....................................................................................................16
2.5.2. Cultural theory paradigm.................................................................................................16
2.5.3. Farm structure model.......................................................................................................16
2.7. Methodological Framework................................................................................................17
2.7.1. perceptions of Risk source and Risk management strategies...................................17
2.8. Analytical Framework.........................................................................................................18
2.8.1. perception of risk source and risk management strategy.........................................18
2.9. Empirical Studies................................................................................................................18
2.9.1. perception or risk source and risk management strategies of a farmer.....................18
2.10. Conceptual Framework.....................................................................................................20
3. RESEARCH DESIGN AND METHODS.................................................................................21
3.1 Description of the study Area..............................................................................................21
3.2. Types and source of data.....................................................................................................22
3.3. Method of Data Collection..................................................................................................22
3.4. Questionnaire Development................................................................................................23
3.5. Method of Sampling............................................................................................................23
3.6. Method of data analysis......................................................................................................24
3.6.1. Descriptive Method...................................................................................................24
3.6.2. Econometric Model...................................................................................................25

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 3.6.2.1. Factor Analysis..............................................................................................25
3.5.2.2. Multiple regression analysis..........................................................................26
3.6. Hypothesis and Definitions of Variables............................................................................27
3.6.1.Research Hypothesis..................................................................................................27
3.6.2. Definitions of Variables...................................................................................................29
4. ACTIVITY BREAK DOWN AND BUDGET PLAN..............................................................34
4.1. Activity Breakdown............................................................................................................34
4.2. Research Budget Breakdown..............................................................................................35
5. REFRENCES.............................................................................................................................36

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 1. INTRODUCTION

1.1. Back ground of the study

The economy of Ethiopia remains highly dependent on agriculture which contributes about 41
percent of GDP, 83percent of employment and 90 percent of exports (EEA, 2012). However, the
agricultural productivity is low due to use of low level of improved agricultural technologies,
risks associated with weather conditions, diseases and pests, etc. Moreover, due to the ever
increasing population pressure, the landholding per household is declining leading to low level of
production to meet the consumption requirement of the households. As result, intensive
production is becoming a means of promoting agro enterprise development in order to increase
the land productivity (Bezabih and Hadera, 2007).

Due to perishable nature and biological nature of production process there is a difficulty of
scheduling the supply of vegetables to market demand. The crops are subjected to high price and
quantity risks with changing consumer demands and production conditions. Unusual production
or harvesting weather or a major crop disease can influence badly the marketing system. Hence,
knowledge crop producers’ perception towards risk is important in designing strategies and
formulating policies for agricultural development (Ayinde et al., 2008).

Production, which is the conversion of inputs into output, takes place under either a perfect or an
imperfect knowledge situation. A perfect knowledge occurs when the cause (action) and results
are known with certainty. Most economic analyses assume a perfect knowledge which is more
theoretical than real. An imperfect knowledge situation occurs when the decision-maker (farmer)
is not very sure of the result(s) of the action to be taken. There are two variants of imperfect
knowledge situations. One of them is a situation of uncertainty, in which either all the possible
outcomes of an event/action or the probabilities associated with each outcome or both are not
known. The other is a situation of risk, which occurs when all possible outcomes for a given

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management decision (action) and the probability associated with each possible outcome are
known

The various sources of risk can be grouped into business risk and financial risk. Business risk
occurs when there is variation in income levels and it is divided into the categories of technical,
market and social risk. The technical risk is the risk associated with adverse variation in yield
because of abnormally bad weather, disease or other climatologically events (Pension and Lins,
1980). Market risk is that borne when actual prices are different from that originally expected.
Social risk derived from human factors such as theft, strikes, sudden death, accidents, wars etc.
that can lead to unexpected decline in yield or total loss of output. The use of debt in financing
farm enterprise exposes it to financial risk. Financial risk occurs when household’s profitability
(rate of return) is less than the cost of capital.

The sources of risk in a crop productions are numerous and diverse. The markets for crop inputs
and outputs have a direct incidence on production risk, particularly through prices. A diversity of
hazards related to weather, pests and diseases or personal circumstances determine production in
ways that are outside the control of the farmer.

Risk perceptions play a key role in the production and investment behavior of farmers in
vegetable production decisions (Ali and Kapoor, 2008). Furthermore, better understanding of
farmers’ risk perceptions facilitates rational resource allocation decision in the farming system,
rural financing and policy formulation. In this context, understanding risk is a key element in
helping producers make better decisions in risky situations, and also provides useful information
to policy makers in assessing the effectiveness of different types of risk protection tools.

Risk management strategies start with decisions on the farm and the household: on the set of
outputs to be produced, the allocation of land, the use of other inputs and techniques, including
irrigation and the diversification of activities on and off-farm. Farmers can also manage risk
through market instruments which include insurance and futures markets. However, not all risks
are insurable through markets, the main reasons for non-insurability being the systemic nature,

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the lack of information on probabilities and information asymmetry with respect to those
probabilities. A risk management system is composed of many different sources of risk that
affect farming, different risk management strategies and tools used and available to farmers, and
all government actions that affect risk in farming. A standard approach to analyses risk
management issues will involve three linear steps. First, measuring the risk or variability that
needs to be managed. Second, use this information to analysis the optimal risk management tool
for a given farmer, accounting for his endowments and risk preferences. Finally, decide on
appropriate government policies to improve this risk management strategy.

1.2. Statement of the problem

The agricultural sector is characterized by higher exposure to a variety of risks compared to the
other economic sectors. Agricultural risks include production, market, credit, technological,
institutional and human resource risks. Moreover, the agricultural risk environment is changing
with high frequency and severity due to climate change and market liberalization. Additionally,
policy decisions about the suggested improvements and intervention measures might be
inappropriate. In such a context, a comprehensive and continuous monitoring of how farmers
perceive risks in their own ways is paramount for policy makers to develop appropriate risk
management strategies. Moreover, it is useful for the developers of risk management programs to
have information about the factors that differentiate farmers’ attitudes and perceptions. Against
this background, it is the objective of the thesis to provide empirical insights into various issues
of risk management in Dugda Districts Tomato Producing households.

Based on survey data of 200 Tomato producing households in Dugda District, this thesis studies
survey data relating to farmers’ perceptions of risk and risk management Strategies. Furthermore,
it analyzes, using multiple regression analysis, whether related socio-economic characteristics
influence the risk source perception and risk management strategies.

Tomato producing households in Dugda woreda face many risks in their farming activities. For
example, in the past, the county has recorded drought, crop and animal diseases and pests as well
as fluctuations in prices of both farm produce and inputs. As a result, there has been variability in

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household income. Risk hinders households from pursuing their cropping as a business. The risk
situation is complicated by the fact that they operate in an environment with weak markets. They
do not have access to sufficient support institutions that can help them cope with risks. The
policies described for risk management include risk sharing institutions like national insurance
and credit schemes that help reduce the burden of risk to society. Since private sector insurance
products in crop production are still in their development stages, farmers have chosen self-
insurance strategies that include social mechanisms and diversification for coping with risk. The
effectiveness of self-insurance strategies including source of risk a risk management has not been
evaluated. This study intends to fill this knowledge gap.

1.3. Research question

1. What are the most common types of risks that face Tomato producing households?
2. What are Household’s risk perceptions?
3. Which types of risk management strategies tomato producing Household’s use?

1.4 .Objective of the study

1.4.1. General Objective of the study

The main objective of this study is to assess perceived risk source and risk management
strategies of Tomato producing households’ in the Dugda District ,east Shewa Zone, Oromia
region, Ethiopia.

1 .4.2 Specific Objective of the study

1. Identifying the risk sources and their relative importance in Tomato farming.
2. Determining the use and the reason for low or non-use of each risk management
strategy.
3. Identifying the appropriate risk management strategies

1.5. Significance of the Study

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The agricultural productivity is low due to use of low level of improved agricultural
technologies, risks associated with weather conditions, diseases and pests, etc. Moreover, due to
the ever increasing population pressure, the landholding per household is declining leading to
low level of production to meet the consumption requirement of the households.

Vegetables can generate high income for the farmers because of high market value and
profitability. On the other hand, as vegetables are highly perishable, they start to lose their
quality right after harvest and continued throughout the process until it is consumed. Hence,
Tomato productions are risky investment activities and several factors that are beyond the
control of producers.

Furthermore, the findings of this study can provide useful information to reinforce the empirical
basis for risk perceptions of Tomato producing house holds’. It also explores the major sources
risks that confront households of Tomato producers and provides more accurate information
regarding risk and risk management in Tomato farming at the farm level to policy makers and
researchers. .

Hence, the analysis of risk source and risk management strategies of Tomato producing
households is expected to provide an input for policy makers and researchers, especially for the
Tomato producing farmers, Commercial firms and Agricultural research organizations found in
Dugda District ,East Showa Zone, Ethiopia. Furthermore, the study will hopefully help for
further studies on the same topic.

1 .6. Scope and Limitation of the study

The study will be confined to Dugda woreda, which was chosen because it is one of the
area where Tomato production is the most important economic activity. It characterized the risks
that Tomato producer’s house hold face, how it affected their behavior, how they managed them
and specifically focused on the role of Tomato production as a risk management strategy.

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 2.LITERATURE REVIEW

This chapter covers the literature review which includes basic concepts, theories, analytical
framework, conceptual framework and empirical literature on risk perception, risk source and
risk management strategies.

2.1. Overview

2.1.1. Basic concepts

Risk in agriculture is pervasive and complex, especially in agricultural production. Farmers

confront a variety of yields, unstable output and input prices and radical changes in production
technology as inherent in their farming operations. These affect the fluctuation in farm
profitability from season to season and from one year to another. The sources of risk and level of
its severity can vary according to the farming systems, geographic location, weather conditions,
supporting government policies and farm types. Risk is a major concerning developing countries
where farmers have imperfect information to forecast things such as Farm input prices, product
prices, and weather conditions, that might impact the farms in the future (Aditto, 2011).

Sources of risk in agriculture are classified into business risk and financial risk. Business risks
can be classified further into production or yield risk, marketing or price risk, institution, policy,
legal risk, human or personal risk, technological risk. On the other hand, financial risk occurs
when farmers borrow to finance farm activities as farmers often face variations in interest rates
on borrowed funds, inadequacy of cash flow for debt payments and changes in credit terms and
conditions

Risks affecting agri-businesses activity can be classified according to different criteria; the
following categories are frequently referred to in the literature of (Ali and Kapoor, 2008; OECD,
2008). These are market risks, production risks, institutional risks, financial risks, personal risks
and asset risks.

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Risk: - is variability of outcomes. Although risk refers to situations where probabilities can be
attached to outcomes, this study assumes risk and uncertainty are subjective issues based on the
decision maker’s personal viewpoint about the occurrence of events (Lukekipkurgat korir 2011)
Risk perception Risk in agriculture typically correlated with the chance of a negative outcome
(e.g., financial loss or yield decrease) and the uncertainty in the decision making process due to
incomplete information such as market prices (Parker et al., 2012)
Uncertainty is a situation when either all the possible outcomes or the probability of the
outcomes are unknown, or both the outcomes and the probabilities are unknown. Most authors
find a more useful distinction between uncertainty as imperfect knowledge and risk as exposure
to uncertain unfavorable economic consequences (Hardaker et al., 2004).
Asset risk is also common to all businesses and involves theft, fire, or other loss or damage to
equipment, buildings, and livestock
Personnel risks; is a risk which arises due to uncertainty due to personnel hazards, such as
injury, illness, or death.
Coping:- the methods used by households to survive when confronted with unanticipated
livelihood failure.
Covariant risk:- a risk that affects all households in a locality and arises out of factors
that prevail on all the households equally such as rainfall and market price conditions.
Risk management: - the systematic application of management policies, procedures and
practices to the tasks of identifying, analyzing, assessing, treating and monitoring risk
(Lukekipkurgat korir 2011).
Ex-ante strategies:- risk management strategies that are employed prior to the occurrence of the
risk in order to reduce the loss once it occurs.
Ex-post strategies:- strategies employed by households to cope with losses after the risk occurs.
Household:- An independent male or female producer and his/her dependants who must have
lived together for a period not less than six months. They make joint economic decisions.

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2.2 Risks in Crop production.

The various sources of risk can be grouped into business risk and financial risk. Business risk
occurs when there is variation in income levels and it is divided into the categories of technical,
market and social risk. Market risk is that borne when actual prices are different from that
originally expected. Social risk derived from human factors such as theft, strikes, sudden death,
accidents, wars etc that can lead to unexpected decline in yield or total loss of output (Ellis
(1988)) identified four types of risks: natural hazards (weather, pests and diseases), market
fluctuations (of output prices), social uncertainty (due to differences over control of resources)
and state actions and wars. According to (Hardakeret al., 2004), three major types of risk in
farming can be identified; yield, price and transaction risks

2.2.1. Production or Yield Risk

Production or yield risk refers to risks that are present at farm level and affect yields. A large
number of risks affect the volume of production of agricultural commodities. These include non
extreme weather events (too little rainfall, too much rainfall, hail, frost, low temperature, and so
on). They also include less frequent but catastrophic weather events (severe floods, droughts,
hurricanes, cyclones, and so on). Outbreaks of pests and diseases can also adversely affect yields,
as can damage by animals, fire, and wind. (WB, Group Report Number 100320-GLB, 2016)

It is called yield risk which distinguishes agricultural production (plant and livestock) from other
business sectors. It is the essence of risk in agriculture which concern losses arising from the
unpredictable nature such as biological, ecological, and technological changes. Farming is
affected by production risk which is often related to weather phenomena including flood,
insufficient rainfall, frost, overheating, hail, windstorms, diseases and insects. (Almadani, 2014).

Production for a specific crop depends on biophysical factors (erratic rain, type of soil and its
quality, diseases and pests) and input prices, resource endowment and household specific
consumption requirements. Yield risk can be measured using the coefficient of variation, which
is a measure of randomness relative to the mean yield value (Hardakeret al., 2004,).

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Development and adoption of new techniques and production methods are considered as one of
production risk. New crop varieties, chemicals, crop rotations, models of machines may cause
losses while they are proving their appropriateness and effectiveness in different agricultural
systems (Miller et al. 2004).

2.2.2. Price Risk or Market Risk

Market risks are the result of variations in supply and demand for crops that are not subjected to
price controls and the inability of controlled markets to respond timely and efficiently to changes
in the market conditions. Variations in the price fetched by the farmers are a reflection of the
market risk. Moreover, market risks may be due to factors affecting the timely delivery of
produce to markets or quality of produce (e.g. poor feeder roads, on-existence of storage/
transportation facilities, bulk and perishable nature of the produce). Consequently, the farmers
are forced to sell their produce to the traders at cheaper prices (Ali and Kapoor, 2008).

2.2.3.Institutional Risk

Institutions are mechanisms that are used to structure human interactions in the presence of
uncertainty. They help to reduce uncertainty and risk in human exchange (Kirsten and Karaan,
2005). This includes political risk, which is the risk associated with unfavorable policy changes.
An example is changes in tax or credit policy and restriction on the use of a certain pesticide that
alters the cost of production

This type of risks represents the negative impact of changes in policies and legislation on
agricultural business. It embodies the political risk by the national governmental interventions in
the agricultural sector such as regulations restricting the use of pesticides in horticulture, and use
of drugs for disease prevention and treatment in animal husbandry sector. Also, it includes
regulations which result in increasing market liberalization and decreasing subsidy levels.
Legislation which control land and water use, as well as area licenses, might affect farm
profitability. (Almadani, 2014).

2.2. 4. Financial Risk

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Financial risk are risks which are resulted from uncertainty about financial flows within a
business due to variability in interest rates, access to credit and value of financial assets. The use
of borrowed funds means that a share of the returns from the business must be allocated to
meeting debt payments.

2.3. Risk management process

Risk management process includes much more than dealing with risky events after they
occurred. It involves the identification of risky events in the organization in advance given the
likelihood and consequences of such events to react in an appropriate way (Merna and Al-Thani
2008). Risk management is a complex process which can be summarized in five consecutive
steps (Figure 3.1): establish the context, risk identification, risk analysis, risk assessment and risk
management (Waters 2011).
2.3.1. Establish the context

Defining the context is the first step in the risk management process. It starts by identifying the
relationship between the farm and its environment, taking into account the strengths,
weaknesses, opportunities and threats related to the farm. Furthermore, the setting of the division
of responsibility for various types of decision making among people in the farm is s very
essential element in the context establishment. The basic risk management instruments through
which risks will be managed must be determined in this stage. Given the impossibility to deal
with every risk all at once, some priority setting must be built in this stage by start with risks
which are expected to be more dangerous. A successful context establishment highly ensures the
efficiency of subsequent risk management steps.

2.3.2.Risk identification

Risks in agriculture are obviously endless. Thus, the aim of the risk identification step is to filter
those events that are predicted to have a notable effect on the attainment of the farm’s
performance by answering the following questions: What might happen, why and how might it
happen, and finally how the organization might be affected (Hardaker et al. 1997).

2.3.3.Risk analysis

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Risk analysis seeks to estimate the chance of risk occurrence, and assess the magnitude of
negative consequences. Thus, it will be able to classify risks into low/high probability/impact
(Al-Thani (2008) introduced various qualitative and quantitative instruments for analyzing risks
such as checklists, risk map and simulations. Balance sheet, profit-or-loss statements (Bahrs
2002 as cited in Schaper et al. 2010),

Among them, the risk map is a standard tool used to assess risks. It is simply a graphical
representation of risks on a two-dimensional graph where each risk can be placed once to clarify
the levels of frequency and severity of consequences for each risk identified in the second step.
Iso-risk curves drawn on the graph help to distinguish relevant risks which need treatment
priorities, and less relevant risk can be distinguished by the risk map (Merna and Al-Thani
2008).

2.3.4. Risk assessment

Risk assessment is concerned with decision making based on the outcome of the risk analysis
step. The decision making has to include two aspects: First, which risks need treatment and
treatment priorities, second, identification of those risks for which current risk management
practices are not appropriate, so that further strategies must be developed. These two steps can be
achieved by comparing the outcomes from events recognized during the analysis process with
risk evaluation criteria which were considered when the context was established.

The assessment of risk in light of the acceptable level of risk and the level of protection already
achieved (the risk management techniques and controls currently in place).The acceptable level
of risk is essentially determined by risk attitude, which is far from being devoid of subjective
factors. Accordingly, decision-makers can be risk averse, risk seeking and risk neutral. The
relationship of the two factors determines priorities and the appropriate techniques of risk
management

2.3.5.Risk management

It follows the risk assessment to identify the range of treatment options such as ignorance,
acceptance, reduction, avoidance and transfer of risks. After that, it proceeds in selecting and

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implementing appropriate options to deal with risks. These options can be applied either
individually or in combination based on the target risk, and the extent of any additional benefits
or opportunities created by the treatment (Nguyen (2007, p. 21) illustrated that “the successful
implementation of the risk management plan requires an effective management system which
specifies the methods chosen, assigns responsibilities and individual accountabilities for actions,
and monitors them against specified criteria”.

During the implementation of risk management, the aim is essentially to reduce the magnitude of
risk (gross risk) to an acceptable level (net risk) rather than to eliminate risk completely (Fekete
2009).

2.3.6.Monitoring and review

The risks and the steps of the risk management process, which have been planned and
implemented, require frequent monitoring. Risks and knowledge of risks are likely to change
over time, so new risks may arise, and new outcomes associated with the new risks have to be
analyzed. Consequently, it is important to monitor the outcomes of the implemented decisions to
identify the insufficient ones, and improve further appropriate management practices.

Monitoring and review based on communication and information exchange are necessary to
certain that the risk management plan is working, and to identify aspects where further decisions
need to be made (Hardaker et al. 1997). Perfect information access is very essential in such a
step.

Figure 3.1: Risk Management Process

Establish the context

Objectives, Stakeholders
Criteria Key elements

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 Identify the risks
What can happen?
How can happen?
When and Where?

Monitor and Review

Communicate Analysis the risks Monitor
and consult Determine probabilities and Review
Determine consequences
Determine level of risk

Assess the risks

Evaluate risks
Rank risks

Manage the risks

Identify options
Develop management plan
Implement management plan

Source: Based on Palinkas (2011).

2.4. Risk Management Strategies

Risk management includes all activities that enable the probability of risk occurring or its effect
to be eliminated or reduced to an acceptable level (Palinkas 2011).The conventional

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identification of risk management strategies refers to the applied measures to remove or
minimize the effect of factors that threaten the crop production.

Risk management finds the combination of activities which are most preferred by the operator
and are congruous with his/her financial situation in order to achieve the desired level of income
and an acceptable level of risk. When all of the mentioned risk management strategies are
impossible to be implemented, risk acceptance will be the last opportunity for farmers. Furthermore,
risk acceptance strategies are employed when risks have not been identified, no appropriate risk
management strategy is available or such a strategy is too expensive (Schaper et al. 2010).

Farm size, age, innovativeness and risk aversion determine the choice of risk management
strategy by farmers (Pennings, et al., 2008). The identification of the sources of risk is important
because it helps to choose the appropriate management strategy. Different farming systems, the
ratio of agricultural income to total family income, as well as the size of arable land,
differentiates their risk response.

According to Wencong et al., (2006) the decision maker’s risk preference affects the type of
agricultural activities and corresponding scales that are selected. It also affects micro agricultural
production structure and stable growth of household’s income. Given a fixed amount of
productive resources such as arable land, capital and labor force, the combination of production
activities with the highest level of expected income/risk would be selected if the decision maker
was a risk taker. For combinations of activities with a lower risk level, diversification might
reduce risks to some extent at a cost of total return. Risk management strategies can be classified
into two broad categories; ex-ante risk management and ex-post strategies.

2.4.1. Ex-ante Strategies

Farmers implement ex-ante strategies because of lack of mechanisms to cope with risks ex-post.
Natural hazards can be managed by irrigation, crop insurance and by growing resistant varieties.
Market risks are managed by price stabilization programs, provision of information and credit
subsidies. Social and state hazards on the other hand are political issues.

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 2.4.2. Ex-post Risk Strategies

These are coping strategies once livelihoods are threatened. Ex-post strategies include re-
deploying labor, depleting food reserves on farm, drawing down on other savings and asset
liquidation. These strategies also include the sale of productive assets like livestock as the last
resort and activation of informal insurance networks within the extended family e.g. food, gifts
or other remittances, loans from informal welfare groups. The problem with these networks is
that they are located within the same locality and so can only cope with idiosyncratic risk and not
covariant risks.

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2.5. Theoretical Frame work

The theoretical framework for the study is based on literature of the psychometric paradigm’
cultural and Farmer structural model theory.

Several decades of work have been devoted to psychological work on the understanding of
perceived risk. Two distinct theories currently dominate the field of risk perception. One is the
‘psychometric paradigm’, rooted within the disciplines of psychology and decision sciences,
whereas the other derives from ‘cultural theory’, developed by sociologists and anthropologists.
One of the most important assumptions within the psychometric approach is that risk is
inherently subjective. “Risk does not exist ‘out there’, independent of our minds and cultures,
waiting to be measured” (Slovic, 1992). What to fear is an individual cognitive process such as
the perception of threats to health or feelings of uncontrollability. In short, psychometric
paradigm encompasses a theoretical framework that assumes risk to be subjectively defined by
individuals who may be influenced by a wide array of psychological, social, institutional, and
cultural factors.

Psychometric paradigm focuses primarily on farmers' attitudes, psychological make-up,

cognitive sources and personal characteristics that are associated with perception of risks. A
cultural theory paradigm asserts that risk is culturally framed while the farm structure theoretical
component is concerned with the attributes of the farm operation that may influence such
perceptions.

2.5.1.Psychometric Paradigm

Psychometric Paradigm, developed by psychologists (Marris et al., 1998).The psychometric

paradigm encompasses a theoretical framework that assumes that risk is subjectively defined by
individuals who may be influenced by a wide array of psychological, social, institutional factors
and their interrelationships can be quantified and modeled in order to illuminate the responses of
individuals and their societies to the hazards that confront them (Slovic, 1992). The

17
psychometric paradigm uses psychophysical scaling and multivariate analysis techniques to
produce quantitative representations of risk perceptions. Cognition and institution-related factors,
i.e. educational levels, access to information, health situation of household members, market-
related factors and one's own perceptions of wealth that originate from the psychometric
paradigm.

2.5.2. Cultural theory paradigm

Cultural theory, founded by Douglas and Wildavsky (1982), is taking culture and other social
aspects in account in explaining risk perception (Rippl, 2002).The cultural theory paradigm
assumes that cultural patterns structure the mind set off individuals and social organizations to
adopt certain values and reject others. According to cultural theory, risk management is the
proximate stimulus rather than its outcome. In addition to being proactive; management
strategies in cultural theory include various coping and adaptive behaviors that tend to be
discounted in conventional approaches (Rayner, 1992).Cultural theory is fundamentally a social
theory concerned first with relationships among human beings and secondly with societal
relationships with nature.

2.5.3. Farm structure model

Theoretical components of the farm structure model are also considered in the broader
theoretical framework that guides this study to identify factors thought to predict perceived risk
from various sources. According to this component of the theoretical perspective, the size of the
farming operation is an important factor in farm structure model. Risk perception studies need, to
take these aspects into account an integrated and wide framework that combines a psychometric
paradigm, cultural theories of risk and farm structure model theory will be used in this research.

2.6. Measurement of Risk

Generally, business risk can be measured by two methods; the standard deviation or the
coefficient of variation (Alimi and Ayanwale, 2005). The coefficient of variation does not
account for substantial skewness but other methods that include value at risk (VaR), tail value at

18
risk, excess tail value at risk, expected policyholder deficit, and default value do (Powers and
Powers, 2009).

2.7. Methodological Framework

2.7.1. perceptions of Risk source and Risk management strategies

Risk perceptions play a key role in the production and investment behavior of farmers in
vegetable production decisions (Ali and Kapoor, 2008). In this context, understanding risk is a
key element in helping Tomato producing household’s to make better decisions in risky
situations, and also provides useful information to policy makers in assessing the effectiveness of
different types of risk management strategies.

Within the context of efforts to achieve sustainable production of vegetables, identification of

risk sources and risk management strategy plays a crucial role. So far, however, in Dugda
Woreda, there are no significant studies that were conducted and documented based on farmers’
indigenous knowledge about the sources of risks vegetable producers have been facing. in the
absence of such type of studies the design and implementation of effective risk management
strategies to increase farm productivity.

According to Jirgi et al (2015), A Likert-type scale of 1 (not at all) to 5 (very important) was
presented to the respondents in order to establish the important sources of risk and risk
management strategies of the crop production farmers. The respondents were asked to score a list
potential risk sources and risk management strategies respectively, according to their importance.
The most important risk sources and management strategies were ranked based on the mean
scores of the variables on the lists.

In this research also a 5-point Likert scale type will be used to identify each source of risks and
risk management strategies of Tomato producing households.

2.8. Analytical Framework

19
 2.8.1. perception of risk source and risk management strategy

There are a number of suitable models for identifying of risk source and risk management
strategies of farmer. Factor analysis, multiple regression models for weighted and continuous
responses. Kumilachew Alamerie (2015) used descriptive statistics like mean, standard
deviation, frequencies and tabular analysis to examine and rank sources of risks based on
farmers’ perception. In addition, a Likert scale (responses on a 1-5 scale (1=no/negligible risk,
2=low, 3=medium, 4=high and5=very high risk) has also been used to rank risks.

According to Kisaka-Lwayo (2012) the relationships between the perceptions of risk sources
against farm and farmer socioeconomic characteristics was explored using factor analysis and
multivariate regression methods. In regression analysis, the standard factor scores achieved from
the factor analyses of the sources of risk was regressed on farms’ and farmers’ socioeconomic
characteristics to identify the impact of these characteristics on the farmers’ perceptions of risk
sources and Management strategies.

2.9. Empirical Studies

2.9.1. perception of risk source and risk management strategies of a farmer

In fact, farmers’ risk realization varies substantially, and scholars repeatedly addressed farmers’
preferences of risk variations. According to previous empirical studies, there is no agreement
about the risks that have a priority for farmers.

Empirical study by Hasan Burak (2014) aims to analyze farmers’ risk perceptions, risk
management strategies in strawberry production in Menemen-Emiralem district of Izmir
province in Turkey. Factor analysis was used in data reduction to identify a small number of
factors related to risk sources and risk strategies in this study. Then, multiple regression models
were used to evaluate the influence of socio-economic characteristics on the strawberry farmers’
risk perceptions and risk management strategies using factor loadings. The results of this study
show that the most important risk resource that the strawberry farmers' perceive is arise from the

20
lack of production capacity. “Sustainable income” was the most important risk management
strategy factor that was significantly perceived by strawberry farmers.

Empirical Study by Ali and Kapoor (2008) of Uttar Pradesh on perception of farmers about
major sources of risks in production of fruits and vegetables the perceptions of farmers about
risks in production of fruits and vegetables have been analyzed using structured survey method
and the perceived priorities of farmers about major sources of risks in production of fruits and
vegetables have been reported under investment risks, socio-economic risks, environmental
risks, production risks and market risks. In general, the price and production risks have been
perceived as the most important sources of risk in production of fruits and vegetables in the area.
The study has argued that public intervention can facilitate better risk management through
improved information system, development of financial markets and promotion of market-based
price and yield insurance schemes.

In Syria, Almadani (2012) based on survey data of 103 wheat-cotton and 105 pistachio farms in
Syria, analyses farmer’s risk attitudes and farmers’ perceptions of risk and risk management.
Analyzes, using multiple regression analysis, whether related socio-economic characteristics and
farmers’ subjective beliefs relate to these attitudes and perceptions. Results show that Rainfall
shortage and fuel price increase are the most important risk sources that threaten both wheat-
cotton and pistachio cultivation.

According to Kisaka-Lwayo and Obi (2012) study on smallholder farmers’ perceptions of risks,
risk management strategies, and factors affecting these risk perceptions in KwaZulu-Natal
Province, South Africa. The findings of the research identified that financial and incentives,
input-output, crop production, labor availability, lack of production information, lack of market
opportunity, and input availability as sources of risk. The standard factor scores of these seven
principal factors were used as dependent variables in multivariate regression analyses to identify
farmer socioeconomic characteristics, location, and risk preferences characteristics influencing
perceptions of risk sources. Their study suggested that instruments include crop insurance,
forward contract, and futures as modern risk management tools and crop diversification,

21
precautionary savings and participating in social network as the most important risk management
strategy in the absence of modern risk management tools among rural smallholder.

22
2.10. Conceptual Framework

The problem is conceptualized in below figure. Biophysical factors, characteristics of transacting

partners, prices, commodity stock levels and institutional environment are factors that are out of
control to the farmer. These factors introduce different types of risks to the production activity;
these are yield, price and transaction risks.

Production Risk
Low production
Plant and Animal pest
yield/yield loss
Environmental hazards
Production failure

Financial Risk Farming with poor

Financial in ability management strategy Poverty

Price /Marketing Risk

High commodity price Risk Management Strategies
Low Output price

Farming system with strong

Institutional/Policy/Risk
management strategies
In accurate Policy
Trade Liberalization/privatization

Personal Risk Asset Building of Higher yield and

Death, Divorce, injury, Theft etc farmers profit

Risk Management Strategy.

23
Biophysical factors Policies,regulati Prices quantities of Conflict and war
-Weather, soil, Pests on e.g Tax, Harvest and stock
and disease Credit, Land

Types of Risk:-
Technical, Social, Market, Institutional,
Financial

Household’s characteristics: Age, education and risk

preference Wealth

Risk Management strategies- On farm diversification,

Social and Cultural mechanism, and low risk enterprises

Outcome
Stable Income

Own Conceptualization

3. RESEARCH DESIGN AND METHODS

3.1 Description of the study Area

Dugda woreda is located at central rift valley in East Shewa zone of Oromia region.The capital city
of this woreda is Meki town, which is located at 134 km from Addis Ababa along the main asphalt

24
road that leads through Mojjo to Hawassa. The woreda is bordered with SNNPRS to the west,
Zeway Dugda to the East, Bora woreda to the North and Adami Tullu Jiddo Kombolcha woreda to
the south. The woreda has a total of 36 rural and 3 urban kebeles. Its total population and
households were estimated at 15, 7818 and 17,156, respectively. Of the total woreda population of
15, 7818, about 81,186 were males and 76,632 were females. Amongst the total 17,156 rural
agricultural households, 14,721 and 2,435 were male and female headed households, respectively
(CSA, 2011).

The woreda has a total area of 95,945 hectare and is situated 80 01’to 8025'N Latitude and 38032'to
39004'E Longitude. From the total area, cultivated land, grass land, forest area, water body,
mountain and stone areas, and others account 52490, 13417, 3411, 12032, 298, and 14297 hectares,
respectively. Soil type is 70% sandy, 20% clay, and 10% salty. The topography of the woreda is
96.38% plain and 3.46% mountainous. The woreda’s altitude range from 1600 to 2000 m. a. s. l.
The mean annual temperature and rainfall are 22 to 280c and 700 to 800mm, respectively (CSA,
2011).

The woreda has a total area of 95,945 hectare and is situated 80 01’to 8025'N Latitude and
38032'to 39004'E Longitude. From the total area, cultivated land, grass land, forest area, water
body, mountain and stone areas, and others account 52490, 13417, 3411, 12032, 298, and 14297
hectares, respectively. Soil type is 70% sandy, 20% clay, and 10% salty. The topography of the
woreda is 96.38% plain and 3.46% mountainous. The woreda’s altitude range from 1600 to 2000
m. a. s. l. The mean annual temperature and rainfall are 22 to 280c and 700 to 800mm,
respectively (CSA, 2011).
The major water resources in the woreda include Meki and Dembel rivers, ground water, and
Batu Lake. These rivers and ground water play quite a vital role in operation of agricultural
practices. Mixed farming system characterizes agriculture in the woreda. The diversified agro-
ecology of the area creates an opportunity for the production of different crops such as cereals,
pulses, oil crops, vegetables, onion, tomato, papaya and cabbage (BOARD, 2008).

3.2. Types and source of data

25
Primary data will be collected from tomato producing households. An individual was considered
to be a Tomato producing house hold if Tomato was one of the crop enterprises engaged in.
From four kebeles Tomato producing households will be selected using simple random sampling
technique. The number of Tomato farmers selected from each kebele will in proportion to the
population of Tomato farmers in the village and simple random sampling technique will used in
the selection of the respondents Secondary data that will be collected from woreda agricultural
and rural development office.

3.3. Method of Data Collection

In this study, both primary and secondary data will gather. Both qualitative and quantitative data
will be collected using semi-structured questionnaire, focus group discussions, and an in-depth
interview. For implementing the household level questionnaire, the following procedure will
followed. First, a pilot study will be carried out to identify source of risk and risk management
strategy in the study area. Second, the pilot survey will be carried out enabled to develop the
questionnaire. Third, random sampling technique will be followed to pick sample respondents
based on the lists obtained from respective kebele offices. Finally, survey will be carried out at a
household level.
Structured questionnaire will be used to collect data from the tomato producing households; risk
sources and level of concern by ranking (a particular risk is considered a major concern if it is
ranked among the most important six); risk reducing strategies, their use (if used) and reason for
non-use.

3.4. Questionnaire Development

In order to develop the questionnaire relevant literature was consulted in order to identify the
variables to include in the survey. Some of the questions asked in the questionnaire covered:
personal characteristics of the respondents, the experimental gambling game, risk sources and
management strategies. The questions were designed to answer the objectives of the study.

A pilot study will conducted to test the validity of the questionnaire. Five house holds’ will
randomly Selected from each of the four Tomatoes producing kebele in Dugda District and the

26
questionnaire will be administered to them. The responses from the respondents will checked to
see if the replies are as required in the questions. The questions that seemed not to be clear to the
farmers will be reconstructed.

3.5. Method of Sampling

In order to undertake this study, DugdaWoreda was selected purposively since it has Tomato
production potential. Then, a two stage sampling technique will used to select sample producers.
Firstly, in consultation with the Woreda agriculture and Rural Development Office, the Tomato
producing Kebeles in the woreda will be identified then; a total of four kebeles will be selected
based on potential of producing Tomato. Secondly, a total of 200 sample households will be
selected randomly based on the proportion to the size of household population from the selected
kebeles. Besides, different published and unpublished materials, bulletins and websites will
consulted to generate relevant secondary data.

In the second stage, simple random sampling technique was used to obtain sample respondents
from each Kebele. Sample size will determined per each kebele proportionally to the total
number of farm households.

Representative sample size is always determined by taking into account the level of precision,
the level of confidence and the degree of variability in the attributes being measured. It is
typically determined using statistical calculations. Following Kothari sample size will
determined using the following formula as:
2
Z pq . N 1 . 962 (0 . 5)(1−0 .5 )(420 ) 403 .368
2 2 2 2
= =200 . 89≈200
n= e (N −1)+Z . p . q = (0 .05 ) ( 420−1 )+(1. 96 ) (0 . 5)( 0. 5 ) 2 . 0079
Where, n - desired sample size
Z - Values of standard variant at 95% confidence interval (Z = 1.96).
N= 420 Total number of Tomato producing households.
P - Estimated proportion of tomato producing households
As the exact proportion of households participate in tomato production is not known a prior,
P= 0.5 will be used to obtain maximum number of sample household heads.

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3.6. Method of data analysis

3.6.1. Descriptive Method

The data collected will be analyzed using frequency distribution (tabulation) to indicate the level
(proportion of farmers) of use of risk management strategies. Both standard deviation and
coefficients of variation of income will be used as measures of risk. This study will use
descriptive statistics like mean, standard deviation, frequencies and tabular analysis to examine
and rank sources of risks based on farmers’ perception. In addition, a Likert scale (responses on a
1-5 scale (1=no/negligible risk, 2=low, 3=medium, 4=high and5=very high risk) has also been
used to rank risks. A Likert scale is a psychometric scale commonly used in questionnaires, and
is the most widely used scale in survey research.

3.6.2. Econometric Model.

In order to undertake comparative analysis, the study will employ econometric models such as
Factor analysis, multiple regression model, principal component analysis, and multivariate
models.

3.6.2.1. Factor Analysis.

Factor analysis is the names given to a group of statistical techniques that can be used to analyze
inter relationships among a large number of variables and to explain these variables in terms of
their common underlying dimensions (factors). The factors are simply a weighted sum of the
observed variables, where the weights associated with the variables usually differ from each
other. Thus, each subject in the sample obtains a score on each defined factor that is computed
by summing the weighted scores on the observed variables of this subject. The weights for the
various variables used to define the factors are equal for all subjects. The factors are usually not
computed from the raw observed scores on the variables, but from the standardized versions of
the variables. Hence, it is customary to use standard scores, also called z-scores, instead of the
raw scores on the variables. By definition, the mean score of a standardized variable over all
subjects in the sample is zero, and the standard deviation is one. In the factor analysis, the factor

28
score for the ith subject on the qth factor was calculated according to the formula given below
(Timmerman 2005).
fiq=b1qzi1+b2qzi2+b3qzi3+….+bJq ziJ
Where; bij denotes the weighting of the variable ( j=1,…,J)iJ used in determination of qth factor.
and Zij denotes the score of subject i (i=1,…,n) on the jth variable standardized.
Exploratory factor analysis (EFA) is an essential empirical tool used in various subjects such as
economics, social, psychology, and political science. In agricultural risk studies, factor analysis
facilitates to summarize the information about risk perceptions and risk management strategies
obtained from a large set of variables in a reduced number of latent variables (factors), which
explain the variance of original variables ( Hair et al. 2010; Pallant 2007). Factor analysis gathers
variables in combinations which are uncorrelated. The combinations obtained measure different
dimensions in the data as they are uncorrelated (Manly 2004).

Factors with latent root criterion (eigenvalues) greater than 1 were considered in this study,
which mean that each factor contributes for a greater variance than had been possible by any one
of its variables. About factor loadings, a minimum threshold of 0.3 is generally accepted in the
literature, even though other authors suggest the minimal range between 0.4-0.5 in practical
purposes (Von Pock 2007).

The Kaiser-Meyer-Olkin (KMO) method measures sampling adequacy and varies from 0 to 1.
KMO with 1 value means that each variable is perfectly predicted without error by the other
variables. KMO result of 0.6 or greater is recommended (Hair et al. 2010). Von Pock (2007) has
illustrated that KMO value of greater or equal to 0.50 is already considered to meet the minimum
level in the literature. In addition, orthogonal (varimax) rotation was implemented in order to
minimize the number of variables that have high loadings on each factor, thus to obtain factor
solutions that were easier to interpret.

To evaluate the internal consistency of each factor, Cronbach’s coefficient alpha was employed
as one of the most prevailing reliability tests. Cronbach’s coefficient alpha of 0.6 was accepted in
this study as a minimum level of factor reliability as suggested by Hair et al. (2010) for such
exploratory factor analysis. Similarly, Aditto (2011) accepted risk sources’ factors with
Cronbach coefficient alpha values, 0.43 and 0.51.

29
 3.5.2.2. Multiple regression analysis

The relationships between the socioeconomic variables and the perception of risk sources and
risk management strategies of the Tomato producer farmers will be analyzed. Multiple
regressions will employed to evaluate the influence of farm and farmer characteristics on the
Tomato producer farmers’ risk perception and risk management responses.

Multiple regression models will be used to analyses the relationships between the socio-
economic characteristics and the perception of risk sources and risk management strategies of the
Tomato Farmers (Aditto et al 2012; Flaten et al 2005). This method will be employed to evaluate
the influence of socio-economic characteristics on the Tomato producer households’risk
perceptions and risk management strategies. The regression equations for the Tomato producing
households’ perceptions of risk source and risk management strategies with socio-economic
variables are presented as follows:

Si=b0+b1 AGE +b2 GEN+ b3 EDU +b4 EXP+ b5 OFFW +b6 FSIZ+b7 INCM+ b8 LOC +b 9FINC
+b10 AHIN +b11 HSIZ+ e…………………………… (1)
The model for risk management responses with socioeconomic variables is given as follows:
Ri= b0+ b1 AGE +b2 GEN +b3EDU +b4 EXP+ b5 OFFW +b6 FSIZ+b7 INCM +b8 LOC+ b9 FINC
+b10 AHIN +b11 HSIZ +e……………………………. (2)
Where:
Si is source of risk i (from factor analysis); Ri is risk management strategy i (from factor
analysis); AGE= 1, if the respondent’s age is over 40 years old, 0 otherwise; GEN= 1, if the
respondent is male, 0 if female; EDU = 1, if the highest education of the respondent is high
school and higher, 0 if primary school education or less; EXP= 1, if the farming experience is
over 30 years, 0 otherwise; OFFW= 1, if the respondent has off-farm work, 0 if no off-farm
work; FSIZ is farm size; INCM is net farm income; LOC= 1, if the respondent’s farm is located
in central region, 0 if a farm located in north-east region; FINC= 1, if farm has a loan, 0 if farm
without a loan; AHIN= 1, if the annual household income greater than 90,001 baht, 0 otherwise;
HSIZ is household size; and e is error term.

30
3.6. Definitions of Variables and Hypothesis

Dependent variables
Risk perception score: It is a continuous variable. It is constructed from principal component
analysis. In PCA, uncorrelated risks are extracted by linear transformations of the original
variables so that the first few PC’s with Eigen value greater than one will be
will be used as dependent variable in SUR model.

Independent (explanatory) variables: The explanatory variables of importance in this study are
those variables, which are thought to have influence on the Types of risk. These include
household’s personal and demographic variables, economic variables, household socio-
psychological variables and institutional variables. These explanatory variables are defined as
follows:
Sex of the household head: It is a dummy variable assuming 1 if male and 0 if female
household head. According to (Aditto 2011) Gender is negatively related to the ‘personal and
farm business environment’ and ‘natural disaster’ risks on farm. This implies that female heads
of farm households are likely to perceive these sources of risk significantly more important than
male household heads .Female household heads perceived this risk Management strategy as
more important than male household heads. The reason is because the female farmers or wives
can easily find off-farm work (Aditto 2011). Female heads are likely to perceive sources of risk
as significantly as more important than as male household heads counterparts. According to
Kisaka-Lwayo (2012) Sex of households’ has a significant relationship with the various sources
of risk. it is hypothesized that these is that responses to risk source and management strategy are
gendered.

31
Age of the household head: It is a continuous variable that is measured in complete years. Older
adults usually rate themselves as if they accumulate more experience and perceive more than the
young adult. According to Kisaka-Lwayo (2012) Age of the households’ have a significant
relationship with the various sources of risk. According to Uematsu and Mishra (2011) and
Musara et al. (2011) also found that younger farmers tend to be more willing to adopt risk
management strategies than their older counterparts. Then, this variable is expected to have a
positive effect on risk perception and the risk management strategy.
Education attainment of household head: It is a continuous variable and measured in years of
schooling of the household head. Educational attainment is a key human capital variable.
According (Aditto,2011). More educated farmers would have better know how about how to
manage risks and apply more appropriate risk mitigation measures and perceived source of risk
as significantly more important in farming. The reason is because the more educated farmers
realized that the family farm situation and the changes in farm business environment, such as
high labour wages and relatively high prices of agricultural land, may indirectly affect their farm
operations. According to Kisaka-Lwayo (2012) house hold with more education perceive risk
source than the other. According to Almadani (2014) farmers with higher general level of
education tend to prefer off-farm activities more than on-farm ones because of their higher
qualifications which enable them to enter other economic sectors. It appears that educated
farmers were more willing to mitigate risk impacts through on-farm mechanisms than to look for
nonfarm resources to support farm income. This willingness arises from their ability to perfectly
employ farm resources capacity to manage their risks. According to (Mustafa 2006) more
educated farmers performed better in managing their farm business compared with less educated
farmers. Hence, this Variables related to human and social capital (education, networks, years of
experience, health) affect management responses in certain ways. it is hypothesized that these
variables will relate directly to risk responses of Tomato producing households
Farming experience: This is a continuous variable and measured in terms of the number of years
engaged in vegetable production for market. According to Aditto (2011) the number of years in
farming is negatively related to the ‘economic and political’ risk perceptions. So that, less
experienced farmers were more likely to be interested in employing these strategies to manage
risk on their farms than the more experienced farmers. It is expected to influence risk perception
negatively.

32
Family size: It is a continuous variable measured in terms of number of persons in a family. An
increase in family size increases domestic consumption requirements and may render households to
be more susceptible to risk. In addition, large family households usually can smooth their
consumption from diverse sources of income other than vegetable production and are less likely to
apply risk management tools. Therefore, the family size of the farm household is expected to be
negatively related with contract farming participation.
Land holding size: It is a continuous variable expressed in terms of hectares of farm land owned by
the household head. Households with more land are less likely to perceive risks than others. Land is
one of the major conventional inputs that limit agricultural production. Moreover, land is the main
source of rural livelihoods since options other than farming are scarce. Then, it is expected that the
more land they possess the less they aware risk sources. Land ownership also determines farmer’s
decision in choosing the type of agricultural activity and amount of agricultural production.
According to Arumugam et al. (2011) and Musara et al. (2011), size of land owned by the producer
influencing positively fresh fruits and vegetables farmers’ willingness to participate in contract
farming. Hence, this variable is expected to influence contract farming participation positively.

Livestock size (TLU): This is a continuous variable expressed in terms of tropical livestock unit
(TLU). Livestock contribute to household livelihoods in a variety of ways – by providing
manure, traction power, savings and insurance, and collateral for financial services. This variable
is expected to vary inversely with risk perception. Farmers who own more livestock are not that
much concerned about risks as they diversified their income sources.

Household assets: It is a continuous variable that will be obtained from the sum of values of all
household utensils, farm equipment and estimated values of household utensils. According to
(Frank et al. (2010), as cited in Gemechu Mulatu 2017) households with more assets base are
associated with higher level of risk perception. Rural households’ risks expect changes in asset
values, returns on assets and general measures of well-being. Hence, it is hypothesized that
wealth of households will relate positively to risk responses.

33
Off/non-farm income: The value of off/non-farm income earned by the sample households
which is a composite remittances earned, aid, safety net programs, sale of fuel wood and
charcoal, sale of grass, land rental income, self-employment, compensation received and pension
etc. are a continuous variable. According to (Aditto 2011) Risks related to the ‘economic and
political’ and ‘personal and farm business environment’ were perceived as highly important by
farmers who had off-farm work. This suggests that farmers who have off-farm work are very
concerned about those risks that can disrupt their off-farm income. According to (Uematsu and
Mishra (2011) cited in Gemechu Mulatu, 2017) working off-farm reduces managerial time
available on the farm, and therefore, off-farm labor is expected to negatively correlate with risk
management strategies.

Social capital: Dummy, 1 if the household is member of idir, equb, cooperative and other self-
aid institutions. Membership of these institutions creates opportunities for social interaction, risk
sharing and development of friendships, dispute resolution, sharing of timely information. Then,
the association between social capital and risk perception is expected to be positive. According
to Gashaw (2014) membership of cooperative has a positive impact of agricultural technical
efficiency of farmers. The basic reason is that membership of institution increases accessibility to
newly established technologies and market information which is expected to enhance technical
efficiency of vegetable farmers.
Illness shock: Dummy, 1 if the household member is sick during the cropping season. Health
situation of the household in last year cropping season is an important factor in determining the
productivity of farmers. Family members with good health situation are ready to receive new
ideas and practices than those who have health problems. Then, this variable is expected to
enhance participation in contract farming.

Access to information: Opportunity variables such as infrastructure and access to information

are expected to lead towards increased connectedness/improved connectivity. Previous studies in
the region have pointed out that distance affects opportunities for petty trading, waged
employment and informal sector activities (Belaineh, 2000, 2002). Higher market search costs
lead to higher transaction costs, dis favoring those living in far distant areas from facilities. Little
et al. (2001:15) pointed out that the further one gets from market centers, the less important

34
certain items become, especially those that are difficult to transport, spoil easily, or generate little
income. Sales of milk, charcoal, firewood, wages, livestock, etc. decrease as the distance to
towns and roads increases. Conclude that people who live far from towns have fewer options to
diversify, and indeed have less need to diversify because of access to better quality pastures and
livestock. Since mobile or radio is commonly used by rural households as source of market
information and making awareness about the newly introduced technologies, ownership of
mobile and/or radio will be used as a source for access to information. According to Kisaka-
Lwayo (2012) households Access to information to have a significant relationship with
perception various sources of risk. It is expected that Tomato producing household’s who have
more access to information perceive more risks than others.

Distance to all weather roads: Opportunity variables such as infrastructure and access to
information are expected to lead towards increased connectedness/improved connectivity.
Previous studies in the region have pointed out that distance affects opportunities for petty
trading, waged employment and informal sector activities (Belaineh, 2000, 2002). Higher market
search costs lead to higher transaction costs, dis favoring those living in far distant areas from
facilities. Little et al. (2001:15) pointed out that the further one gets from market centers, the less
important certain items become, especially those that are difficult to transport, spoil easily, or
generate little income. Sales of milk, charcoal, firewood, wages, livestock, etc. decrease as the
distance to towns and roads increases. Conclude that people who live far from towns have fewer
options to diversify, and indeed have less need to diversify because of access to better quality
pastures and livestock. It is hypothesized in this study that differences in proximity to towns,
services, roads and other infrastructure are inversely related to risk responses of tomato
producing households’.

Farm size was positively related to the ‘diversification’ strategy. Farmers with larger farms
perceived a diversification strategy as highly important. It should be noted that farm size is one
of the constraints to diversification, that is, farmers with a small holding have limited ability to
diversify their farm activities.(Aditto 2011)

35
Farm business finance is positively related to the ‘financial situations’ risk factor and is
statistically significant at the one per cent level. This suggests that farmers who have loans are
more likely to pay more attention to the changes to their farm financial situation, such as interest
rates and level of debt. In addition, farm business finance is positively related to the ‘natural
disaster’ risk factor. This implies that farmers who have loans perceived this source of risk as
highly important. This may be due to the ‘natural disaster’ risk damaging their farm crops, which
results in insecurity of their farm income and debt repayment capacity. (Aditto 2011)

36
Access to credit service: It is a dummy variable taking value 1 if a household have received
formal credit from any financial institution and 0 otherwise. Access to credit increases financial
resources of farmers and their ability to purchase inputs timely. In addition to providing low-
income households with access to financial services, the service providers help them improve
their management skills, which improve their perception of vegetable farming risks.
Frequency of extension contact per cropping season: This is continuous variable that will be
measured as the number of extension agent contact or vice versa during the last 12 month
cropping season. Having agricultural extension services is expected to influence farmers’
perception of risks in vegetable farming positively. According to Beyan, Jema and Endrias
(2012); Ahmed et al. (2013) and Yuya (2014) accesses to extension services enhance production
efficiency.
Technology adoption: this is whether or not the household adopted at least one improved
agricultural technology. It is a dummy variable defined as 1 if the farmer had adopted at least one
improved technology and 0 otherwise.

4. ACTIVITY BREAK DOWN AND BUDGET PLAN

4.1. Activity Breakdown

37
Activities Octo Nove Dece Janua Feb March April May June
ber mber mber ry
Planning/Preparing
Training of enumerators
Pre testing questionnaire 

Printing questionnaire 

Actual survey 

Examination of specimen 

Data entry 

Preliminary result work shop 

Analysis and interpretation 

Preliminary report writing 

Final presentation 

4.2. Research Budget Breakdown

Part I: Budget Source – Own

38
A. Stationery Costs

Items Unit Quantit Unit Price (Birr) Total Cost in

y Birr
1 Note Book pieces 15 15 225
2 Pen Packet 1 150 150
3 Printer paper Packet 6 195 1170
4 Pencil Piece 15 1 15
5 Toner Cartridges Pieces 1 1,550 1,550
6 CD-RW packets 1 100 100
Sub Total Birr

B. Transport and utilities

Items Unit Quantity Unit Price (Birr) Total Cost in

(Birr)
1 Bale Robe-Shashamene Birr 5x2 100 1,000
2 Shashamene- Meki Birr 5x2 50 5,00
3 Utility and Service (Telephone, Birr 4,500
Internet fees etc)
Sub Total

C. Personnel Costs

Description of the Activities Number Perdiem Number Of Total Cost

of rate Days (Birr)
Personnel (Birr)
1 Advisors Field Supervision 2 3,00 7 8,400
2 Honorarium fees for Advisors 2 3,00 6,500
Sub Total

Budget Summary for Part One

Cost Item Total Cost in Birr

Stationery Cost
Transport and Utilities
Personnel Coasts

39
 Total Cost

Part II: Budget Source…

I Items Units Number Number Perdiem per Total

of of Days per day per
Person person
1 Field data collection- data collectors’ Birr 12 7 200 16,800
perdiem= 10 person*7 days*200 Birr/day
2 Field data collection – supervisors Birr 4 7 300 6,300
perdiem = 4 person*7days*300 Birr/day
Sub Total

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