**2. Sources of risk and risk management strategies on farm**

There is much literature on risk sources that impact farming operations and their risk management strategies. Flaten et al. argued that the assessment of farmers' perceptions and how they respond to risk are very important because this can describe the decision making behaviour of farmers when faced with risky situations.(19) Similarly, Hardaker et al. states that *"the welfare of the farm family and the survival of farm business may depend on how well farming risks are managed"*.(1)

The lack of relevant information on farmers' risk perceptions and their risk behaviour present a challenging task for policy makers and researchers who want to create a proper risk management system to help farmers.(19, 20) Extant literature shows that there is no agreement about the most appropriate methods to describe sources of risk and risk responses on farms. However, the Likert-scale rating method has been regularly applied in previous research. In most of those studies, the respondents were asked to rate the sources of risk that affected their farm and the risk management strategies they used on a five-point scale (where 1 is not particularly important and 5 is highly important).

Boggess, Anaman, and Hanson examined farmers' awareness of risk in crop and livestock production in northern Florida and southern Alabama.(21) The respondents were asked to define risk and then to rank the sources of risk and risk management strategies based on how important each risk was to their farm. The results showed that most respondents defined risk as the probability of a negative outcome. The respondents ranked rainfall variability, pests and diseases, and crop price variability as the primary sources of risk for crop production. Livestock price and weather variability and livestock diseases were perceived as important sources of risk for livestock production.

450 Risk Management – Current Issues and Challenges

affect farm production costs.

*farming risks are managed"*.(1)

Thailand. In addition, agricultural commodity prices rise and fall annually depending on the demand and supply in both local and international markets, which are out of the farmer's control. Similarly, the costs of farm inputs also vary each year and may negatively

Agriculture contributes approximately 7.86 per cent to Thailand's GDP and 8.98 per cent to exports in 2008.(14, 15) However, large numbers of farmers in rural Thailand still live below the poverty line. In 2007, Thai farm households earned an average income of 129,236 baht/year (US\$ 3,692) but only 39 per cent or 50,370 baht/year (US\$ 1,439) is from farm activities.(16) Thai farmers are basically smallholders and the national farm size is approximately 7.72 acres.(17) Most farmers have limited diversification potential, face resource problems, environmental variability, lack of soil fertility and water shortages especially smallholder farmers in the north-east region.(18) In addition, smallholder farmers

in Thailand also face various sources of risk that vary both seasonally and annually.

**2. Sources of risk and risk management strategies on farm** 

scale (where 1 is not particularly important and 5 is highly important).

Knowledge of the characteristics of risks that influence smallholder farmers is the key to developing appropriate strategies to deal with risks. However, empirical studies on farmers' responses to risks and how risk affects farmers' income, especially in rural Thailand are limited. The aim of this chapter is to examine the sources of risk for smallholder farmers in the central and northeast regions of Thailand and their risk management strategies. We will also relate the farmers' socioeconomic characteristics to their perceived sources of risk and their favoured risk management strategies to gain a deeper understanding of their choices.

There is much literature on risk sources that impact farming operations and their risk management strategies. Flaten et al. argued that the assessment of farmers' perceptions and how they respond to risk are very important because this can describe the decision making behaviour of farmers when faced with risky situations.(19) Similarly, Hardaker et al. states that *"the welfare of the farm family and the survival of farm business may depend on how well* 

The lack of relevant information on farmers' risk perceptions and their risk behaviour present a challenging task for policy makers and researchers who want to create a proper risk management system to help farmers.(19, 20) Extant literature shows that there is no agreement about the most appropriate methods to describe sources of risk and risk responses on farms. However, the Likert-scale rating method has been regularly applied in previous research. In most of those studies, the respondents were asked to rate the sources of risk that affected their farm and the risk management strategies they used on a five-point

Boggess, Anaman, and Hanson examined farmers' awareness of risk in crop and livestock production in northern Florida and southern Alabama.(21) The respondents were asked to define risk and then to rank the sources of risk and risk management strategies based on how important each risk was to their farm. The results showed that most respondents Patrick, Wilson, Barry, Boggess and Young studied farmer attitudes towards risk and risk management among mixed crop and livestock farmers in the US.(22) A total of 149 farmers in 12 states were interviewed. The respondents were grouped into five types of farm; mixed farming; cotton; corn, soybean and hogs; small grain and ranch. The results showed that changes in weather, output price and input costs were rated as the three most important sources of risk in both crop and livestock production.

A nationwide mail survey was used to examine the sources of risk and the risk management strategies of New Zealand farmers by Martin(23). The survey covered eight types of farm including sheep and beef, dairy, deer, pip fruit, kiwifruit, cropping, vegetables and flowers. The results showed that marketing risk (such as change in product prices and change in input costs) was ranked as a very important source of risk by all farmers. Conversely, production risks (such as rainfall variability, weather, and pests and diseases) were regarded differently depending on geographical location, farm type and product.

Pellegrino studied rice farmers' perceptions of the sources of risk and risk management responses in Argentina.(9) Using size of the respondents' farms as large, medium, and small farms, the author argued that a farmer's awareness of the sources of risk varied depending on farm size. The small size farm group tended to have a higher awareness of production risks than the other two groups.

Meuwissen, Huirne, and Hardaker identified price and production risks as the most important sources of risk for livestock farmers in the Netherlands.(24) An insurance scheme was rated as the appropriate strategy to manage risk. Flaten et al. compared risk perception and the risk responses of conventional and organic dairy farmers in Norway.(19) The results revealed that the institutional (such as government support policies) and marketing risks were classified as the principal sources of risk for the organic dairy farmers. The authors ranked production cost variability and animal welfare policy as the greatest worries for conventional dairy farmers.

Hall, Knight, Coble, Baquet and Patrick found severe drought and meat price variability as the primary sources of risk perceived amongst cattle farmers in Texas and Nebraska.(25) In a recent study, large-scale South African sugarcane farmers perceived land reform regulations, labour legislation and crop price variability as the three most important risk factors.(20)

In terms of risk management strategies, Boggess et al. and Patrick et al. reported that 'placing of investments', 'obtaining market information' and 'enterprise diversification' were the most important strategies that the sampled crop and livestock farmers use to handle risk in the US.(21, 22) Meuwissen et al. found that 'cost of production' and 'insurance schemes' were regarded as important risk strategies among livestock farmers in the Netherlands.(24) Similarly, Flaten et al. noted that organic and conventional dairy farmers in Norway perceived 'increasing farm liquidity', 'disease prevention', 'buying farm insurance' and 'cost of production' as the most important strategies used to deal with risk on their farms.(19) On the other hand, New Zealand farmers used a mix of risk management strategies to reduce risk. The strategies varied among the groups of farmers depending on the nature of the product, market structure and conditions, farmer characteristics, dynamic risk adjustment considerations and the regulatory situation.(23)

Sources of Risk and Risk Management Strategies: The Case of Smallholder Farmers in a Developing Economy 453

number of original variables into a smaller group of new correlation dimensions (factors), which are linear combinations of the original variables.(28, 29) The Kaiser-Meyer-Oklin (KMO) method measured the appropriateness for factor analysis of both data sets. The KMO index varies from 0 to 1, with results of 0.6 or greater suitable for factor analysis. The latent root criterion (eigenvalue > 1) was estimated to identify how many factors in each data set to extract. After the number of factors had been identified, the orthogonal (varimax) rotational method was performed in order to minimize the number of variables that have high loadings on each factor. A factor loading of ± 0.4 was employed as a cut off criterion to determine the inter correlation among the original variables. In addition, Cronbach Alpha was employed to

The relationships between the socioeconomic variables and the perception of risk sources and risk management strategies of the smallholder farmers were also analyzed. Multiple regression was employed to evaluate the influence of farm and farmer characteristics on the smallholder farmers' risk perception and risk management responses. Diagnostic tests were carried out to verify that there was no violation of the multiple regression assumptions. The model specification for the farmer's perception of risk source with socioeconomic variables

> 01 2 3 4 5 6 7 8 9 10 11

*<sup>i</sup> S b b AGE b GEN b EDU b EXP b OFFW b FSIZ*

The model for risk management responses with socioeconomic variables is given as follows:

01 2 3 4 5 6

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,

The household and farm characteristics of the central and north-east region farmers are presented in Table 1. Table 1 shows that except for gender, household size and finance used for the farm business, central and north-east region farmers generally differ in terms of personal

*R b b AGE b GEN b EDU b EXP b OFFW b FSIZ <sup>i</sup> b INCM b LOC b FINC b AHIN b HSIZ e*

7 8 9 10 11

 

+

*b INCM b LOC b FINC b AHIN b HSIZ e* (1)

(2)

evaluate the internal consistency of each factor.(28)

is postulated as follows:

0 otherwise; *HSIZ* is household size; and e is error term.

**4.1. Socioeconomic characteristics of the farmers** 

 

**4. Results and discussion** 

where:

Despite the fact that the evaluation of farmers' risk perceptions and risk management responses are essential to better understand their risk behaviour and managerial decisions, few studies have explicitly investigated awareness of risk among Thai farmers. Akasinha, Ngamsomsuk, Thongngam, Sinchaikul and Ngamsomsuk examined risk perceptions among rice farmers in Payao and Lampang provinces in the northern region.(26) In their study, the Participatory Risk Mapping (PRM) technique was used to elicit sources of risk. The authors' results showed that rice farmers in Payao faced five major sources of risk including 'outbreak of rice disease', 'insects causing damage to rice', 'high input costs', 'flooding', and 'shortage of water supply'. Farmers in Lampang typically faced 'drought', 'insects causing damage to rice', 'low output prices', 'pests', and 'high input costs'.
