Adamon Mukasa is a PhD Candidate at the Department of Economics and Management of the University of Trento, Italy and a former Visiting Scholar at Cornell’s Dyson School. He is currently on the job market.
In this last installment of my food price shocks series, I explore two intertwined types of agricultural households’ responses to uncertainties about future food prices, yield levels and weather conditions, namely crop selection and acreage allocation decisions. Indeed, agricultural households often make their production, land, and input allocation decisions before the realization of food prices. In regions where the levels and volatility of food prices change constantly, farmers have a reduced capacity to accurately formulate expectations, struggle to make sound investment decisions because they become more pessimistic about the future, and face greater potential losses if they fail to adjust to high and changing food prices. In addition, owing to the quasi-absence of formal insurance and credit markets, agricultural households in most developing countries generally rely on informal mechanisms or crop diversification strategies to protect themselves against high variances in food prices (Fafchamps, 1992).
Accordingly, I answer in this post the following empirical questions: Are Ugandan farmers more sensitive to changes in expected prices or expected yields? Or is it the volatility of prices and yields that matter more? In the context of changing prices and volatility, do farmers continue to grow the same crops over time (inertia effects) or do they instead take advantage of crop rotational effects (spillover effects)? Which factors—household characteristics (such as education, sex, household size), environmental factors (such as land quality, typology of soil, irrigation practices), or agricultural and market-related risks—are most important when it comes to selecting and allocating land to particular crops?
The impacts of yield and/or price expectations and variability on crop choices and acreage allocations are among the most researched topics in applied agricultural economics (Chavas and Holt, 1990; Coyle, 1992, 1999; Holt, 1999; Just and Pope, 2001; Carpentier and Letort, 2009; Fezzi and Bateman, 2011; Lacroix and Thomas, 2011; Kaminski et al., 2013; Livingston et al., 2014). The recent swing in commodity prices in 2008, to levels not seen since the early 1970s, led to abundant empirical studies questioning the adjustment of land use to these price changes (Livingston et al., 2008; Weersink et al., 2010; Lacroix and Thomas, 2011; Hausman et al., 2012). However, most of these studies focus either on food price or yield risks and those that include both generally ignore the dynamic nature of agricultural activities by estimating static crop choice or acreage allocation models. In addition, most studies in developing countries mainly investigate how farm households change their crop composition in reaction to weather-related risks or internal family dynamics (such as increases in household size, changes in dependence ratio, etc.). Since all of these aspects are likely to be interrelated, my research incorporates them into the analysis and thereby uncovers their differential contributions to farmers’ crop choices and land allocation decisions.
I measure the sensitivity of Ugandan farmers to changes in expected prices and yields, price and yield risks, weather conditions, and household characteristics by estimating two models: (i) a multivariate crop selection model that analyses the factors affecting the probability of selecting and growing different crops under market uncertainties and (ii) a conditional acreage share model that investigates how they allocate their agricultural land to different crops. In these models, the choices made by the farmers in the past regarding the crops they grew and how much land they allocated to different crops are assumed to influence current farmers’ choices, leading to dynamic crop choice and land allocation problems. Hence, these model specifications allow me to distinguish true state dependence in crop choice and land allocation from spurious state dependence (due to unobserved heterogeneity) and to check for the presence of inertia effects (if farmers do not change their previous crop choice patterns) or spillover/rotational effects (if choices made in the past by a farmer regarding one crop affect current decisions about competing crops).
Similarly to my first and second posts in this series, both the selection and land share models are estimated using a panel dataset of 1,598 agricultural households surveyed over 4 periods (2005/6; 2009/10; 2010/11 and 2011/12) from the Uganda Bureau of Statistics (UBoS).
Results from the selection model suggest that after controlling for unobserved heterogeneity, past crop choices significantly and positively influence farmers’ current decisions. This crop persistence over time may be explained by both farmers’ preferences and constraints. For example, the costs of transitioning from one crop to another may be sufficiently high due to differences in input requirements or agronomic constraints. In addition, all estimated coefficients associated with own-expected prices are not only significant but also exhibit the expected signs: farmers’ anticipations of an increase in expected market prices positively affect the likelihood of selecting and growing crops. Conversely, the more volatile the expected crop prices, the lower the likelihood of crop selection, as implied by the negative and significant signs of all the estimates of expected own price risk.
In terms of the conditional acreage model, econometric results reveal that the expected price effects are inelastic for all selected crops (matooke, cassava, maize, potatoes, beans, and other cereals). For example, a percent increase in the expected prices of matooke, maize, and beans increases the land acreage shares of these crops by 0.32, 0.38, and 0.31 percent respectively. This inelastic reaction of acreage shares to expected prices may be partially explained by crop-specific agronomic constraints (Wu et al., 2004), crop interdependence since changes in the prices of one crop also affect acreage decisions of other crops (Lacroix and Thomas, 2011), or market failures (de Janvry et al., 1991).
Furthermore, the impact of own expected yields on acreage shares is both positive and in all cases larger than the corresponding price elasticities. This larger impact may be explained by the fact that most agricultural households in Uganda are subsistence farmers or net buyers (Benson et al, 2008). Therefore, they place greater value on yields as larger yields generally imply higher production and subsequently higher home consumption, while increases in the expected end-of season output prices are more meaningful to net sellers. Finally, the empirical findings suggest that price, yield, and weather risks are more important than their expected values in explaining the land allocation behavior of Ugandan farmers whereas household characteristics have an insignificant impact on crop selection and acreage allocation decisions.