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Invited paper presented at the 6th African Conference of Agricultural Economists, September 23-26, 2019, Abuja, Nigeria Copyright 2019 by [authors]. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies. Production risk and risk preference among small-scale pig enterprises in Southwestern Cameroon By Mbah Leslie Tembei Centre for Independent Development Research, P.O. Box 58 Buea, SWR, Cameroon Ernest L. Molua, PhD Department of Agricultural Economics and Agribusiness Faculty of Agriculture, University of Buea, Cameroon, P.O. Box 63 Buea, SWR, Cameroon. Mr Ajapnwa Akamin Department of Agricultural Economics and Agribusiness Faculty of Agriculture & Veterinary Medicine University of Buea, SWR, Cameroon *Corresponding author: Email: [email protected] 1 Production risk and risk preference among small-scale pig enterprises in Southwestern Cameroon Abstract This article analyses average pig production and output variability in southwestern Cameroon. After testing for the presence of production risk, the feasible generalised least squares (FGLS) technique is used to estimate the mean and variance functions and identify sources of output variability in pig production. Both descriptive and econometric results converge on the fact that pig producers become more risk averse when exposed to production risk. Income diversification and variable input use are identified as the main factors influencing expected output. Meanwhile, of all factors posited to cause variability in output, activity diversification alone tends to increase output risk. Keywords: Pig production, risk, risk preferences, Cameroon Introduction The agriculture sector is the key sector of Cameroon’s economy, employing more of the active population than any other sector and contributing very significantly to the country’s gross domestic product (76.38% in 2017) (MINADER 2018). Over the years, the country has witnessed an upward trend in agricultural output (albeit a less than proportionate increase in productivity) which can be attributed to an expansion of the size of cultivated area rather than to an increase in productivity and efficiency in the agricultural sector (Dewbre & Borot de Batisti 2008). Cameroon’s agribusiness sector plays a vital role in the economy, not only at the national level but also at household level, as it provides a source of food, employment and livelihood. Meat production is a particularly lucrative business in Cameroon both in terms of its contribution to the country’s GDP, as well as serving as a source of food and livelihood for many. Meat production includes ruminants, birds, as well as other livestock. Pig production contributes about 15% of the country’s total meat production, significantly lower than cattle (54%), but just slightly above sheep and goat (13%). Meanwhile, poultry and rabbits contribute 17% and 1% respectively (GESP 2011). The pig agribusiness in Cameroon is dominated by small-scale subsistent producers. Figure 1. Evolution of pig production in Cameroon Source: Authors’ computation using FAOSTAT data. 2 Agribusinesses by their nature attract a lot of risk. As a result, decision-making is a complex issue for most agribusinesses (both small- and large-scale), because production is often subject to uncertainty and risk (Moschini & Hennesy 2001). Many sources of risk exist which influence agribusiness decisions, some of which include; political risk (war, political unrest, administrative bottlenecks), economic risk (financial, price, and credit risk), environmental risk (disease outbreak, climate and weather risk), amongst others. The focus of this study is on production risk only. Uncertainty and risk are inherent features of the agricultural production process - both crop and livestock. Two main forms of these are fluctuations in output (production risk) and prices (price risk), and their combined effect significantly influences farm income. Production risk often arises because agricultural production depends on natural biotic and abiotic processes which cannot be controlled entirely by man. Various sources of production risk in agriculture and agribusiness include weather vagaries, plant and animal diseases, natural disasters, amongst others. Risk associated with crop and animal production is thus more pronounced in less developed agrarian economies as the technology available to them to curb output risk is limited compared to more industrially advanced countries (Asche & Tveteras 1999). As such agribusiness decision-making (under uncertainty) is best analysed by taking into consideration the risk preference behaviour of the latter. Conceptually speaking, agribusinesses exhibit three possible attitudes towards risk; risk- averse, risk-neutral, and risk-friendly preferences. Materials and methods Conceptualisation of risk in agriculture Throughout this study, risk is viewed as the chance of a bad event occurring relative to the producer’s expected outcome. Risk is likely to have a potentially negative impact on the profitability of investments in the agribusiness sector. The various sources of uncertainty and risk in agriculture and agribusiness can be classified under four main categories; economic/financial, social, environmental, and political risk. Institutional risk - unpredictable changes in the provision of services from institutions that support farming – is also known to affect the functioning of agribusinesses. Such institutions can be both formal and informal and include banks, cooperatives, marketing organizations, input dealers and government extension services. Price support, subsidies, food quality regulations for export crops, rules for animal waste disposal and the level of price or income support payments are examples of decisions taken by government that can have a major impact on the farm business. Meanwhile, marketing risk refers to variations in prices beyond the control of the individual farmer. The price of farm produce is affected by its supply and demand, as well as the cost of production (Kahan 2008). Risk preference refers to the level of tolerance agribusinesses exhibit when faced with risk. Risk aversion can thus be defined as the willingness to accept lower expected returns in a bid to reduce risk involved. Meanwhile, risk-loving agribusinesses will exhibit willingness to accept higher expected returns even if it means incurring higher risk in the process. Risk preference analysis is therefore very important for understanding why and how agribusinesses make decisions when faced with uncertain outcomes. Usually, smallholders either do not adopt or only partially adopt new technologies, even when these technologies could generate higher returns than the existing technologies. One possible explanation for this reluctance among smallholders in developing countries could be the perceived risk profile associated with these technologies (Hardaker et al. 2015). For instance, Smale et al. (1994) show that production risks lead to slow adoption of new technologies in maize production. Production decisions are thus greatly influenced by the level of risk preference of the agribusiness (risk averse, risk friendly or risk neutral). The effects of production risk, if not properly managed, could result in misallocation of resources, low productivity, inefficiency, low investments and consequently slow rate of business growth. 3 Production risk influences agribusiness decisions in many ways. Agribusiness managers decide what inputs to use, where, when and how, depending on their level of tolerance to the associated production risks. This is particularly true for small-scale agribusinesses whose management decisions are highly influenced by exogenous processes. Such high dependence leads these agribusinesses to exhibit high aversion towards risk. In addition, micro agribusinesses usually lack adequate technology to mitigate the effects of the risks they face. As such the low investments lead to low productivity and by extension lower expected profits for the agribusiness (Cole et al, 2017). In order to cope with production risk, farmers in developing countries adopt a range of risk- management strategies, ranging from income diversification and production strategies to common risk-sharing mechanisms based on kinship and social networks. The latter approach is more appropriate for covariate shocks as opposed to idiosyncratic shocks. Evidence suggests that in the absence of formal risk management, less risky but less profitable farming practices are adopted, resulting in lower productivity (Antonaci et al. 2014). In this paper, we focus on production risk. This refers to output uncertainty caused by the vagaries of the weather and other production-related shocks in the course of the production cycle. Production risk arises because agricultural production depends on natural and environmental processes which cannot entirely be controlled by the producer or agribusiness - weather, animal disease outbreak, political instability, and natural hazards, amongst others. It also arises from uncertainty around the use of technologies. As such, farmers decide to produce amid uncertainty about ex post production (Kahan 2008). The identification of the sources of risk is important because it helps to choose the appropriate risk management strategy: these strategies can either be ex-ante or ex-post. Although awareness of the existence of risk is clearly important, the latter needs to be clearly identified

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