Risk and Risk Aversion in Farmers’ Production Decisions in the Northern Region of Ghana

Agricultural production systems in Ghana particularly in the Northern region are generally poorly diversified, focusing on rain-fed staple crop production and raising livestock. These production activities are inherently risky hence farm households investment and production decisions made within these environments are affected/influenced by risk. Despite the uncertainty/risky nature of the farming environment of farmers in Northern region of Ghana, there is little knowledge about how these farmers behave towards risk and how that affects/influences their production decisions. The main objective of the study is to assess the role of risk preferences/aversion in farmers’ production decisions in the Northern region of Ghana. For instance, to which extent can farmers’ production decisions be explained by their risk preferences? And how do the risk preferences affect production decisions? The study used a data from a pilot survey of a South-driven DANIDA funded research project, “Technological and market options for managing climate change induced risks for smallholder farmers in northern Ghana”, and it was obtained from 40 farmers using well-structured questionnaires. The data was analysed using descriptive statistics and regression analysis (multiple linear regression(s) and logit model(s)) in R software.

The study found that farmers in Northern region of Ghana are less risk averse, with about 41 percent of the farmers exhibiting intermediate to moderate risk aversion. Also, the results indicate that marketing risks associated with the unexpected variability of input (chemical fertilizers) and product prices, and production variability (crop yield) are considered as important sources of risk among the farmers. The farmers resort to using saving cash and assets, spreading of sales overtime and growing different crops as major risk management strategies. Further, the results revealed that farmers’ risk preferences do not influence their production/management decisions. The study therefore suggests investment in an index based insurance to help farmers in their farming operations.