The role of off-farm investments in risk management of agricultural households

Farmers face many risks which arise from natural, economic and socio-political environments. Risk sharing institutions like national insurance and credit schemes that help reduce the burden of risk to society are weak in many developing countries. Private sector insurance products are still in their developing stages and this has prompted farmers to turn to self insurance strategies that include diversification and social mechanisms for coping with risk. Off-farm investment is one of the diversification strategies whose prevalence and effectiveness in risk management have not been evaluated. This paper sought to determine risk attitudes of farmers, to identify the determinants of off-farm investments and to investigate the effectiveness of off-farm investments in risk management. All the farmers were risk averse. Years of experience in farming, employment income, gender and farm income significantly determined off-farm investment decisions. The review showed that off-farm investment income reduces risk. Government policies and institutional mechanisms that reduce risk (such as crop insurance and irrigation technologies) and those that facilitate farmers’ access to assets like off-farm investments in order to manage risks in farming are required.