Farm-level Analysis of Off-farm Income and Farm Capital Accumulation Among Small-scale Farmers in North-central Nigeria
The study analysed off-farm income and farm capital accumulation among small-scale farmers at farm level in North Central Nigeria. Multistage sampling technique was used to select 360 respondents, comprising participants and non-participants in off-farm work. The participants were disaggregated into three main typology namely, agricultural wage, non-agricultural wage, and self-employments. Data for the study were obtained from primary source with the aid of standard questionnaire and analysed using descriptive and inferential statistics. Self-employment was the dominant (42.78%) off-farm work. Full-time participants were mainly (38.50%) in non-agricultural wage employment. Participants with off-farm work experience of 14–19 years were mostly (55.20%) in self-employment, while 61.50% of the farmers with off-farm work experience of 26–33 years were in agricultural wage employment. Off-farm income constituted 50.28% of total household income. The strongest and weakest predictors of enterprise diversification were funds for farm investment (0.65) and crop failure (0.36), respectively. The mean entropy of diversification was 0.67. Farm income (p < 0.01, t = –10.237) and off-farm income (p < 0.01, t = 2.536) significantly affected market labour supply. Self-employed participants had the highest average off-farm income (N266,680.78). Farm capital differed significantly (p < 0.05) among off-farm work typology. Farm capital was unequally distributed among the respondents (G = 0.56). Causality ran from farm capital to off-farm income. Participants had significantly (p < 0.01) less total farm liabilities, debt-asset-ratio, and loan for farm production than non-participants. Participants significantly (p < 0.01) incurred more yam production costs and total variable costs than non-participants. Participants had significantly (p < 0.01) higher average technical efficiency estimates in yam and cowpea enterprises but less average profit efficiency estimates than non-participants. It was concluded that small-scale farmers had average reliance on off-farm income for the purposes of generating funds for farm investment and increasing farm capital. Although, self-employment generated higher off-farm income, farm capital was highest among farmers in agricultural wage employment. Thus, off-farm income was diverted to non-farm enterprises, signaling a gradual drift from core farm production. It was recommended that small-scale farm households should increase off-farm income’s share invested in farming so as to raise production level, farm capital and obtain higher returns so that they could take full part in agribusiness; that IFAD and other stakeholders in rural development should encourage farmers in non-agricultural and self-employments to re-invest off-farm income in farming; and the Federal Government and IFAD should train farmers on the management of additional income from off-farm work. These measures would facilitate the development of the agribusiness sector and forestall dual farm structure from adversely affecting food production by small-scale farmers.
1.1 Background of the Study
In sub-Saharan Africa, agriculture occupied a prominent position in national economies as the sector served as a key driver of growth, employment generation, wealth creation, food production, raw material supply, and poverty reduction (Ekpo & Olaniyi, 1995; Diaz-Bonilla & Gulati, 2003; Lawanson, 2005; Wankoye, 2008). Ajakaiye (1993), National Bureau of Statistics (2007), and Matthew (2008) attested to the potentials and indispensable roles of agriculture in Nigeria’s economy. The recognition of the role of agriculture in Nigeria’s economy informed the decisions of the Federal Government and donor and foreign agencies to marshal numerous interventions to the sector (Oyeyinka, Arowolo & Ayinde, 2012).
Some of the interventions, which aimed at mitigating financial constraints faced by farmers, included Family Economic Advancement Programme, Nigerian Agricultural Credit, Rural and Development Bank now called Bank of Agriculture, Agricultural Credit Guarantee Scheme Fund, Community Banks, Microfinance institutions, National Special Programme for Food Security and Fadama Development Programmes (Nweze, 1995; Ogbanje, Okwu & Saror, 2010). These efforts are justifiable given the importance of agriculture to both developed and developing countries of the world. For instance, it has been observed that the rapid growth of the newly industrialised economies of the Asian continent was directly associated with substantial growth of the agricultural sector (Kay, 2001). Wankoye (2008) was of the view that commercial agriculture is the most effective and sustainable catalyst that would lead to sustainable industrialisation. It follows that the need to increase farm income and agricultural productivity among small-scale farmers is sine qua non, if the farmers must maintain their national, though inadequately recognised role of feeding the nation.
In Nigeria’s move towards agricultural renaissance, it is important to note that commercial farms are profitable only if they generate sufficient income (on and off-farm) and accumulate adequate capital for possible re-investment. In this direction, it is imperative for small-scale farmers to embrace farm diversification strategies as measures to curb declining farm and household incomes and to insure against agricultural production and marketing risks (Reardon, 1997; Amit & Livnat, 1988; Kijima, Matsumoto & Yamano, 2006; Matsumoto et al., 2006; Hazell, Syed, Zupi & Miyazako, 2011).
Off-farm income is that portion of household income which is obtained off the farm. It includes non-farm wages and salaries, pensions, trading and interest on income earned by farm families (Matthews, 2004). Off-farm income doubles as risk minimisation and household income stabilisation strategies. In the United States, for instance, off-farm income accounted for over 90 percent of farm operators’ household income (Sommer et al., 1997; Babcock, Hart, Adams & Westhoff, 2000; Briggeman, 2011). Ahearn and Lee (1991), Perry and Hoppe (1993), Blank, Erickson, Nehring & Hallahan (2009) and Briggeman (2011) asserted that several farms in the United States of America could not boast of favourable leverage ratio without off-farm income. In a developing country like Nigeria where agriculture has been relegated, and further worsened by flagrant diversion of agricultural intervention funds to unintended beneficiaries (Idachaba, 1993), off-farm activities deserve no less attention. Besides, Babatunde (2008) has shown that off-farm income supplements and boosts farm and total household incomes.
Off-farm work refers to activities from which farmers earn income apart from their own farm. In Mexico, De Janvry and Sadoulet (2001) clearly separated farmers into those who participated in off-farm work and those who did not. According to Babatunde, Olagunju, Fakayode and Adejobi (2010), the scenario, however, is different in rural Nigeria, where farmers engaged in several activities at the same time in a way that decisions to participate are not mutually exclusive. Off-farm engagement is generally disaggregated into three components. These are agricultural wage employment (AWE) involving labour supply to other farms, non-agricultural wage employment (NAWE) including both formal and informal non-farm activities, and self-employment (SE) such as own businesses. This typology has been used by Babatunde et al. (2010) and Ibekwe et al. (2010).
Myyra, Pietola and Heikkila (2011) affirmed that besides generating annual income, a farm family might have a goal to accumulate wealth through capital gains from off-farm activities. This is especially relevant for the about 900 million extremely poor people who lived in rural areas of developing countries. But, with little income or collateral, poor farmers were hardly able to obtain loans from banks and other formal financial institutions (Ochi & Nnanna, 2007; Asogwa, Umeh & Ater, 2007). Access to rural financial services is worse among women (Audu, Otitolaiye & Edoka, 2009) even though, women often had the best credit ratings and were more actively involved in agricultural production (International Fund for Agricultural Development (IFAD), 2000, 2003, 2004; Adepoju, Umar & Agun, 2006; Audu et al., 2009). The most effective way out of this contraption, according to IFAD (2004), is that the small-scale farmers need to be able to borrow, invest and save, and to protect their families against risk. According to Mellor (1962), Kibara (2007) and Petrick and Kloss (2012, rural financial capital improved agricultural productivity, food security and poverty profile. Osaka (2006) and Ogbanje (2010) noted that capital, including cash and other man-made farm assets that are required to carry out production, is usually accumulated through savings and investment.
Since formal credit facilities were unreliable, farmers have resorted to alternative measures to raise capital for farm investment. The two major alternative sources of farm capital for small-scale farmers were the numerous local savings’ schemes and involvement in off-farm activities (Adam & Agba, 2006; Alade, 2006; Ibekwe et al., 2010). In some contexts, rural off-farm activities are important sources of local economic growth (e.g. tourism, mining, and timber processing). Off-farm sector is of importance to the rural economy because of its production linkages and employment effects, while the income it provided to rural households could represent a substantial and sometimes growing share of farm capital (Alimba, 1995; Okorji, 1995; Okoye, 1995; Davis, 2003; Zeller, Schrieder, von Braun & Heidhues, 1997).
It has become widely accepted in academic and policy research that rural off-farm activities make up a significant component of rural livelihoods in developing countries (Chikwama, 2004; Bezabih, Gebreegziagher, GebreMedhin & Köhlin, 2010). Coupled with the increasing share of off-farm incomes, off-farm activities could no longer be considered as marginal. Relatedly, agricultural economies in transition are now gradually shifting toward a market economy and these shifts have been driven, in part, by push and pull factors (Vera-Toscano, Phimister. & Weersink, 2004). Reardon (1997) observed that households were pulled into off-farm activities when returns to off-farm employment were higher and less risky than in agriculture. Also, when farming became less profitable and more risky due to population growth and market failures, many households were pushed into non-farm activities. Nevertheless, many farm households in developing economies are yet to adopt market-oriented agricultural practices and, hence, are unable to enjoy the benefits of the market economy. As a supplementary measure, activities in the off-farm sector have witnessed a boom in the manufacturing, agro-based and service sectors (De Janvry, Fafchamps & Sadoulet, 1991; Ibekwe et al., 2010).
In addition to providing the much needed investment capital for the farm, off-farm occupation has been seen by some researchers as a risk minimising strategy which is important, especially, to the small-scale farmers. This is, indeed, a sound safeguard against crop failure and market failure (Ellis & Freeman, 2004; Babatunde et al., 2010). De Janvry and Sadoulet (2001) and Ruben and Van den Berg (2001) have shown that farmers resorted to these sources to boost farm capital and investment.
McNamara and Weiss (2005) maintained that farmers faced a number of uncertain factors such as weather and market conditions that affected their household income. Since small-scale farmers are risk-averse, farm diversification is an efficient risk management mechanism which stabilises expected returns in an uncertain environment or enterprise such as agricultural production. For a developing country such as Nigeria, agricultural production enterprises of interest would be those that focus on the production of staple food crops which most households rely on. Kolawole (2006) and NFRA (2008) showed that common staples in Nigeria, and the North Central region in particular, included yam, cassava, rice, maize, sorghum, cowpea, soyabean, bambara nut, and sesame.
In recognition of the crucial roles of rural finance, the Federal Government of Nigeria in 2009, entered into partnership with the International Fund for Agricultural Development (IFAD) to build capacity for rural finance. The strategy includes efforts to strengthen access to credit and land; participation in decision-making; access to agricultural extension services; access to improved seeds and planting materials, farm inputs and tools; and encouragement of traditional thrift, savings and insurance schemes (World Bank, 2008). This partnership, as well as its strategies further attests to the indispensability of capital accumulation to farm firm growth.
Studies have reported the inadequacy of farm income and high prevalence of poverty among small-scale farmers resulting in their inability to meaningfully invest in farm business (Lambert & Bayda, 2005; Kwon, Orazem & Otto, 2006). Another group of literature has shown that farmers’ resort to sourcing credit from financial intermediaries has not brought the much anticipated farm capital relief (Musser, White & McKissick, 1977; Bagachawa, 2000; Obike, Ukoha & Nwajiuba, 2007; Bage, 2011). Consequently, current research in agricultural finance has beamed its searchlight on off-farm activities embarked upon by farmers as an alternative and sustainable source of farm capital. It is, thus, expedient to provide empirical content on the role of off-farm employment in farm capital accumulation.
1.2 Problem Statement
The move towards commercial agriculture in Nigeria has been consistently frustrated largely by limited capital and financial constraints (Awoyemi, 2005; Abiodun, 2011). A number of factors accounted for the capital constraints faced by small-scale farmers. The major factor was their ineligibility for formal credit which arose from the small-scale nature of their farm firms, the biological nature of the enterprise, vulnerability to shocks, indisposition to insurance policies, and restricted liquidity (IFPRI, 2007; Kimura & Thi, 2011).
Small-scale farmers belonged to the poorest segment of Nigeria’s population and therefore could not make meaningful investment in farming (Asogwa, Umeh & Ater, 2007; Omonona, 2009; Rural Poverty Portal, 2012). In furtherance to this position, Onuk, Ibrahim, Bello and Patrick (2009) maintained that incidences of poverty and poor agricultural production were closely interwoven. Lack of income and poverty among small-scale farmers were consequences of lack of adequate finance. According to Oyeyinka et al. (2012), lack of capital inhibited the purchase of improved seeds and agrochemicals as well as constrained the acquisition of appropriate production technologies for enhanced productivity.
Poor access to formal financial services is due to inherent difficulties associated with such characteristics as low population density in rural areas where farmers reside, isolated markets, seasonality of products, and highly covariant risks such as widespread crop failures, commodity price fluctuations, and high post harvest losses (Yaron, 2004). Similarly, inadequate infrastructure in rural areas often dissuades profit-oriented formal financial institutions from entering this market, thereby affecting the profitability of agricultural production (IFAD, 2004). Coupled with inadequate policies to attract formal financial intermediaries, small-scale farmers have become vulnerable to money lenders known for cut-throat loan terms.
Following the inefficiency and unreliability of formal financial intermediaries (Ajayi & Ojo, 1986; Folawewo & Osinubi, 2006; IFPRI, 2007; Ogunmuyiwa & Ekone, 2010), some farmers have resorted to farm diversification by sourcing for finance from off-farm enterprises (Adams, 2001; Reardon, Berdegue & Escobar, 2001; Jhingan, 2003). Participation in off-farm income generating activities, however, leads to tradeoff in time and labour utilisation. Tavernier, Temel and Li (1997), Mishra and Holthausen (2002) and Loening, Rijkers and Soderbom (2008) observed that off-farm activities constituted diversion of critical productive resources from the farm, thereby leading to reduction in specialisation and efficiency in farm production (Bojnec & Ferto, 2011) and, invariably, dual farm structure (Spitze & Mahoney, 1991; Phimister & Roberts, 2002).
In addition to these problems, there is dearth of literature on the effects, opportunities and constraints inherent in the off-farm sector of the rural economy in relation to farm firm capital accumulation in Africa and Nigeria. Loening, Rijkers and Soderbom (2008) affirmed that available evidence on off-farm enterprises in sub-Saharan Africa was fragmented and sparse. Ibekwe et al. (2010) admitted that very little was known about the role off-farm activities played in the income generation strategies of farm households in Nigeria as well as their contribution to farm capital. Similarly, farmers were faced with the dual problems of investment decision and level of investment (Kalachi, 1971; Harris, Blank, Erickson & Hallahan, 2010).
Information asymmetry with respect to off-farm income is prevalent in rural areas. This is a pointer to the relevance of human capital as critical determinants of the successful combination of farm with off-farm income enterprises (Kurosaki, 2001) especially with respect to the management of tradeoff in market labour supply (Newman & Gertler, 1994; Hitt, Ireland & Hoskisson, 2001; Sonoda, 2006). According to Harris et al. (2010), human capital is implicated in off-farm income and investment in farm assets, thereby necessitating in-depth investigation.
Since farm and off-farm works compete for critical productive resources, off-farm work could affect farm efficiency. The effect could be more adverse among small-scale farmers who are resource-constrained. In economies where off-farm work is a major determinant of the well-being of farm households, there could be increased investment in non-farm assets (Reardon, Crawford, Kelly, 1994; Andersson et al., 2005). Kurosaki (2001) observed that households were bound to respond to the new economic opportunities offered by off-farm work by adjusting labour allocation. In doing this, farm households would be left with little or no time to acquire and optimally utilise technologies that could improve efficiency of their enterprises. The impact of off-farm income on farm performance was investigated in Slovenia (Bojnec & Ferto, 2011) and among Norwegian farm households (Bjornsen & Mishra, 2012). In these studies, cost and profit efficiencies were excluded. Besides, there was no control group. Nehring and Fernandez-Cornejo (2005) have observed that the role of off-farm income has been largely neglected in empirical analyses of farm structure and economic performance. In addition, Smith (2002) has argued that increased reliance on off-farm employment could reduce on-farm efficiency.
Some studies focused on off-farm activities, income and wage variability. Examples include those of Ahituv and Kimhi (2002) that examined the role of heterogeneity and state dependence of off-farm work and capital accumulation decisions of farmers over the life-cycle; Briggeman (2011) assessed the importance of off-farm income in servicing farm debt in Kansas City; Davis (2003) analysed rural non-farm economy, livelihoods and their diversification; Ji, Zhong and Yu (2011) evaluated machinery investment decision and off-farm employment in rural China; and Mishra and Holthausen (2002) determined the effect of farm income and off-farm wage variability on off-farm labour supply in India. Others were Harris et al. (2010) which examined the double-hurdle approach to off-farm income and investment in farm assets; Bojnec and Ferto (2011) which determined the impact of off-farm income on farm efficiency; and Kwon et al. (2006) which examined off-farm labour supply responses to permanent and transitory farm income. These studies did not segregate off-farm work into three typology, neither did they measure and decompose farm capital between participants and non-participants. Furthermore, the studies did not evaluate farm efficiency in relation to off-farm work.
In Nigeria, Babatunde et al. (2010) analysed the determinants of participation in off-farm employment among small-holder farming households in Kwara State. Ibekwe et al. (2010) evaluated the determinants of non-farm income among farm households in southeast Nigeria. None of these studies effectively represented North Central Nigeria. Furthermore, the effect of the tradeoff on farm efficiency (technical efficiency, profit efficiency, and cost efficiency) and farm financial management has not been determined. These constituted the research gaps, among others, that this study was designed to fill, so as to provide empirical information that would facilitate the formulation of relevant policies that would forestall the emerging dual farm structure from adversely affecting food crop production. Hence, the study addressed the following research questions:
i. what were the characteristics of off-farm work in relation to off-farm work typology?;
ii. what was the off-farm income’s share of household income that was invested in farming by respondents who participated in off-farm work?;
iii. what were the factors that influenced enterprise diversification among small-scale farmers?;
iv. what was the degree of off-farm diversification among the respondents?;
v. how did farm and off-farm income jointly affect market labour supply?;
vi. was there any difference in off-farm income among off-farm work typology?;
vii. what was the level of farm capital accumulation among off-farm work typology?;
viii. what was the level of concentration of farm capital among small-scale farmers?;
ix. what was the direction of causality between off-farm income and farm capital?;
x. was there any difference in farm capital between participants and non-participants in off-farm work?;
xi. what were the farm financial characteristics of the respondents?; and
xii. what was the level of farm efficiency (technical, cost and profit) in common staple food crops in North Central Nigeria?
1.3 Objectives of the Study
The broad objective of this study was to conduct farm-level analysis of off-farm income and farm capital accumulation among small-scale farmers in North Central Nigeria. The specific objectives were to:
i. examine the characteristics of off-farm work in relation to off-farm work typology;
ii. evaluate off-farm income’s share of household income;
iii. identify the factors that influenced enterprise diversification among small-scale farmers;
iv. ascertain the degree of off-farm diversification among the respondents;
v. determine the joint effect of farm and off-farm income on market labour supply;
vi. evaluate the difference in off-farm income among the main typology;
vii. analyse the level of farm capital among off-farm work typology;
viii. assess the concentration of farm capital among small-scale farmers;
ix. determine the direction of causality between off-farm income and farm capital;
x. determine the difference in farm capital between participants and non-participants in off-farm work;
xi. describe the farm financial characteristics of the respondents; and
xii. determine the level of farm efficiency (technical, cost and profit) in common staple food crops in North Central Nigeria.
1.4 Hypotheses for the Study
The following null hypotheses were formulated to guide the study:
i. socioeconomic and farm financial characteristics of farmers have no significant effect on the probability of investment and amount of off-farm income’s share of household income invested in farming;
ii. socioeconomic characteristics of farmers have no significant effect on off-farm diversification;
iii. there is no significant difference in farm capital among off-farm work categories;
iv. there is no significant relationship between off-farm income’s share and farm capital;
v. there is no significant difference between farm capital quartile and the decision to participate in off-farm employment;
vi. there is no significant difference in farm capital between male and female-headed households; and
vii. there is no significant difference in farm efficiency estimates in staple crops between farmers who engaged in off-farm enterprises and those who did not.
1.5 Justification of the Study
The results of this study would be of great relevance to stakeholders in rural economy. This is because the results would facilitate an in-depth comprehension of structural change imminent in the agricultural sector as the sector reacts to persistent farm investment capital constraint. As noted by Lambert and Bayda (2005), reliance on external funds could affect farm production decisions. In particular, off-farm diversification and debt financing influence factor usage, farm cost, and farm efficiency. Thus, the extent to which the emerging dual farm structure affected farm firm was demonstrated and could be important for policy formulation on sustainable farm production.
Andreu, Featherstone, Langemeier and Grunewald (2006) and Chen, Huffman and Rozelle (2009) noted that, in spite of recent advances in technology such as improved and high performance seeds, farm businesses faced an increasingly competitive market from global demand for food. Therefore, the findings of this study would guide farm operators on the need to make appropriate financial decisions in order to be economically successful and provide sufficient food for the teeming Nigeria population. This is because financial variables, especially debt incurred to purchase inputs, and the availability of capital deeply affect the structure and organisation of farm production (Lagerkvist, Larsen & Olson, 2006). Also, recognising the endogeneity of capital stock in the analysis of off-farm income is particularly important in a period of structural change in the agricultural sector. Similarly, the findings of this study would guide stakeholders in rural and agricultural finance in the formulation of policies that would reduce rigidity in off-farm work adjustments.
Ji et al. (2011) have noted that capital markets were less competitive in developing economies, hence off-farm income could facilitate capital accumulation, especially where agricultural households were subjected to borrowing constraints, as is the case among small-scale farmers in Nigeria. Current literature has pointed out that the linkages between off-farm labour market and farms’ capital investment has important policy implications. Zeller (2000) noted that over the last 30 years, microfinance has had an enormous impact on rural development. Groundbreaking institutions and models have emerged that are expanding financial services in new directions, using technology and innovations to serve more clients in increasingly remote communities, and offering them an ever-wider range of products. In a changing global economy and in the context of financial crises, volatile food and agricultural commodity prices, and the perils of climate change, rural finance studies have become more imperative than ever before. A pointer to this fact is the commitment of approximately $800 million worth of investments in rural finance by IFAD (Wenner, 2002; IFAD, 2004). As such, the findings of this study would complement the ongoing rural finance building capacity programme of the IFAD/FGN collaboration by providing more empirical basis for effective financial intervention.
Understanding the opportunities and constraints in rural off-farm enterprise sector is of crucial importance since, according to Amao (2008), the economy remains highly dependent on the performance of the agricultural sector, while ongoing population growth increases the need for income diversification strategies. Promotion of off-farm enterprise activity is considered to be a promising catalyst for the development of agriculture (Loening, Rijkers & Soderbom, 2008). In this direction, the findings of this study would draw the attention of relevant stakeholders to off-farm sector with the view to making appropriate policies that would mitigate financial constraints and improve capital accumulation among farmers and consequently enhance farm-firm growth.
The farmer’s endowment of time is fixed. This is the time he allocates to farm work, off-farm work, and leisure. In this time constraint scenario, empirical evidence from this study would guide farmers on optimal time (invariably labour) allocation among competing enterprises. This is further underscored by the position of researchers that labour is a critical productive input, especially in small-scale farming (Akinpelu & Ogbonna, 2005; Ezedinma, Okarter, Asumugha & Nweke, 2006; Shehu, Tashikalma & Gabdo, 2007; Okoye, Onyeaweaku, Ukoha & Asumugha, 2008; Iheke, 2009).
The measurement of efficiency remains an important area of research in both developing and developed countries. An understanding of the relationship in efficiency measurement would provide policy makers with information to design programmes that would make food production effectively resistant to the adverse impact of dual farm structure (Nganga, Kungu, de Ridder & Herrero, 2010).
1.6 Limitations of the Study
The major constraint encountered in the course of this study was the basis for separating farmers into participants and non-participants as well as off-farm work typology. After extensive literature review, the researcher settled down for 75% labour allocation as the basis for the demarcation. Another limitation was the large capital outlay required for the field work. The mitigation measure adopted here was confinement of the study to three states and three dominant staple food crops in the region. Furthermore, there was language barrier, which was resolved by using village extension agents who were resident in the selected or nearby communities as enumerators. The problem of apprehension from farmers was resolved through moral suasion and guarantee of anonymity. Finally, the study had to contend with time and financial requirement, especially, for the large-scale data analysis. This made the researcher to acquire relevant analytical software, underwent tutorial, and sought for the cooperation of colleagues who were well versed in some analytical methods which the researcher was not earlier familiar with. In the end, the limitations did not adversely affect the outcome of the study.
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