Adoption of Contract Farming and Precautionary Savings to Manage the Catastrophic Risk of Maize Farming: Evidence from Bangladesh

Abstract

Agricultural production faces several types of risk, and risk management tools vary by place, season, and crop type. Most farmers use multiple risk-minimizing tools to reduce the effects of various hazards. However, previous research has overlooked the potential connections between different risk management tool utilization decisions. This study examines farmers’ decisions of adopting risk management tools (contract farming and precautionary savings) and investigates the impacts of various factors on farmers’ risk management decisions by using bivariate and multinomial probit models. The study was carried out in four different agro-ecological regions of Bangladesh with 350 farmers chosen through multistage stratified random sampling procedures. The findings revealed that the farmers’ decisions towards adopting risk management tools are correlated, and the adoption of one risk management tool may induce farmers to adopt other risk management tools at that time. Moreover, the results revealed that age, education, income, and land ownership are the major factors affecting the adoption of risk management tools, and most farmers are risk-averse in nature. Both models provide interpretation and information for the development of a better understanding of the current situation of rural farm households, which may serve as a platform for policymakers who are anticipating appropriate risk management tools for the farmers.