Understanding farmers’ behavior toward risk management practices and financial access: Evidence from chili farms in West Java, Indonesia

1 Introduction

The agricultural sector is important for Indonesia, and the economy is also dependent on this sector [1]. Agriculture contributes to Indonesian income by 12.98% [2]. In addition, agriculture has been engaged by many Indonesians, where chili is one of the agricultural products that have a high economic value, and contributes to Indonesian agricultural export by 6% [3]. Chili production is vulnerable to risks such as natural disasters, price fluctuations, crop disease, climate change, and capitalization. Risks of harvest failure can be due to lack of maintenance such as pest attacks and diseases that may decrease crop productivity. In addition, high humidity can lead to increased disease attacks [4]. Agricultural risks may include harvest failure to agricultural production that may decrease agricultural productivity. Farmers need to know the level of risk of their farms and manage the risks to make the decisions efficiently [5].

Agricultural risks affect the production and investment decisions of farmers, who tend to avoid high risks and prefer ease in decision-making, although each farmer has different characteristics in dealing with agricultural risks. The study of Duong et al. [6] highlighted the tendency of farmers to avoid high risks through the comprehensive review of farmers’ perceptions of agricultural risks. The presence of risk in agriculture has a significant influence on farmers’ production and investment decisions [7]. The behavior of farmers in the face of risk is influenced by socio-economic factors, such as land size, farmers’ age, number of households, farmer’s education, farming experience, and land ownership status [8]. Furthermore, several socio-psychological factors such as age and household size can influence farmers’ attitudes toward risk [9]. The agricultural risks are an unfavorable thing that can arise during the production where the probability of such risks and their impact, in fact, can be calculated and predicted. Understanding farmers’ attitudes toward risk is essential for designing effective agricultural policies and programs [10,11].

Access to agricultural financing can boost farmers’ income and is a significant factor in agricultural production risk [7]. Having access to financing is essential for raising farmers’ incomes and enhancing their standard of living. Farmers can purchase agricultural inputs such as seeds, fertilizer, and equipment by increasing their access to financing [12–14]. Additionally, having access to financing can help farmers invest in infrastructure and technology [15], such as transportation, storage facilities, and irrigation systems, which can help them become more competitive over the long run [16].

Understanding the farmers’ behavior in facing risks and its relation to access to finance has not studied yet, especially in financing from different financial providers. Therefore, this research is important to help farmers’ decision-making in coping agricultural risk, in particular chili production. This study aimed to analyze the farmers’ risk behavior on chili production, and determine access to finance and other factors that influence the behavior to such risks. This study is crucial in contributing to the development of the agricultural sector especially in chili production. Furthermore, the findings of this study provide insights to agricultural policymakers and providers of finance by considering the role of access to finance to help farmers coping with the risk.

2 Methods

This research was performed in West Java, particularly in the districts of Bandung, Garut, and Ciamis, considering that these areas are production centers and potential areas in chili production in West Java, Indonesia. The sample area was determined based on the distance of the farmer’s area to the city center as a representation of the financial service center, i.e., near, medium, and far from the city center. The closer the distance to the city is represented as the group who can easily access various financial services.

The survey was performed by conducting interviews with 300 chili farmers who were randomly selected in the study areas. This study used supporting letters from Universitas Padjadjaran, Indonesia to support the farmers’ survey. The agricultural office of each study area gave a study permission before conducting the survey. Prior to the interviews, the farmers were explained about the objectives and contents of this study. To ensure the farmers’ voluntary participation and to guarantee their anonymity, the farmers were first asked if they would be interested in being interviewed.

Agriculture risks may arise from several factors that are unpredictable and uncontrollable by the farmers. Risk is the probability of an event resulting in a loss when the event occurs during a certain period. Coefficient of variation (CV) was used to measure the risk:

where CV is the coefficient variation, σ is the standard deviation, and X̅ is the average.

The criteria for measuring the value of the CV are when the CV is more than 0.5 then the risk on the business that the farmer bears is greater. The farmer’s behavior was analyzed with the K(s) or risk aversion value to calculate the value of reluctance in risk [17]:

where K(s) is the level of reluctance in facing risk, θ is the coefficient variation production, P _xi is the most significant input price (IDR), X _i is the quantity most significant user input, P _y is the output price (IDR), f _i is the elasticity of the most significant production input (%), and μ _y is the average production.

Farmers’ behavior in relation to risk includes risk averse, which means that they are not prepared to take the risk or the loss. The second type of risk is neutral, i.e., a farmer who is unaware of the level of risk faced. The third is a risk taker, who is willing to take risk even though the results obtained may be low. The K(s) value is categorized into three behavioral criteria, i.e., risk taker (K(s) is lower than 0.4 indicating farmer faces risk), risk neutral (0.4 ≤ K(s) ≤ 1.2 means farmer’s behavior between risk taker and risk averter), and risk averter (1.2 < K(s) < 2.0 means farmer avoids risk) [18]. In the formula K(s), the regression analysis of the production function of chili is used in obtaining the most significant production input using the value of the standardized coefficient of the largest independent variable [17]. The beta coefficient (standardized coefficient) value is obtained using the following formula:

Standardized coefficient = beta coefficient

a _n X _n = coefficient regression variable independent to −n

σX _n = standard deviation variable independent to −n

σY = standard deviation variable dependent

Coefficient value of the independent variable in beta coefficient (standardized coefficient) is obtained through the regression analysis of chili production function with an equation model regression as follows:

where Y is the amount of production of chili (ton), A is the estimated parameters in function production, LL is the land area (ha), BBT is the amount of seed (stem), PPK is the total fertilizer (kg), PS is the total pesticide (liter), TK is the man-days (HKSP), and € is the error term.

Factors related to the farmers’ behavior in risk were investigated using logistic regression analysis. The logistic equations used are as follows:

where Y is the farmers’ risk behavior (Y = 1 if a farmer is a risk taker; Y = 0 otherwise), β 0 is a constant, β is the coefficient, X 1 is the financial access (1: have experience in obtaining finance from at least one financial source; 0: otherwise), X 2 is the age (years), X 3 is the education (years), X 4 is the farming experience (years), X 5 is the number of family members (numbers), and X 6 is the farm size (hectare).

The variables related to farmers’ access to finance and their characteristics such as age, education, farm experience, family size, and farm inputs such as amount of seed, fertilizer, pesticide, labor, and land area. Farmers’ access to finance refers to the farmers’ experience in obtaining finance from any financial source, measured in whether the farmers obtained finance from at least one source of finance. In general, farmers can obtain finance from many sources of finance such as from banks, micro-finance institution, government through farmers, association, trader, agricultural input kiosk, and other sources of finance such as from family, friends, and relatives [19]. Access to finance is important for farmers to help in their decisions about investment that are significantly affected by the existence of risk in agriculture [7].

Farmer’s characteristics such as age, farming experience, land area, and resource ownership can also influence farmers’ risk [20]. Age is a characteristic of a farmer that refers to the amount of time since a person’s birth measured in years. Age of farmers can influence farmers’ behavior [21,22]. Furthermore, the behavior of farmers is influenced by age, in which farming activities can be carried out by productive farmers by participating in farmer groups’ activity, such as rice farming training and interacting with other farmers about planning their farm operations [23].

The level of education refers to the length of formal education measured in years. New technologies and best management practices are more likely to be adopted by farmers who have received formal agricultural education, which is attributed to less risk aversion, higher skills, and improved decision-making abilities [24].

Farm experience refers to the knowledge and skills acquired by a farmer through practice and direct interaction with farm activities, such as farm management, crop maintenance, or other farm-related activities over a certain period of time and are measured in years. Farmers who have more farming experience are more likely to take less risk [25] which potentially have acquired the information and abilities necessary to assess risks, thus have a better ability to weigh potential gains against potential losses.

Land area refers to the size of farms operated by the farmers, measured in hectare. Larger farms often have diversified farm systems, which can serve as a buffer against changes in prices and other disturbances, and potentially are able to implement more creative and yield-maximizing techniques [26]. Family size refers to the number of persons who live in the farmers’ house, measured by number. The large number of family members encourages a brave attitude toward the risk of fluctuations in chili prices [27].

The farmers were also asked about the agricultural inputs applied in their farms. Farmers who are more risk-taking are more likely to invest in adopting high-yielding varieties and fertilizers, although in the face of risks associated with climate change and volatile markets [28]. Seeds have an influence on farmers’ behavior [29,30]. Furthermore, a pesticide is a chemical substance or formulation used to control pests, weeds, and plant diseases and is measured in liter per hectare (L/ha). Pesticides can affect farmers’ behavior [31], in which farmers who are more willing to take risks often apply more pesticides to increase crop yields [32].

The sum of the labor force is all those who are willing to work, and is measured by the unit of man-days. Labor consumption influences farmers’ behavior [33]. Higher risk-tolerant farmers are more likely to adjust to labor investments to adapt to the climate change and increase agricultural production [34].

1. Consent: Farmers’ consent was obtained for this study prior to the interviews, by adopting a methodology from a study by Wulandari et al. [19].

2. Ethical approval: The research related to human use has been complied with all the relevant national regulations, institutional policies and in accordance the tenets of the Helsinki Declaration, and has been approved by the authors’ institutional review board or equivalent committee.

3 Results and discussion

3.2 Risk level of chili production

Farmer often faces a variety of production risks, thus farmer needs to understand the risks because the farmer is vulnerable to the various risks. The risk level of chili production was assessed using CV analysis by comparing the standard deviation value with the average production. A low value of the CV indicates lower risks. The risk analysis represented by the CV value is presented in Figure 1.

Figure 1

Risk analysis of chili production.

From Figure 1, in general the production risk encountered by chili farmers regarding the distance to the city is relatively high because the CV value is greater than 0.5. The results also show that the CV of the chili farmer whose location is not far from city has a risk level of 1.456 which is higher than the other two locations. This means the level of risk that the farmer who is located not too close or not too far from the city is larger than the two other areas. This may be due to the farming centers being carried out in medium-far areas, thus many chili farmers are in this area. A study by Flaten et al. [38] revealed that farmers living in central areas tended to pay more attention to production risks which may be associated with the occurrence of disease outbreaks, and more densely populated area may also contribute to the greater disease matter.

3.3 Risk behavior of farmers

The risk behavior was analyzed by calculating risk aversion or K(s) values [16]. Prior conducting the resistance test, it is necessary to analyze any of the factors that have the greatest and most significant contribution to the chili production indicated as in Table 1.

Table 1

Factors that influence the production of chili regarding the distance from city

Variable	Near			Medium			Far
	Coefficient regression	Standardized Coef	Sig.	Coefficient regression	Standardized Coef	Sig.	Coefficient regression	Standardized Coef	Sig.
Seedlings	0.439	0.176	0.014	0.377	0.147	0.012	0.466	0.138	0.001
Fertilizer	0.111	0.247	0.653	−0.100	0.123	0.417	−0.058	0.119	0.627
Pesticide	−0.328	0.278	0.242	0.185	0.129	0.154	0.151	0.137	0.270
Labor	0.896	0.217	0,000	0.612	0.143	0,000	0.495	0.158	0.002

The results of the factor analysis show that the most influential input is different regarding the distance, in which the most significant input contribution for the nearest and medium area is labor, while for the far area is the seedling. The further procedure is by determining the parameter of K(s) using the factor value presented in Table 2.

Table 2

Factor value used to determine the parameter K(s)

Location	θ	P xi	X i	P y	f i	μ y
Near	0.948	Wages for each respondent	Number of labors for each respondent	Average chili sell price	0.044	5076.47
Medium	1.456	Wages for each respondent	Number of labors for each respondent	Average chili sell price	0.522	6875.77
Far	1.259	Wages for each respondent	Amount of seeds for each respondent	Average chili sell price	0.023	4050.62

The risk aversion or K(s) values [18] indicate the behavior of farmers in which 0 < K(s) < 0.4 means the farmer behaves boldly to face the risk (risk taker), 0.4 ≤ K(s) ≤ 1.2 means the farmers behave between the risk taker and the risk averter (risk neutral), and 1.2 < K/s < 2.0 means the farmer behave avoiding the risk (risk averter). Farmers’ behavior toward the risks of chili production is presented in Figure 2.

Figure 2

Farmers’ behavior toward the risks of chili production.

Overall, farmers’ behavior is dominated by farmers who are risk taker at 51%. Risks may include natural disasters, crop diseases, price fluctuations [39], and capitalization [40]. All the farmers who live in the nearest areas to the city are risk takers. These farmers are risk takers because areas near the center are vulnerable to water scarcity, high humidity, temporary conditions of the soil in the process of production, the need for water, moisture, and soil fertility that is a very important part in boosting the production process. Another reason that farmers’ tendency to be risk takers may be related to economic pressures, such as low income or high debt levels, which lead to coerce farmers to engage in riskier agricultural practices to maintain their livelihoods [40]. Areas that are medium distance from the city is dominated by farmers who behave risk neutral where the farmer is eager to accept risk but is less willing to take high risks. Farmers who are in the most remote areas of the district, mostly behave at a risk neutral level at 53%, which means that farmers expect additional profits when the risks they face increase.

4 Conclusion and recommendations

Chili farmers in Indonesia face high production risks due to a number of factors including climate change, land conditions, pest disease plants, and price fluctuations. In general, farmers behave dominantly as risk-taker. Factors of financial access and farm size have significant influence on the farmer’s risk behavior. To cope with the risk, the role of the government, the technical team, and the accompaniment are needed in monitoring, motivating, and supervising the farmers. In this case, training and discernment are important to improve farmers’ competency in facing the production risks. Moreover, support for farmers in the form of broader and more affordable access to finance is important to help farmers in facing production risks.