Are Risk Attitudes and Rainfall Variability Determinants of Diversification? Evidence from Rondonia, Brazil

Risk exposure and management are inherent to smallholder farmers. One of the risks they face is climate change. Climate change decreases rainfall, increases frequency of drought, adds heat stress to crops from higher temperatures, and leads to higher rainfall variability. The threat of rainfall variability causes higher production in some years and lower in others. Even if the average income remains the same, people’s welfare is reduced by the variability and the size of the loss will depend on their attitudes towards risk. Diversification is one adaption strategy that may help reduce climate risk. Diversified farmers produce multiple types of crops, sell things like milk and livestock, or look to off-farm sources like jobs or rental income. Rainfall variability is one risk that may continue to grow as the earth faces higher rates of climate change. It is useful to understand how farmers adapt to this risk as they face potentially even higher variabilities in their seasonal rainfall. Looking into how households make decisions based on their own risk tolerance and increasing environmental risk will aid policy makers in crafting policy to alleviate the burden on smallholder farmers. Farmer’s likelihood to adopt a diversification strategy in the face of increased rainfall variability could depend on their attitudes towards risk. People will have different risk tolerance, with some more naturally open to risks, others more averse. This paper uses Ordinary Least Squares and Poisson regression analysis to answer how rainfall variability and risk attitudes impact diversification. The results of this analysis show that both risk attitudes and rainfall variability have a statistically significant impact on the diversification level of smallholder farmers in Rondônia, Brazil. Additionally, I find that the rainfall variability during the dry season as well as the length of the dry season are more important in determining diversification than rainfall variability during the entire year or the wet season. I find that the interaction between risk attitudes and rainfall variability is significant, but the effects are not significantly different from one another. These results suggest that as we continue to see increased climate change, we will see farmers move towards diversification