Economic Analysis of Smallholder Major Crop Production Under Condition of Risk: The Case of West Arsi and East Shewa Zones of Oromia

The present study was carried out with the objectives of understanding the existing resource allocation practice, the possibility of increasing farm income through optimal allocation of resources under risk situation, and to develop risk efficient sets of farm plans for representative households based on cross-sectional data drawn from 240 households who were selected using stratified multi-stage random sampling technique during the 2022/23 production year. Linear programming and MOTAD model were used to analyse the data. The results of descriptive analysis show that most of the socioeconomic variables were found to be significantly different among the three agro-ecologies. Based on the existing farm situation and prevailing price levels, households in highland, midland, and lowland areas were obtaining the total annual income of Birr 19,480.00, 22,356.00, and 14,717.00, respectively. From the results of the MOTAD risk programming model, Sustainable plans within which households can minimize risks and remain efficient are suggested for the three identified agro-ecologies. The model results also show that, in all agro-ecologies under risk neutral plan, there is substantial difference between households’ existing plan and gross income maximization plan implying that if farm households reallocate their resources among different activities, there is a much room to increase their income under risk neutral plan. Overall, from general discussion there is need for policies that spur investment in public infrastructure, rural financial markets, private investment, and support institutions to address the problems of high transaction costs to investors, and reduce risks faced by farmers.