1. Introduction

One of the most critical factors which challenge the transformation of rural agriculture is the incapability of rural peasants to form appreciable surplus with subsistent and sometimes declining level of incomes. It has been widely argued in the

∗

Ph.D. candidate at the Center for Development Research (ZEF), University of Bonn, Germany

^†Senior Researcher at the Center for Development Research (ZEF), Bonn University, Germany

^‡Professor of Economics at the Faculty of Economic Sciences, Goettingen University, Germany

received literature that various forms of uncertainties contribute to the subsistent nature of most rural economies. Rural households in general face different kinds of risks. Among others, as Dercon (1996) indicated, income risks would be critical if they imply consumption fluctuations as households may end up with low risk activities which imply lower returns. In developing countries where different kinds of risks are rampant, households usually invest their wealth in staple crops whose technology they know best.

In the Ethiopian context, Daniel (2003) demonstrated well how tenure insecurity, irreversibility, and liquidity constraints affect households’ decision to allot land for coffee (high value cash crop).

However, risks associated with prices in particular in connection with transportation costs affect crop choice even among those crops with high turnover of production. Moreover, while most risks such as production risk are more or less common for both cash crops and staple crops, price risks are more critical for cash crops since only small portion of such crops are used for home consumption.

Risks associated with crop prices have been identified as major factors that put a rural household in high return cash crop versus risk diversification options. Fafchamps (1992) argued that since staple crops with low income elasticity account for a large share of their total consumption, they minimize risk from volatile prices by ensuring self sufficiency in staple crops.

This paper attempts to look into how location of an agricultural activity in relation to markets which are usually urban centers play a pivotal role in reducing risks of producing high value cash crops through reduced cost of transportation¹ based on an Ethiopian case study. It demonstrates that rural households who operate nearer to urban centers have a relatively lower spread of expected profits during price volatility compared to those who operate far from market centers allotting their plot for high value cash crops. It also shows that level of per capita income improves with proximity to urban centers.

One of the routes through which location determines rural livelihood is its impact on the household’s crop choice for a given plot of land. Households’ decision to engage in the production of cash crops which have more value at the market by shifting resources, most importantly land, from the production of staple crops which give more security to the household against falling prices highly depends on cost of transportation and expectations about market prices of the cash crops.

¹Distance of an agricultural activity from urban centers/markets also affect the level of risk associated with price through information asymmetry. We assume here cost of transportation in a broader context.

Cost of transportation and expectation formations about prices depend on the distance of the particular plot from the market, most importantly the urban centers. Hence, agricultural households who operate plots far form urban centers would allot their plots for less valued staple crops.

Households’ decision to allot all or most of their plots to the production of less valued staple crops would result in a subsistent economy with meagre surplus for an agricultural community operating far from urban centers. This leads to the argument that it is likely that incidence of poverty increases with distance away from urban centers.

The remaining part of this paper is organized as follows. Section 2 highlights the mode of livelihood in the villages under survey. It summarizes households’ income diversifying strategies and crop choices across households in relation to their proximity to urban centers. Section 3 discusses the theoretical framework. This section combines the basic agricultural household model in the presence of price uncertainty and location theory. Section 4 deals with the econometric analysis. In this section, we estimate the determinants of land allocation decisions for the production of cash crops and staple crops. We also present the determinants of rural income by using the optimally allotted land for cash crops and staple crops as explanatory variables. Finally, section 5 concludes.

2. Location of Agricultural Land and Livelihood in some Ethiopian Villages

With poor transport networking and low demand from the urban center (only 15% of the 77% million people is urbanized), it is generally believed that Ethiopian farmers focus on the production of staple crops except for coffee that has already established international market. According to the national data from Central Statistical Agency (CSA), in 2005, 84.3% of rural households in Ethiopia, excluding nomadic areas, live on crop production and livestock. About 84% of the total production of major crops is accounted by cereals and about 11% of total production comes from pulses. That means about 96% of the total crop production is staple crop. If we exclude the production of teff¹ which is both staple and cash crop, the share of the purely staple crops is still as high as 79%[CSA, 2005].

It is quite difficult to illustrate the association between location and crop choice

¹Teff is a grass growing in Ethiopia and is used to make Ethiopian staple bread called injera. Teff is indigenous crop to Ethiopia.

at a national level. However, the data