Off-farm Income and Fertilizer Investments by Smallholder Farmers in Kenya

Nonfarm earnings from diverse sources account for a substantial and growing share of household income among smallholder farmers in many areas of Sub-Saharan Africa, but information about the effects of these earnings on farm investments is relatively sparse. This study focuses on fertilizer investments given the importance of soil fertility in raising crop productivity, the central role of fertilizer in most recommendations for managing soils, and the high cash cost of fertilizers. We use panel data from a sample of roughly 1200 smallholder farmers in Kenya to estimate input demand for fertilizer, testing the effects of off-farm income, as well as nonfarm income, income from labor on other farms, and all off-farm income combined. We compare effects among three types of crops: a major food staple (maize), and emerging cash crop (vegetables), and traditional export crops (coffee/tea). Demand functions are estimated with double hurdle regression, a Control Function approach to handle potential endogeneity of off-farm income, and Correlated Random Effects to treat time-invariant heterogeneity. We find that, holding prices, other crops grown, locational and relevant household characteristics constant, off-farm earnings have a negative impact on fertilizer use on both staple and emerging cash crops in Kenya, and a weak, positive effect on traditional cash crops. Nonfarm income explains most of this pattern, although the effects of labor on other farms are evident in the case of vegetables, which are relatively labor-intensive throughout the growing season. Results have implications for public investments in rural development as smallholders commercialize in Kenya.