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Rice production provides a means of livelihood and income. Increased rice production is expected to lessen the financial burden of food importation and of food availability and affordability. In Anambra State, rice is grown in almost all parts of the state. The growing of rice is mainly in the hands of small-scale, resource poor farmers who employ rudimentary technology with concomitant low productivity. It therefore makes social and economic sense to encourage growth in rice production in Anambra State in particular and in the country at large since it is capable of ensuring food security and has the ability of creating jobs for the teeming unemployed in the country, Nigeria.
The government in Nigeria in its policy and strategy document, envisions growth in the integrated agriculture sector by working with key stakeholders to build an agribusiness economy capable of delivering sustained prosperity by meeting domestic food security goals, generating exports, and supporting sustainable income and job growth (Federal Ministry of Agriculture and Rural Development, FMARD, 2016). The document specifically states that crop production, rice inclusive, is expected to record rise in performance by 85% within the planning horizon.
In its efforts to increase production, Nigeria’s agriculture sector, rice production in Anambra State inclusive, continues to have poor access to financial services that enable farmers to adopt new technologies, improve market linkages, and increase their resilience to economic shocks (FMARD, 2016). The challenge of poor access to financial services tend to be more daunting for rice farmers on account of the predisposition of the government to bridge the demand supply deficit through legal importation of foreign rice.
According to Winter (2013), just improving farm yields is not enough to lift families and communities out of poverty. There is also a need to change the systems in which the smallholders operate. One of the systems is the debt equity mix of the rice enterprise especially in the face of risks and returns associated debt financing.
The farmer has two basic sources of capital namely: own capital and someone else’s capital also called non-equity capital or debt financing (Ejiogu, 2018). The employment of additional capital in a typical rice farm enterprise almost always involves the use of non-equity fund. The use of debt financing essentially creates fixed financial obligations in the form of due repayment of principal, interest, rent and other commitments. The point should also be made that the use of equity capital is not without cost as it is associated with opportunity cost and that the employment of equity, debt or a combination of both in an enterprise involves risks on the part of the rice farmer.
According to Boehije (n.d.), the total risks that farmers encounter emanate from various sources, but their consequences can be categorized as operating risk or financial risk. Operating risk, also called business risk by Van Horne (1985), is generally defined as that inherent in the operating performance of the enterprise independent of the way it is financed. It embraces the risk that is encountered with 100% debt or 100% equity financing. Operating risk is manifested in the variability in the return on assets (ROA) of the business. Major sources of operating risk in any production period include price, cost, productivity, and production uncertainty.
Boehije (n.d.), defined financial risk or uncertainty as the added variability of net returns to owner equity on account of the financial obligation associated with debt financing. This risk results primarily from the use of debt as reflected by leverage; leverage multiples the potential return or loss that will be generated with different levels of operating performance. Financial risk is evidenced by variability in the return on equity (ROE) of the business.