Booms, Busts, and Household Enterprise: Evidence from Coffee Farmers in Tanzania

Abstract

We test the long-standing hypothesis that agricultural households in low-income contexts engage in intermittent enterprise activity as a way to mitigate shocks. We link panel data on smallholder coffee farmers in Tanzania with a time series of global coffee prices. We first verify that global coffee prices matter for these households, through their effects on farmgate prices, quantity of coffee sold, farm revenues and, consequently, household expenditures. We then show that enterprise ownership increases by 5 percentage points (22 percent) during coffee price busts. Surprisingly, “persistent” entrepreneurs–those households whose businesses stay open during booms and busts–increase input intensity when the coffee price is high, and reap large rewards in terms of profits and business survival. Our results suggest that policymakers should 1) encourage smoothing mechanisms like savings, commodity storage, and price floors to better insulate households from global commodity market fluctuations; and 2) help intermittent household enterprises by reducing geographical and informational barriers to trade during busts.