gssp seminar: profitability of maize, rice, and soybean

INTERNATIONAL FOODPOLICY RESEARCH INSTITUTEsustainable solutions for ending hunger and poverty Ghana Strategy Support

Program

Analyzing Profitability of Maize, Rice and Soybean: PAM and DEA Results

Kamiljon AkramovMehrab Malek

IFPRI, Washington, DC

March 12, 2012Accra, Ghana

Ghana Strategy Support Program INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE

Outline

• Introduction• Methodology

• PAM• DEA

• Descriptive findings• Observed versus profit-efficient production plans• Results • Summary of main findings• Conclusions and Policy implications


Introduction

• PAM was developed in 1980s and widely used to evaluate private and social profitability of farmers• Portuguese agriculture (Pearson et al 1987; Monke and

Pearson 1989)• Indonesian agriculture (Pearson et al. 2003)

• Recently researchers start to combine PAM with technical efficiency analysis (Reig-Martinez 2008)

• Winter-Nelson and Aggrey-Fynn (2008) applied conventional PAM for Ghana’s agriculture

• We combine PAM with DEA to evaluate profitability of maize, rice and soybean farmers in Ghana


Outline of Policy Analysis Matrix

Revenue

Costs

Profits

Tradable inputsDomestic

factors

Private prices A B C D

Social prices E F G H

Divergences I J K L

• Definitions• Private profits: D=A-B-C• Social profits: H=E-F-G• Output transfers: I=A-E• Input transfers: J=B-F• Factor transfers: K=C-G• Net policy transfers: L=D-H=I-J-K

Ratio indicators• Private cost ratio: PCR=C/(A-B)• Domestic cost ratio: DCR=G/(E-F)• Subsidy ratio to producers: SRP=(D-

H)/E=L/E

Source: Monke & Pearson (1989)


Identifying Efficient Farmers: Data Envelopment Analysis

• Efficiency analysis: DEA versus SFA• DEA was introduced by Charnes et al (1978)• Main assumption: production outcomes are the

result of profit-maximizing behavior• Objective: maximize short-term profit for given

input & output prices• Evaluate the performance of peer farmers by

comparing with best observed practices


Formal DEA model for Profit Maximization


Graphical Illustration of DEA Concept

Source: Young-bae & Lee 2010


Data

• Data was collected by students from the University of Hohenhiem (Germany) in 2010

• Sample includes 256 farmers from Tolon (60), Yendi (64), Nkronza (71) and Sissala East (61) districts

• 418 crop budgets for three crops • 201 maize crop budgets • 130 rice crop budgets • 86 soya bean crop budgets


Descriptive Findings: Maize

Variable UnitsQuantities Price

Mean SD (GHC per unit)

Output kg 3,400.80 3745.1 0.39

Cultivated land ha 2.36 3.04 ***

Labor GHC 515.4 943.9 ***

Capital GHC 29.1 30.6 ***

Seeds GHC 21.8 49.1 0.56

Fertilizer GHC 325.3 367.7 ***

Agrochemicals GHC 55.4 81.5 6.42*

Contracted services GHC 341.7 471.9 ***

*Price per 1 liter bottle of herbicides


Descriptive Findings: Rice

Variable Units

Quantities Price


Output kg 2630.1 2966.1 0.4

Land Ha 1.46 2.41 ***

Labor GHC 592.9 516.6 ***

Capital GHC 33.8 48 ***

Seeds GHC 41.3 60.1 0.56


Agrochemicals GHC 56.4 122.1 6.67*

Contracted Services GHC 284.2 523.4 ***



Descriptive Findings: Soybean

Variable Units

Quantities Price


Output kg 1628.3 2863.2 0.5

Land Ha 1.44 2.88 ***

Labor GHC 394.7 597.1 ***

Capital GHC 29.6 51.8 ***

Seeds GHC 42.1 106.8 0.69


Agrochemicals GHC 34 86 6.98*

Contracted services GHC 150.6 284.9 ***



Comparing average observed farmers versus profit-efficient farmers

• Computing profit-maximizing production plans with DEA allows us to construct a farmer that is profit-efficient

• Profit maximizing plans were computed using user-written data envelopment analysis command in Stata (Young-bae & Lee 2010)

• Profit efficient-farmers earn higher revenues because they have significantly higher yields

• They also have lower costs than the average farms in the sample because inputs are more efficiently managed

• They also depend more on family labor than wage labor, especially in rice cultivation


Comparing Production Plans of Average and Efficient Farmers: Maize

Variable Units Observed Profit-maximizing (22 farmers) Variations (%)

Output Kg/ha 1614.6 1939.5 20.1

Variable inputs

Labor GHC/ha 254.4 179.4 -29.5

Family labor GHC/ha 165 137.5 -16.7

Hired labor GHC/ha 89.4 41.9 -53.1

Capital GHC/ha 25 24.5 -2

Seeds GHC/ha 10.7 9.3 -13.1

Fertilizer GHC/ha 126.8 57.4 -54.7

Agrochemicals GHC/ha 28.9 16.5 -42.9

Contracted services GHC/ha 161 145.2 -9.8


Comparing Production Plans of Average and Efficient Farmers: Rice

Variable Units Observed Profit-maximizing (13 farmers) Variations (%)

Output Kg/ha 2278.5 2656.4 16.6

Variable inputs

Labor GHC/ha 659.3 831.8 26.2

Family labor GHC/ha 376.3 772 105.2

Hired labor GHC/ha 282.9 59.8 -78.9

Capital GHC/ha 27.1 14.8 -45.4

Seeds GHC/ha 32.3 23.2 -28.2

Fertilizer GHC/ha 113.2 10.6 -90.6


Contracted services GHC/ha 185.6 127.1 -31.5


Comparing Production Plans of Average and Efficient Farmers: Soybean

Variable Units Observed Profit-maximizing (10 farmers) Variations

Output Kg/ha 1109.4 1874.5 69

Variable inputs

Labor GHC/ha 363.2 318.2 -12.4

Family labor GHC/ha 253.6 237.2 -6.5

Hired labor GHC/ha 109.6 81 -26.1

Capital GHC/ha 25.3 19.3 -23.7

Seeds GHC/ha 26.2 30.1 14.9

Fertilizer GHC/ha 27.5 20 -27.3


Contracted services GHC/ha 113.4 59.1 -47.9


Policy Assumptions for PAM Analysis• Import duty, taxes & fees (USDA 2011 & official sources)

• Import duty: 20% for maize and rice; 10% for soybean• VAT – 12.5 % for all three cereals• NHI levy – 2.5%• ECOWAS levy – 0.5% and EDF Levy -0.5%• Inspection fee- 1%• Ghana Customs Network (GCNET) fee – 0.4%

• RER overvaluation – 2% (IMF • Fertilizer subsidy – 30%• Social costs of labor and land assumed to be equal to their private

costs• We consider two alternative profit functions:

• Including family labor costs in factor costs• Not including family labor costs in factor costs


Price CalculationsPrivate prices Social prices

Maize Rice Soybean Maize Rice SoybeanCIF Price Accra, US$/MT 407 560 406 407 560 406Exchange rate 1.42 1.42 1.42 1.45 1.45 1.45CIF Price Accra, GHC/MT 577.9 795.2 576.5 590.2 812.0 588.7Import duty 115.6 159.0 57.7 0.0 0.0 0.0ECOWAS Levy 2.9 4.0 2.9 0.0 0.0 0.0EDFL 2.9 4.0 2.9 0.0 0.0 0.0Processing fee 5.8 8.0 5.8 5.9 8.1 5.9Cost before VAT & NHIL (CIF+Import duty) 693.5 954.2 634.2 596.1 820.1 588.7VAT 86.7 119.3 79.3 0.0 0.0 0.0NHIL 17.3 23.9 15.9 14.9 20.5 14.7CIF+duty+tax+fees 809.1 1113.3 740.8 616.9 848.7 609.3Port fees and charges/1 238.8 328.6 238.2 243.9 335.5 243.3Cost landed into storage in Accra 1047.9 1441.9 979.0 860.7 1184.3 852.6Haulage to shared market 130.0 130.0 130.0 130.0 130.0 130.0Cost in shared market 1177.9 1571.9 1109.0 990.7 1314.3 982.6Haulage to production zone 170.0 170.0 170.0 170.0 170.0 170.0

Value in production zone (import quality) 1007.9 1401.9 939.0 820.7 1144.3 812.6Quality adjustment 453.6 841.1 281.7 369.3 686.6 243.8

Value in production zone (local quality) 554.4 560.7 657.3 451.4 457.7 568.8

Haulage to farm 120.0 120 120.0 120.0 120 120.0Farm-gate price (calculated) 434.4 440.7 537.3 331.4 337.7 448.8Reported price 390.0 400.0 500.0 --- --- ---1/ Includes inspection fees, service charges and fees to the Ghana Shippers Council


Monthly Wholesale Prices of Maize, Rice & Soybean in Ghana (2000-2011)

Authors’ calculations using official data

05

001

000

150

02

000

GH

C p

er M

T

2000m1 2002m1 2004m1 2006m1 2008m1 2010m1 2012m1Month

rmaize rlriceririce rsoybean


PAM for Maize: Including Family Labor in Domestic Cost Factor

PAM under observed productive plans: Maize (GHC/ha)

RevenueCosts

ProfitsTradable inputs Domestic factorsSeed Fertilizer Chemicals Labor Capital Services

Private value

629.7 10.7 126.8 28.9 254.4 25 161 22.9

Social value

537.5 10.9 167.4 29.5 254.4 25 161 -110.7

Transfers 92.2 -0.2 -40.6 -0.6 0.0 0.0 0.0 133.6

PAM under profit-efficient productive plans: Maize (GHC/ha)

RevenueCosts


Private value

756.4 9.3 57.4 16.5 179.4 24.5 145.2 324.1

Social value

645.7 9.5 75.8 16.8 179.4 24.5 145.2 194.5

Transfers 110.7 -0.2 -18.4 -0.3 0.0 0.0 0.0 129.6


PAM for Rice: Including Family Labor in Domestic Cost Factor

PAM under observed productive plans: Rice (GHC/ha)

RevenueCosts


Private value 911.4 32.3 113.2 42.1 659.3 27.1 185.6 -148.2Social value 759.2 32.9 149.4 42.9 659.3 27.1 185.6 -338.1Transfers 152.2 -0.6 -36.2 -0.8 0.0 0.0 0.0 189.9

PAM under profit-efficient productive plans: Rice (GHC/ha)

RevenueCosts


Private value 1062.6 23.2 10.6 34.8 831.8 14.8 127.1 20.3Social value 885.1 23.7 14.0 35.5 831.8 14.8 127.1 -161.7Transfers 177.4 -0.5 -3.4 -0.7 0.0 0.0 0.0 182.0


PAM for Soybean: Including Family Labor in Domestic Cost Factor

PAM matrix under observed productive plans: Soya bean (GHC/ha)

RevenueCosts


Private value

554.7 26.2 27.5 22.3 363.2 25.3 113.4 -23.2

Social value

492.1 26.7 36.3 22.7 363.2 25.3 113.4 -95.5

Transfers 62.6 -0.5 -8.8 -0.4 0.0 0.0 0.0 72.3

PAM under profit-efficient productive plans: Soya bean (GHC/ha)

RevenueCosts


Private value

937.3 30.1 20 19.6 318.2 19.3 59.1 471.0

Social value

831.5 30.7 26.4 20.0 318.2 19.3 59.1 357.8

Transfers 105.7 -0.6 -6.4 -0.4 0.0 0.0 0.0 113.1


PAM for Maize: Excluding Family Labor from Domestic Cost Factor

PAM under observed productive plans: Maize (GHC/ha)

RevenueCosts


Private value

629.7 10.7 126.8 28.9 89.4 25 161 187.9

Social value 537.5 10.9 167.4 29.5 89.4 25 161 54.3Transfers 92.2 -0.2 -40.6 -0.6 0.0 0.0 0.0 133.6

PAM under profit-efficient productive plans: Maize (GHC/ha)

RevenueCosts


Private value

756.4 9.3 57.4 16.5 41.9 24.5 145.2 461.6

Social value 645.7 9.5 75.8 16.8 41.9 24.5 145.2 332.0Transfers 110.7 -0.2 -18.4 -0.3 0.0 0.0 0.0 129.6


PAM for Rice: Excluding Family Labor from Domestic Cost Factor

PAM under observed productive plans: Rice (GHC/ha)

RevenueCosts


Private value 911.4 32.3 113.2 42.1 282.9 27.1 185.6 228.2Social value 759.2 32.9 149.4 42.9 282.9 27.1 185.6 38.3Transfers 152.2 -0.6 -36.2 -0.8 0.0 0.0 0.0 189.9

PAM under profit-efficient productive plans: Rice (GHC/ha)

RevenueCosts




PAM for Soybean: Excluding Family Labor from Domestic Cost Factor

PAM under observed productive plans: Soybean (GHC/ha)

RevenueCosts



PAM under profit-efficient productive plans: Soybean (GHC/ha)

RevenueCosts


Private value 937.3 30.1 20 19.6 81 19.3 59.1 708.2Social value 831.5 30.7 26.4 20.0 81 19.3 59.1 595.0Transfers 105.7 -0.6 -6.4 -0.4 0.0 0.0 0.0 113.1


Private and Social Profitability Indicators for Maize

Indicator

Including family labor in domestic cost factor

Excluding family labor in domestic cost factor

PAM on observed data

PAM on profit-efficient data



Private cost ratio 0.95 0.52 0.59 0.31

Domestic cost ratio 1.34 0.64 0.84 0.39

Subsidy ratio to producers 0.25 0.20 0.25 0.20


Private and Social Profitability Indicators for Rice

Indicator


Excluding family labor from domestic cost factor









Private and Social Profitability Indicators for Soybean

Indicator


Excluding family labor from domestic cost factor









Summary of main findings: Maize

• Including family labor in domestic cost factor• Profitable for average farm in private prices but not

profitable in social prices• Profitable for profit efficient farms both in private and

social prices

• Excluding family labor from domestic cost factor• Profitable for both average and profit efficient farms in

both private and social prices

• Subsidy ratio for producers• 25% for an average farmer• 20% for a profit efficient farmer


Summary of main findings: Rice

• Including family labor in domestic cost factor• Not profitable for average farm both in private and social

prices• Profitable for profit efficient farms in private prices and

not profitable in social prices





Summary of main findings: Soybean

• Including family labor in domestic cost factor• Not profitable for average farm both in private and social

prices• Profitable for profit efficient farms both in private and

social prices





Conclusions and Policy Implications• Policy implications of findings are distinctively different under observed and

profit-maximizing scenarios • One may argue that average maize, rice and soybean farmers are not viable

in the long-run because they are making losses at social prices• But an efficient PAM findings suggest that efficient farmers make substantial

positive profits and the society also makes welfare gains from resources allocated to maize and soybean production• Policies based on dissemination of best practices could improve overall efficiency of

these cropping systems• Bridging the gap between average and efficient farmers shifts average farm from a net

loss of GHC111 (GHC96) per ha to a net profit of GHC196 (GHC358) for maize (soybean)

• Rice production seems not profitable in social prices even for efficient farmers• Including family labor in net revenue provides different perspective pointing to

the ability of maize, rice and soybean production to create value for farmers and also to add welfare gains to the society


Thank you

gssp seminar: profitability of maize, rice, and soybean

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