Analysis of Profit Efficiency Among Smallholder Maize Producers

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Published on International Journal of Economics & Business
Publication Date: May 15, 2019

Asrat Anye Aka
Departement of Economics, College of Business and Economics, Hawassa University
Hawassa Ethiopia

Journal Full Text PDF: Analysis of Profit Efficiency Among Smallholder Maize Producers (Evidence from Damot Pulasa District, Wolaita Zone, Ethiopia).

Coping with increased population and running a profitable venture are major problems in developing countries of which Ethiopia is one. In Ethiopia, agriculture is leading sector in meeting these big concerns and maize is one of the most important crops in the country. Thus the main objective of this study was to analyze profit efficiency of maize production among smallholder famers and to assess the effects of socio-economic variables on the profit inefficiency in Damot pulasa district; wolayta zone of SNNPRS. Data for the study were collected using the multi-stage sampling technique, and administering structured questionnaires to a total of 246 randomly selected respondents from five kebeles. Data collected were analyzed using descriptive statistics and econometric models. The study employed translog stochastic frontier profit function model. The results showed that profit efficiencies of the farmers varied widely between 24.6% and 99% with a mean of 78.4% suggesting that an estimated 21.6% of the profit was lost due to a combination of both technical and allocative ineffiaciencies in maize production. From the inefficiency model, it was found that education; experience, extension, soil conservation practice, credit service, non-farm employment and access to markets were significant factors influencing profit efficiency. This implies that profit inefficiency in maize production can be reduced significantly with improvement in the level of education of sampled farmers. As maize is one of the most important staple foods of great socio-economic value in the study area, an improvement in the understanding of the level of profitability can greatly aid policy makers in enhancing policies that will promote profitability in production of the crop. In addition, acquisition of formal education, improving rural financial markets and strengthening the existing extension services were recommended to improve profitability in maize production in the area. Furthermore, the study will go a long way to help other researchers and research institutions in further research for more effective combinations of resources for better efficiencies as well as increase output and productivity in the farming business, it would also help the government, policy makers and other donor agencies in planning, designing and formulations of agricultural programs that would tend towards increase resource, resource availability as well as affordability.

Keywords: Maize producers, Profit efficiency, inefficiency model, translog model, Ethiopia.

This chapter deals with background of the study, statement of the problem, research questions, objectives, significance, scope, organization and limitations of the Study.

1.1 Background of the study
Resource allocation influences profitability or productivity of crop enterprises, particularly among smallholder agricultural systems, yet many empirical studies tend to ignore this fact. Agricultural productivity and efficient use of scarce natural resources such as agricultural land and variable inputs remain an important focus of government policies in sub-Saharan Africa (Isaac et al, 2014). This sustainability objective of governments is even more central in recent times where population pressure and increasing urbanization are continuously generating a decline in agricultural land (Chamberlin et al, 2014; Nin-Pratt & McBride, 2014).
Agriculture is the most important sector for sustaining growth and reducing poverty in Ethiopia. It accounts for 85% of employment, 50% of exports and 43% of Gross Domestic Product (GDP) (FAO, 2010). In spite of its huge economic contribution, the sector is almost entirely dominated by subsistence, small-scale and resource poor farmers. More over lack of adequate farm management practices, low level of modern inputs usage, the depletion of soil organic matter, rain fed dependent agriculture system are major obstacles to sustain agricultural production in the country (Pender and Gebremedhin, 2007; Kassie et al., 2009). In cognizant of these problems, the government of Ethiopia launched Agricultural Development Led Industrialization (ADLI) strategy in 1993 that sets out agriculture as a primary sector to generate more output, employment and income for the people and as the spring board for the development of the other sectors of the economy (Kassa and Abebaw, 2004; Gebremedhin et al., 2009). Following ADLI, one of the major programs formulated by the Ethiopian government is the national extension package program known as Participatory Demonstration and Training Extension System (PADETES). The objective of PADETES is to achieve sustainable development in rural areas through increasing farm productivity (yield), reducing poverty, increasing the level of food security, increasing the volume and variety of industrial raw materials (primary products) and producing for the export market (Kassa, 2003; EEA/EEPRI, 2006). The PADETES program has been intended to focus on supply-driven intensification which consists of promotion of improved seeds, fertilizers and on-farm demonstrations of improved farm practices (Kassa, 2008; Gebremedhin et al., 2009; Asfaw et al., 2012).
However, the performance of the agriculture sector has been very dismal in spite of implementing the national extension package program-PADETES. The country is still vulnerable to recurrent food shortfalls and national food insecurity (Abate et al., 2011). Despite considerable technological changes, agricultural production under improved technology in developing countries including Ethiopia encounters substantial inefficiencies due to farmers’ high degree of unfamiliarity with new technology coupled with poor extension, education, credit and input supply system among others (Alene and Zeller,2005). Since the introduction of new technologies requires intensive management and information, farmers in developing countries with low literacy rates, poor extension services and inadequate physical infrastructures have great difficulty in adopting new technologies, let alone exploiting their full potentials (Alene and Hassan,2006).
Coping with increased population and running a profitable venture are major problems in developing countries of which Ethiopia is one. In Ethiopia, agriculture is leading sector in meeting these big concerns and maize (Zea mays) is one of the most important crops in the country. Annually an estimated amount of over 6 million tons of maize is produced and 75% of it is consumed by the farming households whereas the balance is supplementing the diets of most of the urban poor (Adam and Yitayal, 2014). Maize is one of Ethiopia’s major and strategic cereal crops that have important role in the country’s food security and farmers’ livelihood. According to the results from a DIIVA study titled ‘Improved maize varieties and poverty in rural Ethiopia’, from the 1960s to 2009, the calorie contributions of maize to the Ethiopian diet has doubled to around 20% while, its protein contribution to the country diet has been doubled to 16% in the same period. Maize is grown in 13 agro-ecological zones on about 1,994,813.8 ha (16.08%) of the total grain crop area of which 39% of the total maize area in Ethiopia is now planted with improved varieties. Among all cereals, maize is second to tef (Eragrostistef) in area coverage but first in productivity and total production (CSA, 2014). Maize is currently produced by more farmers than any other crops. According to the agricultural sample survey 2013/14 provided by central statistical agency of Ethiopia, at the national level, there are about 8,809,221 maize-cropping smallholder farmers.
Even though the emphasis was given on maize at looking agronomic factors, limited knowledge exists particularly on socio-economics. Therefore this study would make a contribution to the empirical research in this field. It should also be noted that, the current policy thrust with respect to agriculture in Ethiopia is modernization of the sector. This calls for increased research, on how best to increase productivity, profitability and inform policy. It is hoped that the transformation of the sector can make a significant contribution to poverty reduction efforts. Thrust of this study was therefore to augment the existing empirical body of literature on the economics of the smallholder maize production by focusing on the level of profit efficiency and factors that influence the profit efficiency of maize production on smallholder farmers in Damot pulasa district.

1.2 Statement of the Problem
Efficient use of scarce resources in fostering agricultural production has long been recognized and has motivated considerable research into the extent and sources of efficiency differentials in smallholder farmers. Empirical evidences suggest that improving the productivity of smallholder farmers is important for economic development(Bravo-Ureta and Evenson 1994). Accordingly, many researchers and policymakers have focused their attention on the impact that adoption of new technologies can have on increasing farm productivity and income (Hayami and Ruttan, 1985; Kuznets, 1966; Seligson, 1982). Technically efficient farmers are highly productive because they are able to use a minimum level of inputs to produce a given level of output or produce maximum output from a given level of inputs. Similarly, allocatively efficient farmers tend to run more profitable farming enterprises as they are able to produce a given level of output from minimum costs (Bravo-Ureta and Pinheiro, 1993).
How farmers allocate their resources in response to price incentive is an important determinant of the profitability of the farming enterprise. Both technical and allocative efficiency are important in improving the productivity gains from existing technologies Therefore an approach that can be used to solve the problem of efficient utilization of scarce resources focuses on two questions: first, whether farmers are economically (technically and allocatively) efficient in production and second, what factors determine their level of efficiency? Answers to these two questions provide a clue on how we can assist farmers to be efficient in utilizing their resources employed in production process. Farmers not only need to be more efficient in their production activities, but should also be responsive to market indicators, so that scarce resources are utilized efficiently to increase productivity as well as profitability.
In Ethiopia several studies have been carried out at examining productive efficiency of farmers that is exclusively focused on technical efficiency of the farmers. For instance, (Alene &Hassan, 2003a;Endrias, et al., 2013;Ahmed, et al.,2014).The existing studies have given little attention to measuring profit efficiency of farmers even when the prices of output and input are known in an attempt to examine the allocative efficiency of the farmers. The physical productivity considerations (Technical efficiency) are important improvement in production efficiency, but profit efficiency will lead to greater benefits to agricultural producer in the country. Computing profit efficiency therefore, constitutes a more important source of information for policy makers than the partial vision offered by analyzing cost efficiency (Maudus, et al., 2003).The estimation of a frontier profit function capture firm level production specialization, thus allowing the higher revenues reserved by the firms that produce differentiated or higher quality output to compensate for the higher cost incurred. Technical efficiency is derived from production function which is possible to achieve while realizing sub-optimal profit. Thus, a technically efficient farmer can be kicked out of the market due to failure to achieve profit. On the other hand, in profit measure, we take care of input costs and output prices. This apparent lack of empirical research on profit efficiency of smallholder farmers in Ethiopian agricultural sector drives the heart of this research. To augment profit aspect, it may in fact be entirely appropriate to consider profit efficiency given that most efficiency studies in Ethiopia have focused on technical efficiency.
Maize is largely grown as a cash crop in Damot pulasa district. According to the Woreda office of ARD about 80% of farmers produce maize. Production of the crop is therefore motivated by earning a positive economic return. Meeting this objective requires efficient utilization of scarce resources. Thus, this study was carried out to analyze profit efficiency in maize production and to identify factors that influence efficiency in the study area.

1.3 Research questions
What is the existing mean level of profit efficiency of households in maize production?
What determines profit efficiency and productivity of smallholders’ maize production?
What are the effects of socio-economic variables on the profit efficiency that may be valuable to the policy makers?
What are the distinctive characteristics of maize production system in Damot pulasa district?

1.4 Research hypotheses
Cobb-Douglas function model is the right model for analysis of the level of profit efficiency of smallholder maize farmers in damot pulasa district.
Maize farmers in damot pulasa district are operating on efficient profit frontier.
Variables included in the inefficiency effect model have no effect on the level of profit inefficiency.

1.5 Objectives of the Study
The main objective of this study was to analyze profit efficiency of maize production among smallholder famers at farm level in Damot pulasa district.

1.6 Specific objectives were:
To estimate the level of profit efficiency of rural households in the production of maize in the study area.
To determine farm specific production factors that influence the observed variability of profit efficiency levels among maize producers.
To assess the effects of socio-economic and institutional variables on the profit efficiency that may be valuable to the policy makers.To characterize maize production system in Damot pulasa district.

1.8 Significance of the Study
An understanding of profit efficiency, market indicators and farm – specific characteristics could provide the policy makers with information to design programs that can contribute to measures needed to expand the food production potential for the nation. Therefore the results of this study could be useful for different actors working in the area of maize research and development. Extension workers operating in the study area could use the results and recommendations forwarded on factors that influence profit inefficiency among maize farmers in study area. Similarly this study would contribute the understanding of profit loss with in resource use in smallholder maize producers in Damot pulasa district, while contributing to empirical literature with respect to African agriculture in general, and Ethiopian agriculture in particular as background information for those who would like to conduct related research on the same area.

1.9 Scope of Study
Geographically, this study was conducted in the Damot Pulasa district of Wolaita Zone in SNNPRS, Ethiopia. Smallholder maize producers’ profit efficiency might be related to marketing, consumption, distribution, production, etc. However this study has dealt with efficiency of production and marketing. Conceptually, this study has estimated profit loss and inefficiency scores of maize crop production for selected sample farmers. Methodologically, this study intended to use one production year for cross-sectional data and its generalization is made for Smallholder maize producers in the study area. In addition, this study has been concerned with demographic, socio-economic and institutional factors affecting profit efficiencies in maize production among maize producers.

1.9 Limitations of the Study
According to Best and Khan (2008), limitations are conditions beyond the control of the researcher that may place limitations on the conclusion of the study and their application to other situations. Damot pulasa Woreda is one of densely populated areas with large households’ size. As a result undertaking study in this Woreda needs longer time and enough budgets. However, because of time and budget constraints only five kebels were used for sampling frame which may pose some limitations of the result of the study as representing the Woreda. The study also took one production year cross-sectional data. As a result, the effects of those factors that vary with time are not be incorporated in the study. Again there was inconvenience of respondents to give the right response for all questions because of their personal reason. Some respondents were affected by factors such as suspicion; however the researcher assured them of the confidentiality of the study.

1.10 Organization of the study
This study is organized into five chapters. The first chapter deals with introduction which contains background, statement of the problem, objectives of study, research questions, significance, limitations and scope of the study. The second chapter is concerned with theoretical and empirical review of related literatures and conceptual framework of the study. The third chapter elaborates the research methodology which includes description of the study area, the study design, sampling technique, and methods of data collection, model specification, discussion of the variables and data set that were used in the study. The fourth chapter lists the data and outlines findings and analysis and discussion on significance of the data. Finally, the summary conclusions of the major findings and recommendations, and suggestions for further research are discussed in chapter five.

This chapter presents a review of literature from a number of studies that are related to this study and elaborates on the theoretical and empirical basis for the study. It presents about maize production and transformation in Ethiopia, the meaning of efficiency, theoretical and empirical literature of technical, allocative and profit efficiency as well as demographic, socio-economic, and institutional factors that affect profit efficiency of stallholder maize producers. The theoretical literature deals with concepts and methods that have been advanced to explain types of efficiencies, profit function and profit inefficiency model. The empirical literature provides evidences from past studies related to the factors that affect technical, allocative and profit efficiencies in maize production, including studies specifically carried out in Africa and Ethiopia. The last part elaborates conceptual frame work of the study.