AAMP Training Materials

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AAMP Training Materials

• Module 1.1 Production Cost and Farm Productivity

Steven Haggblade (MSU) blade_at_msu.edu
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Module Contents

• Objectives
• Background material
• Exercises
• Conclusions

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Objectives

• Understand what determines the price level of a
  good
• Compute plot-level production costs and compare
  between farmers
• Explore what affects farm productivity using
  estimate yield functions
• Examine policy implications (for stimulating
  agricultural growth government procurement
  pricing)

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Background Material

• Review determinants of price
• What factors affect the cost of supplying maize
  to the market?
• Why does productivity vary across farms?

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Determinants of price
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Determinants of price (contd.)
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What affects the cost of supplying maize to the
market?

• Farm-level cost of production
• Transport costs (distance to market)
• Marketing costs (handling, storage, profit, risk
  premium)

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Why does productivity vary

• Among farmers?
• Across plots?

Q Is this a good farmer or a bad farmer?
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Good farmer? Bad farmer?
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Good farmer? Bad farmer?
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Good farmer? Bad farmer?
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Where are the good farmers and bad farmers on
this supply curve?
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Exercise 1 Compute Plot-level Cost

• Open Production Cost and Price Variability.xls
• Read the red NOTES tab to familiarize yourself
  with the contents of the workbook
• Click on the data1 plots tab and explore the
  data
• There are 200 farmers represented
• Focus on yield
• Why is yield so variable?

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Exercise 1 Compute Plot-level Cost contd.

• Click on the ex 1 cost of production tab
• Values in yellow refer to data1 plot
• Values in green are results
• What do you notice?
• On average, do farmers have positive revenue?
• What are the major costs?
• Compare farm productivity between farms
• Select a farmer from data1 plot
• Link the yellow highlighted values to a farm in
  data1 plot
• How does this compare to the mean?
• Repeat for several different farms
• How do they compare to each other?

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Exercise 1 Results

• Farm productivity varies greatly
• Some farmers in the sample receive negative
  revenue from maize
• Policy should focus on increasing farmer
  productivity
• Raises farmers profits
• Lowers consumer costs

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Exercise 2 Cost Histogram Supply Curve

• Examine the Cost Histogram in ex 2 cost
  groups
• What do you see?
• Can you make generalizations about smallholder
  production costs based on this histogram?

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Exercise 2 Cost Histogram Supply Curve

• Next, examine columns Z, AA AB in data4 cost
  per ton
• Copy column AB (tot_cost_ton) from data4 cost
  per ton and paste it into ex 2 cost per ton
• Sort the column in ascending order (small values
  to large values)
• Select the entire column and make a line chart
• What does this chart show?
• Compare with the chart in slide 11 of this
  presentation
• If you were asked to choose a fair maize price
  based on this chart, what price would you choose?

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Exercise 2 Results

• Individual farmers cost of production varies
  greatly
• Setting a price floor based on production costs
  has several problems
• Who decides whats fair? Where do you draw the
  line?
• Set the price too high ? government buys large
  volumes from inefficient farmers
• High price risks pushing out private traders
  hurting consumers
• Policy that focuses on lowering farmers cost of
  production evades these problems

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Exercise 3 Estimate Plot-level Yield Function

• What are the factors affecting plot-level yield?
• Seed Type (high yielding varieties vs. local)
• Fertilizer application (kg/ha)
• Time of planting (number of days after November
  1)
• Tillage system (hand hoe, conservation farming
  basins, plowing, ripper)
• Number of years experience with conservation
  farming
• Plot size
• Gender
• Yield a b Fert c HYV d Till
• Yield is a function of Fertilizer, seed type,
  tillage type etc....

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Exercise 3 Regression Equation

• Open a new sheet in Excel
• Use the Regression Tool to estimate the yield
  function
• See notes in this presentation, as well as the
  NOTES tab in the Excel workbook for tips
• Examine the coefficients
• Which variables have the most impact on maize
  yield?
• Are there any surprises?
• How can this information be used in agricultural
  policy?
• Research?
• Extension?

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Exercise 3 Interpreting Regression Coefficients
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Exercise 3 Interpreting Regression Coefficients
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Exercise 3 Results

• High yielding seed varieties, planting basins,
  and fertilizer have a positive impact
• Which has the biggest impact?
• Which is cost effective? Look at the coefficient
  on fertilizer is that a big enough increase in
  yield to justify the cost?
• The planting date variable has a strong negative
  impact.
• Highlights the importance of timeliness in
  agriculture.
• What does this mean for agricultural extension?

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Conclusions empirical

• Cost of production differs across farmers and
  plots
• Efficient farmers produce at lowest cost

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Conclusions policy

• Raising farm productivity ? higher farmer profits
  and lower costs to consumers
• Key public investments for lowering farmers cost
  of production
• Agricultural research (breeding, agronomy)
• Extension (improves agronomic and management
  practices)
• Infrastructure improvements (lowers input cost
  prices)
• If government sets procurement prices
• High price ? large volumes procured. Purchases
  made from inefficient farmers
• Low price ? lower volumes procured. Purchases
  made only from efficient farmers

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References

• Chirwa, E. 2007. Sources of Technical Efficiency
  among Smallholder Maize Farmers in Southern
  Malawi. AERC Research Paper 172. Nairobi
  African Economic Research Consortium.