Study on production efficiency and Agricultural risk management: The case of major crops in Northern Vietnam

STUDY ON PRODUCTION EFFICIENCY AND

AGRICULTURAL RISK MANAGEMENT: THE CASE OF

MAJOR CROPS IN NORTHERN VIETNAM

HO VAN BAC

2018

Graduate School of Bioresource and Bioenvironmental Sciences

Department of Agricultural and Resource Economics

Laboratory of Agricultural and Farm Management

STUDY ON PRODUCTION EFFICIENCY AND

AGRICULTURAL RISK MANAGEMENT: THE CASE OF

MAJOR CROPS IN NORTHERN VIETNAM

HO VAN BAC

FUKUOKA, JAPAN

2018

STUDY ON PRODUCTION EFFICIENCY AND

AGRICULTURAL RISK MANAGEMENT: THE CASE OF

MAJOR CROPS IN NORTHERN VIETNAM

By

HO VAN BAC

A Dissertation

Submitted to Kyushu University in partial fulfillment

of the requirements for the degree of

DOCTOR OF PHILOSOPHY

in

Agricultural and Resource Economics

Supervised by

Professor Teruaki NANSEKI, Ph.D

Assistant Professor Yosuke CHOMEI, Ph.D

Dissertation Committee:

1. Professor Teruaki NANSEKI, Ph.D

2. Professor Koshi MAEDA, Ph.D

3. Professor Mitsuyasu YABE, Ph.D

KYUSHU UNIVERSITY

2018

i

SUMMARY OF DISSERTATION

Vietnam has a favorable natural condition for agricultural production, with a large

agricultural land accounting for 82.4% total natural area. The sector has contributed

significantly to the economy in terms of employment (48%), GDP share (18.1%), and food

security. Especially, agricultural production is essential income source for people living in

rural area and the poor in the region with 75% and 90% respectively. However, the sector has

been facing many challenges such as low productivity and quality, scattered and small scale

production, food safety etc. Besides, the sector also is very sensitive and vulnerable to various

kinds of risks. Improving production efficiency and risk management could be seen as

feasible measures contributing to the improvement of income for local people in the context

of limited production land expansion and inefficient used resources. In Vietnam there have

been several studies on production efficiencies of main crops such as rice, vegetable, tea etc.

However, understanding the risk sources and combination of efficiency and production risk

are still limited. Moreover, there is not any comparison study on productive efficiency of

farmers using propensity score matching approach to control the selection bias. Besides, the

adoption of eco-friendly production practices such as VietGAP, organic methods are

expected to increase household income and reduce concerns from food unsafety. But the

study on evaluating impact of VietGAP adoption on farmer’s livelihood in Vietnam is rare.

Thus, the objectives of the study are to: (1) explore the production efficiency of rice and tea

farmers and factors affecting inefficient levels; (2) investigate the economics of adoption,

source of risks facing by farmers and also understand their management response to the risks.

The study was conducted in northern Vietnam where agricultural production plays

an important role in household’s income sources. Tea and rice are two of major crops of the

region and selected fort this study because of their representative and dominant importance.

While rice crop is mainly produced to serve household’s demand or self-sufficiency, tea

plantation is grown as a commercial crop and provide cash income for other daily demands

of households. At first location was purposely selected based on representative characteristics

for rice and tea production areas, then rice and tea sampled farmers were randomly chosen

from that province. Total 120 rice farmers and 326 tea farmers were used to analyze in the

study. To achieve the purpose of the research, we applied several models to fit with specific

objectives. Stochastic frontier approach (SFA) was used to analyze production and profit

ii

efficiency of farmers, while principal component analysis (PCA) and multiple linear

regression were applied to determine the sources of risk and farmers’ response to the risks.

Farmers’ decision to adopt new practice was analyzed using probit regression model. The

findings of the study were derived from analyzing cross-sectional data of rice farmers and tea

farmers collected in study area.

The findings of chapter 2 and 3, analyzing productive efficiency of rice and tea

production, indicate that there are still potential rooms for improving efficiency with given

inputs and technology through the use of better practice production methods or more efficient

decision. In details, technical efficiency based on the SFA analysis with average score of 88

percent indicates that rice farmers could improve their technical efficiency for about 12

percent with given inputs and technology by improving farmer’s resource use efficiency. The

result also revealed that reducing technical inefficiency of rice farmers could be done by

enhancing educational levels, and land consolidation. While tea farmers have the potential of

increasing their profit efficiency for about 25 percent. Further analysis indicated that investing

active irrigation system, joining cooperatives/production groups and good extension service

are major factors for improving the tea farmers’ profit efficiency. Notably, comparison the

profit efficiency between two groups revealed that “safe” tea production practice (VietGAP)

could achieve higher efficiency than conventional tea production practice.

Chapter 4 and 5 determine factors underlying the probability of tea farmer’s decision

to adopt the new production practice and economic effect of VietGAP tea production on

households’ income. In order to achieve the purpose, we analyzed two groups of sample,

namely adoption and conventional one. The finding shows that farmers with better or more

advantageous production features are more likely to adopt new production practice. Positive

incentives affecting both conversion decision and more farmland allocation of tea farmers

include number of household members, tea farm size, ratio of tea income over total household

income, access technical information on new production practice from extension agencies

and using labor-saving machinery in tea production. Furthermore, with the aim of estimating

the casual effect of VietGAP adoption on farmers’ livelihood in Vietnam, PSM was

employed. The result indicates that farmers adopting VietGAP tea production received

economic benefits with higher income in comparison with conventional tea farmers. This

also implies that VietGAP tea production should be supported for diffusion. The premium

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benefit is attributed to better price and higher tea yield of farming practice under VietGAP

standards.

Perception of farmers’ risk sources and their management response are an important

part of the study. And its detailed contents are presented in Chapter 6. Descriptive statistics,

PCA, and multiple linear regression were applied to determine the risk sources and also find

socio-economic factors influencing the farmers’ risk perception and their management

response. The result of descriptive analysis indicates that there are 17 sources of risk that

perceived and listed by tea farmers in the study area. The analysis result indicates that price

volatility, disease risk and an increase of production cost are the most serious in farmer’s

perception as single risks. Moreover, there are no differences existing in farmer’s risk

perception between VietGAP and conventional tea farming systems. Analyzing variables

affecting on risk perceptions indicates that agricultural educated farmers were found to be

related to lower worries and risk perception. Besides that, farmers with main occupation

involving in farming activities worry more about production risk, yield and quality risk. For

risk management response, farmers considered pest and disease prevention, production cost

minimization as the most important measures to limit damages from risk sources above.

In short, the result of the study highlighted that there is a scope for further increasing

efficiency scores of tea and rice farmers in the study area. More efficient resource allocation

decision or better production management skills could lead to improve productive efficiency.

Moreover, conversion in tea production was promoted by economic incentives and adopting

VietGAP tea production practice also contributed to increase the profit efficiency and

households’ income of farmers. Thus, it is important that interventions and government

support should aim at improving current production efficiency and expanding the conversion.

Lastly, agricultural production is exposed to various types of risks based on farmers’

perception. In which variability of output price, disease risk and increase of production inputs

are perceived as the most serious risks. To reduce risks for farmers, stabilizing market price

of output and production inputs, preventing disease risk with technical education programs

that government should support for farmers would be meaningful.

Keywords

Production efficiency, stochastic frontier, principle component analysis, risk source, management

response, major crops, Vietnam

iv

ACKNOWLEDGEMENTS

I would like to thank all persons who have contributed to the successful

completion of my PhD study at Kyushu University, Fukuoka, Japan. First and foremost,

I would like to express my deepest gratitude and much respect to my academic supervisor,

Prof. Dr. Teruaki NANSEKI, who has directly guided my study, provided valuable

suggestions, insightful feedback and constructive comments for me to end up with a

coherent dissertation. I really appreciate his constant support, both academic and social

aspects. I understand that the study would not have come to successful completion

without his kind support. My special thanks also go to Assistant Professor Dr. Yosuke

CHOMEI for providing helpful advices and comments to this study. My great

appreciation goes to other professors, Prof. YABE and Prof. MAEDA, for taking part of

the dissertation committee and kindly revise the content of my thesis. Without their kind

support and encouragements from the dissertation committee, it will be difficult to pursue

and complete the study program for Doctoral degree.

I am deeply indebted to the Ministry of Education, Science, Culture, and Sports of Japan

(MEXT scholarship) for the great opportunity and providing financial support for my

studies in Japan. My special thanks are given to Kyushu University staffs for providing

research facilities upon which the successful completion of this dissertation have

critically depended.

I am grateful to Thai Nguyen University of Agriculture and Forestry and my colleagues

in Vietnam, who always support and encourage me during my study period in Japan.

I wish to extend my appreciation to the households and staffs at Department of

Agricultural and Rural Development from Thai Nguyen province, Vietnam on their

hospitality and kind collaboration helped me doing field survey successfully. Without

their assistance and cooperation in providing precious information, the study would not

have been possible.

I would like to thank all friends in Kyushu University, and special thanks for colleagues

in the Laboratory of Agricultural and Farm Management for their sharing of knowledge,

skills and helping during my study period.

Last but not least, special appreciation is given to my wife PHAM THI THANH HUYEN

for her constant supporting, encouraging, kind understanding and together taking care of

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our son HO GIA BAO during my study period. I am very grateful to my lovely parents

and all relatives for always understanding and encouraging me during the time for doing

the research. Finally, I wish to thanks everyone who has helped and encouraged me to

strive for academic excellence.

HO VAN BAC

Fukuoka, September 2018

vi

Table of Contents

SUMMARY OF DISSERTATION ................................................................................i

ACKNOWLEDGEMENTS ..........................................................................................iv

LIST OF FIGURES.......................................................................................................ix

LIST OF TABLES.......................................................................................................... x

ABBREVIATION .......................................................................................................... xi

CHAPTER 1. INTRODUCTION.................................................................................. 1

1.1 Background information ............................................................................................. 1

1.1.1 Agricultural sector......................................................................................................... 1

1.1.2 Major yearly-planted crops........................................................................................... 3

1.1.3 Major perennial plants .................................................................................................. 4

1.2 Production efficiency, risk and VietGAP adoption in Vietnam ................................. 7

1.2.1 Production efficiency .................................................................................................... 7

1.2.2 Linkage between agricultural risk and efficiency ......................................................... 9

1.2.3 The situation of VietGAP adoption............................................................................. 10

1.3 Problem statement..................................................................................................... 11

1.4 Research objective .................................................................................................... 13

1.5 Organization and structure of the dissertation .......................................................... 13

1.6 Selection of study area .............................................................................................. 15

CHAPTER 2. PRODUCTIVE EFFICIENCY OF RICE FARMERS AND ITS

DETERMINANTS........................................................................................................ 17

2.1 Introduction............................................................................................................... 17

2.2 Methodology............................................................................................................. 18

2.2.1 Overview of efficiency................................................................................................ 18

2.2.2 Techniques of efficiency measurement....................................................................... 19

2.2.3 Analytical framework ................................................................................................. 21

2.2.4 Data collection ............................................................................................................ 22

2.3 Results and discussion .............................................................................................. 23

2.3.1 Descriptive statistics of variables................................................................................ 23

2.3.2 Estimation of stochastic frontier production function ................................................. 24

2.3.3 Input elasticity and its responsiveness to rice yield..................................................... 25

2.3.4 Frequency distribution of technical efficiency............................................................ 26

vii

2.3.5 Analysis of determinants of technical inefficiency ..................................................... 27

2.3.6 Estimation of potential rice yield ................................................................................ 29

2.4 Conclusions and recommendations........................................................................... 29

CHAPTER 3: PROFIT EFFICIENCY OF TEA FARMERS AND ITS

DETERMINANTS........................................................................................................ 31

3.1 Introduction............................................................................................................... 31

3.2 Methodology and data collection.............................................................................. 32

3.2.1 Measurement of production and profit efficiency ....................................................... 32

3.2.2 Impact evaluation approach ........................................................................................ 34

3.2.3 Empirical model.......................................................................................................... 34

3.2.4 Propensity score matching .......................................................................................... 36

3.2.5 Description of used variables...................................................................................... 38

3. 2.6 Study area and data collection.................................................................................... 39

3.3 Results and discussion .............................................................................................. 40

3.3.1 Socio-economic characteristics of tea farmers............................................................ 40

3.3.2 Estimated result of profit frontier function.................................................................. 43

3.3.3 Factors explaining the profit efficiency of tea farmers................................................ 45

3.3.4 Distribution of profit efficiency and average treatment effect .................................... 47

3.3.5 Propensity score for VietGAP tea adoption ................................................................ 47

3.4 Conclusions and recommendations........................................................................... 50

CHAPTER 4. VIETGAP TEA PRODUCTION AND DETERMINANTS OF

FARMER’S ADOPTION............................................................................................. 52

4.1 Introduction............................................................................................................... 52

4.2 Methodology............................................................................................................. 53

4.2.1 Model specification..................................................................................................... 53

4.2.2 Variable selection in the model................................................................................... 55

4.3 Results and discussion .............................................................................................. 56

4.3.1 Comparative statistics of used variables ..................................................................... 56

4.3.2 Factors affecting conversion decision of tea farmers.................................................. 57

4.3.3 Factors influencing farmers’ farmland allocation ....................................................... 60

4.4 Conclusions and recommendations........................................................................... 63

viii

CHAPTER 5. ASSESSING EFFECT OF VIETGAP TEA PRODUCTION ON

FARMER’S INCOME.................................................................................................. 65

5.1 Introduction............................................................................................................... 65

5.2 Methodology............................................................................................................. 66

5.2.1 Conceptual framework for VietGAP tea adoption ...................................................... 66

5.2.2 Econometric models for impact assessment................................................................ 66

5.2.3 Specification of econometric models.......................................................................... 67

5.3 Results and discussion .............................................................................................. 68

5.3.1 Descriptive statistics of variables................................................................................ 68

5.3.2 Econometric estimation............................................................................................... 70

5.4 Conclusions and recommendations........................................................................... 73

CHAPTER 6. FARMER’S RISK PERCEPTION AND THEIR MANAGEMENT

RESPONSES ................................................................................................................. 75

6.1 Introduction............................................................................................................... 75

6.2 Methodology............................................................................................................. 76

6.2.1 Data collection ............................................................................................................ 76

6.2.2 Theoretical framework and analysis technique ........................................................... 77

6.2.3 Description of variables used in the regression model................................................ 77

6.3 Results and discussion .............................................................................................. 79

6.3.1 Farmer’s perception on risk sources........................................................................... 79

6.3.2 Risk perception in relation to farm and farmer characteristics................................... 83

6.3.3 Farmers’ perception on risk management .................................................................. 85

6.4 Conclusions and recommendations........................................................................... 87

CHAPTER 7. CONCLUSIONS AND POLICY IMPLICATIONS ......................... 88

7.1 Main conclusions...................................................................................................... 88

7.2 Policy implications.................................................................................................... 90

7.3 Study limitation and future research......................................................................... 91

REFERENCES.............................................................................................................. 93

LIST OF PUBLISHED ARTICLES ......................................................................... 106

LIST OF RELATED PRESENTATIONS................................................................ 107

APPENDIX.................................................................................................................. 108

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LIST OF FIGURES

Figure 1. 1 Planted area of major crops in Vietnam (1000 ha)......................................... 3

Figure 1. 2 Planted perennial area of Vietnam ................................................................. 5

Figure 1. 3 Planted tea distribution in Vietnam................................................................ 5

Figure 1. 4 Proportion of tea production among regions in Vietnam............................... 6

Figure 1. 5 Variability of tea yield in Vietnam................................................................. 7

Figure 1. 6 Overall structure of the dissertation ............................................................. 14

Figure 1. 7 Map of study area ......................................................................................... 16

Figure 3. 1 Density distribution of propensity scores…………………………………..49

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LIST OF TABLES

Table 1. 1 Land statistics of Vietnam ............................................................................... 1

Table 1. 2 Land use structure in Northern mountainous region of Vietnam .................... 2

Table 1. 3 Structure land use of MNR.............................................................................. 4

Table 2. 1 Descriptive statistic of variables in the model………………………………..23

Table 2. 2 Estimated parameters of stochastic frontier production function .................. 25

Table 2. 3 Frequency distribution of technical efficiency .............................................. 27

Table 2. 4 Determinants affecting technical inefficiency ............................................... 28

Table 3. 1 Variable definition of used models …………………………………………38

Table 3. 2 Descriptive statistics of tea production practices........................................... 40

Table 3. 3 Comparative statistics of model variables..................................................... 42

Table 3. 4 Estimation result of profit efficiency among tea farmers.............................. 44

Table 3. 5 Factors affecting profit efficiency of tea farmers .......................................... 46

Table 3. 6 Frequency distribution of profit efficiency (PE)............................................ 47

Table 3. 7 Logit estimates of the propensity to adopt VietGAP tea production............. 48

Table 3. 8 Estimation of average treatment effects on the treated.................................. 49

Table 4. 1 Definition of variables used in the models………………………………….56

Table 4. 2 Descriptive statistics of explanatory variables in the model..........................57

Table 4. 3 Factors influencing farmer’s conversion decision of tea productions...........58

Table 4. 4 Marginal effects of factors associated with farmer’ adoption .......................60

Table 4. 5 Factors affecting farmer’s farmland allocation..............................................61

Table 4. 6 Marginal effect of factors associated with allocation ....................................62

Table 5. 1 Basic features of two tea production practices ……………………………..69

Table 5. 2 Coefficient estimation for adoption of VietGAP tea production................... 70

Table 5. 3 Test of matching quality ................................................................................ 71

Table 5. 4 Balance condition .......................................................................................... 72

Table 5. 5 Estimation of treatment effects (ATT)........................................................... 73

Table 6. 1 Statistics of variables used in multiple linear regression ……………………78

Table 6. 2 Mean score and rank for risk sources perceived by tea farmers.................... 80

Table 6. 3 Varimax rotated factor loading for risk sources ............................................ 82

Table 6. 4 Estimation of multiple linear regression model for risk sources................... 83

Table 6. 5 Mean score and rank for risk management.................................................... 85

Table 6. 6 Varimax rotated factor loading for risk management.................................... 86

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ABBREVIATION

ATT: Average Treatment Effect on the Treated

ATE: Average Treatment Effect

ATU: Average Treatment Effect on the Untreated

AseanGAP: Asean Good Agricultural Practices

DEA: Data Envelopment Analysis

FAOSTAT: Food Agriculture Organization Statistics

FDA: Food and Drug Administration

GlobalGAP: Global Good Agricultural Practices

GDP: Gross Domestic Product

GSO: General Statistic Office of Vietnam

HACCP: Hazard Analysis and Critical Control Points

KM: Kernel Matching

MLE: Maximum Likelihood Estimation

MONRE: Ministry of Natural Resource and Environment

NMR: Northern mountainous region

NNM: Nearest Neighbor Matching

OLS: Ordinary Least Square

PSM: Propensity Score Matching

PE: Profit Efficiency

PCA: Principal Component Analysis

QD TTg: Prime Minister’s Decision

RM: Radius Matching

SFA: Stochastic Frontier Approach

TE: Technical Efficiency

VietGAP: Vietnamese Good Agricultural Practices

UN: United Nations

WTA: World Tea Association