the impacts of fluctuations of inputs price on the economic efficiency of tea production of farmer housedolds in thai nguyen province

DEPARTMENT OF EDUCATION AND TRAINING THAI NGUYEN UNIVERSITY NGUYEN THI PHUONG HAO THE IMPACTS OF FLUCTUATIONS OF INPUTS PRICE ON THE ECONOMIC EFFICIENCY OF TEA PRODUCTION OF FARMER HOU

DEPARTMENT OF EDUCATION AND TRAINING

THAI NGUYEN UNIVERSITY

NGUYEN THI PHUONG HAO

THE IMPACTS OF FLUCTUATIONS OF INPUTS PRICE ON THE ECONOMIC EFFICIENCY OF TEA PRODUCTION OF FARMER HOUSEDOLDS IN

THAI NGUYEN PROVINCE

Speciality: Agricultural Economics Code No.: 62.62.01.15

Ph.D THESIS SUMMARY OF AGRICULTURE

THAI NGUYEN, 2014

The study was done at:

COLLEGE OF ECONOMICS & BUSINESS

ADMINISTRATION, THAI NGUYEN UNIVERSITY

Scientific supervisors: 1 Doan Quang Thieu PhD

2 Assoc Prof Nguyen Dinh Long PhD

The peer review 1:

The peer review 2:

The peer review 3:

The thesis is prevented to the Council held in Thai Nguyen University at the …, … , 2014

Desertation can be found at:

PREAMBLE

1 The necessity of the subject

The economic efficiency of tea in Thai Nguyen has given farmers and the province economic benefits However, in recent years, the input market of tea production has fluctuated, which is detrimental to farmers Prices of inputs such as fertilizers, plant protection chemicals, stimulants, labor, fuel has been continuously increasing, causing difficulties to a majority of farmers and adversely affecting their tea production efficiency In this context, facing general difficulties of tea sector of Thai Nguyen and of tea farmers in the province, it is very necessary and practical to conduct a study which assesses the impact of price fluctuations of inputs on production, results and efficiency of tea farmer households, therefore introducing practicable solutions to improve the efficiency of tea production From the above reason, the author has chosen the subject

“The impacts of fluctuations of inputs price on the economic efficiency of tea production of households in Thai Nguyen province”

as a doctoral dissertation

2 The research purposes

The purpose of the thesis rearch is to propose a number of measures to advise the government and farmers to behave properly to improve the efficiency of tea production in Thai Nguyen, after analyzing the influence of price fluctuations of inputs on efficiency

of tea production of households in the province

3 Object and scope of the thesis research

* Object:

The main researching objects of the thesis research are economic efficiency in tea production of farmer households, the impact of increasing price of inputs on economic efficiency in tea production

of farmers, the influence of inputs on productivity and technical efficiency in tea production of farmers in Thai Nguyen province

* Scope:

Of content, the research limits on the economic efficiency in tea production of farmers before and after increasing price of inputs; the influence of increasing price of inputs on economic efficiency in tea

production of farmers; analysis the impact of various types of inputs

on the technical efficiency in production of farmers in Thai Nguyen; the impact of rising costs on economic efficiency in tea production of farmers Of space, the research limits on Thai Nguyen province Of time, the research uses secondary data collected from 200 to 2012 Primary data was collected through direct interviews with households in 2008, and 2012

4 The layout of the thesis

Besides the introduction and conclusion, the thesis consists of 04 chapters:

Chapter 1: The rationale for the impact of increasing price of inputs

on economic efficiency in tea production of farmer households Chapter 2: Research methodology

Chapter 3: Impact of increasing price of inputs on economic efficiency in tea production of farmer households in Thai Nguyen province

Chapter 4: Major solutions to improve economic efficiency in tea production of farmer households in Thai Nguyen province

Chapter 1 THE RATIONALE FOR THE IMPACT OF INCREASING PRICE OF INPUTS ON ECONOMIC EFFICIENCY IN TEA PRODUCTION OF HOUSEHOLDS 1.1 Rationale for the price, price fluctuations and economic efficiency in tea production of households

1.1.1 Specification and economic characteristics of tea plant

According to Willson, K.C (1992 ), the scientific name for tea plant is Cmaellia sinesis whose leaves and buds are used to produce tea There are many factors influencing tea production such as natural conditions ( soil , climate), technical ones( breed, irrigating water, fertilizer, planting density, hewing, picking tea ), economic ones (prices )

1.1.2 Farm household’s economy

There are many different notions of farm household and farm household’s economy Refering to documents, the dissertation presents the concept of farm households and farm

household’economy Farm household is a household that is considered as an economic unit having land, means of production, productive capital owned by the household and mainly using family labor for production in agriculture The household members are entitled to the income and all decisions are based on the general idea

of adult members of the household Farm household’s economy is kind of economy in which production activitities are based mainly on family labor and its purpose is to meet the demand of the household (not to manufacture goods for sale) However, it should be noted here that the households can also produce for exchange but at a limited level

1.1.3 Economic efficiency in tea production of farm households

a The concept of economic efficiency in tea production

Presently there are a lot of views on economic efficiency, but in this topic we refer to some materials and synthesize a concept: Economic efficiency in tea production of farm households is an economic category reflecting the quality of tea production process which is determined by comparing the outputs of tea production with the cost of inputs

b Factors affecting the economic efficiency in tea production of farm households

Technical factors in tea production (breed, fertilizer, farming practices); Economic conditions and organization of production (production scale , competence of the household head, policy environment) ; social factors (farming practices , ethnicity , gender); price factors (price of inputs, price of tea)

c Methods to assess the impact of changes in input prices to economic efficiency in tea production of farm households

Qualitative Analysis : Participatory rural appraisal (PRA) is used, including in-depth interviews, group discussion method, expert meetings, method of scoring and ranking, scheduling, causal diagram (problem tree )

The quantitative analysis is performed by following methods: Comparing the efficiency indicators before and after the price changes Using the CD production function to assess the impact of price on economic efficiency in the tea production Using the frontier

production function to analyze the influence of inputs on productivity and technical efficiency of tea production Using creasing regression to analyze the impact of increasing input costs on household economic efficiency

d Improving economic performance of tea farmers

In order to improve economic efficiency in production, farmers need to consider and follow the directions: Firstly, expanding the scale of production in order to enhance the results obtained, however the growth rate of output must be greater than that of input costs Secondly, improving the results obtained with unchanged input costs Thirdly, using inputs economically and effectivelys to reduce production costs while results are constant

1.1.4 Price and price fluctuation in tea production

a The concept of price and types of price in tea production

Prices in tea production include prices of inputs and outputs There are many types of prices used in the market depending on the purpose and exchange relationships In this research for the purpose

of considering the effects of increasing price on production

efficiency of farmers we mention the following prices: (1) Price of inputs for tea production: comprises costs of materials, services and

rental price of labor (2) Price of outputs of tea production which is the selling price of tea products

b Price fluctuations and Cause

The concept of price fluctuations is interpreted as the increase or decrease in the price of products on the market from time to time or space In this research, price fluctuations are subject to increasing price of inputs typically between one or several production cycles that can create the risk of increasing or decreasing perfomance and production efficiency

The main causes of price fluctuations are: Currency inflation (depending on the macroeconomic policy of the government); External price fluctuations (regional and international prices); Urbanization: Increasing demand, attracting rural labours makes rural labors’cost increase; Events, factors caused reduced demand or increased supply (eg, natural disasters, avian flu , mad cow epidemi);

Consumer psychology (eg, fear of disease transmission products ); Monopsony situation , exclusive sales; Other causes

c The impact of increasing price of inputs on tea production

Price fluctuation is not a new phenomenon but contains many potential instability of agricultural production Price risk is the biggest obstacle to the development of farmers which have smal -scale production Economic cooperation is a solution to help smallholders overcome the "shock" in price and increase production efficiency

1.2 Practical basis of the impact of increasing price of inputs on economic efficiency in tea production of farmers

1.2.1 Price fluctuation of some key inputs in tea production

Fertilizer is a key input in the production of tea The price of fertilizer increased greatly recently which had a strong impact on the efficiency in tea production of farmers in Vietnam in general and in Thai Nguyen province in particular

1.2.2 Lessons of farmers to cope with price fluctuations of input

Lesson 1: State plays an important role in price management, price stability and farmers’support to minimize risks caused by increasing price

Lesson 2: To expand production and promote access to capital is the best solution to overcome the impact of increasing prices of labor and fertilizer in production

Lesson 3: Farmer organizations, industry organizations and industry coordination is a solution to overcome the impact of increasing price of inputs

1.3 Overview of the study

In the past few years there are many studies on tea and farmers in Thai Nguyen province, these works mainly refer to issues about resources of farmers producing tea, there has been no work which researched comprehensively and specifically the impact of price fluctuations on economic efficiency of farmers in Thai Nguyen

province Therefore, the study “The impacts of fluctuations of inputs price on the economic efficiency of tea production of households in

Thai Nguyen province” has practical significance, meeting practical requirements

Chapter 2 RESEARCH METHODOLOGY

2.1 Approach and analytical framework

2.1.1 Approach

The study has used the participatory approach, the area approach, the economic situation of households approach, household type approach, public and private sector approach

* Synthetic Methods: The study uses synthetic tools: Excel,

Chapter 3 EFFECTS OF INCREASING PRICE OF INPUTS

ON ECONOMIC EFFICIENCY IN TEA PRODUCTION OF

FARMERS IN THAI NGUYEN PROVINCE

3.1 Natural and socioeconomic features of Thai Nguyen province

Based on natural features, Thai Nguyen has the potential to develop tea plant The province has the 2nd largest tea area in the country (18 605 ha), 9 districts and cities produce tea Thanks to the blessed soil, water, climate, it suits tea very much Therefore, raw fresh tea in Thai Nguyen has very high quality Beside, tea producers

in Thai Nguyen have sophisticated care, harvesting and processing techniques which have created the characteristic of Thai Nguyen tea,

100 % of the products are green tea products, high-grade green tea, mainly for domestic consumption and exports

3.2 Price fluctuations of inputs in tea production

3.2.1 Limiting period of price fluctuations of inputs tea production

in recent years to conduct research

Research chooses the landmark of 2007 which was before price fluctuation, in which prices of inputs had not fluctuated much Research chooses 2011 which was after price fluctuation, in which prices of inputs increased and became stable, interest rate was fixed, inflation was slight and weather did not change much

3.3.2 Fluctuations in the price of some key inputs in tea production

In recent years, inputs such as fertilizer, plant protection chemicals, fuel, labor fluctuated greatly Causes contributing to the increase in price of inputs in tea production in recent years are: fluctuation in world market prices, urbanization, monetary inflation, consequence of macroeconomic policies, monopoly of agricultural services, profiteering and others

3.3 Assessing the impact of fluctuation in price of input on economic efficiency in tea production of farmers in Thai Nguyen province

3.3.1 The situation of tea production of researched households

- Types of households: Tea production of households seemed to increase after price fluctuation Prices of inputs in the production of

tea grew which made the price of tea products increase, thus tea production of households are reflected through norms of production value’s, added value’s and mixed income’s increase after fluctuations in price of inputs

Value of tea production of specialized households increased more greatly than non-specialized households After fluctuations in price

of inputs, specialized households got the value of tea production of

52 577 ngd, non-specialized got 40 441 Considering mixed income, specializing households still had higher growth rate than non-specialized ones Comparing the tiem after price fluctuations with the time before price fluctuations, the growth rate of mixed income of specialized households was 72%, of non-specialized ones was only 61%

- Level of income: Production value of wealthy households at the time before price fluctuations of inputs was 1.69 times greater than average households and 3.87 times greater than poor ones Mixed income of wealthy households is 1.44 times higher than the average household and 4.05 times greater than the poor ones After price fluctuation, the gap between wealthy households and average and poor ones is widening The production value of wealthy households

is 2.2244 times and 5.18 times higher than that of average household and of poor household, respectively Mixed income of wealthy households is 2,03 times and 5.45 times higher than that of the average household and of the poor one After price fluctuations, wealthy households’production value increased from 32604 ngd to

76864 ngd, income increased from 21921 ngd to 42088 ngd Indicators of tea production of poor households increased but less than wealthier households, production value increased from 8422 ngd to 14830 ngd Mixed income of poor households increased from

5411 ngd to 7718 ngd The average household’s production value and mixed income also increased after price fluctuations

3.3.2 Economic efficiency in tea production of researched households

* By types of household: Table 3.16 shows the efficiency of using captial of two groups changes differently, overall efficiency of the two groups decreased after price fluctuations On average, before price fluctuation, cost of 2.654 thousand dong resulted in production

value of 3,747 thousand dong and mixed income of 2,654 thousand dong After fluctuation, costt of 1 thousand dong resulted in production value of 2,749 thousand dong and mixed income of 1,624 thousand dong Labour efficiency of household also decreased after price fluctuation On average, before price fluctuation, labour cost of

1 thousand dong resulted in production value of 3,158 thousand dong and mixed income of 2,232 thousand Labor cost increased which reduced labor efficiency After fluctuation, labour cost of 1 thousand dong resulted in production value of 2,757 thousand dong and mixed

income of 1,522 thousand dong

Table 3.14 Economic efficiency in tea production of different types of

household (on average)

Indicator unit

Type of production

Average Specialized

household

specialized household Before fluctuation

Average households have the highest efficiency Considering the impact of price fluctuations, the efficiency in using land of households increased But efficiency in using capital and labor decreased

Table 3.15 Efficiency in tea production of households by income

(average/household)

household

Average household

Source: Summary of household survey data in 2012

Before price fluctuation, cost of 1 thousand dong resulted in mixed income of 2,253 thousand dong in wealthy household, of 4,236 thousand dong in average household and 1,914 thousand dong

in poor household After price fluctuation, cost of 1 thousand dong resulted in mixed income of 1,373 thousand dong in wealthy household, of 1,672 thousand dong in average household and 1,184 thousand dong in poor Labour efficiency of poor household after

price fluctuation was very low This proved that increasing price of labor greatly affected poor household

3.3.3 Analysis of the impact of increasing price of inputs on efficiency in tea production of farmers

3.3.3.1 Analysis of price factors affecting economic efficiency in tea production of household

The thesis used Cobb - Douglas production function to analyze the impact of increasing price on economic efficiency of production of tea farmers Price factors affecting economic efficiency in tea production of farmers include: selling price of tea bud’s products, price of inputs (fertilizer, pesticide, fuel, labor), household type, education level of household head, gender of household head and production technology of household

* Analysis of prices affecting MI /rod

Production function:

4.D4 γ3.D3 γ2.D2 γ1.D1 α5 5

α4 4

α3 3

α2 2

α1 1

αi y

P  e-0.273D10.007D2 0.015D3 0.189 D4

Coefficient αi is (+) positive, suggesting that the selling price of tea increased which made mixed income/rod increased Specifically, when other factors unchange, if the price of tea increased by 1 %, mixed income/rod would increase by 0.219 %, meaning that when product prices increase by 1 thousand dong, mixed income/rod increases by 0.731 thousands dong

Coefficients α1, α2, α3, α4, α5 are (-) negative, suggesting that when price of inputs (fertilizer, pesticide, fuel, herbicide, outsourced labor) increases, mixed income / rod decreased

Specifically, the biggest deciding factor to economic efficiency in the production of tea of household is the price of fertilizer When fertilizer price increased by 1 %, mixed income of households/rod fell by 0.322 % Provided that other factors are constant, the price of fertilizer increased by 1 thousand dong then mixed income/rod decreased by 4.404 thousand In case fertilizer prices increased so greatly, households must invest fertilizer according to technincal