Study on production efficiency and agricultural risk management the case of major crops in northern vietnam

STUDY ON PRODUCTION EFFICIENCY ANDAGRICULTURAL RISK MANAGEMENT: THE CASE OF MAJOR CROPS IN NORTHERN VIETNAM HO VAN BAC 2018... Graduate School of Bioresource and Bioenvironmental Science

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 DissertationSubmitted to Kyushu University in partial fulfillment

of the requirements for the degree of DOCTOR OF

PHILOSOPHY

inAgricultural and Resource Economics

Supervised byProfessor Teruaki NANSEKI, Ph.DAssistant 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

SUMMARY OF DISSERTATION

Vietnam has a favorable natural condition for agricultural production, with a largeagricultural land accounting for 82.4% total natural area The sector has contributedsignificantly to the economy in terms of employment (48%), GDP share (18.1%), andfood security Especially, agricultural production is essential income source for peopleliving 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, scatteredand small scale production, food safety etc Besides, the sector also is very sensitive andvulnerable to various kinds of risks Improving production efficiency and risk managementcould be seen as feasible measures contributing to the improvement of income for localpeople 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 ofefficiency and production risk are still limited Moreover, there is not any comparisonstudy on productive efficiency of farmers using propensity score matching approach tocontrol the selection bias Besides, the adoption of eco-friendly production practices such

as VietGAP, organic methods are expected to increase household income and reduceconcerns from food unsafety But the study on evaluating impact of VietGAP adoption onfarmer’s livelihood in Vietnam is rare Thus, the objectives of the study are to: (1) explorethe 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 alsounderstand 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 ofthe region and selected fort this study because of their representative and dominantimportance 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 forother daily demands of households At first location was purposely selected based onrepresentative characteristics for rice and tea production areas, then rice and tea sampledfarmers were randomly chosen from that province Total 120 rice farmers and 326 teafarmers were used to analyze in the study To achieve the purpose of the research, weapplied several models to fit with specific objectives Stochastic frontier approach (SFA)was used to analyze production and profit

efficiency of farmers, while principal component analysis (PCA) and multiple linearregression 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 Thefindings of the study were derived from analyzing cross-sectional data of rice farmers andtea farmers collected in study area

The findings of chapter 2 and 3, analyzing productive efficiency of rice and teaproduction, indicate that there are still potential rooms for improving efficiency with giveninputs and technology through the use of better practice production methods or moreefficient decision In details, technical efficiency based on the SFA analysis with averagescore of 88 percent indicates that rice farmers could improve their technical efficiency forabout 12 percent with given inputs and technology by improving farmer’s resource useefficiency The result also revealed that reducing technical inefficiency of rice farmerscould be done by enhancing educational levels, and land consolidation While tea farmershave the potential of increasing their profit efficiency for about 25 percent Furtheranalysis indicated that investing active irrigation system, joining cooperatives/productiongroups and good extension service are major factors for improving the tea farmers’ profitefficiency Notably, comparison the profit efficiency between two groups revealed that

“safe” tea production practice (VietGAP) could achieve higher efficiency thanconventional tea production practice

Chapter 4 and 5 determine factors underlying the probability of tea farmer’sdecision to adopt the new production practice and economic effect of VietGAP teaproduction on households’ income In order to achieve the purpose, we analyzed twogroups of sample, namely adoption and conventional one The finding shows that farmerswith better or more advantageous production features are more likely to adopt newproduction practice Positive incentives affecting both conversion decision and morefarmland allocation of tea farmers include number of household members, tea farm size,ratio of tea income over total household income, access technical information on newproduction practice from extension agencies and using labor-saving machinery in teaproduction Furthermore, with the aim of estimating the casual effect of VietGAP adoption

on farmers’ livelihood in Vietnam, PSM was employed The result indicates that farmersadopting VietGAP tea production received economic benefits with higher income incomparison with conventional tea farmers This also implies that VietGAP tea productionshould be supported for diffusion The premium

17 sources of risk that perceived and listed by tea farmers in the study area The analysisresult indicates that price volatility, disease risk and an increase of production cost are themost serious in farmer’s perception as single risks Moreover, there are no differencesexisting in farmer’s risk perception between VietGAP and conventional tea farmingsystems Analyzing variables affecting on risk perceptions indicates that agriculturaleducated farmers were found to be related to lower worries and risk perception Besidesthat, farmers with main occupation involving in farming activities worry more aboutproduction risk, yield and quality risk For risk management response, farmers consideredpest 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 furtherincreasing efficiency scores of tea and rice farmers in the study area More efficientresource allocation decision or better production management skills could lead to improveproductive efficiency Moreover, conversion in tea production was promoted by economicincentives and adopting VietGAP tea production practice also contributed to increase theprofit efficiency and households’ income of farmers Thus, it is important thatinterventions and government support should aim at improving current productionefficiency and expanding the conversion Lastly, agricultural production is exposed tovarious 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 Toreduce risks for farmers, stabilizing market price of output and production inputs,preventing disease risk with technical education programs that government should supportfor farmers would be meaningful

Keywords

Production efficiency, stochastic frontier, principle component analysis, risk source, management response, major crops, Vietnam

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 mystudies in Japan My special thanks are given to Kyushu University staffs for providingresearch facilities upon which the successful completion of this dissertation havecritically 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 ofAgricultural and Rural Development from Thai Nguyen province, Vietnam on theirhospitality and kind collaboration helped me doing field survey successfully Withouttheir assistance and cooperation in providing precious information, the study would nothave 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 THANHHUYEN

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

our son HO GIA BAO during my study period I am very grateful to my lovely parentsand all relatives for always understanding and encouraging me during the time for doingthe research Finally, I wish to thanks everyone who has helped and encouraged me tostrive for academic excellence

HO VAN BAC Fukuoka, September 2018

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

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

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

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

1 0

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

1 1

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

Table 1 1 Land statistics of Vietnam

Agricultural export increased consistently over years and bring in a substantial positivetrade balance The major agricultural export products are rice, rubber, coffee, cashewnuts, fishery and forestry products In 2011 the total value of export reached $25 billionthat doubled the export value in 2007 (JICA, 2013)

Although agriculture has achieved significant achievements contributing topoverty reduction, social economic development and food security of Vietnam, there arestill many existing challenges and constraints The first one is unstable agriculturaldevelopment and less competitiveness in world market Small production scale andscattered agriculture has led to high production cost Moreover, food safety issue andlow production efficiency are becoming emerging and increasing concerns inagriculture Besides, support services and industry in agricultural development is lessdeveloped Most of exported agricultural commodities are under raw and less processedproducts As a result, added value and product quality are quite low compared with othernations’ products In agriculture, cropping accounted for a high proportion (more than50%) Of which, rice production is still the most important crop (MARD, 2009)

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

Land types Area (1000 ha) Ratio (%)

Total land area 9522.2 100

Northern mountainous region of Vietnam (NMR) has advantage of forestryproduction with about 2.1 million ha, accounting for 71.4% of total agricultural land ofthe region The agricultural production land covers about 28% According to the plan ofagriculture and rural development (2011-2020) issued by MARD (2009), the NMR willfocus on forestry development and advantageous industrial crops such as tea, coffee(Arabica type), maize, lychee, soybean etc

1.1.2 Major yearly-planted crops

In Vietnam, rice production takes the very high land proportion, accounting for59.2% of total annual cropping land area (MONRE, 2016) Over the past 10 years (2007– 2016), total sown rice area increased consistently, reached approximately 8 million ha

in 2016 (GSO, 2018) The figure 1.1 also indicates that rice production area is muchmore than than other crops in combination including maize, peanut, soybean, cotton

rice maize peanut soybean cotton

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

Source: General Statistic Office of Vietnam, 2018

Northern upland area of Vietnam has about 2.1 million ha of agricultural landarea, in which yearly-planted area is about 77% And rice production is also animportant crop, accounting for 35.4% of total cropping land area of the region Whileperennial cropping areas such as tea, fruit, coffee (Arabica) … accounts for about 23%

of total agricultural land of the region (MONRE, 2016) In the region, more than 90%people out

of about 11 million people are living in rural area while agricultural activities such ascropping, animal husbandry, forest economics are their main income Notably, riceproduction still takes an important role in household’s income source, accounting forabout 25% Besides, rice production is not for commercial purpose or export, but riceself-sufficiency also contributes to food security in the region where transportationsystem is still very difficult compared with flat area due to hilly and complextopography (Bac et al., 2013).

Table 1 3 Structure land use of NMR

Land type Area (1000 ha) Ratio (%)

Total agricultural production land 2123.4 100

Source: Ministry of Natural Resource and Environment, 2016

1.1.3 Major perennial plants

The trend over the last ten years of production are presented below for the majorperennial plants in Vietnam There has been a major expansion of rubber planting area,while coffee and pepper planted areas has rose moderately Tea planted area remainedfairly steady over the years

Cashew nut Rubber Coffee Tea Pepper

Figure 1 2 Planted perennial area of VietnamSource: General Statistic Office of Vietnam, 2018

Vietnam is amongst few nations in the world that have advantages of natural andclimatic conditions for tea production (SOMO, 2007) Tea production is taking place in

39 out of 64 provinces all over the country with total 130 thousand ha NMR has thelargest tea production area in comparison with other four regions of Vietnam, with about

93 thousand ha accounting for 72% of total planted tea area of Vietnam

Figure 1 3 Planted tea distribution in VietnamSource: General Statistic Office of Vietnam, 2011

5

Similarly, the region also provide the highest tea production quantity of Vietnam,

accounting for 66% of total produced tea quantity

3%

23%

8%

66%

Red river delta Northern mountainous area

North central and coastal area Central highland

Figure 1 4 Proportion of tea production among regions in Vietnam

Source: General Statistic Office of Vietnam, 2011

Tea production plays an important role in both cultural and economic aspects InVietnam tea plantation has a long history and tea drinking custom, dating back about

3000 years (Tran, 2008) In 2012, tea production has contributed to total exported value

of $224.8 million, with more than 146.8 thousand tons of exported tea products (FAO,2012b) The sector also attracts about 400 thousand households involving in productionand relevant activities for their income and livelihood In total, tea sector providesemployments for about 1.5 million people (SOMO, 2007)

7 120.0

100.0

Vietnam's tea yield

Production efficiency is composed of two components including technicalefficiency and allocative efficiency The purely technical or physical component isdefined as the farmer’s ability to avoid waste during production In other words, afarmer uses the given inputs to create an output as high as possible, or produce a givenoutput by applying inputs as low as possible Thus, the target of an estimation oftechnical efficiency is to find solutions to increase output or decrease inputs in thecontext of available

conditions While the allocative or price component is determined by combination ofinputs and outputs in the optimal level in term of considering market prices Measuringtechnical efficiency implies use of input and output quantity without introducing theirprices Technical efficiency can also be further decomposed into three subcomponents,which are scale efficiency (the potential productivity gain from achieving the optimalsize of a firm), congestion (increase in some inputs could decrease output), and puretechnical efficiency (Farrell, 1957).

Economic efficiency involves in increasing output without using more thanconventional inputs The use of existing technologies is more cost-effective thanapplying new technologies if farmers currently cultivate their products inefficiently withcurrent technologies (Shapiro, 1977) Economic efficiency can be classified into twotypes: technical efficiency and allocative efficiency Technical efficiency measures theability of a farmer to achieve maximum output with given and obtainable technologies.While allocative efficiency tries to capture a farmer’s ability to apply the inputs inoptimal proportions with respective prices (Farrell, 1957, Shapiro, 1977) The technicalefficiency (TE) of a firm always varies from 0 to 1 value (0 ≤ TE ≤ 1) If TE is equal to

1, the firm produces with full technical efficiency For instance, the firm could achievefull technical efficiency

Production efficiency is considered as means of fostering production, thus largenumber of studies has focused on agricultural efficiency (Thiam, 2001) In Vietnam,agricultural sector has contributed significantly to the economic growth, food security,social stability and poverty reduction Thus, improving the sector efficiency alsoreceives much attention from Vietnam government and scientists In research aspect,there are few researches on production efficiency of crops such as rice, tea, vegetableetc Almost of studies found that Vietnamese farmers did not operate at fully efficientlevel (Hong et al.,

2015; Bac et al., 2013; Tran, 2008; Vu, 2005) This implies that there is a significantpotential for farmers to reduce their costs by increasing efficiency Moreover, efficiencyimprovement becomes more important in context of limited land source Also, applyingtechnology requires more capital investment and longer time Another constraint forhigher technology application is that agricultural production in Vietnam is characterized

by scattered and small scale production

1.2.2 Linkage between agricultural risk and efficiency

Production could be defined as a process of transforming inputs such as land,labor, capital, fertilizer etc into output such as goods and services This process is notonly applied in agricultural production, but also in other production sectors In otherwords, production activities are generally linked closely to natural conditions andenvironment in which farmers operate In agriculture, production process is subject tomany uncertainties and risks Any producers’ decision is closely linked with variouspotential outputs with different probability The producers or farmers could not controlevents, including weather, market, policy, but these factors have direct effects on returnsfrom farming activities and businesses In the context, it is important that farmer has tomanage farming risk as part of farm operation in general In response to the multiplepossible effect of those events, risk management strategies for farming systems mayinclude decisions on-farm, changes in structure, use of market instruments, governmentsupport, and diversification of farming income sources A standard approach to analyzeaspects of risk management response involve in 3 steps The first step is to determine ormeasure the risk source and possible variability The next one is select the optimal riskmanagement tool based on this information Finally, appropriate government policies aredesigned to improve the risk management strategy (OECD, 2009) Another approach inrisk analysis is called as holistic approach In this approach, the linkage among three sets

of element is considered as multiple relationship (not linear as in standard approachabove)

As a certain part of agricultural production, risk study has been received manyattentions from researchers Thus, literature in this study field is abundant Agriculturalproduction is exposed to various sources of risks and uncertainties (Akcaoz and Ozkan,2005) Similarly, agricultural production in Vietnam is also affected by those riskyfactors Risk types and uncertainties are not uniformly spread over all farmers due tocomplexity and change of natural and climatic conditions (Riwthong et al., 2017) Risksource is very diversified and can be grouped into five sources of risk namely productionrisk, marketing risk, financial risk, legal and environmental risk, human resource risk(USDA, 1997) The relationship between production risk and efficiency was studied byTiedemann (2013) The results also indicate that output variability in German organicand

conventional farming is mainly caused by production risk Since risks have negativelyaffected production output of farmers, it is very important for farmers to identify andmanage the risks (Drollette, 2009).

1.2.3 The situation of VietGAP adoption

As the same with many other Asian countries, the VietGAP adoption wasmotivated by the importance of GlobalGAP that is one of the most important privatestandards in the area of food safety and sustainability (Nabeshima, 2015) Besides,conventional agricultural production has been facing many challenges because excessiveuse of pesticides and chemical fertilizers has led to extremely negative impacts onhuman health and environment Together with increasing concerns on food safety fromdomestic consumers, Good Agricultural Practices (GAPs) was encouraged to apply inagriculture Basically, GAP principle is a set of standards and guidelines which must beapplied to all phases of production from field selection, pre-plant field preparation,production, harvest and post-harvest (FDA, 1998) To fit with specific conditions ofVietnam’s agriculture, the Vietnamese government has tried to initiate its own GoodAgricultural Practice development, called Vietnamese Good Agriculture Practice(VietGAP), based on the Hazard Analysis Critical Control Points (HACCP) andprinciple of AseanGAP On 28

Jan 2008 Ministry of Agriculture and Rural Development of Vietnam (MARD) issuedthe decree No 379/QD-BNN-KHCN on VietGAP implementation VietGAP wasconsidered as the main standard, procedure and guidelines for production of safe fruitand vegetables The aim of VietGAP adoption is to prevent and minimize the riskhazards which often occur in production, harvesting and post-harvesting processes offruit and vegetables Adopting GAP and/or safe standard package are also expected toreturn producer or farmers with economic benefits such as increasing and/or stabilizingrevenue, reducing average costs, improving market access, reducing vulnerability topoor agricultural practices as well (Hobb, 2003)

Although VietGAP adoption has returned a wide range of practical benefits, thenumber of farmers who are certified VietGAP has not been high yet Several barriers areattributed to the limited spreading of VietGAP adoption in Vietnam The first one is lowpopularity of VietGAP in compared with other standards in the market as GlobalGAP

Moreover, this domestic standard has not been yet recognized internationally Thus,farmers or producers has no incentives to invest more on less credible certification Thenext reason is that adopting VietGAP requires higher level of infrastructure This seems

to be more difficult for most of Vietnamese farmers who have very small land areas(0.25 ha on average) An other important reason is high cost for applying fro and gettingVietGAP certificates for most of farmers or production firms The high cost does notonly limit new producers to apply the standards, but also discourage farmers to renewtheir certificates (Nabeshima, 2015)

1.3 Problem statement

Agriculture has achieved very impressive growth over the last two decades, butVietnam is still a developing country with low average income Although agriculturalcontribution to Vietnam’s GDP tends to decrease due to faster increase of industry andservices, but the agricultural sector remains an important component to the economy.Moreover, in Vietnam about 65.5% of population is living in rural area and agriculturalactivities are still main income sources of most of rural households With remarkableachievement in agricultural development, national poverty rate has been declined from58.1% in 1993 to 13.5% in 2014, many challenges still exist Most of the poor are living

in rural areas and also heavily rely on agricultural production Especially, rate of ethnicminority is 35.7%, but the rates among some groups are extremely high: La Hu 84.9%and H’Mong 82.9% (UNDP, 2017) In addition, the northern mountainous region ofVietnam has the highest poverty rate amongst regions (GSO, 2018) Thus, agriculturedevelopment, rural and farmers are under special attention of Vietnam government

Over the last two decades, impressive increase in Vietnam agriculture has beenpartly motived by planting land expansion Up to date horizontal growth seems to reachits limitation because the availability of undeveloped agricultural land in Vietnam is verylimited Moreover, Vietnam’s population density is considered as one of the highest ones

in the world This mean that there is no opportunity for horizontal expansion of cropping.Findings of previous studies indicate that Vietnamese farmers are not fully efficient formany cropping activities such as rice, tea, vegetable etc Thus, improving productionefficiency and optimization of land production is a key factor when assessing growthpotential And improving the efficiency of the sector development is also one of sixpriority

goals recognized by Vietnam government in coming years (JICA, 2013) In 1999, theVietnamese government established a tea production development plan for the period of2005-2010 (Decision 43/1999 QD-TTg) Of which objective of its development plan was

to increase production, export turnover and create employment opportunities for farmerswho their income source heavily depends on tea production The implementation of thispolicy was expected to reduce poverty rate in the uplands tea producing areas, which areoften poor mountainous regions with small scale farming, and limited off-farm incomeopportunities In addition, other important policy measures also were implemented topromote the development of the tea value chain and strengthen greater access to marketfor the rural poor farmers such as “the law of Private Enterprise” which waspromulgated in

1990, and “the Enterprise Law” which was enacted in 1999 and revised in

2005

Agricultural activities are generally linked to natural conditions and environment

in which they operate And the sector is often characterized by high variability ofproduction outcomes due to production risk The risk sources are also closely associatedwith negative outcomes originating from unpredictable biological, climatic and pricevariables that is not in control of agricultural producers (WB, 2005) In Vietnam,agricultural production is also under those situations Besides, Vietnam agriculture ischaracterized by small scale and scattered production with low adoption of technology.Thus, agricultural productivity and product quality is not high, less competitive in themarket High technology application and managing risk sources are very important inincreasing agricultural production and farmer’s income

The start of VietGAP standards had been considered as indispensable measure toissues of food safety in Vietnam that originated from increasing concerns of consumers

in both domestic and international market The safe production standards calledVietnamese Good Agriculture Practices (VietGAP) was issued by MARD in 2008, andwas established in GlobalGAP, ASEAN Good Agriculture practices and Hazard analysisand critical control points It is also considered as eco-friendly production practicebecause of maximal usage of organic component in cultivation and protection (Ha,2014) At first the standard package was targeted to vegetable production in Vietnam,then it was opened to apply in fruit and tea production in 2009 The applying VietGAP

standards is expected to give farmers with more economic values and reducingproduction risks

through premium price, better access to market and lower average production cost.However, in reality spreading of VietGAP adoption has not yet been high asexpectation Also, farmers have different points of view on economic value on adoptingthis standard package A large number of studies have been focused on productionefficiency, but there are few researches on production efficiency of crops adoptingVietGAP, and its impact on household income.

1.4 Research objective

From statements above, overall objective of the study is to analyze the currentlevel of production efficiency of tea and rice farmers, contribution and importance ofVietGAP tea production for livelihood of farmers, and risk sources facing farmers andtheir management response in northern Vietnam The specific objectives of the study are

to (1) explore the production efficiency of rice and tea farmers, and factors affectinginefficient levels; (2) investigate the economics of adoption, farmer’s perception onsources of risks and also understand their management responses

To achieve the overall objective, three main research questions need to be investigated:

1 Do tea and rice farmers operate at fully efficient levels or is there any potential forimproving farmer’s production efficiency? And which factors have effects on improvingproduction efficiencies of farmers?

2 How does VietGAP tea production affect household’s income in the study area? Andwhat are determinants for shifting from conventional to VietGAP tea production?

3 What is source of risks facing by farmers and how do they respond to those risksources?

1.5 Organization and structure of the dissertation

The content of study consists of 2 main objectives and is organized into 7chapters Objective 1 covers chapter 2 and chapter 3, while chapter 4, 5 and 6 belong tothe objective 2 The detail of each chapter is as follow The chapter 1 with title

“Introduction” presents general information of agricultural sector, major crops andperennial plants, problem statement and objective of the study as well While detailedanalysis on current level of production and profit efficiency of rice and tea farmerswould be found in chapter

2 and chapter 3 respectively Moreover, determinants of improving technical and profit

efficiency for farmers will also be included in these chapters Chapter 4 will focus onanalyzing factors affecting farmers’ decision to adopt VietGAP tea production.Contribution and importance of VietGAP tea production on household’s income will gointo chapter 5 Farmer’s risk perception and their risk management response is one ofimportant components of the study that will be detailed presented in chapter 6 Finally,main findings of the research and policy implications will be included in chapter 7.

The structure of the dissertation is presented as figure 1.6 below

Chapter 1 Introduction

O bj ect ive 1 To analyze productive efficiency of tea and rice farmers

Chapter 2 Analysis of technical efficiency of rice farmers and its determinants

Chapter 3 Analysis of profit efficiency of tea farmers and its determinants

O

b j ec t i ve 2 To determine the economics of adoption, risk sources and farmers’

risk management response

Chapter 4 Factors affecting farmers’ decision to adopt VietGAP production

Chapter 5 Assessing impacts of VietGAP production on farmers’ income

Chapter 6 Farmer’s perception of risk sources and their management response

Chapter 7 Conclusion and policy implicationFigure 1 6 Overall structure of the dissertation

1.6 Selection of study area

Northern Vietnam, including midland and northern mountainous region, has totalnatural land area of 95,222 km2 and population of 11.98 million people belonging tovarious ethnic minority groups (GSO, 2016) The region consists of 14 provinceslocating in the northwest and northeast regions The region is covered with mountainsand hill ranges And agricultural and forestry economics are dominated in the region due

to favorable natural and climatic conditions for the sectors The major croppingand

perennial plants of the region include rice, maize, tea, rubber, Arabica-coffee etc Thestudy was conducted in Thai Nguyen province where its socio-economic anddemographic characteristics could be a representative of Northern upland area ofVietnam The province has a total population of 1,227.4 thousand persons with anaverage density of 384 persons per squared kilometer (GSO, 2016) Thai Nguyenprovince is divided into 09 administrative units including 7 districts, one city and onetown: Dinh Hoa, Dai Tu, Dong Hy, Vo Nhai, Phu Binh, Phu Luong, Pho Yen district,Song Cong town and Thai Nguyen city The smallest administrative unit in Vietnam iscommune Moreover, tea and rice farming plays an essential role in household’slivelihood, especially in rural areas While rice production is mainly produced for self-demand/sufficiency, tea plant is producing to serve as commercial purpose, bring backincome as cash for daily life The sampled farmers were randomly selected fromrepresentative districts of study area Field survey was taken in two periods of time Data

of rice production was collected from 120 rice farmers, while primary data of teaproduction was gathered in 2016 through face to face interview of 116 VietGAP and 210conventional tea farmers Some observations with missing information was got rid out

of dataset Only observations with fully required information were used for analysis inthe study Prior to field survey, pretest survey was also conducted to adjust content ofquestionnaire following the real understanding of farmers and time management.Numerators were selected from experienced staffs in field survey and also werecarefully trained to ensure capturing the objective of research and get much information

as possible Rice data was used in chapter 2, while data of tea production was used in allremaining chapters

Surveyed location

(3 districts)

Figure 1 7 Map of study area

CHAPTER 2 PRODUCTIVE EFFICIENCY OF RICE

FARMERS AND ITS DETERMINANTS

2.1 Introduction

Rice is a staple food of Vietnamese people, and is one of the main food cropsthat play an important role in household income in rural areas Impressive growth ofagriculture has brought significant benefits The agricultural achievement hascontributed significantly to poverty reduction in Vietnam However, there are still manydifficulties and challenges facing Vietnam now Firstly, poverty rate is still as high as13.5% nationwide in 2014, and the rate is very high for ethnic minority groups.Secondly, income disparity is relative wide between urban and rural area, delta andmountainous area due to unequal growth amongst regions Notably, ethnic minoritygroups of the region share only 7% of total population, but its poverty rate is 25.4% incompared with total number of the poor of the country (Nguyen et al, 2017) Northernupland area has total annual cropping land area of about 1.6 million ha, in which ricearea is 579 thousand

hectares, accounting for 35.4% and ranked 4th in Vietnam The region’s economy ischaracterized by agricultural production Farmer’s income depends mainly onagricultural activities such as cropping, animal husbandry, fishery raising and forestryactivities, in which rice production plays an important role in household’s income,especially in the rural and mountainous area, accounting for about 25% (GSO, 2009).Moreover, rice self-sufficiency also contributes to food security in upland area wherepublic transportation system is still very difficult due to high and complex topography

Although several studies on productive efficiency of agricultural crops wereconducted in Vietnam (Nguyen et al 2003; Linh, 2008), there are few studies ontechnical efficiency of rice production And most of these studies were conducted in twomain rice production areas such as Mekong river delta and Red river delta Other studiestried to estimate the technical efficiency of rice production nationwide under animportant assumption that there was no large difference among areas in Vietnam (Khaiand Yabe in

2011) Therefore, our study would investigate technical efficiency and estimate theimpact of various fertilizers on rice production Its result will contribute more tocomprehensive insight on whole picture of rice production in Vietnam

2.2 Methodology

2.2.1 Overview of efficiency

Technical efficiency (TE) is one of the important and interesting index used inproduction firms It is often used to measure efficiency of using resources such as land,labor, capital, materials and so on And measuring technical efficiency is one ofconcerns of researchers with the objective to estimate efficient level of farmers involved

in agricultural production Technical efficiency helps researchers to answer question inshort run: Can rice farmers increase their productivity under given conditions? Technicalefficiency (TE) and allocative efficiency (AE) are two components of economicefficiency (EE)

2.2.1.1 Economic, technical and allocative efficiency

Production is a process of transforming inputs such as land, labor, capital,fertilizer… into output such as goods and services This process is not only applied inagricultural production, but also in other production sectors The difference ofproduction performance is generally displayed at different inputs and outputs Ultimateobjective of agricultural production may be profit or revenue maximization, costminimization, maximum output etc They can vary from time to time or firm to firm.Some concepts cover technical efficiency such as productive efficiency or economicefficiency

Production efficiency is composed of two components including technicalefficiency and allocative efficiency The purely technical or physical component isdefined as the firm’s ability to avoid waste during production In other words, a firm usethe given inputs to create an output as high as possible, or produce a given output byapplying inputs as low as possible Thus, the target of an estimation of technicalefficiency is to find solutions to increase output or decrease inputs in the context ofavailable conditions While the allocative or price component is determined bycombination of inputs and outputs in the optimal level in term of considering marketprices Measuring technical efficiency implies use of input and output quantity withoutintroducing their prices Technical efficiency can also be further decomposed into threesubcomponents, which are scale efficiency (the potential productivity gain fromachieving the optimal size

of a firm), congestion (increase in some inputs could decrease output), and pure

technical efficiency (Farrell, 1957)

Economic efficiency involves in increasing output without using more thanconventional inputs The use of existing technologies is more cost-effective thanapplying new technologies if farmers currently cultivate their products inefficiently withcurrent technologies (Shapiro, 1977) Economic efficiency can be classified into twotypes: technical efficiency and allocative efficiency Technical efficiency measures theability of a farmer to achieve maximum output with given and obtainable technologies.While allocative efficiency tries to capture a farmer’s ability to apply the inputs inoptimal proportions with respective prices (Farrell, 1957, Shapiro, 1977) The technicalefficiency (TE) of a firm always varies from 0 to 1 value (0 ≤ TE ≤ 1) If TE is equal to

1, the firm produces with full technical efficiency For instance, the firm could achievefull technical efficiency

2.2.1.2 Concept of production frontier

In microeconomic theory, a production function is a function that specifies theoutput of a firm for all combinations of inputs Given the set of all technically feasiblecombinations of output and inputs, only the combination encompassing a maximumoutput for a specified set of inputs would constitute the production function.Alternatively, a production function can be defined as a specification of the minimuminput requirements needed to produce an output, given available technologies Byassuming that the maximum output technologically possible from a given set of inputs isachieved, economists are using production function in analysis to solve problems oftechnical efficiency and allocative efficiency The observed outputs below theproduction frontier show the firm producing inefficiently

2.2.2 Techniques of efficiency measurement

There are two methods widely applied to estimate the technical efficiency of afirm: parametric and non-parametric The parametric approach assumes a functionalrelationship between output and inputs and uses statistical techniques to estimate theparameters of the function The non-parametric approach, in contrast, constructs a linearpiecewise function from empirical observations on inputs and output without assuming

any functional relationship between them Non-parameter and parametric approachmethod are called in term of DEA and SFA respectively The comprehensive reviews ofthe two methods are carried out by Kalirajan and Shand (1999); Bravo-Utera andPinheiro (1997) The choice as the best method is unclear Some rigorous empiricalanalyses have been conducted in assessing the sensitivity of efficiency measures to thechoice of DEA and SFA in agriculture (Sharma et al 1999) The limited findings showthat efficient score estimated from each approach is quantitative change, although theordinal efficiency ranking of farms achieved from two methods are quite similar So thechoice of other method application depends on the objectives of the study, type of farmsand some assumptions regarding the data generating process.

Data envelopment analysis (DEA) is a mathematically programming method that

is useful for multiple-input and multiple output production technologies The method,initially studied by Charnes et al (1978), uses linear programming methods to build anon-parametric piece-wise surface or frontier over the data and estimate each datapoint’s efficiency relative to the frontier The DEA method assumes that the variablesare reasonably separated into inputs and outputs Each data point in DEA represents adecision-making unit (DMU), or a producer in practice The decision of a unit is tocreate outputs by using inputs as efficiently as possible (Zheng et al, 2004)

Stochastic frontier approach (SFA) uses econometrics based on the deterministicparameter frontier Aigner et al (1977) independently proposed the stochastic frontierproduction function model of the form: lnqi = xiβ + νi – ui, where qi represents the output

of the ith firm; xi is a vector containing the logarithms of inputs; β is a vector of unknownparameters; vi accounts for statistical noise; ui represents for technical inefficiency Thedifferent techniques are applied to generate the strengths and weaknesses of the twomethods The econometric approach is stochastic and parametric It has ability toseparate the effects of noise from the effects of inefficiency and confound the effects ofmisspecification of functional form with inefficiency, but generate good results only forsingle output and multiple inputs In contrast, DEA method is not stochastic andparametric It does not separate the effect of noise and inefficiency during thecomputation of technical efficiency, and less sensitive to the type of specification error,but could be useful to apply for farms with multiple inputs and multiple outputs

production The calculation of technical efficiency using the production frontier model isonly applied to single output production Depending on the structure of the data(whether cross-sectional data or panel data), different estimate techniques are applied inreality.

2.2.3 Analytical framework

As described in sections above, two methods have been widely used to estimatetechnical efficiency, including Data Envelope Analysis (DEA) and Stochastic FrontierAnalysis (SFA) Both methods have different strengths and weaknesses In the study, weuse SFA technique because it can separate the effects of noise from technicalinefficiency And it only can generate good results for production systems with only oneoutput and multi-inputs Rice production in Vietnam has one output of quantity andinputs of seed, fertilizers, labor, pesticide and hired machine And Cobb-Douglasproduction function was extensively used in the literature In the research rice yield isused as dependent variable instead of rice production as well as Nguyen et al (2003),because it is a realistic assumption that a similar harvest regularity about scale for eachfarmer existed in the study area due to small rice area per household, givenapplied technology in rice production and similar natural conditions in the region.Logarithm both side of the function will result in the model as below

The Cobb-Douglas production function can be expressed by following equation

ln yi = βo + Σ βj ln (xij) + εi (2.1)Where yi is rice yield of ith farm, xij is the jth input (j=1-7) used by ith farmer βo isintercept

and βj are parameters to be estimated or elasticity corresponding to each input (j=1-7),including used seed, nitrogen, phosphorus, potassium, pesticide, working day and hiredmachinery, respectively and εi is an error term consisting of two components, Vi and Ui.Where Vi is random variable error associated with random factors such as measurementerrors and other statistical noise and exogenous factors beyond the farmer’s control such

as natural disasters Vi is assumed to be independently and identically distributed, andindependent of Ui While Ui is non-negative random variable associated with farm’sspecific factors which would affect technical efficiency of rice farmers Ui is assumed to

be independently truncated-normal distribution with mean µ and variance δ2 Although

Ui can also have other distributions, FRONTIER 4.1c computer program used in thestudy can only harmonize with above assumption The term µi is defined as follows

µi = δo + δ1Z1j + δ2Z2j + δ3Z3j + δ4Z4j + δ5Z5j + δ6Z6j + ωi (2.2)Where µi is inefficiency effects that could be estimated by 2 stage estimation technique

in FRONTIER 4.1c spontaneously δo is the intercept term, δj is the parameter for jthindependent variables Z1j is experience of farmers (years); Z2j is education level offarmers (years); Z3j is household size (persons); Z4j is number of land plots; Z5j is areavariable, Z5j = 1 means Northeast and 0 means Northwest area; Z6j is credit access, if Z6j

= 1 then farmer has borrowed credit loans from financial agencies and zero otherwise; ωi

is an error term (unobservable random variables) Maximum likelihood estimates(MLEs) for all parameters of the stochastic frontier production (1) and inefficiencymodel (2) and were simultaneously estimated by using the FRONTIER 4.1c computerprogram (Coelli,

1996) This program also presented the coefficients of variance parameters