The response of farmers to price incentives in sugar cane production in the south of vietnam

THE RESPONSE OF FARMERS TO PRICE INCENTIVES IN SUGAR-CANE PRODUCTION IN THE SOUTH OF VIETNAM A thesis submitted in pa_rtial �lfillment o!. behavior of farmers · in undeveloped agricultur

THE RESPONSE OF FARMERS TO PRICE INCENTIVES IN SUGAR-CANE PRODUCTION IN THE SOUTH OF VIETNAM

A thesis submitted in pa_rtial �lfillment o! the requirements for the degree of

MASTER OFARTS IN ECONQMICS OF DEVELOPMENT

BY NGUYEN THANH NHAN

HO CHI MINH CITY, DECEMBER 1997

11

patently false and harmful Price policy based on it always impair the efficiency of agriculture "

And Behrman (1968) concluded his study on four commodities in Thailand

by saying that "strongly supports the hypothesis that farmers in economically ' underdeveloped' countries respond significantly and substantially to economic incentives The burden of proof thus now lies with those who · maintain that the supply behavior of farmers · in undeveloped agriculture cannot be understood predominantly within the framework of traditional economic analysis."

Thus, many countries have introduced a positive price ·policy to give a stimulus to agricultural output in general and to alter the composition of agricultural output in particular There is 'iri fact many evidences that farmers respond positively to price changes, as economic theory would predict ·,

According to economics theory, an incr�ase in output price will gi�e the farmers an incentive to Jncrease more 6utput by using more input factors 'on the other hand, a decrease iri input price' will �lso encourage the farmer use more ·input factors, then it causes the output in�rease In terms of policy; we see that reducing input prices will have similar effects to increasing the output price, but the influential degree �ftwo effects will not

be the same

: _?i1?s O 992) indicated that an increase in th� general '1evel of output price�,

ceteris paribus, increase returns to all inputs in' production, encouraging

23

production, except the case of labor and _fertilizer in the small farms The effects of changing land quantity and education level on input demand and output supply are positive and,not symm,etric across input share equations The influence of land quantity onoutput supply is quite high (3.38) in the large farms

2.2 METHODOLOGY

2.2.1 The budgeting analysis ·

Ac.cording to farmers in sugar-cane· cultivation, profitability plays an important role to choose sugar-cane or other industrial crops and to apply new technology in production: Iri addition, return from production will allow farmers to acquire and sustain a certain type and quantity of resources for · rice production· · Therefore, the · budgeting analysis 1s introduced It will help us to determine the profitability as well as return of major inputs in sugar-cane cultivation The items· :of costs and returns·

· which included in sugar-�ane cultivation are calculated per ha by these

,·' , equations as follows :

• Yieid (Tonllia) =· Total production I Total area·

• Gross return (VND/ha) = Yield x Price per ton · ·

• Net return (VND/ha) = Gross return -Total cost

• · Material input costs · = · Cost ·of seed, · fertilizer, pesticide, landI '

·· preparation and other �aterial inputs

'

• Purchased input costs = Material input costs + hired labor costs

· · •· · Interest payment = Material input costs x (1.5% x.10 •months) where the

•' ' • '"�::\.,

·-1 ·

· ·' interest rate of loan is 1.5%

• Tax payment= (6% x production price/ton) x yield where the rate ofagricultural tax is 6%

From the table 4.2, the nominal protection coefficient for sugar-cane equals

to 1.092: As the economic meaning ofthe nominal protection coefficient was presented in Chapter 2, the NPC > 1 means that the protection of the

·- - '

than the output price policy However, the output price policy are in favo_r

of the government because this policy· would provide the highest incentive

to farmers to increase the level use of input factors and output supply in the market

\

72

CHAPTERS SUMARY AND CONCLUSION

This chapter will provide an overview of the study through summari�g these e�pirical results and discussions presented in the previous chapters Conclusion and reco�endations are drawn to �uggest some appli�ations and further researches·in developing the s�gar'."cane industry

sown area under sugar-cane has been increased rapidly from 1994 The sown area is concentrated mainly on the Mekong Delta with 44% of the whole country in 19?5

The growth rate of sugar-cane yield is slowly over the long period In

73

other inputs would reduce in sugar-cane cultivation To sum up, the growth

�f sugar-cane output depends mainly on the expansion.of sugar-cane sown area In order to increase sugar-cane output shapely, the main way is to increase sugar-cane yield because the expansion · of sown area 1s constrained by the agricultural land

For developing the sugar-cane industry, the government has established some policies such as the minimum price policy, the procurement price

policy and so on, to stabilize botll prices of sugar-cane and sugar However, the effectiveness of these policies is limited since thesugar-cane output which is consumed by these:: state sugar factories is low in comparison with the manual private producers In addition to the import sugar policy, the supply:-demand affecting policy is imposed to reduce the bad effects of the sugar shortage in.domestic market and the seasonality 9f sugar-cane cultivation; However, both the forecast and management of the government in carrying out these policies are so weak that they make these­policies low efficient

In the budgeting analysis, some results can be derived as fe>!lows: There is intensity of labor use, especially · in crop caring and harvesting The investment in · material · inputs as well as lab?r input offers a positive returns The !eturn I cost ratio in all selected provinces is positive, ranking fr�m 1.086 to 1.160 It implies �at farmers gain profit in sugar-cane cultivation However, the gross returns to farmers can increase :significantly if the yield of sugar-cane is improved by �han�g seed and ��·

.74

the import price of raw sugar in 1996-1997 crop It is larger than unity, thus it shows that protection policy which based on import tax and quota is effective to sugar-cane farmers

All elasticities of output supply, demand for fertilizer, seed, labor and

'•.,;, pesticide have meaningful signs as expected Except the case of fertilizer, it

is less elastic in· response to its price while the others are elastic when their prices change in the market In addition, almost cross price elasticities of demand are low, less th� 1 in absolute value and negative These results reflect the complementary relationship between almost variable inputs in sugar-cane production Except pesticide and labor, it is substitute input factors On the other hand, the own�price elasticity of sugar-cane output is 2.62 in absolute value It indicates that the sugar-:-cane output is quite elastic in response to changes its price ·,

,·

These empirical results in the cost-effectiveness analysis point out that a 5 percent subsidy for output price are more effective than for input prices ' because the net benefit of farmers as well as the net impact of this policy is

' '

<

highest In order to increase the sugar-cane yield, a subsidy price for seed

is of top priority because it is a key input factor in sugar-cane cultivation In addidon, the empirical result in our study also confirms the cost­effectiveness of this policy to farmers and society

5.2 POLICY RECOMENDATIONS

Viet nam has more advantages to develop the sugar-cane industry {�However, it also requires the government to have the suitable_ policies to

· convert these potentials· into' reality: Thus, the sugar-cane industry will

·meet the domestic, demand and earn foreign ex��a.p.ges from sugar- '• exportati�:m From the profile · of sugar-cane cultivation presented· in the