Efficiency In Agricultural Production Process Economics Essay

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The concept of efficiency (technical or Allocative) in an agriculture production process is based on a "production function". A production function describes the technical relationship between inputs and outputs under a given technology. It defines the possible attainable output from a set of inputs (Coelli, Rao, & Battese, 1999). Production function plays an important role in agriculture productivity and farm management in order to estimate the quantity of production from a given level of inputs, to locate a point of maximum profit, or to see how efficiently resources are being allocated under a given existing farm conditions and technology (Dahal, 1996). Therefore it is very cost-effective for a farmer to be able to identify the most rational point in the production function that can best satisfy his production goals of profit ( or utility) maximization and cost( or risk) minimization (Mendola, 2007). The comparison of the output obtained from the farmer's field and the output that the production function predicts for these levels of inputs provides us the basis for "technical efficiency", termed by Farrel (Farrel, 1957). Different production functions utilize different sets of inputs based on the agriculture system (e.g. cereal cropping or tree cropping); bio-physical conditions (e.g. tropical, temperate, arid or semi arid); farmer's socio-economic conditions and availability and/or accessibility of inputs (labour, fertilizer and irrigation facilities etc).

Fruit farming is more risky than to produce other crops. The variability in fruit yield is 2 to 3 times higher than that of rice yields (Aujla, Abbas, Mahmood, & Saadullah, 2007). In fruit farming a farmer treats his fixed inputs (land, capital, irrigation, family labour) as "irreversible investments" since it is very difficult (sometimes impossible) to transfer them economically to some other use at a short notice (Reig-Martinez & Picazo-Tadeo, 2004).

Micro-economic theory considers agriculture production process being a result of farmer's optimization behavior (profit maximization and/or risk minimization). Managerial decisions concerning the choice of "what" and "how much" input-mix to use lead the farmer to achieve his objectives (Mendola, 2007). Unfortunately, not all producers (farmers) are successful to achieve these objectives especially the resource poor small farmers living in mountainous areas (like the case of Balochistan). These deficiencies allow us to work out the degree of departure from technical, allocative and, consequently, economic efficiencies of each individual farm (Reig-Martinez & Picazo-Tadeo, 2004). These deficiencies are often attributed to lack of managerial ability and/ or unwillingness of producers to adjust (allocate) input levels in efficient manner. These deficiencies might emerge from the farmers' perception towards traditional agriculture being most efficient system (Schultz, 1964) or the presence of socioeconomic, institutional, physical or policy constraints (Ghatak and Ingerset, 1984; Dhungana, 2004). If existing technology is not being used efficiently by the farmers then efforts designed to improve efficiently will be more cost effective than introducing new technologies (Dhungana, 2004). Such inefficiencies, according to Farrell (1957), consist of two components namely "Technical" and "Allocative or Price" inefficiency.

Technical efficiency refers to the ability of a production unit to produce maximum output by using the given set of inputs and existing production technology. On the other hand, allocative efficiency selecting that combination of inputs (land, labour, capital, machinery etc.) which gives a production at minimum cost given the input prices and prevailing technology. Technical and allocative efficiencies are then combined to provide measure of overall economic efficiency (Farrell, 1957; Coelli et al. 1999), that is;

Economic Efficiency = Technical Efficiency * Allocative Efficiency

Achieving only one of these efficiencies is not the rational choice, rather attaining both efficiencies simultaneously ensures overall economic efficiency (Dahal, 2005).

A plethora of farm specific, socioeconomic, institutional and policy determinants affect these efficiency levels. These determinants may include farmer's age (Hussain, 1995; Dhangana, 2004; Bashir & Khan, 2005; Mari & Lohano, 2007), family size (Kalirajan, 1991; Dhangana, 2004; Mari & Lohano, 2007), educational level (Kalirajan & Shand, 1986; Ali & Flinn, 1987; Ekanayake, 1987; Hussain, 1995; Dhangana, 2004; Bashir & Khan, 2005; Mari & Lohano, 2007), farm size (Ray, 1985; Kalirajan, 1991; Hoque, 1993; Hussain, 1995; Mochebelele & Winter-Nelson, 2000, Bashir & Khan, 2005; Mari & Lohano, 2007), farming experience (Kalirajan & Shand, 1986; Ekanayake, 1987; Mari & Lohano, 2007), migration (Mochebelele & Winter-Nelson, 2000), and more. A less skilled and less motivated farmer may come up with high inefficiencies (Mochebelele, 2000). Similarly farming groups with poor access to extension services (Kalirajan & Shand, 1986; Kalirajan, 1991; Hussain, 1995), credit facility (Kalirajan & Shand, 1986; Ali & Flinn, 1987; Ekanayake, 1987), road networks (Mari & Lohano, 2007) and information (Ray, 1985) tend to have high level of inefficiencies from their produce.

Sustainable agriculture growth calls for an efficient marketing system as it affects both producer's income and consumer's welfare. Right from buying of inputs to selling of produce, the farmers are directly or indirectly engaged to the market (Aujla et al. 2007). Marketing refers to the series of services involved in moving a product from the point of production to the point of consumption at a profit (Dixie, 2005). As a function marketing refers to a two-way process of transmission of price signals and physical transmission of a commodity between producers and consumers. As a system, marketing refers to a series of inter-connected activities along which a commodity passes through physical change and price decisions (Ellis, 1996; Dixie, 2005).

In case of fruit marketing, these inter-connected activities include planning of production, buying inputs, harvesting, grading, packing, storage, transportation, distribution and selling of fruit products to consumers by several intermediaries (Kinsly, 2001; Dixie, 2005). By linking farmers closely to consumers, an efficient marketing system transmits signals to farmers (through information facilities) on new market opportunities like prices, information, supply and demand levels, consumers' preferences and tastes (WDR, 2008).

Various socioeconomic characteristics, physical infrastructure, institutional development plans and policy matters influence fruit marketing system. At micro-level farmer's education, family structure, household economy, employment status, food sufficiency, food habits and his access to information, roads and market centers influence farmer's production and marketing options (Gunawan, 1997; Yamamoto, 1997; Pokhrel, 2005; Norton, 2004; WRD, 2008). For example, economically poor farmers with large families and poor access to information, infrastructure and markets are subject to debt-ties, powerless in price bargain, social subordination, relied on intermediaries and have no influence on market prices (Khushk & Smith, 1996; Demain, 1996; APO, 1997; Mohtar, 1997; Khushk, 2001).

Fruits are perishable in nature and require careful handling, developed transportation, packaging, cold stores, refrigerated transport and rapid delivery to consumers in order to reduce physical and nutritional losses and maintain quality (Gunawan, 1997; WDR, 2008). Due to weak infrastructure, about 25 to 40 percent of fruit products in Pakistan are spoiled as post-harvest losses (Aujla et al., 2007). Pradhan (1998) and Shrestha & Shrestha (2000) have found that the farmers near to roads or assembly markets fetch high farm-gate prices and high marketing margins as the transportation of inputs and outputs accounts for a considerable amount of cost. At the same time farmers near to roads and market centers have better access to education, knowledge, technology, price information, extension services and are powerful in price bargain (NPC, 2003b).

At meso-level, institutional settings like Government and Non-Governmental Organizations (NGOs), Community-Based Organizations (CBOs), Farmers' cooperatives, business associations and marketing groups influence marketing system. Efficient markets alone do not promote equitable outcomes, so smallholders may need to build their bargaining power through their producer organizations, assisted by public policy (WDR, 2008). Hill and Bender (1993) point out that there will be a dramatic improvement in efficiency, equity and growth if the government provides the appropriate economic and regulatory environment. These institutions can help to improve farmer's bargaining power, solving production and marketing problems, competence of market participants even in weak socioeconomic and infrastructure settings and market and policy failure. They can also assist state organizations in policy formulation (Demain, 1996; Tsukano, 1997; Lee, 1997; Shin, 2001; Aujla et al. 2007). As reported by Khushk and Smith (1996), Aujla and Jagirani (2002) and Khushk et al. (2006), the major problems in horticulture marketing in Pakistan are inter- and intra-seasonal price fluctuations caused by dis-equilibrium supply and demand at peak production seasons. Role of state agencies affect production and marketing technology, information, inputs and credit availability (Ellis, 1996; Pokhrel, 2005).

Agriculture marketing policies are state interventions in market economy concerned with the transfer of inputs to farms and farm products to consumers. The main objectives of agriculture marketing policies include safeguarding farmer's price, stabilizing consumer's price, reducing marketing costs and margins and improvement of product quality and standard (Ellis, 1996; Norton, 2004). Such instruments influence cost of production, transportation, marketing on one hand, and the income and survival of producers and market functionaries on the other hand. Various state policy matters in Asian states are viewed biased towards agriculture sector in favor of non-agriculture sectors and agriculture pricing policies are biased in favor of urban population resulting low prices for the farmers. State policies can exert negative impacts on marketing operation when they are biased, poorly implemented and lack effective instruments (Demaine, 1994; Partap, 1999; Norton, 2004). State can intervene in market to promote market information system, support services and facilities, to regulate market operation and commodity price through various taxes, quotas, bans, tariffs, subsidies, incentives, levies, commissions and donations.


Farming Experience


HH Size


Land-Holding Size

Family Labor

Farm / Non farm Income

Women Labor


Information (TV,Radio, Phone)

Land Tenure (contract/Non-contract)


Macro-Level Factors

Road Distance

Distance to market

Information Flow

Credit Access

Extension Services

Education & Health facility

Electricity Flow

Soil Quality

Credit Policy

Price (Floor & Ceiling) Policy

Subsidy Policy

Tax Policy

Meso-Level Factors

Micro-Level Factors



Energy / Electricity





Production Function (Profit Maximize / Cost Minimize)

Controlled Environment + Technology + Budget

Experimental output

Technical Efficiency

Marketing System Components

Physical Transmission (Inputs)

Price (Input & Output) signal transmission through Information

Production (Demand & Supply Signals)



Storage Facilities

Post-harvest & Market Losses

Profit Margins & Economic Efficiency

Actual Output