Accepted Manuscript Technical Efficiency of Potato and Dairy Farming in Mountainous Kazbegi District, Georgia R Shavgulidze, D Bedoshvili, J Aurbacher PII: S1512-1887(17)30016-7 DOI: 10.1016/j.aasci.2016.11.002 Reference: AASCI 83 To appear in: Annals of Agrarian Sciences Received Date: September 2016 Accepted Date: 29 November 2016 Please cite this article as: R Shavgulidze, D Bedoshvili, J Aurbacher, Technical Efficiency of Potato and Dairy Farming in Mountainous Kazbegi District, Georgia, Annals of Agrarian Sciences (2017), doi: 10.1016/j.aasci.2016.11.002 This is a PDF file of an unedited manuscript that has been accepted for publication As a service to our customers we are providing this early version of the manuscript The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain ACCEPTED MANUSCRIPT Annals of Agrarian Science vol 15, no.1, 2017 Technical Efficiency of Potato and Dairy Farming in Mountainous Kazbegi District, Georgia R Shavgulidzea, D Bedoshvilia, J Aurbacherb Agricultural University of Georgia, I Lomouri Institute of Crop Sciences 240, David Aghmashenebeli Alley, Tbilisi 0159, Georgia b Justus Liebig University Giessen, Institute of Farm and Agribusiness Management 3, Senckenbergstraße, Giessen, 35390, Germany Received: 05 September 2016; Accepted: 29 November 2016 Corresponding author: David Bedoshvili SC d.bedoshvili@agruni.edu.ge RI PT a ABSTRACT M AN U The study employs a stochastic frontier analysis to assess technical efficiency of potato and cheese production and determine socio-economic factors that influence farmers’ technical efficiency levels in mountainous Kazbegi district of Georgia The study found improved feeding to be inversely related with technical inefficiency in cheese production In potato production, the analysis revealed implementation of the plant protection measures and use of quality seeds to be significant aspects that influence technical efficiency of potato growers Introduction TE D Keywords: potato, productivity, commercialization, livestock, household - AC C EP Potato and dairy farming is concentrated among small-scale, diversified, subsistence farmers, and represent major livelihood and source of food security for rural households in mountainous Kazbegi district These production systems are characterized by low productivity and limited commercialization Potato and dairy producers have poor linkages in upstream markets, limited access to extension and other services and infrastructure There is a high consumer demand for potato and cheese produced in the Kazbegi district in major urban areas of the country, where these products are sold at a premium However, most of the output is self-consumed by farming households and extended family members due to small output and a limited success to establish long-term downstream linkages in major markets, and only surplus is marketed either for cash or through in-kind exchange The objective of the study is to identify gaps in efficiency and potentials in the production processes and associate them with socioeconomic and technical factors This allows deriving policy and extension recommendations for improved income generation at the farm household level Data and Analytical Methods To measure and explain the efficiency of the two most prominent production processes in the district, the stochastic frontier analysis has been used Data has been gathered by an empirical primary data survey Data Source The study is based on 82 potato and 151 livestock farmers’ 2014 cross-sectional production data The information was collected through a survey of farmers in 10 villages of Kazbegi district The survey was carried out in summer 2015 and was based on respondent-driven sampling ACCEPTED MANUSCRIPT State of the Art of Stochastic Frontier Modelling M AN U SC RI PT Stochastic frontier models have been used recently to measure inefficiency in agricultural production processes There are different approaches like one-stage and two-stage methods In the two-stage approach the first stage considers estimation of a stochastic frontier equation and decomposition of regression residuals, while the second stage foresees regression of estimated inefficiencies on exogenous variables to explain inefficiency In the one-stage approach, the parameters of stochastic frontier and inefficiency model are estimated simultaneously in a maximum likelihood estimation (MLE) procedure The one-stage approach is more useful since it avoids statistical problems encountered during estimation with the two-stage method [1, 2] Technical efficiency analysis has been found to be useful in identification of factors that contribute in inefficiency of different production systems E.g technical efficiency analysis of paddy farmers in India determined farmer age and schooling to be significant factors that impact technical efficiency levels among growers [1] A study of technical efficiency in maize production in Zambia found that age of farmers, use of certified hybrid seed, access to loans, extension advice and off-farm income to impact technical efficiency levels [3] The research of technical efficiency of Wisconsin dairy farms revealed farm intensification, the level of contribution of family labour in the farm activities, the use of total mixed ration feeding system and administration of bovine somatotropin hormone to lactation cows to be positively related with farm technical efficiency [4] Cheese and Potato Stochastic Frontier Models The study uses Cobb-Douglas production functional form Stochastic production frontiers are jointly estimated with technical inefficiency models in a single stage estimation procedure by the maximum likelihood both for cheese and potato production.1 TE D Cheese Model Stochastic frontier production model ln(outputit) = β0 + β1 ln(lactationit) + β2 ln(hayit) + β3 ln(herdit) + Vit - Uit Inefficiency model Uit = δ0 + δ1(branit) + Wit AC C EP • ln(outputit) is natural logarithm of annual output of cheese of farmer i in tth period measured in kilograms; • ln(lactationit) is natural logarithm of the length of lactation period in months of cattle of farmer i in tth period; • ln(hayit) is the cattle hay feeding rate per season per head by farmer i in tth period measured in kg; • ln(herdit) is the number of dairy cattle per farmer i in tth period; • branit is a dummy variable and it=1, if a household feeds the cattle with bran as a supplementary feed to hay, and it = 0, if household does not feed cattle with a supplementary feed Potato Model Stochastic frontier production model ln(outputit) = β0 + β1 ln(areait) + Vit - Uit Inefficiency model Uit = δ0 + δ1(ppmeasuresit)+ δ2(seedit) + Wit Different variables were tested with an expectation of significance and explanatory power of technical inefficiency, and only those were left that have ensured good statistical properties of the models ACCEPTED MANUSCRIPT RI PT • ln(outputit) is natural logarithm of potato output of farmer i in tth period measured in kilograms; • ln(areait) is natural logarithm of the area of land planted with potatoes by farmer i in tth period measured in hectares; • ppmeasuresit is the dummy variable, and it = 1, if farmer implements measures against diseases and pests/ insects, and it = 0, if a grower does not implement plant protection measures; • seedit is a dummy variable, and it = 1, if a grower uses proper quality seeds for planting, and it = 0, if a grower does not use quality seeds In both models, Vit is an error term that captures the effects of unspecified explanatory variable and is independent of Uit, while Uit accounts for technical inefficiency in production and it ranges between zero and Results SC Descriptive Results AC C EP TE D M AN U On average, the rural households own heads of cattle Original breed characteristics of livestock have been lost due to poor selection, breeding and management practices The artificial insemination service is not available in the district, and breeding of cattle is carried out naturally, with bulls Milk production is characterized with significant seasonality, while the average lactation period is about 7.3 months The peak period of milk output is from May through September, when cattle is grazing For the majority of farmers, the average daily milking rate per head of cattle during the grazing period is 8.8 liters From October through April feed availability is limited, the daily milking rate per head of cattle shrinks to 4-5 liters and the milk output declines substantially During this period main feed of cattle is hay Also, growers use a part of the poor quality potato harvest and bran as supplementary feed Due to limited affordability, the cattle are fed with bran mostly just before and after calving Average daily feeding rate with bran is 2.2 kg According to surveyed farmers neither bran nor potato possesses sufficient nutritional value Farmers differentiate between so called “lowland” and “highland” hay.2 Based on surveyed farmer feedback hay from “highlands” is more nutritious as compared to that from “lowlands” Average feeding rate of the cattle with hay per season is 942.6 kg/head Livestock is kept at barns in proximity to farmer living premises Barns are cleaned on a daily basis Removed manure is piled in the yards and kept in the open Manure is used by farmers for soil fertilization in potato and vegetable production Farmers remove manure from the yards either by some portions on a regular basis, or accumulate first and then remove at once to apply all of it to potato plots prior to ploughing During the grazing period, cattle is taken to the pastures either by owners or community shepherds for a certain fee; livestock owners perform shepherd services based on a schedule agreed among fellow farmers Duration of a cattle owner labor input as a community shepherd depends on the number of cattle owned by a farmer; the more cattle is owned by the farmer, the more hours he/she works as a community shepherd Cattle is taken to the pastures in the morning and returned back in the evening Water is available in sufficient volumes at the pastures Farmers start the preparation of winter feed in August The average area of the farmer-owned meadows, where grass for feeding is grown, is 4,626 square meters The average output of hay per 0.25 is about 6-8 hay stacks Grass cutting is carried out manually with scythe; also, farmers cut grass on community meadows Grass cutting is very labor intensive and requires specific skills Due to limited interest and high rate of migration of the younger generation from rural settlements of the district, skilled labor is disappearing and large areas of meadows, especially in “highlands”, remain idle Farmers haul cut grass either by trucks or draft animals Farmer with off-farm income and relatively larger operations also procure hay The epizootic situation in the district is more favorable compared to the most of the mainland of Georgia due to its geographic remoteness The state implements a mandatory free of charge vaccination program against certain diseases, and all local farmers benefit from it Moreover, the main source of advice for farmers on diseases and in general livestock management practices is the local veterinary service Several retail operators also provide the most demanded pharmaceuticals in the district The cattle are milked twice a day in the barns, in the morning and in the evening Farmers There is no specific definition of highlands and lowlands In general areas in proximity to farmer residence are considered as lowlands, while those in remote mountains - highlands ACCEPTED MANUSCRIPT produce different types of dairy products Milk is processed into different types of products in the kitchen Processing activities takes place every day With the exception of cheese, most of the other dairy products either are self-consumed or shared with extended family members outside of the district Cheese represents the main marketable commodity due to relative storability and high price; cheese is the most valuable item for an exchange On average, it requires 9.3 liters of milk to make kg of cheese Another main ingredient for cheese making is an enzyme, which is imported The cheese ripening period largely depends on the demand for cheese and availability of cash-paying customers (table 1) mea n stdev heads 82 2.9 2.6 months 82 7.3 1.6 l/head/day 82 8.8 2.96 64 2.2 1.2 kg/head/d ay kg/head/ season 82 m2/HH 61 l/kg 82 mi n max 20 11 SC Cattle ownership Lactation period Milking Rate Bran feeding rate Hay feeding rate Area of meadows Milk to cheese conversion rate Obs unit 60 942 462 3,928 80 9.3 1.03 5 M AN U object RI PT Table Dairy Descriptive Statistics 5,33 20 2,50 20,0 00 10 Source: 2015 Field Survey, estimates AC C EP TE D The average area of the potato plots is 0.05 ha, and it is the most widely produced crop in the district With the exception of ploughing, all production activities are carried out manually Ploughing is done either by small-scale machinery or by draft animals; 75 percent of the growers have used small-scale machinery for ploughing It is a common practice for the potato growers to use a part of their own harvest as seed for 3-5 years, and afterwards to exchange seed among each other There are not many growers who source seeds outside of the district, and only farmers from surveyed growers have had the knowledge about the origin and characteristics of the varieties used Growers use livestock manure as a fertilizer In most cases the source of manure is own livestock; 32 percent of the surveyed growers obtain additional manure from fellow farmers either free of charge, through in-kind exchange or for cash The manure application average rate is 11.9 kg/m2 Use of chemical fertilizers is very rare Weed control in general is implemented manually or with draft animals; only 11 percent of surveyed growers have used herbicides for weed control In general potato is not irrigated in the Kazbegi district Pesticides are rarely used to control diseases and pests in potato despite reported increasing trend in the occurrences There is a limited grower awareness and knowledge of the diseases and pests, and respective plant protection measures; only 14 percent of surveyed growers have applied chemical measures to control diseases and pests For the majority of the growers, the main source of advice on plant protection measures are relatives and fellow farmers, and only 10 percent of surveyed growers have referred for advice to local extension service and input supply shops in major urban areas In addition to the biotic stresses, major production impending factors have been heavy rains and drought during the critical stages of potato plant development, having negative impact on the quality and volume of the output Potato yields are low and their average yield is about 1.6 kg/m2 Harvested potato is sorted directly in the field Potatoes are stored at underground storages at house premises The condition of the storage facilities allows growers to store their harvest through the end of spring The majority of the growers self-consume potatoes and distribute them among the extended family residing outside of the district (table 2) ACCEPTED MANUSCRIPT Table Potato Descriptive Statistics M AN U SC RI PT Object Unit Obs mean stdev Min max Area sq.m/HH 151 516.9 790.9 32 8,400 Machinery y=1; use for 151 75.5% n=0 ploughing Procurement y=1; 151 32% of manure n=0 Manure application kg/m2 151 11.9 10.96 0.95 80 rate Herbicide y=1; 151 11% application n=0 Disease and y=1; pest control 151 14% n=0 measures Source of y=1; 97 10% advice n=0 Yield kg/m 151 1.6 1.2 0.02 Source: 2015 Field Survey, estimates The consumer demand for potato and cheese produced in the Kazbegi district is high in the major urban settlements, where these products are sold for premium prices However, the local producers have limited success to establish long-term downstream linkages in major markets and are largely dependent on “visiting traders”, who travel on a regular basis to the villages of the Kazbegi district by their minibuses AC C EP TE D Potatoes and cheese are sold either for cash or in-kind The latter is a common practice in the district, and farmer produce is exchanged for household items and different food products such as flour, fruits, vegetables and sweets, etc For in-kind transactions, the price of agriculture production is about the half of a cash sales price of an equivalent product Farmers mainly exchange potatoes, and in general, are very reluctant to sell cheese through in-kind transaction Although, farmers lose margin during in-kind exchange, the business relation with visiting traders still is mutually beneficial It is common that traders supply household items and food products to growers on a request basis and on pre-agreed terms of transaction; such arrangements allow growers for saving time and money on transportation to regional or urban centers outside of the region to buy different needed household items and food products In contrast to potato and cheese, calves are sold only for cash, and to specialized buyers who make procurement throughout the country and either keep acquired cattle for further fattening or deliver them to slaughterhouses There is a clear division of the labor both in dairy and potato farming based on gender Tasks requiring physical strength such as manure application, ploughing with draft animal, shepherding, grass cutting/ hay preparation, etc are performed by males, while other tasks are performed by females or by both of them Efficiency Analysis Maximum Likelihood Estimates The Maximum Likelihood Estimates (MLEs) of determinants of technical efficiency of cheese and potato producers and significance levels3 are provided in Tables and 2, respectively The source of critical values of inputs in stochastic and inefficiency models are z-tables ACCEPTED MANUSCRIPT t-stat Variable Parameter Coefficient Stochastic Frontier Production Model Intercept β0 7.01 7.06*** ln(lactationit) β1 1.58 11.23*** ln(hayit) β2 -0.71 -4.97*** Intercept Bran sigma squared gamma log (likelihood) β3 1.005 17.38*** Inefficiency Model -4.90 2.80*** δ0 δ1 -9.025 -1.48* Variance Parameter σ2 2.92 1.76 γ 0.98 69.5*** Λ 38.13*** *** p < 1%, ** p < 5%, * p < 10% SC Ln(herdit) RI PT Table Cheese Model MLEs M AN U Table Potato Models MLEs EP TE D Variable Parameter Coefficient t-stat Stochastic Frontier Production Model Intercept β0 2.67 6.62*** ln(areait) β1 0.70 11.06*** Inefficiency Model Intercept δ0 -3.39 -1.34* Ppmeasures δ1 -10.48 -1.47* Seed δ2 -3.52 -1.51* Variance Parameter sigma squared σ2 4.69 2.25 gamma γ 0.95 34.23*** log (likelihood) Λ 41.84*** *** p < 1%, ** p < 5%, * p < 10% AC C Testing Hypothesis on appropriateness of the models Both, the first and the second null hypothesis that (1) technical efficiency effects are absent in Cheese and Potato Models, and (2) that these inefficiency effects in Cheese and Potato Models are not stochastic are rejected at percent significance levels, respectively Results on the Cheese Production Efficiency The inputs in the stochastic frontier such as cattle lactation period, hay feeding rate per head of dairy cattle per season, and herd size are significant at a one percent level, and the signs are as expected The length of lactation period is positively associated with the cheese output Lactation period is restricted due to unfavorable weather conditions and the lack of quality feed when there is no natural grazing The cattle are fed mostly with hay during off-season, and hay feeding rate In the first null hypothesis estimates of likelihood ratio values (λ) of Cheese and Potato Models test statistics are 38.13 (df=3) and 41.1 (df=4), respectively, and those in the second null hypothesis tests are 28.08 (df=2) and 29.84 (df=2), accordingly In these tests degrees of freedom (df) are the number of restrictions [5] ACCEPTED MANUSCRIPT is low, as well as its nutritious quality Number of dairy cattle is positively related with cheese output, and higher number of dairy cattle per farmer is associated with a larger dairy output The coefficient in the inefficiency model is significant at the 10 percent level The positive sign of cattle feeding with bran shows that improved feeding practices result in a larger output of cheese Bran is used as a supplementary to hay during off-season, while not all farmers can afford supplementary feeding of their cattle RI PT SC 45 40 35 30 25 20 15 10 0-0.1 M AN U frequency Obtained technical efficiency estimates range between and 95 percent, and efficiency scores of more than 50 percent of farmers is in the range of 70 to 95 percent Average technical efficiency score is 81 percent with a 0.13 standard deviation (Figure 1) 0.4-0.5 0.5-0.6 0.6-0.7 0.7-0.8 0.8-0.9 0.9-1 technical efficiency score Fig Distribution of Technical Efficiency Scores, Cheese Production AC C EP TE D The estimate of the average technical efficiency score implies that cheese output can be increased by 23 percent with the use of same level of inputs and improving management practices Derived variance parameter (γ), 0.98, indicates that 98 percent of variation among cheese producers performance can be explained by technical inefficiency Partial elasticity coefficients of lactation period and herd size are elastic, and total 1.6 percent and 1.01 percent, respectively; while partial elasticity coefficient of hay feeding rate is inelastic and equals -0.71 The signs of lactation period and a herd size are positive, while that of hay feeding rate is negative Results show that one percent increase in the lactation period and herd size would lead to more than a proportional increase in the cheese output, and one percent increase in the hay feeding rate would results in less than a proportional decline in the cheese output The returns to scale coefficient, which is the sum of the partial elasticities, is 1.9, It indicates increasing returns to scale - more than proportional increase in cheese output by one percent increase in lactation period, herd size and a hay feeding rate Results on Potato Production Efficiency The input of the stochastic frontier model, area of land planted with potato, is significant at the one percent level and its sign is positive This shows that area of land planted with potato is positively related with potato output Also, this estimate jointly with distribution of yields and areas of potato fields points out on the extensive nature of potato production The estimated coefficients in the inefficiency model are significant at the 10 percent level and are negative, implying that implementation of plant protection measures and use of quality seeds are inversely related with inefficiency, and growers could improve efficiency by employing measures against diseases and pests, and using quality seeds Estimates of technical efficiency among potato growers varies between and 92 percent and this estimate of more than 50 percent of the surveyed potato growers are in the range of 50 to 80 percent The average technical efficiency level is 57 percent with standard deviation being equal to 0.22 (Figure 2) ACCEPTED MANUSCRIPT 45 40 35 RI PT frequency 30 25 20 15 10 SC technical efficiency score M AN U Fig Distribution of Technical Efficiency Scores, Potato Farming TE D The estimated average technical efficiency score indicates that there is a scope to increase potato output by 75 percent through employment of the same level of inputs and improved management practices Obtained variance parameter (γ) is 0.95 implying that 95 percent of variation in potato grower performance is due to technical inefficiency The partial elasticity estimate of the area of potato fields is 0.7 and is inelastic showing that one percent increase in the area of land planted with potato would result in less than one percent increase in the potato output In this model the returns to scale coefficient is the same as the partial elasticity estimate, and it indicates that there is a decreasing return to scale – increase in area of land planted with potato would lead to a less than proportional increase in output; obtained decreasing returns to scale could be attributed to inadequate management practices Discussion AC C EP The results show that high level of inefficiency was found in most of the farms for both commodities This confirms that agriculture of the Kazbegi district is largely represented by inefficient self-sufficiency farming, while commercial farms, which are based on modern efficient production systems and run by agricultural professionals, are very rare Some of the inefficiency might be explained by differing natural conditions like soil fertility, but its largest part could be attributed to the identified indicators The example of the potato farms shows, that inclusion of modern technologies like seeds and pesticides into the production system, can result in sharp increase of productivity of the other production factors such as land In the case of dairy production, improved feeding should lead to an increased output The elasticities to scale, which were identified for potatoes, point out that the given technology reaches its limitations and must be upgraded when increasing cultivated area (machinery, seeds, chemicals) For dairy production, the returns to scale are larger than one, which means that an increase of the production can be carried out with the given technology but availability of supplementary feeding must be improved Policy Implications As large amounts of inefficiency can be observed, policy makers are recommended to promote farmer education and agricultural extension to improve production and management practices and reduce inefficiencies Further, the development and implementation of less market distortive support measures could be promising to strengthen farmer linkages with input and output markets by provision of financial and technical support to the development of producer managed organizations, and facilitation and ACCEPTED MANUSCRIPT enhancement of public-private partnerships (PPP) The latter has proved to be effective during the recent years to improve agricultural producer access to production inputs and finances Increased government policy focus on economic development of mountainous districts provides a good momentum for agriculture development in Kazbegi district.5 The private sector has been risk averse, and therefore, the Government, through its direct support policy measures, should act as a catalyst that promotes private business activities in Kazbegi district, and link the Kazbegi producers to the major urban markets RI PT Conclusion M AN U SC The objective of the study was to estimate technical efficiency in cheese and potato production, and identify socio-economic factors that influence technical efficiency levels The study has estimated production frontiers jointly with technical inefficiency models by a maximum likelihood approach for both cheese and potato production Estimates of technical efficiency levels in cheese and potato production were 81 and 57 percent, respectively The results of the study revealed that availability of family labor input and the extent of commercialization of agriculture activities in cheese production, and implementation of proper management practices in potato production to be significant factors that influence efficiency Results of the study have important policy implications The study recommends policy makers design less market distortive support measures that would improve grower skills and capacities, and linkages in upstream and downstream markets Acknowledgements References TE D The research was carried out within the framework of the AMIES-II project, which was funded by the Volkswagen Foundation, which we gratefully acknowledge We further would like to thank our colleagues from the project, students of the Georgian Agricultural University and field personnel of Georgia National Statistics Office in Kazbegi district who have supported data collection in the field, and the farmers for participating in our survey Battese, G, E., Coelli, T, J., A Model for technical inefficiency effects in a stochastic frontier production function for Panel Data Empirical Economics, 20 (1995) 325-332 EP Barnes, A, P., Technical Efficiency Estimates of Scottish Agriculture: Evidence from the Dairy, Sheep and Cereals Sector Land Economy Working Paper, 14, 2006 Chiona, S., Kalinda, Th., Tembo, G., Stochastic Frontier Analysis of the Technical Efficiency of Smallholder Maize Farmers in Central Province, Zambia J of Agricultural Science 6, (2014) 10 AC C Solis, V, E, C., del Corral, J., Studying the impact of managerial activities on the technical efficiency of Wisconsin Dairy Farm In: Efficiency series Papers 2009, pp 1-9 Kodde, A, D., Palm, C, F., Wald criteria for jointly testing equality and inequality restrictions Econometrica 54 (1986) 1243-1248, 10 year tax holidays for legal entities and individuals registered and involved in economic activities in mountainous regions and increased social benefits to mountainous region residents (Source: Tax Code, The Law on Development of Mountain Regions, 2015) ...ACCEPTED MANUSCRIPT Annals of Agrarian Science vol 15, no.1, 2017 Technical Efficiency of Potato and Dairy Farming in Mountainous Kazbegi District, Georgia R Shavgulidzea, D Bedoshvilia,... demanded pharmaceuticals in the district The cattle are milked twice a day in the barns, in the morning and in the evening Farmers There is no specific definition of highlands and lowlands In. .. (MLEs) of determinants of technical efficiency of cheese and potato producers and significance levels3 are provided in Tables and 2, respectively The source of critical values of inputs in stochastic