Farm Size and Efficiency Comparative Profit Analysis

1. Introduction The largest and biggest contributor to Bangladesh’s economy is the agricultural sector. Seen often as the ‘unsung’ hero of our growth revolution, it still serves as the most significant industry in this country. In spite of its large contribution to employment, relatively speaking, its contribution to GNP falls short of expectations. Hence, as with other developing countries, the agriculture sector in Bangladesh can be classified as predominantly being ‘traditional’.This implies that it is mainly comprised of small households that suffer from technological stagnation, unskilled labor, and supply chain and market linkage problems. In spite of this, a modern agriculture sector does exists which enjoys substantial economies of scale. It is a well established fact that with increase in scale of output, efficiency increases up to an optimum point and this paper will put this to the test by investigating whether this holds true in the agricu lture sector as well. 2. Problem statementIdeally, government policy should be directed towards increasing the capacity of the traditional agriculture sector in order to transform it towards a more modern one. However, with a weak local government structure, lack of strategic planning and corruption, effective government support towards this sector cannot be expected. Even if policy makers could come up with viable policies to help rural farmers, it would be very costly as most of these rural farmer’s are too small and dispersed in remote areas. Therefore, any aggregate development would either fail in cost effectiveness or fail in implementations.This leads to the point that increase in farm size needs to take place in the grassroots level This paper therefore will look into the possibility of rural farmer’s joining together to ‘pool in’ their limited technology, land, labor and skills to achieve some form of economies of scale that can increase their eff iciency and lower the costs. Such a framework could be done in the style of a producer’s cooperative. An agriculture cooperative is â€Å"a type of cooperative that unites agricultural producers for production or other activities needed by the members (such as processing, marketing of output, or supply of the means of production). An increase in efficiency can be contributed to a variety of factors such as improvement in technology, more efficient use of land, increase in skilled labor etc. While individual quanitative analysis is beyond the scope of this paper, a single variable can be used to do a comparative analysis to see whether belonging to a cooperative, through which there would be an increase in farm size, actually lead to any increase in efficiency. In terms of the variable, net profit of individual farmer’s not belonging to cooperatives and that of cooperatives will be used.Hence, a hypothesis can be developed at this point: The hypothesis will therefore t est the probability that belonging to a ‘co-op’ leads to increase in profit holding output constant. 3. Literature Review There has been extensive work done farm size and efficiency, and agricultural cooperatives as an extension. Oduol and Hotta examined the effect of farm size on the productive efficiency of smallholder farms in a land–scarce Embu district of Kenya.In particular, the study seeks to establish the relationship between farmsize and three components of productive efficiency, namely technical, scale and allocative efficiency, â€Å" Farm Size and Productive Efficiency: Lessons from Smallholder Farms in Embu District, Kenya Judith Beatrice Auma ODUOL1*, Kazuhiko HOTTA2, Shoji SHINKAI2 and Masao TSUJI3† There has been extensive work done on cooperative movement in the agriculture sector by leading academics.However, a point to be noted at the very outset is that there is clear evidence of a lack of study in this field in the South Asia region. T his is not only surprising but also indicates a clear need for research and investigation of this topic with a special focus on country’s like Bangladesh as South Asia is a primary producer of agricultural products. Assistant Professor Richard J. Sexton, in his paper â€Å"Factors critical to the success or failure of emerging agricultural cooperatives† provides a powerful insight into the strength and limitations of the cooperative movement in general.He argues that a solid foundation in supply chain and market linkage is critical if agricultural cooperatives are to survive. â€Å"Agricultural cooperatives and markets in developing countries† by ANSCHEL, K. R. ; BRANNON, R. H. ; SMITH, E. D. treats the matter more specifically in context of developing countries. In his study, it was found that belonging to cooperative movement gives farmers’ a form of ‘institutional’ support to carry out its production and marketing.Furthermore, a paper titl ed â€Å"Revitalizing Market-Oriented Agricultural Cooperatives in Ethiopia† conducted in cooperation with USAID’s Cooperative Development Program by Tesfaye Assefa provides insightful analysis on a comparative study done on a developing, agriculture developing country similar to Bangladesh. This study sheds light on the fact that developing countries are particularly in need of farmer’s receiving certain technical support in order to reduce their costs. Economic analysis on this issue has been dealt with fairly in the text â€Å"The economic theory of agrarian institutions†, Bardhan, P.K. (eds. ). – Oxford (United Kingdom): Oxford University Press, 1991. Finally, the future prospects and potential of the cooperative movement has been addressed in the paper â€Å"Future Roles for Agricultural Cooperatives† by Peter Helmberger where he argued that agricultural cooperatives will take on a larger role in the coming years with the rise in linkag e with large food retailers. A paper titled â€Å"AGRICULTURAL CO-OPERATIVES: ROLE IN FOOD SECURITY AND RURAL DEVELOPMENT† investigated the link between the need for food security and the development of agricultural co-operatives.This is a highly important point as food security is seen as one of the major threats to the 21st century. The role of cooperatives into only being a profit making structure, but also a socially beneficial function in terms of addressing the question of food security should not be taken lightly. This is especially true in a country like Bangladesh where the current government is aggressively trying to address the problem of food security for one of the most densely populated countries.In terms of classifying the agriculture sector in a more academic sphere of economics, it can be deduced that a developing country’s agriculture sector is divided into the traditional agriculture sector comprising of unskilled, self sufficient rural households an d the modern agriculture sector consisting of a capital intensive, efficient, large scale producer. T. W. Schultz, in his paper highlighted the significance of transforming these traditional sectors into a more modern agriculture sectors and the possible consequences of these in the development process, Schultz T. W (1964),Transforming Traditional Agriculture, Yale University Press, New Haven. One of the underlying reasons for a larger farming structure in the form of cooperatives is the technological innovation that comes along with it. Bachman, K. L and Christensen highlighted the need to remove technological stagnation from the traditional agriculture sector in order to achieve long term development, Bachman, K. L and Christensen, R. P (1967), ‘The Economics of Farm Size’, in Southworth, H. M and Johnston, B. F. (eds), Agricultural Development and Economic Growth, Cornell University Press, Ithaca.Finally, Berry and Cline investigated the correlation in productivity a nd farming structure and found there to be a positive trend between increased output and productivity levels, Berry, D. A. and Cline, W. R. (1979), Agrarian Structure and Productivity in Developing Countries, John Hopkins University Press, Baltimore. This study provided a case in point about the possible role of cooperatives in making the traditional agriculture sector much more productive. 4. Study methodology Secondary data from the available records of Ferdous Biotech Pvt. Ltd, an agro-based company based in Gazipur has been used to compile these statistics.The data has been derived from potato farmers that the company employs in the northern region of Bangladesh. Regional variations have been held constant while similar output levels have been selected between farmers belonging to ‘co-ops’ and not belonging to them so that a single variable (profit) can be tested. Further assumptions have been made in terms of seasonal variability being minimum and fertility showing unremarkable changes. The data was tabulated and statistic measures such as central tendencies, bar charts and hypothesis testing was undertaking to infer the data.SPSS software was used for most of the data analysis. It should be noted out that some of the data was filtered out due to create an appropriate sample. 5. Descriptive statistical analysis As seen in the frequencydistribution table that in each corresponding category of data with holding output constant, the farmers belonging to co ops show a signficinant rise in profits as opposed to those not belonging to co ops. While there are certain variations, there are not signficant enough to be inferred as statistically inconsistent. A clear trend analysis of the data can be seen from the chart seen above titlted Profitibality Study.For most data, belonging to to co-ops as signified by the blue bars shows a higher trend then the red bars indiciating profits by farmers not belonging to co ops. The measures of central tendency fo r these data show a significant variation. The middle values for each profit level stands at 75650 and 73100 respectively with the highest frequency for each category (with co op and without co op) standing at 60050 and 42400 as well. The average profit shown by farmers belonging to co ops stands at 81590 while those opting out of co opt standing at 79986.These values clearly shows that belonging to a co op does lead to better off profits as seen by the higher central tendency values in each category. This can be extended to be proved through the lowest values and highest values also. The lowest value for farmers in co ops stand at 14000 while those for without co ops are at 12500. Corresponding higher values are at 160300 and 159200, with the range standing at 146300 and 73100 for co-ops and without co-ops respectively. In terms of the quartiles, Q1 stood at 42075 and 41450 for co-ops and without co-ops while Q3 stood at 121925 and 118050 respectively.It is worth noting at this poi nt that from central tendencies along, it can be inferred that consistently, farmers belonging to a larger farm size in terms of co-operatives show a higher profit levels than those not belonging to such co-operatives. However, there is significant dispersion in the data that can be seen through the standard deviation for each data set standing at 46106. 9 and 45687. 8 respectively. Dispersion between the data as used for the development of the confidence interval, the standard deviation here stands at 8636. 9.In terms of the confidence level the range is at -2556. 076 to 5763. 74 As stated in the problem statement the hypothesis will there test the probability that belonging to ‘co-ops’ leading to increase in profit holding output constant. To analyze this, a hypothesis test was undertaken using SPSS and the results are presented below: Hypothesis T-Test One-Sample Statistics NMeanStd. DeviationStd. Error Mean Profits With Co-ops3081590. 166746106. 984718417. 94519 Pro fits Without Co-ops3079986. 333345687. 855448341. 42301 One-Sample Test Test Value = 0 tdfSig. 2-tailed)Mean Difference Profits With Co-ops9. 69229. 00081590. 16667 Profits Without Co-ops9. 58929. 00079986. 33333 One-Sample Test Test Value = 0 95% Confidence Interval of the Difference LowerUpper Profits With Co-ops64373. 535698806. 7977 Profits Without Co-ops62926. 207797046. 4589 It is clear from the above results that with the mean for co-ops consistently being higher than that of profits of farmers not belonging to co-ops that the hypothesis cannot be rejected. Therefore, belonging to co-ops does tend to show a higher profitability than in absence of it. . Summary The test results clearly demonstrate that belonging to co ops show a significant increase in profits. While there are certain variations in the data, these could be due to miscalculations due to large number of sample data or through farmer’s misinterpretation of market calculations as well. There are quite a few justifications for the results that have been shown. Clearly belonging to such co ops increases the technical capacity of the farmers to achieve lower costs and higher revenues leading to increase in profits.Through marketing economies of scale, they are able to sell at a better rate while their technical economies such as specialization and indivisibility of capital allows them to achieve the lower costs as stated above. In conclusion the data clearly supports the hypothesis that belonging to co-ops is a much better option for farmers then not doing so. This leaves us with the question – in terms of farm size and efficiency, is there a role for the cooperative movement? While the tests results clearly show hat belonging to co-operatives leads to an increase in profit, this point comes with strong qualifications because a profit function in itself cannot be used to make absolute inferences regarding efficiency. This is especially true due to the fact that most of the agraria n households belong to the traditional sector and as discussed earlier, they suffer from certain problems such as technological stagnation, unskilled labor and lack of capital. These serve as a major impediment towards achieving efficiency.While belonging to cooperatives may bring in certain economies of scale which may mitigate some of these problems, the underlying problem of transforming the traditional agricultural sector a modern one would need much more than just formation of co-operatives. It requires extensive long term technological and financial investment by the government and the non government sector. There is no doubting the role of agriculture in the economy of Bangladesh, but with regards to the extent to which it can contribute to an ever modernizing economy is up for debate.Appendix I – Output (Kgs) Profit (Co-ops)Profit (Without Co-ops) 2001400012500 2501750016300 3001880017500 3502320021300 4002780026800 4503210031050 5003750038600 5504360042400 6004820042 400 6505340052100 7005960060050 7506005062300 8006005064700 8506890066300 9007350070000 9507780076200 10008340084000 10508900087060 11009750096000 115010010598030 1200110500105500 1250115600110300 1300120300117200 1350126800120600 1400130100125200 1450141500139300 1500147300148200 1550152400151300 1600156900157200 1650160300159200