AAMP Training Materials
Module 1.1: Production Cost and Farm Productivity
Steven Haggblade (MSU)
blade@msu.edu
Module Contents
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Objectives
Background material
Exercises
Conclusions
Objectives
• Understand what determines the price level of a good
• Compute plot-level production costs and compare
between farmers
• Explore what affects farm productivity using estimate
yield functions
• Examine policy implications (for stimulating agricultural
growth & government procurement pricing)
Background Material
• Review determinants of price
• What factors affect the cost of supplying maize to the
market?
• Why does productivity vary across farms?
Determinants of price
Determinants of price (contd.)
What affects the cost of supplying maize to
the market?
• Farm-level cost of production
• Transport costs (distance to market)
• Marketing costs (handling, storage, profit, risk premium)
Why does productivity vary…
• Among farmers?
• Across plots?
Q: Is this a good farmer or
a bad farmer?
Good farmer? Bad farmer?
Good farmer? Bad farmer?
Good farmer? Bad farmer?
Where are the good farmers and bad farmers on
this supply curve?
Exercise 1: Compute Plot-level Cost
• Open “Production Cost and Price Variability.xls”
• Read the red NOTES tab to familiarize yourself with the
contents of the workbook
• Click on the [data1 – plots] tab and explore the data
– There are 200 farmers represented
• Focus on yield
– Why is yield so variable?
Exercise 1: Compute Plot-level Cost contd.
• Click on the [ex 1 – cost of production] tab
– Values in yellow refer to [data1 – plot]
– Values in green are results
• What do you notice?
– On average, do farmers have positive revenue?
– What are the major costs?
• Compare farm productivity between farms
– Select a farmer from [data1 – plot]
– Link the yellow highlighted values to a farm in [data1 – plot]
• How does this compare to the mean?
– Repeat for several different farms
• How do they compare to each other?
Exercise 1: Results
• Farm productivity varies greatly
• Some farmers in the sample receive negative revenue
from maize
• Policy should focus on increasing farmer productivity
– Raises farmers’ profits
– Lowers consumer costs
Exercise 2: Cost Histogram & Supply Curve
• Examine the Cost Histogram in [ex 2 – cost groups]
– What do you see?
• Can you make generalizations about “smallholder
production costs” based on this histogram?
Exercise 2: Cost Histogram & Supply Curve
• Next, examine columns Z, AA & AB in [data4 – cost per
ton]
• Copy column AB (tot_cost_ton) from [data4 – cost per
ton] and paste it into [ex 2 – cost per ton]
• Sort the column in ascending order (small values to large
values)
• Select the entire column and make a line chart
– What does this chart show?
– Compare with the chart in slide 11 of this presentation
– If you were asked to choose a “fair maize price” based on this
chart, what price would you choose?
Exercise 2: Results
• Individual farmers’ cost of production varies greatly
• Setting a price floor based on production costs has
several problems
– Who decides what’s “fair”? Where do you draw the line?
– Set the price too high  government buys large volumes from
inefficient farmers
– High price risks pushing out private traders & hurting consumers
• Policy that focuses on lowering farmers’ cost of
production evades these problems
Exercise 3: Estimate Plot-level Yield Function
• What are the factors affecting plot-level yield?
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Seed Type (high yielding varieties vs. local)
Fertilizer application (kg/ha)
Time of planting (number of days after November 1)
Tillage system (hand hoe, conservation farming basins, plowing,
ripper)
– Number of years experience with conservation farming
– Plot size
– Gender
• Yield = a + b Fert + c HYV + d Till + …
– Yield is a function of Fertilizer, seed type, tillage type etc....
Exercise 3: Regression Equation
• Open a new sheet in Excel
• Use the Regression Tool to estimate the yield function
– See notes in this presentation, as well as the NOTES tab in the
Excel workbook for tips
• Examine the coefficients
– Which variables have the most impact on maize yield?
– Are there any surprises?
• How can this information be used in agricultural policy?
– Research?
– Extension?
Exercise 3: Interpreting Regression Coefficients
Exercise 3: Interpreting Regression Coefficients
Exercise 3: Results
• High yielding seed varieties, planting basins, and
fertilizer have a positive impact
– Which has the biggest impact?
– Which is cost effective? Look at the coefficient on fertilizer… is
that a big enough increase in yield to justify the cost?
• The planting date variable has a strong negative impact.
– Highlights the importance of timeliness in agriculture.
– What does this mean for agricultural extension?
Conclusions: empirical
• Cost of production differs across farmers and plots
• Efficient farmers produce at lowest cost
Conclusions: policy
• Raising farm productivity  higher farmer profits and
lower costs to consumers
• Key public investments for lowering farmers’ cost of
production
– Agricultural research (breeding, agronomy)
– Extension (improves agronomic and management practices)
– Infrastructure improvements (lowers input cost prices)
• If government sets procurement prices…
– High price  large volumes procured. Purchases made from inefficient
farmers
– Low price  lower volumes procured. Purchases made only
from efficient farmers
References
• Chirwa, E. 2007. Sources of Technical Efficiency among
Smallholder Maize Farmers in Southern Malawi. AERC
Research Paper 172. Nairobi: African Economic Research
Consortium.