International Journal of Management and Social Sciences Research (IJMSSR)
Volume 2, No. 8, August 2013
Illustrative Optimal Portfolio Selection for Agroforestry
Crops: A Linear Programming Approach
Zira, B.D., Department of Forestry and Wildlife, University of Maiduguri, Nigria
Ghide, A.A, Department of Agricultural Economics, University of Maiduguri, Nigeria
ABSTRACT
Discussion on agroforestry investment business often
appears difficult. The difficulty seems to lie in the absence
of coherent theory of portfolio selection information per
se, as well as lack of clarity on the potentials of linear
programming methods. As a result, we focus on investment
combinations and their mathematical programming
solution. This paper describes some structures in the
design of linear programming for the portfolio selection of
a hypothetical Danquah Agroforestry Farms (DAF). On
one hand, agroforestry farm owners are responsible for
clearly defining their forms of management constraints
and the projected annual returns on permissible
investments. The optimal results of subsequent fictitious
DAP portfolio selection problem confirmed the reliability
of sufficiently high rate of return of investments; Beans
(19%), Maize (25%), poultry (19.4%), and fuelwood
(13.8%) to justify the practice of agroforestry.
Keywords:
Optimal portfolio selection, Agroforestry, linear
programming approach.
INTRODUCTION
The increasing importance and profitability of agroforestry
system necessitate the need for a change in its present day
crop selection techniques, crops planning methods and
financial procedures. Agroforestry, as a means requires
various inputs such as land, labour, materials, capital and
management. In consequence, Zira et al., (2013) suggested
the application of business method and technical forestry
principles (into agroforestry practices) to enhance profit
maximization; the central assumption of agroforestry.
Optimal crop and livestock portfolio for agroforestry
farms via linear programming can show the combinations’
attractiveness based on ratings of such factors like market
growth rate, market size, profit margin, competitive
intensity, and scale welfare economics of agroforestry
productions. Very little if anything at all, has been done
about agroforestry crop portfolio selection. The purpose of
this paper is to demonstrate the potential of linear
i-Xplore International Research Journal Consortium
ISSN: 2319-4421 139
programming in the portfolio selection of agroforestry
crops and livestock.
METHODOLOGY
An application of linear programming for evaluating
primary crops and livestock for agroforestry farm is
described. The analysis incorporates human activity
patterns and the naira invested on agroforestry farms’ crop
and livestock combinations. The objective function for the
problem must be optimization of expected return.
Constraints must take the form of restrictions on the type
of permissible investments.
Maximum crop selection problem can be formulated and
solved using a variety of mathematical programming
techniques. However, if in a particular portfolio selection
problem, it is possible to formulate a linear objective
function and linear constraints, then linear programming
can be used to solve the problem (Anderson, et al., 1983)
PROBLEM SET
To illustrate the best selection for agroforestry crops
combinations, consider a fictitious Danquah Agroforestry
Farms (DAF) located in Michika, in Adamawa State. The
farm has just obtained N1000000.00 loan from an
agricultural bank, and now is looking for investment
opportunities with the fund. Assumed the farm’s
management recommends four crop combinations plus
poultry and piggery farms. In addition, the management
identified and projected annual investment returns for both
crops and livestock. The investments and rate of return are
shown in Table 1. Specific procedures for computing the
rate of return have been discussed by Clutter,e et
al.,(1983).
Portfolio selection problems are financial situation in
which an owner (agroforestry farmer) must select specific
investments. Assume the owner of DAF imposed that
neither (agricultural crop or livestock) investment should
receive more that 50% of the total new investment,
fuelwood should be at least 25% of the crop investments
and that the investment in maize farm cannot be more
than 60% of the total agricultural investment.
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International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 140
Volume 2, No. 8, August 2013

Table 1: Investment Opportunities for Danquah Agroforestry Farms

Investment Projected Rae of return (%)
Beans 19
Maize 25
Piggery 17.2
Poultry 19.4
Fuelwood 13.8

MATHEMATICAL STATEMENT OF THE X1 = Naira invested on Beans

DAF PROBLEM X2 = Naira invested on Maize
X3 = Naira invested on Piggery
X4 = Naira invested on Poultry
According to portfolio principle, investments and amounts X5 = Naira invested on fuelwood
should be made for available N1000000.00. Given the
objective of optimizing projected return subjected to the
budgetary and managerially imposed constraints, one can The linear programming model of the DAF portfolio
solve the problems by formulating a linear programming selecting problem will be as follows:
model of the investment case:
Let

Objective function:
Maximize Z = 0.190X1 + 0.250X2 + 0.172X3 + 0.194X4 + 0.138X5
Subject to:
X1 + X2 + X3 + X4 + X5 =1000,000.00 Available loan
X1 + X2 ≤ 500,000.00 Agricultural crop maximum
X 3 + X4 ≤ 300,000.00 Livestock maximum
0.50X3 + 0.50X4 + X5 ≥ 0 Fuelwood minimum
1.2X1 + 0.8X2 ≥ 0 Maize restriction
X1 , X2 , X3 , X4 , X5 ≥0

We have now succeeded in formulating the objective and
constraints of the DAF problem into a set of mathematical
model. Solution of DAF problem can be done manually
using the simplex operating rules and the mathematical
manipulations can be found in Duckword, et al.,(1978)
and Taha (1982). However , in some situations the number
of equations and the decimal nature of many digits
involved may be complex and make manual solution too
laborious. LINDO, MPS/370, etc have been written for
these complex linear programming problems.
RESULT INTERPRETATION
Systematic planning for the future usually involves
forecasting relevant future conditions. In many situations
significant features of the future are uncertain, and it is
desirable to explicitly account for these uncertainties in
planning. The use of portfolio selection in the practice of
agroforestry system is to give an internally consistent
descriptions of agroforestry business, possible conditions
and events via the linear programming method. Workers
seek the highest reward for their exertion and skill, while
the agroforestry farmers, business head and the like seek
to maximize their profits.
Optimal basic solution to the DAF linear programming
was reached in five (5) iterations. The investment
variables varies (X1, X2 ,X3….. X5) appeared with the
optimal amount of money to be invested on each portfolio.
According to Table 2, N500,000.00 which is the 50% of
the total N1000,000.00 loan Danquah Agroforestry Farms
(DAF) got for 5 investment goes to poultry (X4) Maize
(X2) is allocated with N225,000.00 Beans is given
N150,000.00 while N125000.00 is earmarked for
fuelwood (X5). Investment on piggery (X3) is not feasible,
hence, no amount of Naira is allocated for it.
Each optimal amount of money corresponding to X1, X2,
X4, X5 indicates the fraction of the N1000,000.00 loan that
must be invested on the portfolio selection optimal are
N14,250.00,N28,124.00, N485,000.00 and N8,624.00 for
Beans (X1), maize (X2) Poultry (X4) and fuelwood (X5)
respectively.
Investments on Beans, maize, poultry and fuelwood would
give an expected annual return of N535,988.00k 05 54%.

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International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 141
Volume 2, No. 8, August 2013

Table 2: Optimal portfolio selection for DAF bank loan.

Investment Amount Expected Annual Return
X1 150,000.00 14,250.00
X2 225,000.00 28,124.00
X4 500,000.00 485,000.00
X5 125,000.00 8,624.00
Expected Return of N535,998.00k=5
[2] Clutter,J.L., Fortson,J.C.,Plenaar,L.V., Brister, G.H.
CONCLUSION and Bailey, R.L. (1983): Timber
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The advantages of linear programming in the portfolio Willey and Sons. Pp.333.
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description of the possible investment on agroforestry (1988): A Guide to Operation Research. London:
farms. It allow one to influence and manipulate preference Chapman and Hall.
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strength or ability of agroforestry farmer to identify the Introduction. New York: Macmillan Publishing
major strategic issues and opportunities the farmer faces. Company Inc.
Using linear programming one can evaluate other situation [6] Zira,B.D, Ghide, A.A and Zirah, T. (2013).
such as effects of change in price and taxes, on Economic Effects of Agroforestry farms in Nigeria:
agroforestry product. The approach has been used to solve A case study of Southern Nigeria (Popoola,
numerous forest management problems. L.,Ogunsanwo, K. and Idumah, F.eds) Proceeding
of the 35th Annual Conference of the Forestry
Association of Nigeria held in Sokoto, Sokoto
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