AAMP Training Materials

Module 1.1: Production Cost and Farm Productivity

Steven Haggblade (MSU)
blade@msu.edu
Module Contents
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 whats 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?

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.