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instituto nacional de investigacion y tecnologia agraria y alimentaria inia spanish journal of agricultural research 2008 6 3 309 319 available online at www inia es sjar issn 1695 971 ...

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                    Instituto Nacional de Investigación y Tecnología Agraria y Alimentaria (INIA)                            Spanish Journal of Agricultural Research 2008 6(3), 309-319
                    Available online at www.inia.es/sjar                                                                                                               ISSN: 1695-971-X
                                       The policy analysis matrix with profit-efficient data:
                                                    evaluating profitability in rice cultivation
                                                                                  1,2                                     1                               3
                                                  E. Reig-Martínez , A. J. Picazo-Tadeo * and V. Estruch
                                                      1  Departamento de Economía Aplicada II. Universidad de Valencia. 
                                                                    Avda. dels Tarongers, s/n. 46022 Valencia. Spain
                              2  Instituto Valenciano de Investigaciones Económicas. Guardia Civil, 22, 2-1.º. 46020 Valencia. Spain
                                   3  Departamento de Economía y Ciencias Sociales. Escuela Superior de Ingenieros Agrónomos. 
                                             Universidad Politécnica de Valencia. Camino de Vera, s/n. 46022 Valencia. Spain
                    Abstract
                        This paper combines policy analysis matrix and data envelopment analysis techniques to model the analysis
                    of profitability from farming. Policy analysis matrices are computed for a sample of rice growers located in the
                    wetland of the Albufera (Eastern Spain) under observed conventional and profit-efficient farming conditions.
                    While conventional analysis points to a lack of profitability, farmers are shown to make positive profits at private
                    and social prices when data reflecting efficiency adjustments are used in the analysis. The main conclusion is
                    that the usefulness of the policy analysis matrix might be substantially enhanced by simulating profitability after
                    efficiency-improving managerial decisions have been adopted.
                        Additional key words: AlbuferaNatural Park, data envelopment analysis, European common agricultural po-
                    licy, multifunctionality.
                    Resumen
                    La matriz de análisis de políticas con datos eficientes: evaluación de la rentabilidad del cultivo del arroz
                        Este trabajo combina la matriz de análisis de políticas y las técnicas de análisis envolvente de datos para mo-
                    delizar el análisis de la rentabilidad de la agricultura. Se calculan matrices de análisis de políticas para una mues-
                    tra de cultivadores de arroz ubicados en el marjal de la Albufera (Este de España) con datos observados y datos
                    eficientes resultantes de un proceso de maximización de beneficios. Mientras el análisis convencional apunta a
                    una falta de rentabilidad, cuando se introducen en el análisis datos que reflejan un comportamiento eficiente los
                    agricultores obtienen beneficios, tanto a precios privados como sociales. La principal conclusión es que la uti-
                    lidad de la matriz de análisis de políticas puede reforzarse sustancialmente simulando la rentabilidad que se ob-
                    tendría después de la adopción de decisiones de gestión orientadas a mejorar la eficiencia.
                        Palabras clave adicionales: análisis envolvente de datos, multifuncionalidad, Parque Natural de la Albufera, polí-
                    tica agrícola común.
                    Introduction                                                                          data envelopment analysis (DEA). Since the seminal
                                                                                                          work by Monke and Pearson (1989), the PAM has been
                        This paper evaluates the private and social profita-                              widely employed to compute market-driven and social
                    bility of farming systems by combining the use of two                                 profits for a variety of farming systems under different
                    different tools: the policy analysis matrix (PAM) and                                 technological and institutional scenarios. Here, it is
                    * Corresponding author: andres.j.picazo@uv.es
                    Received: 16-10-07; Accepted: 14-05-08.
                    Abbreviations used: CAP (common agricultural policy), c.i.f. (cost, insurance and freight), CMO (Common Market Organisation), DEA
                    (data envelopment analysis), DRCR (domestic resource cost ratio), EU (European Union), f.o.b. (free on board), OECD (Organisation
                    for Economic Cooperation and Development), PAM (policy analysis matrix), PCR (private cost ratio), SRP (subsidy ratio to producers).
               310                          E. Reig-Martínez et al. / Span J Agric Res (2008) 6(3), 309-319
               shown that important additional insights might be                  recent book included a variety of papers on different
               obtained if the farmers’efficient behaviour is considered,         aspects of the multifunctionality of agriculture, focusing
               in addition to their observed behaviour.                           on the Spanish case (Gómez-Limón and Barreiro,
                  This methodological approach is applied to rice                 2007), while Spanish research on multifunctionality is
               farming in the Albufera Natural Park, a coastal wetland            reviewed in Reig (2006). Furthermore, starting with a
               with great ecological value and located in the Eastern             basic piece of analysis by the OECD (2001), a variety
               Spanish region of Valencia. This empirical applica-                of analytical tools to be used in the modelling of multi-
               tion responds to the concern over whether or not those             functionality have been discussed in the last few years
               European farming systems that can be deemed multi-                 (Randall, 2002; Buysse et al., 2007) and some of them,
               functional, because of the important environmental                 mainly concerned with assessing social preferences,
               functions performed, will be able to survive in the                have been put to use in Spain (Gómez-Limón and
               policy context of the post-2003 common agricultural                Atance, 2004; Kallas et al., 2007).
               policy (CAP).                                                        Rice (Oryza sativa L.) farming provides an interesting
                  The CAP of the European Union (EU) is currently                 case of a multifunctional crop that performs an important
               evolving under the combined pressure of internal re-               ecological role and where the EU has assumed the need
               quirements for change and the need to adjust in advance            to provide more room for imports from developing
               to future international trade agreements. The Uruguay              countries. Rice cultivation in Mediterranean wetlands
               Round of the GATT (1986-94) paved the way for an                   represents a system of land management that, besides
               improvement in the access of third country exporters               helping to shape highly valued traditional landscapes,
               to the internal European market, and a further move in             performs an important non-marketable function linked
               the direction of trade liberalisation is currently envisaged,      to the protection of biodiversity and the environment.
               as a likely outcome of the Doha Round negotiations                 The Albufera Natural Park is a protected wetland area
               (Swinbank, 2005). Partial or total decoupling of agri-             that is representative of the sort of rice fields that were
               cultural support from current production levels has                mentioned as a source of positive environmental exter-
               been the answer of European policy-makers to the criti-            nalities in the review of the Spanish literature on agri-
               cisms raised by foreign competitors concerning the so-             cultural multifunctionality, commissioned by the
               called trade-distortion effects of the CAP.                        OECD (Tió and Atance, 2001).
                  For European authorities, the political problem of                The private and social profitability of rice farming
               supporting farmers’incomes in an increasingly open                 is assessed, as previously noted, using the PAM. In
               economic environment has been further compounded                   addition, this paper goes one step beyond conventional
               by the need to take on board the impact of trade libera-           profitability analysis: instead of adopting a purely
               lisation on the non-commodity outputs of European                  static viewpoint based on what farmers are currently
               agriculture. There is a growing recognition that, beyond           doing, the perspective of what they could do in order
               its primary function of supplying food and fibre, agri-            to rise to the challenge posed by international compe-
               culture can provide environmental benefits and contri-             tition is introduced. Rice farmers will have to adjust
               bute to the sustainable management of renewable natural            in the coming years to a less protective policy environ-
               resources, as well as to the preservation of biodiversity,         ment, by using their productive assets more efficiently
               and the maintenance of the economic viability of less              and cutting costs, thereby improving their chances of
               favoured rural areas. These new concerns are frequently            survival in the face of strong import competition. Hence,
               summarised under the heading of multifunctional agri-              a clear distinction between observed and efficient
               culture and have become an integral part of the European           farming behaviour is drawn, leading respectively to
               model of agriculture (EC, 1999, 2000). The research                observed and efficient outcomes. The estimates of the
               concerning the multifunctional character of agriculture            efficient levels of input use, income, costs and profits
               is no longer restricted to international trade policy. A           are computed using DEA. Efficient1 conditions are
               1 In this paper efficiency is used with two different meanings. One, as in the present paragraph, refers to the adjustment of farms’
               input and output vectors to achieve maximum profits, for a set of prices, fixed factors and the current state of technology. It is
               used in connection with DEA computations. The other, used in connection with the PAM, refers to a social benchmark for the
               calculation of costs and revenues based on the adoption of international prices and the removal of the effects of subsidisation
               and taxation.
                                               The policy analysis matrix with profit-efficient data                              311
              potential for most of the farms and represent the pro-            2 in 1990. The Albufera is a fresh water coastal
                                                                            site
              ductive plans that would prevail if farms were optimally      lagoon, fringed by rice fields that cover a surface area
              operated, in terms of profit-efficiency.                      of 14,350 ha.
                 Usually, the analysis of farming systems has attempted        Rice fields act as seasonal aquatic ecosystems, given
              to assess farms’viability by dealing with actual farmers’     that they are flooded during summer, a season in which
              behaviour, implicitly assuming that all farmers behave        the Mediterranean wetland areas undergo drought
              efficiently. But, one could legitimately ask: what would      conditions, and also during part of winter, for ecological
              happen if the current farming practices of some indi-         reasons. Flooded rice fields around the lake provide
              vidual farmers were inefficient when compared to best         the predominant regional feeding area for bird species
              practices under presently available technologies?             such as ducks, common cranes and egrets, because the
                 The answer to this question has important economic         eutrophication of the waters of the Albufera prevents
              policy implications. The impact of agricultural policies      the lake itself from supplying enough food to cover
              on farmers’income might be widely different under             birds’needs. It has been estimated that at least twenty
              observed and efficient behaviours. Likewise, the              five bird species of European conservationist concern
              assessment of private and social profitability for a par-     use the rice fields in Eastern Spain during the winter,
              ticular farming system can change substantially after         or as a place to rest and feed during their migrations
              major input adjustment decisions have been adopted            (Fasola and Ruiz, 1997).
              in response to the diffusion of best management pro-             The dataset used in this paper corresponds to a sample
              cedures. Profits obtained after all those adjustments         of 131 single crop rice farms located in the Albufera
              could provide a useful benchmark for current production       Natural Park. The data were collected from a compre-
              practices, showing whether enough room exists for an          hensive survey carried out by the authors with support
              improvement in farms’financial situation.                     from the Spanish Ministry of Science and Technology,
                                                                            and correspond to the year 2004. The dataset provides
              Data and sample:the Albufera                                  data for one output and seven inputs. Output is mea-
                                                                            sured in kilograms of rice production. The only fixed
              Natural Park                                                  input is cultivated land, measured in hectares. Variable
                                                                            inputs are: labour (working days), in addition to capital,
                 The Albufera Natural Park is a coastal wetland complex     fertilisers, seeds, herbicides and fungicides, all of
              located nearby the Metropolitan Area of the city of           which are measured in euros. Table 1 presents a sample
              Valencia (Eastern Spain). It protects 21,120 ha of wet-       description for the data.
              lands and was declared a Natural Reserve by the                  Labour input includes both family labour, embracing
              Valencia Regional Government in 1986 and a Ramsar             the farmer’s and his family’s on-farm labour, and hired
              Table 1. Sample description
                                                                                         Quantities
                    Variable           Description           Units                                                       Price
                                                                                 Mean              Standard           (€ per unit)
                                                                                                   deviation
              Output                 Rice                      kg               34,712              62,208                 0.24
              Fixed input            Cultivated land           ha                    4.2                 7.6            721
              Variable inputs        Labour              Working days               66.4                91.6              36.30
                                     Capital                   €                 2,969               5,447                 1
                                     Fertilisers               €                   477                 905                 1
                                     Seeds                     €                   584               1,074                 1
                                     Herbicides                €                   686               1,333                 1
                                     Fungicides                €                   276                 603                 1
              2 The Convention on Wetlands of International Importance especially as Waterfowl Habitat, signed in 1971 in the Iranian city of
              Ramsar.
                 312                           E. Reig-Martínez et al. / Span J Agric Res (2008) 6(3), 309-319
                 labour. Input capital includes the cost of use of both                 need to be computed. Benchmarking productive acti-
                 farm-owned and rented machinery and equipment.                         vity and the computation of technological frontiers
                 Labour is taken to be a variable factor of production                  offer a suitable framework for evaluating firms’relative
                 because part-time farming has long been recognised                     performance and designing productive plans that
                 as a structural characteristic of Valencian agriculture                maximise firms’profits.
                 (Arnalte and Estruch, 2000). The region’s highly diver-                   In agriculture, it has been occasionally argued that
                 sified economic structure allows for alternative jobs                  some farmers would not actually follow a profit maxi-
                 in services or manufacturing industries in the same                    mising strategy, but rather a strategy aimed at maximising
                 areas where rice farms are located. Likewise, many                     a utility function that does not necessarily match the
                 productive tasks are outsourced in the sense that they                 profit function (Gómez-Limón et al., 2004). In order
                 are carried out by external labour teams and rented                    to test for this possibility, rice growers interviewed in
                 machinery.                                                             our survey were asked to manifest their degree of
                                                                                -1
                    The price of rice has been established at 0.24 € kg ,               agreement with the following assertion: «the most
                 and is assumed to be the same for all farms in the                     important target for a farm is to maximise profit».
                 sample. The reason for this choice is that all farms                   Possible responses ranked from 1 (total agreement) to
                 produce similar varieties of rice, which is sold in the                5 (total disagreement), 3 being the neutral answer.
                 local market with no price differentiation. Family-                    Based on this scale of responses, nearly 80% of farmers
                 owned labour has been priced using the wage earned                     declared their agreement or total agreement with this
                 by salaried workers on rice farms, as a conventional                   statement. Thus, we can assume that rice growers in
                 opportunity cost. In the same way, in order to compute                 the Albufera tend to follow a profit maximising strategy
                 the aggregate expenditure on capital services, the price               and then evaluate their relative performance.
                 of own capital services has been equated to the cost of                   Here, DEA is used to compute productive plans that
                 hired machinery. Likewise, it is assumed that the price                maximise short-run profit for given input and output
                 of labour and capital is the same for all farms, because               prices. DEA techniques were introduced by Charnes
                 the markets for both production factors are local                      et al. (1978), while Reig-Martínez and Picazo-Tadeo
                 markets with no observed differences in price. Finally,                (2004) highlight their usefulness for analysing farming
                 as fertilisers, seeds, herbicides and fungicides have all              systems. In essence, these techniques evaluate the per-
                 been measured by total expenditure, their price has                    formance of peer units by constructing a surface over
                 been conventionally set to one3.                                       the data that allows the observed behaviour of a
                    The calculation of PAM matrices also involves the                   decision-making unit to be compared with best observed
                 prices paid for the services of fixed production factors.              practices (see Cooper et al., 2004 for further details;
                 The private rent of land has been established according                also Alvarez-Pinilla, 2001).
                 to the most common quote for transactions in the local                    Computing the productive plan that maximises
                 farmland rent market, which is currently around 721€                   short-run profit for farm k’requires its actual observed
                   -1
                 ha . Input and output prices are displayed in Table 1.                 output and input data to be compared to those of the
                                                                                        farms showing best observed practices, i.e. profit-
                                                                                                          4. Formalising, the profit maximising
                                                                                        efficient farms
                 Computation of profit-maximising                                       combination of variable inputs and output of farm k’
                 productive plans with DEA                                              arises from the following program:
                                                                                         Profit r, p, xk' = Max              ryk' Š    6   p xk'
                                                                                                ()k'k'k'                            ∑                [1]
                                                                                                                            ()
                                                                                                        f          x ,y ,z             v=1  v  v
                    Microeconomic theory considers productive processes                                             v
                 as the result of profit-optimising behaviour. Nonetheless,             subject to:
                 not all firms’managers are successful in achieving this                           yk' ≤ ∑131 zk yk                             (i)
                 goal and profit frontiers representing best practices                                       k=1
                 3 Private prices include VAT. A lack of information prevents us from consider whether a net tax or a subsidy is being implied by
                 the current tax system for farm operators.
                 4 DEA is a deterministic approach to efficiency measurement that attributes all departures from a profit-efficiency status to
                 managerial inefficiencies. Nonetheless, it should be noted that in practice these departures might also obey to any unmeasured or
                 uncontrolled factors related to profit maximisation, such as the effect of luck, be it good or bad.
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...Instituto nacional de investigacion y tecnologia agraria alimentaria inia spanish journal of agricultural research available online at www es sjar issn x the policy analysis matrix with profit efficient data evaluating profitability in rice cultivation e reig martinez a j picazo tadeo and v estruch departamento economia aplicada ii universidad valencia avda dels tarongers s n spain valenciano investigaciones economicas guardia civil ciencias sociales escuela superior ingenieros agronomos politecnica camino vera abstract this paper combines envelopment techniques to model from farming matrices are computed for sample growers located wetland albufera eastern under observed conventional conditions while points lack farmers shown make positive profits private social prices when reflecting efficiency adjustments used main conclusion is that usefulness might be substantially enhanced by simulating after improving managerial decisions have been adopted additional key words albuferanatural par...

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