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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' 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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