Results: comparative profit efficiency

Here we test the second hypothesis that ‘contract rice farmers are more profit efficient than non-contract rice farmers for comparable scales of operation. Table 8 [ PDF 70.7KB | 1 pages ] shows the profit efficiency, actual profit and profit loss per rai for contract and non-contract farms by region. Profits here are after deducting cash costs only from sales revenue. Profit loss is defined as the amount of unrealized profit due to inefficiency and can be calculated as the difference between maximum possible profit (that is, profit on the profit frontier) for each farm and its actual profit.⁶

The estimated mean profit efficiency score for the entire sample farms is 0.68. In other words, significant profit inefficiency occurred among the sample rice farms in Thailand and farms could increase their profit by 32% or 842 baht per rai by improving their efficiency.

As shown in Table 8 [ PDF 70.7KB | 1 pages ] farmers in the North, where new land was brought into production, exhibited significantly higher profit efficiency than farmers working on the more degraded land of the Northeast, with a mean efficiency of 0.76 versus 0.63. Overall, contract farmers were significantly more profit efficient than non-contract farmers, with a mean profit efficiency of 0.72 versus 0.64. This is also true for farmers in the Northeast where contract farmers are found to be significantly more profit efficient than non-contract farmers (0.69 versus 0.56). However, the efficiency scores of contract and non-contract farmers in the North were virtually the same on average, although the scores were more diverse among the non-contract farmers.

Table 9 [ PDF 89.7KB | 1 pages ] shows the profit efficiency across different farm sizes for contract and noncontract farmers. Similar to profitability, contract farmers had higher profit efficiency for all farm sizes except those greater than 20 rai. Contract farmers appear to show a slight tendency to decreasing profit efficiency for larger farm sizes, while non-contract farmers are more homogeneous across all farm sizes. Similar to the profitability, comparison by farm size, with respect to profit efficiency contract farming does not seem to be biased against smaller farms.

Table 10 [ PDF 96.9KB | 1 pages ] shows profit efficiency among the different groups of organic farms we have identified. Farmers with a longer history and more experience in organic farming (the ‘certified’ group) appear to be more profit efficient, as well as more profitable. However, multiple range tests show that all three groups of organic farmers in the North exhibited similar profit efficiency as well as profitability. In fact, in terms of profit efficiency they were not different from the conventional non-contract farmers. In the Northeast profit efficiency was not statistically different between the certified and transitory groups, although it was higher for these than for the initial organic group, whose efficiency was statistically similar to that of conventional non-contract farmers.

Counterfactual simulation for profit efficiency

Similar to the case of the actual-counterfactual profitability comparison, the difference in profit efficiency between contract and non-contract farming can also be evaluated through comparing actual and counterfactual efficiency. The methodology is similar to that used in estimating the counterfactual profitability. To estimate the counterfactual efficiency of a contract farm (that is its profit efficiency when hypothetically operating like a non-contract farm), the first step is to use the estimated profit frontier of non-contract farming to estimate the maximum profit the contract farm would have obtained had it produced like a noncontract farm with 100 percent efficiency.⁷ The second step is to use its hypothetical profit estimated from the counterfactual profit simulation to represent its counterfactual profit in non-contract farming. Then the difference between this counterfactual profit and the counterfactual frontier can be used to measure the farm’s counterfactual efficiency. The counterfactual efficiency of a non-contract farm can be estimated similarly.

Table 11 [ PDF 71.2KB | 1 pages ] shows that contract farms in the entire sample would not have had very different counterfactual efficiency from their actual efficiency (69% versus 70%) had they operated like a non-contract farm. This mainly reflects the situation in the Northeast, while contract farms in the North would have reduced their efficiency from 74% to 68% by counterfactually operating like a non-contract farm. With respect to the non-contract farms, generally for the entire sample, non-contract farms would have had a slightly higher counterfactual than actual efficiency (69% versus. 66%), and the difference is statistically significant at 10%. Again, this mainly reflects the situation in the Northeast (68% versus 59%), while surprisingly the non-contract farms in the North would have had lower counterfactual efficiency than their actual efficiency (69% versus. 77%).

In summary, the results from the counterfactual efficiency estimations are mixed and do not generally support the hypothesis that contract farming enhances profit efficiency. Indeed, the efficiency patterns appear to be different between the North and Northeast regions, perhaps due to different contract management systems and different land endowments.

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