Profit Efficiency Estimation of Cocoa Farm Plots Using The Stochastic Frontier Model Approach

Abstract

Financial and accounting measures of profit are commonly used to evaluate the performance of firms, even in agriculture. However, these measures do not estimate the ideal level of profit for firms and firms' actual performance in generating profits. It is more informative to estimate the most efficient profit frontier and compare firms' profit efficiency performance to this calculated frontier. Given the importance of cocoa production to cocoa-producing countries, it is prudent to investigate if cocoa farmers, and cocoa farm plots as business units, are generating profits efficiently, considering the observed contemporary trend of diversification of cocoa with other tree crops, food crops and livestock alternatives. This study adopts a translog stochastic frontier model with random coefficients and a truncated normal distribution to estimate the efficiency of cocoa farmers in the Western and Ashanti regions of Ghana. The study also investigates the relationship between farmers' choice of diversification strategy and profit efficiency. The results show that farmers' mean profit efficiency was 41.8%, with the maximum frontier having a profit efficiency of 99.6%. Also, it is observed that farmers who diversify into all three options have the highest average profit efficiency of 56.3%. Farm size and diversification of cocoa with food crops were found to be significantly related to profit inefficiency with negative and positive relationships respectively. The results confirm the literature that profit inefficiency increases as farm size reduces. The results also indicate that diversifying cocoa with food crops may be the most profit-inefficient diversification strategy for cocoa farmers.