CHAPTER 3. METHODOLOGY
3.2. Methodology for farm model analysis
3.2.1. Farm enterprise analysis
This research employs basic budgeting methods as described by Brown (1982) and Gittinger (1982) in formulating partial budgets for targeted crops and livestock. In this research, a crop or a livestock of these practices is defined as an enterprise.
3.2.1.1. Scope of enterprise and lifetime
Rain-fed farming is fundamental in the NMR of Viet Nam, including maize, rice, tea, and coffee practices. This research targets these key upland crops and also cattle, buffalo and pig enterprises in farm level analysis. Furthermore, besides such conventional technologies, CSA practices such as minimum tillage (MT) in maize production, mini-terracing in tea and Arabica coffee production are also incorporated to study their comparative advantages on enterprise profitability.
In terms of lifetime, since tea is the research focus, all enterprises are consequently modeled in accordance to conventional tea production. Tea yield commonly reaches full development from year 8 and remains stable up to year 25, then gradually declines (Dang, 2002, 2005b). The economic life span of the plant is generally from 40 to 50 years (Chen et al., 2013) and could be more than 40 years in NMR conditions, depending on cultivars and pruning techniques (Do, 2015; Le et al., 1999). Given such variability, in this research, budgeting for conventional tea streams in a 30-year time frame. For other crops and livestock, even though their life cycles are annual (e.g. maize, upland rice, pig) or perennial but shorter than that of tea (e.g. coffee, buffalo, cattle), they will be also streamed in the same time horizon as that of tea for comparison purposes.
Tea and coffee are typical perennial crops in the NMR of Viet Nam which normally require 2-3 years after planting for framing and crown growing (Chen et al., 2013; Le et al., 1999). This is called the initial establishment or investment phase, because it requires intensive inputs and farm management while having little or no economic harvest. Generally, conventional tea plantations have commercial harvest from year 4 and the yield increases rapidly to its peak from year 8 to 10 (Do, 2015; Le et al., 1999). In contrast, conventional coffee plantations need slightly shorter time to bear cherries for economic harvest. Arabica coffee planted from seedlings in the NMR of Viet Nam regularly begins bearing in year 3 and reaches full production at year 6. The economic phase of conventional Arabica coffee lasts around 10 years, then the plant needs a heavy prune so as to re-start the second cycle (Dien Bien DARD, 2012; Vu, 2017). In mini-terracing technology, the plant is projected to have 2 more years in the economic phase than with conventional technology. For annual crops like maize and rice, their partial budgets, although accounted on a yearly base, are extended in parallel to that of perennial crops.
In livestock enterprise, while cattle and buffalo are raised using traditional methods in which both indigenous and cross breeding are conventionally managed for multiple purposes (meat
production, draft power and breeding), pig farming is rather intensive whereby both sows, piglets and fatteners are kept in smallholder farmers for meat production and weaner off-takings. In developing countries, cattle and buffalo herds generally reach full development at year 7 (Gittinger, 1982) and female adults normally take 3 years (cattle) or 4 years (buffalo) to start calving (Huyen et al., 2010) and (Nguyen, 2012a), whereas the pig stocking cycle, much likely annual crops, falls within 12 months. Hence, in this study, budgeting for pig husbandry is also repeated every year in the designed time horizon.
3.2.1.2. Technical coefficients and assumptions used in enterprise budgets 3.2.1.2.1. Enterprise budgeting for crops
For annual crops (maize; upland rice), most technical coefficients for yield, input and output are taken from Branca et al. (2017). Some of these have been slightly adjusted to be in line with updated references. For example, reference for unit cost of local labor has followed Viet Nam’s Labor Market Update (MOLISA and GSO, 2014). Unit of farm-gate price for upland rice, whose varieties are mainly sticky or local specialty, is about 20% higher than that of normal paddy rice (author’s field interview). For perennial crops (tea and coffee), their budgets are assembled from two phases, namely initial establishment and full development. Budgets for the initial phase are developed using coefficients and assumptions obtained from national and provincial extension programs (number of seedlings, shading trees, inputs used per hectare unit). Budgets for the full development phase use coefficients from Branca et al. (2017).
3.2.1.2.2. Enterprise budgeting for livestock Large ruminant husbandry (cattle and buffalo)
Coefficients for opening stocks, price of inputs (stocks purchased, vaccines, medicines and feed), sale price of output off-taking (live head) are generated from FAO-NOMAFSI dataset (FAO and NOMAFSI, 2014)12. Cattle are categorized by sex and age: cows (heifers ≥18 months;
reproducing cows); bulls (male cattle ≥18 months); heifers (calf ≥ 6 months) (Huyen et al., 2010).
Similarly for buffalos, female adult (heifers ≥21 months; reproducing buffalo); male adult (male heifers ≥21 months); heifers (calf ≥ 9 months). The average calving interval for cattle is 13 months and for buffalo is 18 months (Do, 2010). According to Huyen et al. (2010), cows on small and medium farms are kept as long as they could produce calves and culled at an average
12 FAO and NOMAFSI have carried out a project called “Climate-smart Agriculture: Capturing the Synergies Between Mitigation, Adaptation and Food Security” – CSA Project
of 12.9 years; bulls are culled depending on their working capacity at an average age of 7.8 years.
However, since livestock husbandry is multipurpose and farmers face labor constraint, each year farmers typically just keep a reasonable number of stock and off take the rest for cash earnings.
Mortality coefficients for calf, heifer and adult are derived from data analysis of VARHS (2010, 2012 and 2014). Coefficients related to drought power of cattle or buffalo are assumed or based on expert interviews.
Pig husbandry
Pigs are categorized as sow (an adult female pig), piglet (a baby or young pig before it is weaned) and gilt (a young female pig that has not yet had piglets). Like ruminants, coefficients for opening stocks, price of inputs (stock purchased, vaccines, medicines, feed), sale price of output off-taking (live head) for pig finishing are taken from FAO-NOMAFSI dataset (FAO and NOMAFSI, 2014). Nevertheless, similar parameters for sows and piglets as well as sows and litters dynamic are obtained from Vo and Vu (2006). Mortality coefficients for general pig husbandry are also acquired from data analysis of VARHS 2010-2014 (CIEM, 2012-2014)13. Coefficients related to sow replacement rate, litter per sow per year, and piglets born live per litter are taken from Vu et al. (2007), Phung et al. (2008), and Lemke and Valle Zárate (2008). A few other coefficients are assumed or based on expert interviews.
3.2.1.3. Gross margins analysis
GMs analysis is the first step in selecting the best option in farming activities. The goal of this step is to make a comparison among different crop and livestock enterprises. Therefore, in GMs analysis, only variable costs are included and all fixed costs can be ignored as they accrue to all alternatives. GMs are calculated using only those costs that are actually paid for by the farmer, and is equal to gross revenue minus cash inputs minus cost of hired labor. However, given that smallholder farmers use limited external hired labor, all labor costs are considered as family labor for the sake of simplicity. Main assumptions:
• Land was not considered as an input because it is a fixed input.
• Total variable costs are those directly applicable to crop production, including cash inputs spending on fertilizers, manure, herbicides, insecticides, and fungicides.
• Prices are considered as farm-gate figures even though some output is either sold at farm gate or at processing gate (tea leaves or coffee cherries). The latter case requires some
13 Central Institute for Economic Management
costs associated with transportation but they are insignificant. In principle, different prices need to be used for different quantity and quality of produce sold. Also, the price fluctuates monthly or seasonally. However, a stable averaged price is used for calculation.
GMs are calculated for each crop and target technologies over 1-year product cycle. Calculation of GMs are repeated in each year of the project lifetime using the following equations:
𝐺𝑀𝑗𝑇𝑡 = 𝑇𝑅𝑗𝑇𝑡− 𝑇𝑉𝐶𝑗𝑇𝑡 (1)
𝑇𝑅𝑗𝑇𝑡 = 𝑃𝑗𝑄𝑗𝑇𝑡 (2)
𝑇𝑉𝐶𝑗𝑇𝑡 = ∑𝑛𝑖=1𝑃𝑥𝑖𝑡𝑋𝑖𝑡 (3)
𝐺𝑀𝑗𝑇𝑡 = 𝑃𝑗𝑄𝑗𝑇𝑡 − ∑𝑛𝑖=1𝑃𝑥𝑖𝑋𝑖𝑇𝑡 (4)
Where:
GMjTt = gross margin ($/ha)14, for crop j and technology T of a given year t TRjTt = total revenue ($/ha), for crop j and technology T of a given year t TVCjT = total variable costs ($/ha), for crop j and technology T of a given year t QjTt = crop yield obtained at year t under technologies T (Kg/ha)
Pj = farm-gate price of crop j ($/kg)
XiTt = quantity of input i (per ha) used at year t in production of crop j, under technology T Pxit = farm-gate price of input i ($/kg) of a given year t.
The assumptions for GMs analysis conducted in livestock budgets are:
• Access to pastures was not a calculated cost because pastoralists traditionally practice free grazing in common open fields. All kinds of additional feeds are considered as own produced and farmers were asked to estimate such feeding in monetary value per head per year.
• Total variable costs are those directly applicable to livestock husbandry, including cash inputs spending on feed (see above), vaccines and medicines.
• Prices are averaged at farm-gate value and measured per live head, given that farmers could also sell by weight and selling price is closely dependent on the quality of livestock.
• The number of working days as draft power and hired price per day for cattle and buffalo are assumed to estimate non-cash benefit for pastoralists.
𝐺𝑀𝑙𝑡 = (𝑇𝑅𝑙𝑡− 𝑇𝑉𝐶𝑙𝑡)/ ∑𝑛𝑐=1𝑄𝑙𝐶𝑡 (5)
𝑇𝑅𝑙𝑡 = ∑𝑛𝑐=1𝑃𝑙𝐶𝑡𝑄𝑙𝐶𝑡 + ∑𝑛𝑐=1𝑄𝑙𝐶𝑡𝑁𝑙𝐶𝑡 𝑃𝐷𝑃 (6)
𝑇𝑉𝐶𝑙𝑡 = ∑𝑛𝑖=1𝑃𝑥𝑖𝑄𝑙𝐶𝑡 (7)
𝐺𝑀𝑙𝑡 = ∑𝑛𝑐=1𝑃𝑙𝐶𝑡𝑄𝑙𝐶𝑡− ∑𝑛𝑖=1𝑃𝑥𝑖𝑄𝑙𝐶𝑡 (8)
Where:
GMlt = gross margin ($/head), for livestock l of given year t
14 Calculations are based on original Vietnamese currency (VND) and then converted into US dollar.
Exchange rate USD/VND = 1 / 20, 950 (State Bank of Viet Nam, 2013)
TRlt = total revenue ($), for livestock l of given year t
TVClt = total variable costs ($), for livestock l of given year t
QlCt = Total quantity of livestock l, category C (e.g. weaner, adult) at given year t (head) PCt = farm-gate price of livestock l, category C ($/ live head)
Pxi = farm-gate unit cost of input i (cattle, pig patterning: $/head /year; sows and piglets:
$/sow/litter)
NlCt = number of working day as draught power (day/year), for livestock l (e.g. cattle or buffalo), category C (e.g. adult male or female) at given year t
PDP = sale price of draught power ($/working day; averaged price for both male and female) 3.2.1.4. Profitability analysis
Five profitability parameters are considered here: return to family labor, internal rate of return (IRR), net present value (NPV), benefit-cost ratio (BCR) and annual net margins (NMs). They are calculated through the following formulas:
𝑅𝐹𝐿𝑝𝑡= 𝐺𝑀𝑝𝑡⁄𝐹𝐿𝑝𝑡 (9)
𝑁𝑀𝑝𝑡 = 𝐺𝑀𝑝𝑡− 𝐶𝐹𝐿𝑝𝑡 (10)
𝑇𝐶𝑝𝑡 = 𝑇𝑉𝐶𝑝𝑡+ 𝐶𝐹𝐿𝑝𝑡 (11)
𝐵𝐶𝑅𝑝𝑡 = 𝑁𝑀𝑝𝑡/𝑇𝐶𝑝𝑡 (12)
𝑁𝑃𝑉𝑝 = ∑ [𝑁𝑀𝑝𝑡
(1+𝑟)𝑦− 𝑇𝐶𝑝𝑡
(1+𝑟)𝑦]
𝑛𝑡=1 (13)
𝐼𝑅𝑅𝑝 𝑤ℎ𝑒𝑛 𝑁𝑃𝑉𝑝 = 0 𝑜𝑟 ∑ 𝑁𝑀𝑝𝑡
(1+𝐼𝑅𝑅)𝑦−
𝑛𝑦=1 ∑ 𝑇𝐶𝑝𝑡
(1+𝐼𝑅𝑅)𝑦
𝑛𝑦=1 (14)
Where:
RFLpt = Return to family labor ($/day) of practice p (crop or livestock) of a given year t GMpt = Gross margin ($/ha for crop or $/head for livestock) of a given year t
FLpt = Family labor (total person-day/ha for crop or total person-day/head/year for livestock) of a given year t
CFLpt = Cost of family labor ($/ha or farm) of practice p of a given year t NMpt = Net margin ($/ha or head) of practice p of a given year t
TCpt = Total costs ($/ha or farm) of practice p of a given year t BCRpt = Benefit cost ratio of practice p of a given year t NPVp = Net Present Value of ($/ha or farm) for practice p IRRp = Internal Rate of Return (%) for practice p
Once profitability parameter is obtained, the opportunity cost for switching from other land use alternatives to conventional tea production is evaluated using NMs. The sum of investment ($/ha) in the initial phase of perennial crops is also calculated and separated for analysis costs of investments.