Study on production efficiency and agricultural risk management the case of major crops in northern vietnam

STUDY ON PRODUCTION EFFICIENCY AND
AGRICULTURAL RISK MANAGEMENT: THE CASE OF
MAJOR CROPS IN NORTHERN VIETNAM

HO VAN BAC

2018


Graduate School of Bioresource and Bioenvironmental
Sciences Department of Agricultural and Resource Economics
Laboratory of Agricultural and Farm Management

STUDY ON PRODUCTION EFFICIENCY AND
AGRICULTURAL RISK MANAGEMENT: THE CASE OF
MAJOR CROPS IN NORTHERN VIETNAM

HO VAN BAC

FUKUOKA, JAPAN
2018


STUDY ON PRODUCTION EFFICIENCY AND
AGRICULTURAL RISK MANAGEMENT: THE CASE OF
MAJOR CROPS IN NORTHERN VIETNAM
By
HO VAN BAC
A Dissertation
Submitted to Kyushu University in partial fulfillment
of the requirements for the degree of DOCTOR OF

PHILOSOPHY
in
Agricultural and Resource Economics
Supervised by
Professor Teruaki NANSEKI, Ph.D
Assistant Professor Yosuke CHOMEI, Ph.D
Dissertation Committee:
1. Professor Teruaki NANSEKI, Ph.D
2. Professor Koshi MAEDA, Ph.D
3. Professor Mitsuyasu YABE, Ph.D

KYUSHU UNIVERSITY
2018


SUMMARY OF DISSERTATION
Vietnam has a favorable natural condition for agricultural production, with a large
agricultural land accounting for 82.4% total natural area. The sector has contributed
significantly to the economy in terms of employment (48%), GDP share (18.1%), and food
security. Especially, agricultural production is essential income source for people living in
rural area and the poor in the region with 75% and 90% respectively. However, the sector
has been facing many challenges such as low productivity and quality, scattered and small
scale production, food safety etc. Besides, the sector also is very sensitive and vulnerable
to various kinds of risks. Improving production efficiency and risk management could be
seen as feasible measures contributing to the improvement of income for local people in
the context of limited production land expansion and inefficient used resources. In Vietnam
there have been several studies on production efficiencies of main crops such as rice,
vegetable, tea etc. However, understanding the risk sources and combination of efficiency
and production risk are still limited. Moreover, there is not any comparison study on
productive efficiency of farmers using propensity score matching approach to control the

selection bias. Besides, the adoption of eco-friendly production practices such as VietGAP,
organic methods are expected to increase household income and reduce concerns from
food unsafety. But the study on evaluating impact of VietGAP adoption on farmer’s
livelihood in Vietnam is rare. Thus, the objectives of the study are to: (1) explore the
production efficiency of rice and tea farmers and factors affecting inefficient levels; (2)
investigate the economics of adoption, source of risks facing by farmers and also
understand their management response to the risks.
The study was conducted in northern Vietnam where agricultural production plays
an important role in household’s income sources. Tea and rice are two of major crops of
the region and selected fort this study because of their representative and dominant
importance. While rice crop is mainly produced to serve household’s demand or selfsufficiency, tea plantation is grown as a commercial crop and provide cash income for
other daily demands of households. At first location was purposely selected based on
representative characteristics for rice and tea production areas, then rice and tea sampled
farmers were randomly chosen from that province. Total 120 rice farmers and 326 tea
farmers were used to analyze in the study. To achieve the purpose of the research, we
applied several models to fit with specific objectives. Stochastic frontier approach (SFA)
was used to analyze production and profit
i


efficiency of farmers, while principal component analysis (PCA) and multiple linear
regression were applied to determine the sources of risk and farmers’ response to the risks.
Farmers’ decision to adopt new practice was analyzed using probit regression model. The
findings of the study were derived from analyzing cross-sectional data of rice farmers and
tea farmers collected in study area.
The findings of chapter 2 and 3, analyzing productive efficiency of rice and tea
production, indicate that there are still potential rooms for improving efficiency with given
inputs and technology through the use of better practice production methods or more
efficient decision. In details, technical efficiency based on the SFA analysis with average
score of 88 percent indicates that rice farmers could improve their technical efficiency for

about 12 percent with given inputs and technology by improving farmer’s resource use
efficiency. The result also revealed that reducing technical inefficiency of rice farmers
could be done by enhancing educational levels, and land consolidation. While tea farmers
have the potential of increasing their profit efficiency for about 25 percent. Further
analysis indicated that investing active irrigation system, joining cooperatives/production
groups and good extension service are major factors for improving the tea farmers’ profit
efficiency. Notably, comparison the profit efficiency between two groups revealed that
“safe” tea production practice (VietGAP) could achieve higher efficiency than
conventional tea production practice.
Chapter 4 and 5 determine factors underlying the probability of tea farmer’s
decision to adopt the new production practice and economic effect of VietGAP tea
production on households’ income. In order to achieve the purpose, we analyzed two
groups of sample, namely adoption and conventional one. The finding shows that farmers
with better or more advantageous production features are more likely to adopt new
production practice. Positive incentives affecting both conversion decision and more
farmland allocation of tea farmers include number of household members, tea farm size,
ratio of tea income over total household income, access technical information on new
production practice from extension agencies and using labor-saving machinery in tea
production. Furthermore, with the aim of estimating the casual effect of VietGAP adoption
on farmers’ livelihood in Vietnam, PSM was employed. The result indicates that farmers
adopting VietGAP tea production received economic benefits with higher income in
comparison with conventional tea farmers. This also implies that VietGAP tea production
should be supported for diffusion. The premium
ii


benefit is attributed to better price and higher tea yield of farming practice under VietGAP
standards.
Perception of farmers’ risk sources and their management response are an
important part of the study. And its detailed contents are presented in Chapter 6.

Descriptive statistics, PCA, and multiple linear regression were applied to determine the
risk sources and also find socio-economic factors influencing the farmers’ risk perception
and their management response. The result of descriptive analysis indicates that there are
17 sources of risk that perceived and listed by tea farmers in the study area. The analysis
result indicates that price volatility, disease risk and an increase of production cost are the
most serious in farmer’s perception as single risks. Moreover, there are no differences
existing in farmer’s risk perception between VietGAP and conventional tea farming
systems. Analyzing variables affecting on risk perceptions indicates that agricultural
educated farmers were found to be related to lower worries and risk perception. Besides
that, farmers with main occupation involving in farming activities worry more about
production risk, yield and quality risk. For risk management response, farmers considered
pest and disease prevention, production cost minimization as the most important measures
to limit damages from risk sources above.
In short, the result of the study highlighted that there is a scope for further
increasing efficiency scores of tea and rice farmers in the study area. More efficient
resource allocation decision or better production management skills could lead to improve
productive efficiency. Moreover, conversion in tea production was promoted by economic
incentives and adopting VietGAP tea production practice also contributed to increase the
profit efficiency and households’ income of farmers. Thus, it is important that
interventions and government support should aim at improving current production
efficiency and expanding the conversion. Lastly, agricultural production is exposed to
various types of risks based on farmers’ perception. In which variability of output price,
disease risk and increase of production inputs are perceived as the most serious risks. To
reduce risks for farmers, stabilizing market price of output and production inputs,
preventing disease risk with technical education programs that government should support
for farmers would be meaningful.
Keywords
Production efficiency, stochastic frontier, principle component analysis, risk source, management
response, major crops, Vietnam
3

ACKNOWLEDGEMENTS
I would like to thank all persons who have contributed to the successful
completion of my PhD study at Kyushu University, Fukuoka, Japan. First and foremost,
I would like to express my deepest gratitude and much respect to my academic
supervisor, Prof. Dr. Teruaki NANSEKI, who has directly guided my study, provided
valuable suggestions, insightful feedback and constructive comments for me to end up
with a coherent dissertation. I really appreciate his constant support, both academic and
social aspects. I understand that the study would not have come to successful completion
without his kind support. My special thanks also go to Assistant Professor Dr. Yosuke
CHOMEI for providing helpful advices and comments to this study. My great
appreciation goes to other professors, Prof. YABE and Prof. MAEDA, for taking part of
the dissertation committee and kindly revise the content of my thesis. Without their kind
support and encouragements from the dissertation committee, it will be difficult to
pursue and complete the study program for Doctoral degree.
I am deeply indebted to the Ministry of Education, Science, Culture, and Sports of Japan
(MEXT scholarship) for the great opportunity and providing financial support for my
studies in Japan. My special thanks are given to Kyushu University staffs for providing
research facilities upon which the successful completion of this dissertation have
critically depended.
I am grateful to Thai Nguyen University of Agriculture and Forestry and my colleagues
in Vietnam, who always support and encourage me during my study period in Japan.
I wish to extend my appreciation to the households and staffs at Department of
Agricultural and Rural Development from Thai Nguyen province, Vietnam on their
hospitality and kind collaboration helped me doing field survey successfully. Without
their assistance and cooperation in providing precious information, the study would not
have been possible.
I would like to thank all friends in Kyushu University, and special thanks for colleagues
in the Laboratory of Agricultural and Farm Management for their sharing of knowledge,

skills and helping during my study period.
Last but not least, special appreciation is given to my wife PHAM THI THANH
HUYEN
for her constant supporting, encouraging, kind understanding and together taking care of

4


our son HO GIA BAO during my study period. I am very grateful to my lovely parents
and all relatives for always understanding and encouraging me during the time for doing
the research. Finally, I wish to thanks everyone who has helped and encouraged me to
strive for academic excellence.
HO VAN BAC
Fukuoka, September 2018

5


Table of Contents
SUMMARY OF DISSERTATION ................................................................................ i
ACKNOWLEDGEMENTS .......................................................................................... iv
LIST OF FIGURES ....................................................................................................... ix
LIST OF TABLES .......................................................................................................... x
ABBREVIATION .......................................................................................................... xi
CHAPTER 1. INTRODUCTION .................................................................................. 1
1.1 Background information ............................................................................................. 1
1.1.1 Agricultural sector ......................................................................................................... 1
1.1.2 Major yearly-planted crops ........................................................................................... 3
1.1.3 Major perennial plants .................................................................................................. 4

1.2 Production efficiency, risk and VietGAP adoption in Vietnam ................................. 7
1.2.1 Production efficiency .................................................................................................... 7
1.2.2 Linkage between agricultural risk and efficiency ......................................................... 9
1.2.3 The situation of VietGAP adoption ............................................................................. 10

1.3 Problem statement..................................................................................................... 11
1.4 Research objective .................................................................................................... 13
1.5 Organization and structure of the dissertation .......................................................... 13
1.6 Selection of study area .............................................................................................. 15
CHAPTER 2. PRODUCTIVE EFFICIENCY OF RICE FARMERS AND ITS
DETERMINANTS ........................................................................................................ 17
2.1 Introduction............................................................................................................... 17
2.2 Methodology ............................................................................................................. 18
2.2.1 Overview of efficiency ................................................................................................ 18
2.2.2 Techniques of efficiency measurement ....................................................................... 19
2.2.3 Analytical framework ................................................................................................. 21
2.2.4 Data collection ............................................................................................................ 22

2.3 Results and discussion .............................................................................................. 23
2.3.1 Descriptive statistics of variables ................................................................................ 23
2.3.2 Estimation of stochastic frontier production function ................................................. 24
2.3.3 Input elasticity and its responsiveness to rice yield ..................................................... 25
2.3.4 Frequency distribution of technical efficiency ............................................................ 26

6


2.3.5 Analysis of determinants of technical inefficiency ..................................................... 27
2.3.6 Estimation of potential rice yield ................................................................................ 29

2.4 Conclusions and recommendations........................................................................... 29
CHAPTER 3: PROFIT EFFICIENCY OF TEA FARMERS AND ITS
DETERMINANTS ........................................................................................................ 31
3.1 Introduction............................................................................................................... 31
3.2 Methodology and data collection.............................................................................. 32
3.2.1 Measurement of production and profit efficiency ....................................................... 32
3.2.2 Impact evaluation approach ........................................................................................ 34
3.2.3 Empirical model .......................................................................................................... 34
3.2.4 Propensity score matching .......................................................................................... 36
3.2.5 Description of used variables ...................................................................................... 38
3. 2.6 Study area and data collection .................................................................................... 39

3.3 Results and discussion .............................................................................................. 40
3.3.1 Socio-economic characteristics of tea farmers ............................................................ 40
3.3.2 Estimated result of profit frontier function .................................................................. 43
3.3.3 Factors explaining the profit efficiency of tea farmers ................................................ 45
3.3.4 Distribution of profit efficiency and average treatment effect .................................... 47
3.3.5 Propensity score for VietGAP tea adoption ................................................................ 47

3.4 Conclusions and recommendations........................................................................... 50
CHAPTER 4. VIETGAP TEA PRODUCTION AND DETERMINANTS OF
FARMER’S ADOPTION ............................................................................................. 52
4.1 Introduction............................................................................................................... 52
4.2 Methodology ............................................................................................................. 53
4.2.1 Model specification ..................................................................................................... 53
4.2.2 Variable selection in the model ................................................................................... 55

4.3 Results and discussion .............................................................................................. 56
4.3.1 Comparative statistics of used variables ..................................................................... 56
4.3.2 Factors affecting conversion decision of tea farmers .................................................. 57

4.3.3 Factors influencing farmers’ farmland allocation ....................................................... 60

4.4 Conclusions and recommendations........................................................................... 63

vii


CHAPTER 5. ASSESSING EFFECT OF VIETGAP TEA PRODUCTION ON
FARMER’S INCOME.................................................................................................. 65
5.1 Introduction............................................................................................................... 65
5.2 Methodology ............................................................................................................. 66
5.2.1 Conceptual framework for VietGAP tea adoption ...................................................... 66
5.2.2 Econometric models for impact assessment ................................................................ 66
5.2.3 Specification of econometric models .......................................................................... 67

5.3 Results and discussion .............................................................................................. 68
5.3.1 Descriptive statistics of variables ................................................................................ 68
5.3.2 Econometric estimation ............................................................................................... 70

5.4 Conclusions and recommendations........................................................................... 73
CHAPTER 6. FARMER’S RISK PERCEPTION AND THEIR MANAGEMENT
RESPONSES ................................................................................................................. 75
6.1 Introduction............................................................................................................... 75
6.2 Methodology ............................................................................................................. 76
6.2.1 Data collection ............................................................................................................ 76
6.2.2 Theoretical framework and analysis technique ........................................................... 77
6.2.3 Description of variables used in the regression model ................................................ 77

6.3 Results and discussion .............................................................................................. 79
6.3.1 Farmer’s perception on risk sources ........................................................................... 79

6.3.2 Risk perception in relation to farm and farmer characteristics ................................... 83
6.3.3 Farmers’ perception on risk management .................................................................. 85

6.4 Conclusions and recommendations........................................................................... 87
CHAPTER 7. CONCLUSIONS AND POLICY IMPLICATIONS ......................... 88
7.1 Main conclusions ...................................................................................................... 88
7.2 Policy implications.................................................................................................... 90
7.3 Study limitation and future research ......................................................................... 91
REFERENCES.............................................................................................................. 93
LIST OF PUBLISHED ARTICLES ......................................................................... 106
LIST OF RELATED PRESENTATIONS................................................................ 107
APPENDIX .................................................................................................................. 108

8


LIST OF FIGURES
Figure 1. 1 Planted area of major crops in Vietnam (1000 ha) ......................................... 3
Figure 1. 2 Planted perennial area of Vietnam ................................................................. 5
Figure 1. 3 Planted tea distribution in Vietnam ................................................................ 5
Figure 1. 4 Proportion of tea production among regions in Vietnam ............................... 6
Figure 1. 5 Variability of tea yield in Vietnam ................................................................. 7
Figure 1. 6 Overall structure of the dissertation ............................................................. 14
Figure 1. 7 Map of study area ......................................................................................... 16
Figure 3. 1 Density distribution of propensity scores…………………………………..49

9


LIST OF TABLES

Table 1. 1 Land statistics of Vietnam ............................................................................... 1
Table 1. 2 Land use structure in Northern mountainous region of Vietnam .................... 2
Table 1. 3 Structure land use of MNR .............................................................................. 4
Table 2. 1 Descriptive statistic of variables in the
model………………………………..23
Table 2. 2 Estimated parameters of stochastic frontier production function .................. 25
Table 2. 3 Frequency distribution of technical efficiency .............................................. 27
Table 2. 4 Determinants affecting technical inefficiency ............................................... 28
Table 3. 1 Variable definition of used models …………………………………………38
Table 3. 2 Descriptive statistics of tea production practices........................................... 40
Table 3. 3 Comparative statistics of model variables ..................................................... 42
Table 3. 4 Estimation result of profit efficiency among tea farmers .............................. 44
Table 3. 5 Factors affecting profit efficiency of tea farmers .......................................... 46
Table 3. 6 Frequency distribution of profit efficiency (PE)............................................ 47
Table 3. 7 Logit estimates of the propensity to adopt VietGAP tea production ............. 48
Table 3. 8 Estimation of average treatment effects on the treated .................................. 49
Table 4. 1 Definition of variables used in the models………………………………….56
Table 4. 2 Descriptive statistics of explanatory variables in the model.......................... 57
Table 4. 3 Factors influencing farmer’s conversion decision of tea productions ........... 58
Table 4. 4 Marginal effects of factors associated with farmer’ adoption ....................... 60
Table 4. 5 Factors affecting farmer’s farmland allocation.............................................. 61
Table 4. 6 Marginal effect of factors associated with allocation .................................... 62
Table 5. 1 Basic features of two tea production practices ……………………………..69
Table 5. 2 Coefficient estimation for adoption of VietGAP tea production ................... 70
Table 5. 3 Test of matching quality ................................................................................ 71
Table 5. 4 Balance condition .......................................................................................... 72
Table 5. 5 Estimation of treatment effects (ATT)........................................................... 73
Table 6. 1 Statistics of variables used in multiple linear regression ……………………78
Table 6. 2 Mean score and rank for risk sources perceived by tea farmers .................... 80
Table 6. 3 Varimax rotated factor loading for risk sources ............................................ 82

Table 6. 4 Estimation of multiple linear regression model for risk sources ................... 83
Table 6. 5 Mean score and rank for risk management .................................................... 85
Table 6. 6 Varimax rotated factor loading for risk management .................................... 86

1
0


ABBREVIATION
ATT: Average Treatment Effect on the Treated
ATE: Average Treatment Effect
ATU: Average Treatment Effect on the Untreated
AseanGAP: Asean Good Agricultural Practices
DEA: Data Envelopment Analysis
FAOSTAT: Food Agriculture Organization Statistics
FDA: Food and Drug Administration
GlobalGAP: Global Good Agricultural Practices
GDP: Gross Domestic Product
GSO: General Statistic Office of Vietnam
HACCP: Hazard Analysis and Critical Control Points
KM: Kernel Matching
MLE: Maximum Likelihood Estimation
MONRE: Ministry of Natural Resource and Environment
NMR: Northern mountainous region
NNM: Nearest Neighbor Matching
OLS: Ordinary Least Square
PSM: Propensity Score Matching
PE: Profit Efficiency
PCA: Principal Component Analysis
QD TTg: Prime Minister’s Decision

RM: Radius Matching
SFA: Stochastic Frontier Approach
TE: Technical Efficiency
VietGAP: Vietnamese Good Agricultural Practices
UN: United Nations
WTA: World Tea Association

11


CHAPTER 1. INTRODUCTION
1.1 Background information
1.1.1 Agricultural sector
Vietnam has total natural land area of about 33,123 thousand ha. Of which total
agricultural land, forestry land accounted for about 82.4% and 54.64% of total land area,
respectively (MONRE, 2016). Agriculture plays an important role in Vietnam’s
economy. In 2016 the agricultural sector shared 18.14% in Vietnam’s gross domestic
product (WB, 2016). Although contribution of agricultural production to Vietnam
economy has been decreasing recently, from 22.7% in 2000 to 18.14% in 2016 (WB,
2016), the sector is still considered as very sector contributing to national strategy on
food security of Vietnam and support for industry sector development in coming years
(MARD, 2009). By 2010 the sector employed 48% of the workforce (JICA, 2013). In
recent two decades, agriculture grew consistently but the faster growth of the industry
and service sectors led to the relative drop in the contribution of the agricultural sector.
Table 1. 1 Land statistics of Vietnam
Land
A types
R
r a
To 33,123

tal
1.
27,2
A
84.9
1. 11,5
1 26.7
1. 14,9
2 08.4
1. 797.2
2.92
3
1.
0.06
4
1.
0.13
5
2.
N
3.
6.38
N
Source: Ministry of Natural Resource and Environment, 2016

1


Agricultural export increased consistently over years and bring in a substantial positive
trade balance. The major agricultural export products are rice, rubber, coffee, cashew

nuts, fishery and forestry products. In 2011 the total value of export reached $25 billion
that doubled the export value in 2007 (JICA, 2013).
Although agriculture has achieved significant achievements contributing to
poverty reduction, social economic development and food security of Vietnam, there are
still many existing challenges and constraints. The first one is unstable agricultural
development and less competitiveness in world market. Small production scale and
scattered agriculture has led to high production cost. Moreover, food safety issue and
low production efficiency are becoming emerging and increasing concerns in
agriculture. Besides, support services and industry in agricultural development is less
developed. Most of exported agricultural commodities are under raw and less processed
products. As a result, added value and product quality are quite low compared with other
nations’ products. In agriculture, cropping accounted for a high proportion (more than
50%). Of which, rice production is still the most important crop (MARD, 2009).

Table 1. 2 Land use structure in Northern mountainous region of Vietnam
Land types
Total land area
1
.
1.
1
1.
2
1.
3
1.
4
2
.
3

.

Area (1000 ha)

Ratio (%)

9522.2

100

757
5.9
212
3.3
540
6.9

133
Source: Ministry of Natural Resource and Environment, 2016

2


Northern mountainous region of Vietnam (NMR) has advantage of forestry
production with about 2.1 million ha, accounting for 71.4% of total agricultural land of
the region. The agricultural production land covers about 28%. According to the plan of
agriculture and rural development (2011-2020) issued by MARD (2009), the NMR will
focus on forestry development and advantageous industrial crops such as tea, coffee
(Arabica type), maize, lychee, soybean etc.
1.1.2 Major yearly-planted crops

In Vietnam, rice production takes the very high land proportion, accounting for
59.2% of total annual cropping land area (MONRE, 2016). Over the past 10 years (2007
– 2016), total sown rice area increased consistently, reached approximately 8 million ha
in 2016 (GSO, 2018). The figure 1.1 also indicates that rice production area is much
more than than other crops in combination including maize, peanut, soybean, cotton.
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
2007

2008

2009
rice

2010
maize

2011
peanut

2012
soybean

2013

2014

2015

2016

coton

Figure 1. 1 Planted area of major crops in Vietnam (1000 ha)
Source: General Statistic Office of Vietnam, 2018
Northern upland area of Vietnam has about 2.1 million ha of agricultural land
area, in which yearly-planted area is about 77%. And rice production is also an
important crop, accounting for 35.4% of total cropping land area of the region. While
perennial cropping areas such as tea, fruit, coffee (Arabica) … accounts for about 23%
of total agricultural land of the region (MONRE, 2016). In the region, more than 90%
people out

3


of about 11 million people are living in rural area while agricultural activities such as
cropping, animal husbandry, forest economics are their main income. Notably, rice
production still takes an important role in household’s income source, accounting for
about 25%. Besides, rice production is not for commercial purpose or export, but rice
self-sufficiency also contributes to food security in the region where transportation
system is still very difficult compared with flat area due to hilly and complex
topography (Bac et al., 2013).

Table 1. 3 Structure land use of NMR
Land type
Total agricultural production land
1 16
. 35.
1.1
Ric
1.2 10
Ot 55.
2
.
2.1
Tea

Area (1000 ha)

Ratio (%)

2123.4

100

Source: Ministry of Natural Resource and Environment, 2016

1.1.3 Major perennial plants
The trend over the last ten years of production are presented below for the major
perennial plants in Vietnam. There has been a major expansion of rubber planting area,
while coffee and pepper planted areas has rose moderately. Tea planted area remained
fairly steady over the years.

1200
1000
800
600
400
200
0

2007

2008

2009

2010

Cashew nut

2011
Rubber

2012
Cofee

2013
Tea

2014

2015

2016

Pepper

Figure 1. 2 Planted perennial area of Vietnam
Source: General Statistic Office of Vietnam, 2018
Vietnam is amongst few nations in the world that have advantages of natural and
climatic conditions for tea production (SOMO, 2007). Tea production is taking place in
39 out of 64 provinces all over the country with total 130 thousand ha. NMR has the
largest tea production area in comparison with other four regions of Vietnam, with about
93 thousand ha accounting for 72% of total planted tea area of Vietnam.

17%

4%

7%

72%
Red river delta
Northern mountainous area
North central and coastal area
Central highland

Figure 1. 3 Planted tea distribution in Vietnam
Source: General Statistic Office of Vietnam, 2011

5


Similarly, the region also provide the highest tea production quantity of Vietnam,
accounting for 66% of total produced tea quantity.

3%
23%
8%

66%

Red river delta

Northern mountainous area

North central and coastal area

Central highland

Figure 1. 4 Proportion of tea production among regions in Vietnam
Source: General Statistic Office of Vietnam, 2011
Tea production plays an important role in both cultural and economic aspects. In
Vietnam tea plantation has a long history and tea drinking custom, dating back about
3000 years (Tran, 2008). In 2012, tea production has contributed to total exported value
of $224.8 million, with more than 146.8 thousand tons of exported tea products (FAO,
2012b). The sector also attracts about 400 thousand households involving in production
and relevant activities for their income and livelihood. In total, tea sector provides
employments for about 1.5 million people (SOMO, 2007).

6


120.0
100.0
80.0

Red river delta
Northern mountainous area

60.0

North central and coastal area
40.0

Central highland

20.0

Vietnam's tea yield

2014

2013

2012

2011

2009

2008

2007

2006

2010

0.0

Figure 1. 5 Variability of tea yield in Vietnam

Source: General Statistic Office of Vietnam, 2014

1.2 Production efficiency, risk and VietGAP adoption in Vietnam
1.2.1 Production efficiency
Production is a process of transforming inputs such as land, labor, capital,
fertilizer and so on into output such as goods and services. This process is not only
applied in agricultural production, but also in other production sectors. The difference of
production performance is generally displayed at different inputs and outputs. Ultimate
objective of agricultural production may be profit or revenue maximization, cost
minimization, maximum output etc. They can vary from time to time or firm to firm.
Some concepts cover technical efficiency such as productive efficiency or economic
efficiency.
Production efficiency is composed of two components including technical
efficiency and allocative efficiency. The purely technical or physical component is
defined as the farmer’s ability to avoid waste during production. In other words, a
farmer uses the given inputs to create an output as high as possible, or produce a given
output by applying inputs as low as possible. Thus, the target of an estimation of

technical efficiency is to find solutions to increase output or decrease inputs in the
context of available

7


conditions. While the allocative or price component is determined by combination of
inputs and outputs in the optimal level in term of considering market prices. Measuring
technical efficiency implies use of input and output quantity without introducing their
prices. Technical efficiency can also be further decomposed into three subcomponents,
which are scale efficiency (the potential productivity gain from achieving the optimal
size of a firm), congestion (increase in some inputs could decrease output), and pure
technical efficiency (Farrell, 1957).
Economic efficiency involves in increasing output without using more than
conventional inputs. The use of existing technologies is more cost-effective than
applying new technologies if farmers currently cultivate their products inefficiently with
current technologies (Shapiro, 1977). Economic efficiency can be classified into two
types: technical efficiency and allocative efficiency. Technical efficiency measures the
ability of a farmer to achieve maximum output with given and obtainable technologies.
While allocative efficiency tries to capture a farmer’s ability to apply the inputs in
optimal proportions with respective prices (Farrell, 1957, Shapiro, 1977). The technical
efficiency (TE) of a firm always varies from 0 to 1 value (0 ≤ TE ≤ 1). If TE is equal to
1, the firm produces with full technical efficiency. For instance, the firm could achieve
full technical efficiency.
Production efficiency is considered as means of fostering production, thus large
number of studies has focused on agricultural efficiency (Thiam, 2001). In Vietnam,
agricultural sector has contributed significantly to the economic growth, food security,
social stability and poverty reduction. Thus, improving the sector efficiency also
receives much attention from Vietnam government and scientists. In research aspect,
there are few researches on production efficiency of crops such as rice, tea, vegetable

etc. Almost of studies found that Vietnamese farmers did not operate at fully efficient
level (Hong et al.,
2015; Bac et al., 2013; Tran, 2008; Vu, 2005). This implies that there is a significant
potential for farmers to reduce their costs by increasing efficiency. Moreover, efficiency
improvement becomes more important in context of limited land source. Also, applying
technology requires more capital investment and longer time. Another constraint for
higher technology application is that agricultural production in Vietnam is characterized
by scattered and small scale production.


1.2.2 Linkage between agricultural risk and efficiency
Production could be defined as a process of transforming inputs such as land,
labor, capital, fertilizer etc into output such as goods and services. This process is not
only applied in agricultural production, but also in other production sectors. In other
words, production activities are generally linked closely to natural conditions and
environment in which farmers operate. In agriculture, production process is subject to
many uncertainties and risks. Any producers’ decision is closely linked with various
potential outputs with different probability. The producers or farmers could not control
events, including weather, market, policy, but these factors have direct effects on returns
from farming activities and businesses. In the context, it is important that farmer has to
manage farming risk as part of farm operation in general. In response to the multiple
possible effect of those events, risk management strategies for farming systems may
include decisions on-farm, changes in structure, use of market instruments, government
support, and diversification of farming income sources. A standard approach to analyze
aspects of risk management response involve in 3 steps. The first step is to determine or
measure the risk source and possible variability. The next one is select the optimal risk
management tool based on this information. Finally, appropriate government policies are
designed to improve the risk management strategy (OECD, 2009). Another approach in
risk analysis is called as holistic approach. In this approach, the linkage among three sets
of element is considered as multiple relationship (not linear as in standard approach

above).
As a certain part of agricultural production, risk study has been received many
attentions from researchers. Thus, literature in this study field is abundant. Agricultural
production is exposed to various sources of risks and uncertainties (Akcaoz and Ozkan,
2005). Similarly, agricultural production in Vietnam is also affected by those risky
factors. Risk types and uncertainties are not uniformly spread over all farmers due to
complexity and change of natural and climatic conditions (Riwthong et al., 2017). Risk
source is very diversified and can be grouped into five sources of risk namely production
risk, marketing risk, financial risk, legal and environmental risk, human resource risk
(USDA, 1997). The relationship between production risk and efficiency was studied by
Tiedemann (2013). The results also indicate that output variability in German organic
and


conventional farming is mainly caused by production risk. Since risks have negatively
affected production output of farmers, it is very important for farmers to identify and
manage the risks (Drollette, 2009).
1.2.3 The situation of VietGAP adoption
As the same with many other Asian countries, the VietGAP adoption was
motivated by the importance of GlobalGAP that is one of the most important private
standards in the area of food safety and sustainability (Nabeshima, 2015). Besides,
conventional agricultural production has been facing many challenges because excessive
use of pesticides and chemical fertilizers has led to extremely negative impacts on
human health and environment. Together with increasing concerns on food safety from
domestic consumers, Good Agricultural Practices (GAPs) was encouraged to apply in
agriculture. Basically, GAP principle is a set of standards and guidelines which must be
applied to all phases of production from field selection, pre-plant field preparation,
production, harvest and post-harvest (FDA, 1998). To fit with specific conditions of
Vietnam’s agriculture, the Vietnamese government has tried to initiate its own Good
Agricultural Practice development, called Vietnamese Good Agriculture Practice

(VietGAP), based on the Hazard Analysis Critical Control Points (HACCP) and
principle of AseanGAP. On 28
Jan 2008 Ministry of Agriculture and Rural Development of Vietnam (MARD) issued
the decree No. 379/QD-BNN-KHCN on VietGAP implementation. VietGAP was
considered as the main standard, procedure and guidelines for production of safe fruit
and vegetables. The aim of VietGAP adoption is to prevent and minimize the risk
hazards which often occur in production, harvesting and post-harvesting processes of
fruit and vegetables. Adopting GAP and/or safe standard package are also expected to
return producer or farmers with economic benefits such as increasing and/or stabilizing
revenue, reducing average costs, improving market access, reducing vulnerability to
poor agricultural practices as well (Hobb, 2003).
Although VietGAP adoption has returned a wide range of practical benefits, the
number of farmers who are certified VietGAP has not been high yet. Several barriers are
attributed to the limited spreading of VietGAP adoption in Vietnam. The first one is low
popularity of VietGAP in compared with other standards in the market as GlobalGAP.


Moreover, this domestic standard has not been yet recognized internationally. Thus,
farmers or producers has no incentives to invest more on less credible certification. The
next reason is that adopting VietGAP requires higher level of infrastructure. This seems
to be more difficult for most of Vietnamese farmers who have very small land areas
(0.25 ha on average). An other important reason is high cost for applying fro and getting
VietGAP certificates for most of farmers or production firms. The high cost does not
only limit new producers to apply the standards, but also discourage farmers to renew
their certificates (Nabeshima, 2015).

1.3 Problem statement
Agriculture has achieved very impressive growth over the last two decades, but
Vietnam is still a developing country with low average income. Although agricultural
contribution to Vietnam’s GDP tends to decrease due to faster increase of industry and

services, but the agricultural sector remains an important component to the economy.
Moreover, in Vietnam about 65.5% of population is living in rural area and agricultural
activities are still main income sources of most of rural households. With remarkable
achievement in agricultural development, national poverty rate has been declined from
58.1% in 1993 to 13.5% in 2014, many challenges still exist. Most of the poor are living
in rural areas and also heavily rely on agricultural production. Especially, rate of ethnic
minority is 35.7%, but the rates among some groups are extremely high: La Hu 84.9%
and H’Mong 82.9% (UNDP, 2017). In addition, the northern mountainous region of
Vietnam has the highest poverty rate amongst regions (GSO, 2018). Thus, agriculture
development, rural and farmers are under special attention of Vietnam government.
Over the last two decades, impressive increase in Vietnam agriculture has been
partly motived by planting land expansion. Up to date horizontal growth seems to reach
its limitation because the availability of undeveloped agricultural land in Vietnam is very
limited. Moreover, Vietnam’s population density is considered as one of the highest ones
in the world. This mean that there is no opportunity for horizontal expansion of cropping.
Findings of previous studies indicate that Vietnamese farmers are not fully efficient for
many cropping activities such as rice, tea, vegetable etc. Thus, improving production
efficiency and optimization of land production is a key factor when assessing growth
potential. And improving the efficiency of the sector development is also one of six
priority