Analysis of Technical Efficiency: Lessons and Implications for Wheat Producing Commercial Farms in Ethiopia

Abstract

This paper analyzes technical efficiency of wheat production under commercial farms in Ethiopia. The study also attempted to determine some farm specific, institutional and socio-economic characteristics which influence technical efficiency of wheat production. A stochastic frontier model is applied on cross sectional data of 32 commercial farms that were surveyed during 2010 production year. Cobb-Douglas type production function was found to best fit the data set. The maximum likelihood estimates of the stochastic frontier production function indicated that the elasticities of output with respect to seed, agrochemicals, tractor hours and DAP are positive and significant. On the contrary, the coefficients of area and labour are negative and significant. The production function associated with the commercial farms was characterized by constant returns to scale. The mean technical efficiency of wheat production is 82 percent. It was also revealed that 99 percent of the variations in wheat output from the best practice are due to inefficiency. Factors significantly affecting efficiency level of the commercial farms are found to be experience of managers, distance of the farm from main road, value of farm machineries owned by the farms and provision of mechanization services by the farms. Average age of farm machineries is the only factor that has a significant negative effect on the level of technical efficiency.

Key words: Technical efficiency, Stochastic Frontier model and Returns to scale