Allocative Efficiency and Profitability of Smallholder Wheat Producers in South Eastern Ethiopia: Stochastic Frontier Approach

Abstract

This study was carried out in major wheat producing agro-ecologies of Ethiopia to measure the level of allocative efficiency and profitability of smallholders in wheat production. Cross-sectional data were collected from 381 randomly selected farm households. Descriptive and inferential statistics and Stochastic Frontier Cobb-Douglas cost function were employed to achieve the objectives of the study. The results reveal that elasticities of total cost of production due to changes in prices of improved seed, pesticides, and wheat output are statistically significant in the lowland. In midland, changes in prices of chemical fertilizers, improved seed, pesticides and output have significant effects on the proportionate change in total cost of production. Increased total cost of production is associated with increased profitability. The average allocative efficiency estimates for the lowland, midland and highland agro-ecologies were 89, 88 and 87 percents, respectively. Relatively, smallholders are more profitable in midland agro-ecology with average profit of 8,039.89 ETB/ha. The profitability of smallholders is the lowest in the lowland (1,083.91 ETB/ha). Increases in the supply (availability) and utilization of improved seeds, chemical fertilizers and pesticides with fair prices increase the profitability of smallholders in wheat production.

Keywords: Allocative efficiency, Profitability, Stochastic Frontier, Wheat in Ethiopia