Evaluation_of_cost_efficiency_in_to
Evaluation_of_cost_efficiency_in_to
Abstract:
Aim: The main objective of this research was to evaluate the efficiency of economic costs in seven
units of greenhouse tomato production, during the production cycles of 2016, through the application of
the stochastic frontier, depending on the type of packaging they handle and the cost structure that
governs them.
Design / Research methods: The stochastic frontier model includes the analysis of the non-systematic
random component, which assumes an extremely critical role in the analysis during the interpretations.
With the calculation of the stochastic cost frontier we construct the cost inefficiency index represented
by C_it, delimited below 0. The index shows the percentage in which the cost is exceeded and,
therefore, the degree of inefficiency.
Conclusions / findings: The elaboration of the stochastic frontier finds its justification in the argument
that the less efficient competitor is the one that receives the greater effects of the competition. In this
sense, the location of the companies analyzed with respect to their own line of efficiency is essential for
the design of the strategies of each company. The production units analyzed showed that, on some
occasions, externalities are the cause of inefficiency, but contrary to what is established in theory, there
are some units that show that the inefficiency with which they count is diminished by The influence of
uncontrolled variables.
Originality / value of the article: The contribution of this research lies in the use of efficiency models
in the primary sector, specifically in tomato´s greenhouses..
Key words: Stochastic Frontier Model, Efficiency in Costs, tomato´s Greenhouses
JEL: D14, Q13
1. Introduction
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In México, the area sown in a conventional manner (open field) was reduced to
an average annual rate of 6.7 percent between 2005 and 2015, going from 73,960 to
36,848 hectares. The decrease of the cultivated area in this cultivation modality has
been greater in some entities such as Sinaloa, Baja California and Jalisco. On the
other hand, the area established with protected agriculture (greenhouse and shade
screens) increased from 395 to 13,747 hectares in the mentioned period, that is, it
grew at an annual average rate of 42.6 percent. Greenhouse cultivations is
concentrated in Sinaloa, Baja California and Jalisco, although it has also acquired
greater importance in other entities such as Colima, State of Mexico, Hidalgo,
Michoacán, Querétaro, San Luis Potosí, Sonora and Zacatecas. The increase in the
surface area with protected agriculture infrastructure is attributed mainly to the
success in the harvest of tomato quality export that is intended to the United States
market (FIRA 2016). In this article, only the producers who wanted to share the
necessary information for the study were consulted, the main tomato producing
states were consulted in the greenhouse and the results of those who agreed to
participate were presented.
Authors such as (Calvin, Cook 2005; Cook, Calvin 2005); analyze from the
economic perspective tomato production in greenhouse, and have focused on
marketing channels, production lines, cost structure and governance relationships
between sellers, producers and buyers and they evaluated the generated employment
and the economic multiplier effects generated.
Other studies such as (Engindeniz, Tuzel 2006), make an economic analysis of a
greenhouse in Turkey, from its installation and its operation emphasizes the
economic feasibility associated with the expansion of these greenhouses. On the
other hand (Dodson 2002), studies the diversification of production from organic
tomato production technologies (Mysore, Weng-Fei 1999), focuses on the economic
dimensions of greenhouses in the United States, analyzing the multiplying effects of
the production.
Somewhere research to evaluate the economic efficiency in tomato production
show the main approaches to approach through which the issue of tomato economic
efficiency has been investigated. From the perspective of profitability benefit-cost
engaged in making comparisons using measures such as the ratios of physical
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the models originally proposed by Aigner et al. (1977) and Meeusen and Van Den
Broeck (1977), and adapted by Stevenson (1980), and which includes the non-
systematic random component in substitution of those variables that are omitted and
affect profitability.
This document is divided into 6 sections: The structure of costs in greenhouses;
the stochastic frontier model; Characterization of companies and description of the
variables; Packaging costs, variables not controlled, controlled and determinant;
Monte Carlo simulation-application model; and conclusions.
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management and the cost of water in this primary activity, to analyze the structures
of costs before and after the application of such strategy.
At the Latin American level Benach (2005) studies agricultural and industrial
production cost models, analyzes the cost models used in rice production in Costa
Rica, and designs proposals for new cost-of-production models. Reyes (1995) uses
an econometric model of linear programming for different combinations of research
and development, interest rates and agricultural prices, obtaining an efficient
production structure and costs.
At the national and local level, the identified studies have focused on two
aspects, the first one is that proposed by Kido (2007), who makes a comparative
analysis of costs, analyzes the efficient cost and the opportunity cost having as two
scenarios the planting of maize or the reforestation of the area in question. The
second is that of Sánchez et al. (2004), who calculates the average cost of production
of cotton to reach a point of equilibrium and characterizing the structure of costs and
production of the company.
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EVALUATION OF COST EFFICIENCY IN TOMATO GREENHOUSES
Where:
: is the logarithm for total costs.
: The kernel is the determinant of the production frontier that is defined by
the function (f). The kernel determinant is a function of two vectors of variables
, and their corresponding coefficients of vectors which is based on a
standardized logarithmic cost function, where contains the logarithms of the
products as quantities and prices as inputs and the terms of interaction between
them.
is a random variable of mean 0 and with normal distribution. The importance of
this distribution is that it allows modeling numerous natural, social and
psychological phenomena. While the mechanisms underlying much of this type of
phenomena are unknown, because of the sheer number of uncontrollable variables
involved in them, the use of the normal model can be justified by assuming that each
observation is obtained as the sum of a few independent causes, the normal
distribution is important because of its relationship with the estimation by ordinary
least squares.
is the variable that captures the effect of cost inefficiency which is a measure of
the additional cost as a percentage of the minimum cost. It is assumed that the
random variable follows a normal distribution.
this part a positive coefficient indicates that the growth in an exogenous
variable cause that the inefficiency in the cost increases (Battese, Coelli 1995). As
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indicated in equation (2) the vector is included in the minimum cost function,
which means that within of the exogenous variable in not only changes the
distance between the current cost of the minimum, but can even shift the cost
frontier .
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For the application of the model it is necessary to employ two types of variables,
controlled and not controlled by each production unit. In the first instance, we have
the uncontrolled variables, for this investigation we consider 3, the market price, the
exchange rate and the price of natural gas in 2016. This type of variable shows the
influence that the exterior has inside the structure of cost of the companies.
The controlled variables are represented by the cost structure of the producing
units involved in the analysis. The companies analyzed do not necessarily have
homogeneous accounting entries, making the controlled variables that are necessary
for the application of the model incomparable. With this background, the first
necessary step for the correct application of the model was the homologation of the
cost structures remaining as shown in Table 2.
2.1. Main Product (Fresh Tomato), 2.2. Packaging maquila, 2.3. Government Payments
3. Operation costs by hectare
3.1. Variability costs, 3.1.1. Seeds (Vegetative material), 3.1.2. Growing substrate (soil treatment),
3.1.3. Fertilizers, 3.1.4. Packaging, 3.1.5. Electric Energy, 3.1.6. Gas CO2, Fuel, 3.1.7. Chem/Bio
Supplies, 3.1.8. Water, 3.1.9. Workforce, 3.1.10. Freight, 3.1.11. Comercialization, 3.2 Other
variable costs, 3.2 Fixed Costs, 3.2.1. Company Admin, 3.2.2. Depreciation of assets, 3.2.3. Other
fixed costs
Source: author’s elaboration based on information of 7 greenhouses producers of tomato, homologation
suggested by FIRA (2016).
Once the structure is homologated, the variables to be applied within the model
should be calculated per square meter and per kilogram to calculate the economic
indicators of the company (break-even point and operating profit of kilogram per
square meter).
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As can be seen in the previous section, the packaging plays a dominant role over
other accounting entries reported by all companies, representing in some companies
up to 92% of total costs, becoming a determinant variable in the total cost of the
company, see Table 3.
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In Table 4 the variables defined for the application of the simulation are presented:
Fixed cost: fixed costs reported by companies.
Market price by type of packaging: these represent the daily costs per type
of tomato packaging in two high and low price scenarios, the most used
packages in the market are: 5kg Carton, 5kg Flats, 10lbs, 11lbs, 15lbs and
25 pounds; the simulated market price was the average monthly price per
kilogram reported by USDA for the year 2016.
Exchange rate: Daily peso-dollar exchange rate reported by Bank of Mexico
for the year 2016.Natural gas price: quarterly natural gas price reported by
Bank of Mexico for the year 2016.
Total cost and variable cost: costs reported by companies.
Packaging cost per kg: cost reported by the company.
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The company located in Sonora, within the scenario of high prices, presents
significant levels of inefficiency, especially in the 11-pound package as it increases
by 13.654%, without forgetting that in all types of packaging analyzed has an
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these indicators still when they are not comparable with the percentages obtained
with the distribution of the stochastic error with the market price reflect inefficiency
in the company and a negative influence on the cost components analyzed, since it
increases their inefficiency.
Exchange Rate
States with inefficiency
5 Kg 5 Kg 10 11 15 25
Carton Flats Libras Libras Libras Libras
Saltillo, on the other hand, continues to show the trend of inefficiency shown in
the scenarios discussed above, reflects levels of inefficiency in two of the six types
of packaging analyzed.
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The Sinaloa firm continues to be efficient in managing its costs and although in
the two types of scenarios the inefficiency that shows the distribution of the random
variable is positive the coefficient that presents in both types of scenario continues
below 1%, it is say, although the impact is minimal there is no significant influence
of the random variable on the cost components shown by this company.
Table 3. Stochastic error distribution natural gas price scenario high price
Natural gas price
States with inefficiency 5 Kg 5 Kg 10 11 15 25
Carton Flats Libras Libras Libras Libras
However, interesting cases continue to occur with the error distribution; in the
first instance it is shown that the Sinaloa company now occupies the place in highly
inefficient companies, because although the coefficient of inefficiency is very small
(0.09%), it is positive and greater than the coefficients shown by the other units.
Saltillo continues to show convergence with random variables.
It should be noted on this occasion that the company is located in Cuauhtémoc
as it goes to the area of inefficient units, thanks to the fact that in three of the six
packages analyzed there is no convergence, while in those that if convergence is
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Table 4. Stochastic error distribution natural gas price low price scenario.
Natural gas price
States with inefficiency
5 Kg Carton 5 Kg Flats 10 Libras 11 Libras 15 Libras 25 Libras
Highly Guanajuato 0.068 0.068 0.068 0.068 0.068 0.080
inefficient Sonora -0.088 -0.089 -0.097 n.a -0.008 n.a
Cuauhtémoc n.a n.a -0.087 n.a n.a n.a
Little
Sonora -0.088 -0.089 -0.097 n.a -0.008 n.a
Inefficient
Sinaloa -0.066 -0.066 -0.066 -0.066 -0.066 -0.066
Source: author’s elaboration based on information provided by producers.
The Sonora unit presents levels of negative inefficiency, which means that it
decreases its levels, emphasizes the behavior of the company of Cuauhtémoc as it
has the best scenario as it does not find convergence in 5 of the 6 types of
packaging.
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7. Conclusions
With the application of the stochastic frontier model, the influence of external
variables on the cost structure of the producing units analyzed, showing different
scenarios, showed that, on some occasions, externalities are the cause of the possible
inefficiency can present in them, but contrary to what is established in theory, there
are some units that show that the inefficiency with which they count is diminished
by the influence of uncontrolled variables.
Cuauhtémoc and Sonora proved to be vulnerable units to external conditions and
with cost components that do not have sufficient strength to resist the impact that
these variables exert on them. In contrast, the Monterrey and Parral units have a cost
composition capable of absorbing the effects that the external variables have, this
explains the level of technology they have and the performance they have.
Saltillo, even though it has high technology, deserves special mention because
the uncontrolled variables have an impact on the cost composition, revealing that
this unit is vulnerable to external conditions. Finally, the units in Guanajuato and
Sinaloa have the most efficient cost structures; external conditions do not pose a
danger when measuring inefficiency. This is supported by the coefficients of the
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stochastic error distribution, which in a few cases exceeded 1% both in increase and
decrease in inefficiency, this is an indicator of the strength of these companies,
especially the unit of Guanajuato which is the one that maintains a more stable
behavior of the seven units analyzed in this investigation.
Sinaloa is supported by the importance of the production volume and production
value generated by within the national scope, these are indicators that collaborate so
that its cost structure is one of the strongest within the units analyzed; with all this
the units must establish strategies that lead them to a better functioning.
8. Recommendations
Each type of packaging represents a different market price, which was analyzed
individually for each producing unit, resulting in an efficient type of packaging for
each of which the above-mentioned conclusions were derived and which resulted in
the proposal of different strategies presented below.
The first strategy proposal is for each producing unit to adopt the packaging for
which its cost structure is adequate, each of the units analyzed in this investigation
resulted in a certain type of packaging making the operation efficient according to
the structure of the costs, for which it would be convenient to use that type of
packaging.
For production units to produce in a type of packaging they must know the
characteristics of the market. One of these characteristics is the time it must remain
in the market, during the analysis of each of the units it was concluded that the best
package for all was the 25-pound one.
This type of packaging has the characteristic that it remains throughout the year
in the market, it means the 52 weeks, not only by cycle as produced by the units
analyzed, from which the first strategy based on cost leadership is derived.
The strategy is the organization of producers that allows to supply the 52 weeks
of the year to the target market, that is, to the United States. The organization that
the producers of the analyzed companies can reach and the decisions on the type of
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packaging to which they are produced can be definitive aspects in the improvement
of the efficiency levels of the producing units.
The 10-pound package also represents a good option for all companies, even
though it is not as efficient for all companies, their levels of inefficiency are very
small in all the scenarios previously presented, which means that they adapt to the
structures of costs of the companies that were analyzed and that even collaborates
with the decrease of inefficiency in some of the units.
The great advantage of this type of packaging for the Mexican unit is that its
presence in the market occurs during the months of February to May, November and
December, months in which the producer can meet that demand.
The strategy suggested for this type of packaging is for the production units
located in Guanajuato, Sonora and Saltillo, as the results from the stochastic frontier
support that tomato production must be carried out in this type of packaging, since
inefficiency decreases of the companies.
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