Analysis of Efficiency of Chili Production Cost

Ekawati

, Rahmatullah Rizieq

, Iqbal Firdausi

1,2

, Zulfahmi

, and Yudasto Krisnanto

Panca Bhakti University, Pontianak, Indonesia

Sekolah Tinggi Ilmu Ekonomi Indonesia Banjarmasin, Banjarmasin, Indonesia

iqbal_firdausi@yahoo.co.id

Abstract. This research aimed to find if the chili production has been efficient.

The efficiency was perceived from the cost aspect. This research was important

to avoid any inefficiency of input use in chili production. The more efficient the

costs, the bigger the profit received by the farmers. One of factors leading to the

lack of farmers’ interest in growing chilies was the small profit as well as the

high price fluctuations. The inefficiency of the input use caused high production

costs. Therefore, it was important to find if the chili production has been efficient.

The data were obtained from 30 chili farmers of three villages of Rasau Jaya sub-

district, Kubu Raya district. The samples were determined using balanced simple

random sampling method. The cost analysis was done by estimating the frontier

cost function. The efficiency levels were calculated by comparing the real costs

and the frontier costs. The results revealed that the input use was efficient. The

average cost efficiency was 1.4. The implication of this research was that further

study is required to find the sustainablility of the efficiency.

Keywords: Inefficient ꞏ Frontier ꞏ Profit ꞏ Production ꞏ Maximum likelihood

estimation

1 Introduction

Ten commodities which reached the highest price in Pontianak in August 2019 were

chilis, hospital tariffs, long jawed mackerels, prescription drugs, workman salaries,

yardlong beans, university tuition fees, oranges, golden jewelry, and green beans

respectively [1]. This showed that the demand for chilies was high. This provided

opportunities for chili production business. Theoretically, chili farming will offer

benefits to farmers. In Tapengpah, Insana sub-district, Timor Tengah Utara district, the

value of Revenue Cost Ratio (RCR) of chili farming was 7.12 [2]. Chili farming in

West Kalimantan was highly potential to be developed by implementing several

appropriate strategies[3]. In addition to the benefits, efficiency was important variable

to be analyzed. Nevertheless, the estimation result of the frontier cost function of chili

production in Rejang Lebong district revealed that farmers worked at technical

efficiency level less than 50% [4].

Similar to other farmings, chili farming has different production opportunities.

Technically, each farming implements various possible input-output combinations. The

differences were resulted by the available inputs owned[5]. The efficient input use

results in optimal output. The analysis used to calculate the efficiency has been widely

done. Most of them were production frontier analysis approach [6]. Another possible

Ekawati, ., Rizieq, R., Firdausi, I., Zulfahmi, . and Krisnanto, Y.

Analysis of Efﬁciency of Chili Production Cost.

DOI: 10.5220/0010435100002900

In Proceedings of the 20th Malaysia Indonesia International Conference on Economics, Management and Accounting (MIICEMA 2019), pages 411-416

ISBN: 978-989-758-582-1; ISSN: 2655-9064

411

approach to calculate the efficient input use was the frontier cost approach[7][8]. The

frontier cost function explained the minimum cost which is potential to spend for some

certain resulted outputs.

Assumed, the cost function analyzed was :

𝑌



𝑥



𝛽



𝑉



 𝑈





𝑌



is cost; 𝑥



is production; 𝛽 is parameter; 𝑉



is random variable assumed as

𝑖𝑖𝑑 𝑁



0, 𝜎







and 𝑈



is non-negative random variable assumed as inefficient cost value,

𝑖𝑖𝑑

𝑁



0, 𝜎





|

The calculation of technical efficiency by dividing frontier cost and prediction value

of cost function was [7] [8]:

𝐸𝐹𝐹



𝐸



𝑌



∗



𝑈



,𝑋



𝐸



𝑌



∗



𝑈



0,𝑋





The analysis of chili farming has been widely done in West Kalimantan.

Nonetheless, analysis of farming efficiency using cost production approach has never

been done. Therefore, a study on efficiency of production cost of chili farming in West

Kalimantan is important to do.

2 Method

2.1 Place and Time

This research was done in Rasau Jaya II, Rasau Jaya sub-district, Kubu Raya district.

The consideration was that it was one of areas of program development of crop plants,

particularly chilies. The research was done for 3 months, from March to May 2019.

2.2 Data Collection

The collected data involved primary and secondary data. The primary data were

obtained from various published reports. The secondary data were obtained through

survey method, including direct observation, and interview in Rasau Jaya II, Rasau Jaya

sub-district, Kubu Raya district. The number of chili farmer population was 75 people.

The sample was 50% of the population..

2.3 Data Analysis

There were three stages to estimate the frontier cost function of chilies. The stages were

[6][9]:

The first stage was estimation of production cost function, using ordinary least squares

(OLS), as:

𝐶



 𝛽



 𝛽



𝑄



 𝛽



𝑄





 𝛽



𝑄





 𝜀



is cost, Q

is production, 𝛽



is parameter, and 𝜀



is error term.

MIICEMA 2019 - Malaysia Indonesia International Conference on Economics Management and Accounting

412

The second stage was determining the 𝛾 value, with parameter 𝛽 (excluding value

of 𝛽



) obtained from OLS with the value of parameter 𝛽



and 𝜎



adjusted with OLS

and corrected using formula proposed by Coolli [7]. Parameters 𝜇, 𝜂 or 𝛿 were set into

zero. The third stage was using the value obtained from the second stage as the initial

value for interaction process to obtain the final estimation value, maximum likelihood,

with Davidon-Fletcher-Powell Quasi-Newton method. The data analysis applied

Frontier version 4.1.

3 Result and Discussion

3.1 Result

Table 1 shows the estimation results of chili production cost function using OLS.

Table 1. The Estimation Results of Chili Production Cost Function.

Variable Name Estimated Coefficien

Standa

dErro

T-Ratio

Constan

0.10079690E+08 0.23224358E+07 4.340

Q -0.92273642E+04 0.43015732E+04 -2.145

-0.70522533E-03 0.21648005E+01 2.869

0.44952 x 10

-3

0.28686950E-03 -2.458

*𝐸𝜀 = 0.00000000E+00

*eta is restricted to be zero

All variables of the cost function indicated significant effects on production costs.

This shows that the model is applicable for the analysis.

Table 2 shows the final estimation results using MLE.

Table 2. The Final Estimation Results of Chili Production Cost Using MLE.

Variable Name Estimated Coefficien

Standa

dErro

T-Ratio

Constan

0.91703623E+07 0.16585412E+01 0.55291737E+07

Q -0.90705203E+04 0.63191573E+03 -0.14354003E+02

0.60417442E+01 0.59998484E+00 0.10069828E+02

-0.67568724E-03

0.99599589E-04 -0.67840364E+01

ma-square

0.20294622E+13 0.10000000E+01 0.20294622E+13

Gamma 0.67187067E+00 0.13892557E+00 0.48361914E+01

Mu -0.21635656E+00 0.13267198E+01 -0.16307630E+00

eta is restricted to be zero

log likelihood function = -0.45884093E+03

All variables of the final estimation of cost function using MLE also indicated

significant effects on production costs.

Both estimations were used to calculate the efficiency of chili production cost. Table

3 shows the efficiency values of chili production cost per farmer and their average.

All the 30 farmers were efficient in managing their chili farming. This was indicated

by the efficiency value, that was above 1. The farmer no 25 was the most efficient

Analysis of Efﬁciency of Chili Production Cost

413

farmer, and the farmer no.26 was the least efficient of all. The average efficiency value

was 1.14.

Table 3. Efficiency Values of Chili Production Cost per Farmer and Their Avergare.

farme

eff.-est. Farme

eff.-est. farme

eff.-est.

1 1.1349623 9 1.1406981 16 1.1025832 24 1.1150612

2 1.1394518 10 1.1285411 17 1.1417372 25 1.2334257

3 1.1142252 11 1.1362888 18 1.1425090 26 1.0222231

4 1.0332218 12 1.1376294 19 1.1805107 27 1.1492319

5 1.1362888 13 1.1101797 20 1.1348001 28 1.1420785

6 1.1339708 14 1.1349623 21 1.1080202 29 1.1413473

7 1.0263623 15 1.1417372 22 1.1517986 30 1.1310677

8 1.6537102 23 1.1431353

Mean 1.1447253

3.2 Discussion

The result of data analysis showed that all of the chili farmings were efficient. It was

viewed from the production cost. There were some factors resulting in the efficient chili

farming, which are: 1) fields, 2) farmer ages, 3) farmer education levels, 4) seasons, 5)

farmer groups, 6) field and parcel ownership status, and 7) farming location [10].

Furthermore, the efficiency of farming was determined by: 1) farming duration, 2)

participation in agricultural extension, and 3) agriculture management system [6].

Another factor which resulted in the efficiency was technology use in a production

process [8][11].

Field was the most responsive factor in improving the production [10]. The field

used by the farmers in farming was approximately 0.34 ha. It offered intensive farming

management, indicated by the number of manpower used. Most of the farmings were

run by the family members. It was about 93.15%. Whereas, 16.85% of them was by

non-family member. In addition to the width of field, the problem was the land fertility.

In the research area, the filed was peat soils. Some of fruit and horticultural plants could

grow well after the adaptation to the field condition and particular treatment for

a certain time [12]. Considering the identification results of land physical

characteristics, combined with the requirement of growing horticultural plants, the area

was suitable for culturing the plants [13].

The use of technology was expected to improve the efficiency of agricultural

production process. The more the technology use, the lowest the cost and the higher the

resulted production [13][17]. The technology use was highly related to the adoption of

technology. Both farmer groups and farmer participation in agricultural extension were

factors that fostered the adoption. In the research area, all farmers have joine farmer

groups and actively participated in the extension program. Generally, the government

assistance programs were distributed through the groups; the role of the groups were

important in implementing new technology [15].

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414

4 Conclusion and Recommendation

4.1 Conclusion

In accordance with the discussion, it was concluded that: 1) the chili farming in Rasau

Jaya II, Rasau Jaya sub-district, Kubu Raya district was efficient with 1.14 of the

average efficiency value; 2) the factors expected to result in the efficient chili farming

were: a) fields, b) farmer ages, c) farmer education levels, d) seasons, e) farmer groups,

f) field and parcel ownership status, g) farming location, h) farming duration, i)

participation in agricultural extension, j) agriculture management system, and k)

manpower use; 3) the main factors considered to result in the efficient chili farming

were field and manpower use.

4.2 Recommendation

The advanced research is expected to ensure the causes of efficient chili farming in

Rasau Jaya II, Rasau Jaya sub-district, Kubu Raya district. To reach clear description

of chili farming, comparing the farming in the area with that in other areas is important

to do.

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