ECONOMIC EFFICIENCY OF MILK PRODUCTION IN KHYBER PAKHTUNKHWA BY MUHAMMAD SAJJAD DEPARTMENT OF AGRICULTURAL AND APPLIED ECONOMICS FACULTY OF RURAL SOCIAL SCIENCES THE UNIVERSITY OF AGRICULTURE, PESHAWAR-KHYBER PAKHTUNKHWA (PAKISTAN) JANUARY, 2012 ECONOMIC EFFICIENCY OF MILK PRODUCTION IN KHYBER PAKHTUNKHWA By MUHAMMAD SAJJAD A thesis submitted to the Department of Agricultural & Applied Economics, the University of Agriculture, Peshawar-Khyber Pakhtunkhwa Pakistan in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Agriculture (Agricultural & Applied Economics) DEPARTMENT OF AGRICULTURAL AND APPLIED ECONOMICS FACULTY OF RURAL SOCIAL SCIENCES THE UNIVERSITY OF AGRICULTURE, PESHAWAR-KHYBER PAKHTUNKHWA (PAKISTAN) JANUARY, 2012 ECONOMIC EFFICIENCY OF MILK PRODUCTION IN KHYBER PAKHTUNKHWA By MUHAMMAD SAJJAD A thesis submitted to the Department of Agricultural & Applied Economics, the University of Agriculture, Peshawar-Khyber Pakhtunkhwa Pakistan in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Agriculture (Agricultural & Applied Economics) Approved by: _____________________________ Prof. Dr. Munir Khan Chairman, Supervisory Committee _____________________________ Dr. Abbasullah Jan Member (Major) ______________________________ Dr. Muhammad Idrees Member (Minor) Deptt. of Agric. Ext. Edu. & Comm. ______________________________ Dr. Dawood Jan Chairman/Convener Board of Studies ______________________________ Prof. Dr. Zahid Hussain Dean, Faculty of Rural Social Sciences _____________________________ Prof. Dr. Farhatullah Director, Advanced Studies & Research DEPARTMENT OF AGRICULTURAL AND APPLIED ECONOMICS FACULTY OF RURAL SOCIAL SCIENCES THE UNIVERSITY OF AGRICULTURE, PESHAWAR-KHYBER PAKHTUNKHWA (PAKISTAN) JANUARY, 2012 DEDICATED TO MY PARENTS WHOSE HANDS ARE ALWAYS RAISED FOR MY SUCCESS TABLE OF CONTENTS S.No. Title Page No. List of Tables ............................................................................i List of Figures ...........................................................................iv List of Appendices…………………………………….. ..........v Abbreviations………………………………………………….vi Acknowledgements…………………………………… ...........vii Abstract…………………………………………………. ........viii I. INTRODUCTION………………………………………… ...............1 1.1 Justification of the Study…………………………………... ...5 1.2 Objectives of the Study…………………………………….. ...6 II. REVIEW OF LITERATURE……………………………….. ............7 2.1 Literature on Concept of Efficiency………………...……… 7 2.2 Literature on Empirical Efficiency Studies in Agriculture…………….. ..........................................................9 2.3 Literature on Empirical Efficiency Studies in Livestock Sector……………....................................................11 III. MATERIAL AND METHODS. ...........................................................26 3.1 Description of the Universe …………………………… .........26 3.2 Data Collection Procedure and Sample Size… ........................26 3.3 Sampling Technique…………………………………… .........26 3.4 Analytical Framework……………………..………… ............28 3.4.1 Stochastic Frontier Production Function… ..............................28 3.4.2 Method of Estimation of Stochastic Frontier Production Function ....................................................................................30 3.4.3 Estimation of Technical Efficiency………… ..........................31 TABLE OF CONTENTS S.No. Title Page No. 3.4.4 Model Specification for Technical Efficiency. .........................32 3.4.5 Technical Inefficiency Estimation …… ...................................33 3.5 Estimation of Allocative Efficiency..........................................33 3.5.1 Allocative Inefficiency Estimation. ..........................................34 3.5 Dummy Variable Regression Model……… ............................35 IV. RESULTS AND DISCUSSION……………….................... ...............................36 4.1 Description of the Study Area...................................................36 4.2 Socio-economic Characteristics of Sampled Farmers ..............37 4.2.1 Age of Sample Respondents .....................................................37 4.2.2 Education Status........................................................................39 4.2.3 Family Size of Sample Respondents.........................................40 4.2.4 Source(s) of Income ..................................................................41 4.3 Herd Size ...................................................................................42 4.3.1 Distribution of Livestock Population in the Study Area ...........43 4.4 Milking Animals in the Study Area ..........................................44 4.4.1 Milk Production, Seasonality and Lactation Length.................44 4.4.2 Milk production Per Day Per Animals ......................................45 4.4.3 Daily Milk Production Per Animal/ Household........................45 4.4.4 Daily Milk Consumption of Household Per Day .....................46 4.4.5 Daily Household Milk Sale .......................................................47 4.4.6 Milk Price .................................................................................48 4.5 Milk Production Cost ................................................................48 4.5.1 Cost of Milk Production/ Buffalo .............................................48 4..5.2 Cost of Milk Production/ Cow ..................................................51 TABLE OF CONTENTS S.No. Title Page No. 4.5.3 Cost of Milk Production/ Goat ..................................................53 4.5.4 Cost of Milk Production/ All milch Animals All districts ........55 4.6 Revenue of Milk Production .....................................................57 4.6.1 Average Revenue from Milk Production ..................................57 4.7 Analytical Framework .............................................................58 4.7.1 Likelihood Ratio Test for Selecting the Functional Form .......59 4.7.2 Technical Efficiency Estimates in Peshawar District ...............61 4.7.3 Technical efficiency Estimates in DI Khan District .................63 4.7.4 Technical efficiency Estimates in Mansehra District ...............65 4.7.5 Technical efficiency Estimates for Buffalo, Cow, Goat and All Animal in All Districts ..............................................66 4.8 Technical Inefficiency Effect Model ........................................69 4.8.1 Frequency Distribution of Technical Efficiency of Individual Farmers in Statistical Frontier Production Function ....................................................................................69 4.9 Allocative Efficiency Analysis .................................................70 4.9.1 Allocative Efficiency Estimates for All Milch Animals in Peshawar District ......................................................................70 4.9.2 Allocative Efficiency Estimates for All Milch Animals in DI Khan District ......................................................................71 4.9.3 Allocative Efficiency Estimates for All Milch Animals in Mansehra district ..................................................................73 4.9.4 Allocative Efficiency Estimates for All Animals in All Districts ..........................................................................74 TABLE OF CONTENTS S.No. Title Page No. 4.9.5 Allocative Inefficiency Effect Model .......................................77 4.9.6 Frequency Distribution of Allocative Efficiency of Individual Farmers in Statistical Frontier Cost Function ...........................77 4.10 Frequency Distribution of Economic Efficiency of Individual Farmers in Statistical Frontier Cost Function ...........................78 4.11 Dummy Variables Multiple Regression Model Estimates According to Districts ..............................................................79 4.12 Discussion ................................................................................80 V. SUMMARY, CONCLUSIONS AND RECOMMENDATIONS.. ..82 5.1 Summary ...................................................................................82 5.2 Conclusion and Recommendations ...........................................85 LITERATURE CITED ..............................................................................................87 APPENDICES ......................................................................................98 Appendix I ............................................................................................98 Appendix II ...........................................................................................99 Appendix III ..........................................................................................100 Appendix IV ..........................................................................................101 Appendix V ...........................................................................................102 Appendix VI..........................................................................................102 Appendix VII ........................................................................................103 Appendix VIII .......................................................................................104 Appendix IX ..........................................................................................105 Appendix X ...........................................................................................106 Appendix XI..........................................................................................107