Labor dependence, income diversification, rural credit and technical efficiency of

small-holder coffee farms: A case study from the Cu Mgar District, Dak Lak
Province, Vietnam
H Quc Thng1, Tuyt Hoa Ni Kdm2

Abstract
Vietnam coffee sector is not only important for the countrys economy but also for the global coffee market.
Increasing coffee production efficiency may benefit coffee producers to be more efficient in applying production
resources and increase quantity of coffee for the market supply. However, small-holder coffee farming
households still have many difficulties regarding resources and socio-economic conditions affecting coffee
production efficiency. This study examines relationships amongst income diversification, rural credit loan, labor
dependence and technical efficiency in coffee production. A face-to-face survey of 143 coffee farming
households was conducted in the Cu Mgar District, Dak Lak Province, Vietnam. The stochastic frontier model
showed that mean of technical efficiency scores was 0.64 and inefficiency effect statistically and significantly
existed. Consistently, both Maximum Likelihood Estimate (MLE) and Feasible Generalized Least Square
(FGLS) indicated that higher level of diversity in income sources may negatively affected coffee production
efficiency. Additionally, independence in labour resource for coffee farming may help farmers to increase
technical efficiency of coffee production. Credit loan had a positive and statistically significant relationship with
technical efficiency of coffee production. These relationships held especially true for smallholder coffee farms
with ethnic minority household heads. The policy options of increasing credit loan, intensive investment in coffee
production rather than diversifying income sources of coffee farmers and independent management strategies
for labour sources were suggested as an integrated approach to improve technical efficiency in coffee
production of smallholder coffee farms.
Key words: coffee; credit; Dak Lak; diversification; income; labor dependence; stochastic frontier; technical efficiency

1. Introduction
Enhancing agricultural production efficiency is not only to increasing income for farmers, but also to
solving many burdens on urban areas in developing world. It is nature of economic laws that resources
transit from the inefficient sectors to more efficient areas. Reducing urban population, objectively
limiting labor migrants to cities is especially primary consideration of policy- makers to lessen serious
problems for major cities. Creating more jobs available for rural labors at their community and more
efficient use of resources are known as an integrated strategy to sustainably improve household income,
which is an economic incentive to shorten living standard gaps between urban and rural area.
There were several studies examined how socio-economic factors contributing to levels of efficiency in
agricultural production. For instance, agricultural labors are highly seasonal thus diversifying income
sources was suggested to be better for farmers (Illukpitiya & Yanagida, 2010). Labor is one of the most
important factors for any agricultural production. Comparing the marginal physical product with
respect to this factor and wage are unrealistic. However, this distortion may occur when family labor
and hired labor are not separately treated in production models. Kumbhakar (1996) found that wages
for agricultural labors were relatively equal to the marginal product and family labor was more
technically efficient than hired labor in agricultural production. In addition, rural credit, income
diversification and education of household heads were taken into account of several previous studies
(see Ilslukpitiya & Yanagida, 2010; Kamil, Fatama, Pinang, & Society, 2009; Kehinde, Awoyemi,
1 Khoa Kinh t - i hc Ty Nguyn
2 Khoa Kinh t - i hc Ty Nguyn; Email: hoaniekdam@gmail.com;

Omonona, & Akande, 2010; Marsh, 2007; Obwona, 2006). However, there are very few studies
examining inefficiency in coffee production, and particularly no previous study investigated socioeconomic factors, i.e., labor dependence, income diversification, credit loan, education or ethnicity,
governing coffee production efficiency in Vietnam, the second largest coffee producer in the globe.
Coffee is the primary export crop for Vietnamese agriculture and plays an important role in the
countrys economy. This is especially true for the Central Highlands of Vietnam and its role in the
world coffee market. In these Central Highlands, farmers incomes are mostly dependent on coffee
production. The Dak Lak province has been the largest coffee producer in terms of both coffee yield
and land area in Vietnam. It is apparent that agricultural production in this area has been dominated by
coffee production (Meyfroidt, Vu, & Hoang, 2013). To illustrate, land area, as it relates to coffee
farming in the Dak Lak province, represents approximately 190,200 hectares. In particular, Cu Mgar is
the largest coffee farming district in province, about 40,000 hectares, accounting for roughly 20%
(Statistics, 2011).
In Dak Lak province, the population growth is a complex issue for local government and authorities.
Many people have moved to cities from rural areas, some for schooling and other for their living. On
the other hand, due to favorable condition for agricultural production, there have been a number of
migrants from the countrys Northern provinces transiting and settling in Dak Lak 3. Especially, short
term migrants from other provinces which have moved to Dak Lak during coffee harvesting season are
significant. Therefore, examining socio-economic factors affecting the levels of efficiency in coffee
production and assessing current status of using this resource through econometric model of production
and other non-parametric analysis plays a crucial role for policy makers and coffee growers as well.

2. Theoretical frameworks and methodology

2.1 Theoretical frameworks
Since Aigner, Lovell, & Schmidt (1977) and Meeusen & van Den Broeck (1977) independently and
simultaneously proposed the fundamental stochastic frontier model, various models have been
recommended and applied. The efficient frontier is known as either the maximum level of output for a
given set of inputs (an output orientation), or the minimum set of inputs required to produce a given set
of output (an input orientation) (Tingley, Pascoe, & Coglan, 2005).
Frontier output, Yj* if Vj >0

Y
Deterministic production function Y =
f(x; )

Frontier output, Yi* if Vi < 0

3 This information with some statistic revealed by the Committee for Ethnic Minorities of Vietnam,
retrieved
on
12th
April,
2012
at
http://cema.gov.vn/modules.php?
name=Content&op=details&mid=7786.