Stochastic Frontier Analysis with Price Risk: An Application to Organic Tea Production in Vietnam

Abstract

Traditionally, tea famers have been used chemicals to protect products. But an over usage of pesticides or preservation compounds has negatively affected on the environment and human health. When the living standard has been improved, consumers have changed into buying cleaner and safer products. Therefore, conventional tea production has been gradually converted into organic ones health requirement standards. However, lacks of researches about profit level as well as potential price risk for organic tea industries might be hard to pursue famers and policy makers about that movement. Thai Nguyen province, one of Northern mountainous provinces, has been well-known for its high quality and quantity tea production in Vietnam for along time, which mainly contributes to make tea become one of the country’s primary industrial exports. In this field, Stochastic Frontier Analysis (SFA) was applied to estimate profit levels for 180 tea growers selected from four representative communes of two tea producing districts of the Thai Nguyen province. A risk analytical model using the Monte Carlo method was developed to link risk levels to profit for organic tea producers when the premium price for organic tea and market conditions change. This study shows that organic tea production has a higher profit efficiency level (0.836) than conventional tea production (0.454). If the price premium is removed, the probability that organic tea farmers incur a negative profit is about 22.5% and the probability that the farmers receive profits below the average observed profit increases by 42.5%. Maintaining the price premium is a policy option promoting a smoother transition to organic tea production by stabilizing income.