Journal of Economics Library

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Volume 5 March 2018 Issue 1

Climate change and profit efficiency in Punjab, Pakistan:

Evidence from household-level panel data

By Khush Bukhat ZAHID a† & Munir AHMEDab

Abstract. This study seeks to examine, both theoretically and empirically, the impact of
climate change on farm Profit efficiency in Rural Punjab Pakistan. Current study explores
the climate change impact by using Stochastic Profit Frontier Model at farm level with
panel data. The outcomes of this study are indicative of a strong impact of climate change
on the agriculture of Punjab, Pakistan. Increase in long run normal precipitation and
temperature have significant effect on farm profit that fluctuates in direction as well as
magnitude across quarters. The incidence of weather shocks and socioeconomic
characteristics of the farming households are important factors of profit efficiency at farm
level. The quasi fixed inputs are positively and significantly related to farm profits while
input prices contribute negatively to farm profitability. The average profit efficiency score
turned out to be 0.72, suggesting that the average farm, by improving their efficiency can
increase the profit up to 28 percent. The findings of present study are evocative of huge
impact of climate change on the rain-fed areas of Punjab since these are water scarce areas
depending on rain fall for cropping. Arguably, it is vital for the better performance of the
agriculture sector to combat the impact of climate change more effectively through
implementation of adaptation strategies.
Keywords. Agriculture, Farm production, Climate change, Profit efficiency, Stochastic
profit frontier model and farm level panel data.
JEL. C23, D01,Q12.

1. Introduction

T here is consensus among climate scientists that damages to agriculture from

climate change will be disproportionately concentrated in developing
countries whose economies are largely farm based. The effects on industrial
economies will understandably be modest if long term aggregate global effects are
taken into account. It is projected that in another twenty or thirty years global
warming will actually benefit farm production in developed countries of higher
latitude where temperatures and precipitations have not reached the critically
damaging level that lower latitude countries have already attained. Scientists agree
that there is no doubt that developing countries are going to feel the impact of
climate change on their agriculture much sooner and more severely since they lack
the technological knowhow and capacity to adapt. This consensus serves a timely
warning to agronomists, breeders and economic managers of the developing world,
in particular of South Asia, where local agriculture’s proneness to respond to
climate change in the shape of falling output, floods and droughts has been evident
for some years. It is time for the economic managers in Pakistan to engage them in
aa†
Kashmir Institute of Economics University of AJK muzaffarabad, Pakistan.
. + 05822442573
. [email protected]
b
Pakistan Instiitute of Development Economics, Islamabad, Pakistan.
. +92519248095
. [email protected]
 Journal of Economics Library
preparing their farming communities for the challenges posted by climate change.
This study attempts to add its bit to emphasizing the urgency of these forecasts.
Climate change is one of the biggest threats the earth faces in the form of
turbulent weather. The addition of greenhouse gases in the environment is causing
global warming which has emerged as an important issue in the recent past for the
changes it is bringing about in climate patterns and its potential future impact on
the wellbeing of the earth’s inhabitants. According to the Intergovernmental Panel
on Climate Change (IPCC), ‚…climate change refers to a change in the state of the
climate that can be identified by changes in the mean or variability of its properties
and that persists for extended periods, typically decades or longer‛ (Lee,
Nadolnyak & Hartarska 2012:1). The increase in volume of "greenhouse gasesi"
raises the temperature of the earth and changesthe precipitation pattern. The rise in
earth’s temperature is causing frequent occurrence of extreme weather events
having devastating effects on crops’ performance as well as livelihoods and food
security of the people, especially the vulnerable among them (UN, 2015).
Economies of developing countries largely depend on the agriculture sector
(Finger & Schmidt 2007; Nelson, et al., 2009; Crosson, 1997 and Schipper, 2004).
Furthermore, developing countries lack the capacity to adapt to climate changes
(Eriksen et al., 2008). Therefore, climate change can wreak havoc in these
countries. Though there are several other factors which contribute to agricultural
productivity such as technological advancements, policy environment and optimal
utilization of physical inputs (Cabas et al., 2010), but these factors cannot
contribute effectively to the performance of agriculture unless the climatic and
weatherii conditions are favorable for plant growth and animal rearing. Even the
day to day variations in weather conditions constrain the agricultural practices
resulting in low productivity (White, 1985). Any abnormal variation in the climate
or weather influences the factors of production resulting in wide range of losses in
proportion to the severity of climatic shocks. Various studies have empirically
estimated the impact of climate change on agriculture and shown diverse results,
the empirical literature in general concludes that agricultural production is affected
both negatively and positively. iii In short these impacts change over time which
depends on the magnitude and rate of the climate change (Steffen et al., 2004;
O’Brien & Leichenko, 2003 and Leichenko & O’Brien, 2006).
iv
Pakistan is not an exception and is the most vulnerable country in the South
Asian region because of its overwhelming dependence on agriculture which is
sustained by the Indus Basin River System. The farm lands of Pakistan are mostly
categorized as arid to semiarid, where rainfall is not enough to grow agricultural
crops adequately (Waraich & Mohsin, 2005). About 11 percent of the area receives
250-500 mm annual rainfall, one half of the area has an annual rainfall of 150-250
mm and about one-third receives less than 150 mm annually. The country on the
whole is classified as arid (Iqbal et al., 2008) with the added susceptibility of the
sector to the climatic condition. The Task Force on Climate Change (TFCC)
indicated that the temperature increases in Pakistan are predicted to be higher than
the worldwide average resulting in significant reduction in agricultural production
(TFCC, 2010).
Climatic variables such as precipitation, temperature, humidity and others affect
production through different stages of plant growth. Climate change affects the
timing and application of inputs resulting in inefficiency and low yields. An
unfavorable climate influences productivity of factor inputs causing production
losses and affecting profit efficiency. The present study uses stochastic frontier
approach as a primary method of analysis. Farm specific inputs and climate are
explicitly incorporated in the model. The study also investigates the effects of
various farmer characteristics, such as age, education, tenurial status and farm size
on the farmer’s efficiency. ‘Inefficiency Effect Model’ includes the function in
which technical efficiency is made explicitly dependent on farm specific
characteristics in line with Battese & Coelli (1995).

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Literature, evaluating the impact of changing climate on farm profit efficiency
is also quite scarce. Recently, Pereda & Alves (2012) analysed the impact of
climate change on farm profit of majorcrops in Brazil. The study at hands differs
from Pereda & Alves (2012) both in nature and scope. Firstly, this workundertake
analysis at farm level using all crop data and all seasons for the whole agriculture
year. Secondly, it estimate the model in single step procedure Battese & Coelli
(1995) and Battese et al., (1996) criticized the two-step modeling approach on the
ground that it violated one of the most vital assumptions of stochastic frontier
model i.e. ‘identically independently distributed technical inefficiency effects’.as
contrary to Peredawhich uses only census data at district level and divide climate
data into two seasons data to represent climate.Therefore the present study
measures the impact of climate change more precisely at finer intra-temporal and
spatial scale to better capture the impact of climate change.while others such as
Rahman (2003) and Wadud (2003) analyzed Bangladeshi farmers’ profit efficiency
of rice by using restricted normalized profit frontier approach. Crop inputs and
socio-economic characteristics of the farmers that were used to explain farm profit
and inefficiency but did not consider climatic variables in their approach to explain
farm efficiency.Similarly, Rios & Shively (2005), Nganga, et al., (2010) and in
Pakistan Javed et al., (2009) Javed et al., (2011) also measures efficiency of crops
but without considering climate variables.
Empirical analysis would involve the study of impact of climatic factors along
with socio-economic variables on farmers’ production efficiency. The available
studies relating the subject have used national level data or district level data for
the analysis due to non-availability of household level data such as Pereda & Alves
(2012).The study in hand would thus be a first attempt to study the impact of
climate change at the household level in Pakistan. It uses farm survey data
collected by Punjab Economic Research Institute (PERI) and matches this data
with climatic data of respective households based on village level latitude and
longitude.The existing studies on efficiency of Pakistan’s agriculture do not give a
clear picture of farmers’ profit efficiency because they use farm level data on a
single crop, mostly wheat and rice, and few categories of inputs while climate
change is not factored in the analysis (Battese et al., 1993 and Ali, Parikh & Shah
1996). The present study extends this analysis to all the crops together with all
measureable inputs and includes climatic variables. Its outcomes are therefore
more reliable.
Available efficiency studies have mostly been focusing on farm and farm
operators’ attributes to evaluate the sources of measured efficiencies. Against this
backdrop, the present study, assesses the impact of weather shocks (climatic
deviation) in addition to these variables, extends the previous work in coverage and
scope. Moreover the analysis is extended by analyzing the effect of climate change
on profit efficiency. This area had previously been ignored by researchers, who
focused merely on farm productivity. Indeed, profit efficiency is a broader concept
since it incorporates both input and output oriented efficiencies.
The remaining part of the paper is structured as follows: Section 2 discussed
material and methods Section 3 discussed results and discussion, concludes the
study and suggests recommendations.
2. Material and Methods
2.1. Stochastic Frontier Analysis
The production frontier applying estimated stochastic frontier method is more
appropriate way to measure production efficiencies while using unit level datasets
such as the household farm survey (Hughes et al., 2011).The stochastic frontier
model also allows producers specific random shocks (Thiam & Bravo-Ureta 2001).
The traditional deterministic approaches can lead to overestimation of technical
inefficiency because of not taking account of noise. The stochastic frontier
approach uses a ‘composite error term’ having two components. One is technical
inefficiency that is ‘farm deviations from the production frontier,’ and the other is
statistical noise capturing the effect of random shocks on each producer
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characterized by the environment under which he/she operates (Coelli, 1995).
Additionally, this method also allows the statistical test of hypotheses’ in respect of
the production structure and the degree of inefficiency.

2.2. Study Area and Data

The area of this study is Punjab Province of Pakistan while data is taken from
different agro ecological zones i.e barani, partial barani and irrigated zone
following to the reason that their specific agronomic characteristics can provide
important insights for our research questions. In crops wheat, rice, maize,
v
sugarcane, cotton and others are taken for simplification because these crops cover
the major area of Punjab under cultivation. The farm level panel data collected by
Punjab Economic Research Institute (PERI) from 537 farm families in the study
area is available for the agricultural years 2005-06, 2006-07 and 2007-2008. The
sample included fair representation of small, medium and large size farm
households vi . Profit (Gross Margin) serves as dependent variable which is
computed as difference of revenues from crop outputs and variable costs involved.
Profit (Gross Margin) is calculated as total revenue from crop production minus the
variable cost. Total revenue includes revenue obtained from selling of crops and by
products. The variable cost includes labor, fertilizer, seed, irrigation, pesticides and
weedicides and farm yard manure, involved in production of crops. In profit
frontier we used six quasi-fixed variables: four inputs--land, seed, permanent labor
and capital; and two climatic variable—temperature and precipitation measured as
20 years moving average; and three variable inputs (labor, irrigation, and material
inputs). The prices of three variable inputs are wage rate (labor), per irrigation
vii
price, and price index of material inputs (fertilizer, charges per chemical
application (weedicide and pesticide), price of farm yard manure (FYM) per
cartload).
For quasi-fixed inputs, land is total cultivated area in acres while seed index
used is same as constructed above, labor is permanent hired and family labor
involved in farm work measured in male adult equivalent MAE. Labor is an
important factor in farm productivity. Those farmers who don’t have their own
labor they hired them who are paid in kind and/or cash. Male adult equivalent
(MAE) is define as a person working 100 percent for 300 days per annum or 8
hours daily for 25 days per month was consider as one male adult equivalent.
Capital is the total of the present value of farm implements, tractors and tubewells
owned by the farmers. The farm implements include cultivators, trolley, thresher,
reaper, sprayers, and other farm implements and climatic variables are 20 year
moving average of monthly precipitation and temperature. Descriptive statistics is
reported as Table-1 in Appendix.
According to Battese (1997), it is also necessary to incorporate dummies for
variables having zero values in the data to describe various production systems for
farmers who use definite inputs as compared to those who do not. Using Cobb-
Douglas or Translog functional forms in absence of dummies could lead to biased
parameter estimates. This procedure applied by many including Battese & Broca
(1997), Ahmad (2003), Ahmad et al., (2002) and Nasim, Dinar & Helfand (2014).
All the inputs in the sample contain at least some zero values, to account for zero
values in the Cobb Douglas function we follow Battese & Broca (1997) adding a
dummy variable 𝐷𝑘 in the production function and transforming ln 𝑥𝑘 to ln𝑥𝑘∗
where k is the input for which this dummy specifies.

0 𝑖𝑓𝑥𝑘 = 0
𝐷𝑘 = and 𝑥𝑘∗ = 𝐴𝑟𝑔𝑀𝑎𝑥 𝑥𝑘 , 1 − 𝐷𝑘 (1)
1 𝑖𝑓𝑥𝑘 > 0

The above transformation implies that when the inputs 𝑥𝑘 is applied then 𝑥𝑘∗ =
𝑥𝑘 but when 𝑥𝑘 is not applied 𝑥𝑘∗ = 1 the inclusion of dummies signifies that the

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intercept term differs between farmers that apply the input and farmers that do not
apply the input.

2.3. Stochastic Profit Frontier Model

Specification of profit function is parameterized Cobb-Douglas log functionviii
which is used as an empirical approach. It is assumed that the farmers are
producing single or multiple crops by using the fixed inputs including capital,
labor, land and environmental factors—temperature and precipitation normal, and
the profit function is specified as a restricted profit function. This implies that these
inputs are specified as being fixed in the short run. Moreover, in order to impose
the property a function being homogeneous in prices, that function is normalized
with respect to output price. Hence, the stochastic restricted normalized profit
function is specified and estimated using capital, land, seed and labor input factors
in the presence of variable inputs prices under different climatic conditions as
follows.
𝜋 𝑖𝑡 𝑚𝑎𝑡 𝑖𝑡
ln 𝑝 𝑖𝑡
= 𝛽0 + 𝛽1 lnCAit + 𝛽2 lnPFLit + 𝛽3 lnFIit + 𝛽4 lnseedit + 𝛽5 𝑙𝑛 𝑝 𝑖𝑡
+
wag it Irri
𝛽6 𝑙𝑛 +𝛽7 𝑙𝑛 it + 𝛽8 dcw𝑖 + 𝛽9 drw𝑖 + 𝛽10 dmw𝑖 + 𝛽11 dt 2 + 𝛽12 dt 3 +
𝑝 𝑖𝑡 𝑝 𝑖𝑡
𝛽13 P1it + 𝛽14 P2it + 𝛽15 P3it + 𝛽16 P4it + 𝛽17 T1it + 𝛽18 T2it + 𝛽19 T3it + 𝛽20 T4it +
𝑣𝑖𝑡 − 𝑢𝑖𝑡 (2)

Where
𝜋 𝑖𝑡 𝑛 𝑛
= [( 𝑖=1 𝑃𝑖𝑡 𝑌𝑖𝑡 − 𝑖=1 𝑊𝑖𝑡 𝑋𝑖𝑡 )/𝑝𝑖𝑡 )] (3)
𝑃𝑖𝑡

𝜋
is restricted normalized profit computed for ithfarm defined as farm revenue
𝑝
less variable costs divided by output price—wheat price which is major crop
produced by all the sample farmers.
The coefficients are estimated by MLE using R-Frontier software.
Following Battese & Coelli (1993) the technical inefficiency effects of 𝑢𝑖𝑡 gain
in the above equation are specified as.
𝑢𝑖𝑡 = 𝑑0 + 𝑑1 age𝑖𝑡 + 𝑑2 eduit + 𝑑3 farmsizeit + 𝑑4 dtenantit + 𝑑5 DVp1𝑖𝑡 +
𝑑6 DVp2𝑖𝑡 + 𝑑7 DVp3𝑖𝑡 + 𝑑8 DVp4𝑖𝑡 + 𝑑9 DVt1𝑖𝑡 + 𝑑10 DVt2𝑖𝑡 + 𝑑11 DVt3𝑖𝑡 +
𝑑12 DVt 4𝑖𝑡 (4)

We finally estimate the profit efficiency of each producer based on the

distributional assumption discussed below (Coelli, 1993).

3.Findings
3.1. Stochastic Profit Frontier Empirical Results
Equation 2 and 4 was estimated using R-Frontier Package. This statistical
package provides maximum-likelihood estimates (MLE). The results of the profit
frontier function incorporating inefficiency effects in the model are reported in
Table 2.

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Table 2: The Maximum Likelihood Estimates for Cobb-Douglas Profit Frontier
Variables Parameters Coefficients Std. Error
Profit Function
Constant 𝛽° 0.69 1.05
Log of Cultivated Area lnCA 𝛽1 0.51*** 0.03
Log of permanent family labour LnPFL 𝛽2 0.00 0.03
Log of present value of farm implement LnFI 𝛽3 0.02*** 0.01
Log of seed value index Lnseed 𝛽4 0.31*** 0.02
Log of material price index Lnmat 𝛽5 -0.08*** 0.01
Log of wage rate of hired labour Lnwag 𝛽6 -0.04*** 0.01
Log of irrigation rate Lnirri 𝛽7 -0.05** 0.02
Dummy variable for cotton wheat zone Dcw 𝛽8 0.77*** 0.07
Dummy variable for rice wheat zone Drw 𝛽9 0.97*** 0.06
Dummy variable for mixed zone Dmw 𝛽10 0.65*** 0.05
Dummy variable for year 2006-07 dt1 𝛽11 0.20*** 0.04
Dummy variable for year 2007-08 dt2 𝛽12 0.66*** 0.06
Precipitation normal for April-June P1 𝛽13 0.00* 0.00
Precipitation normal for July-Sept P2 𝛽14 0.00 0.00
Precipitation normal for Oct-Dec P3 𝛽15 -0.01* 0.01
Precipitation normal for Jan-March P4 𝛽16 0.04*** 0.02
Temperature normal for April-June T1 𝛽17 -0.10** 0.05
Temperature normal for July-Sept T2 𝛽18 0.03 0.07
Temperature normal for Oct-Dec T3 𝛽19 -0.04 0.09
Temperature normal for Jan-March T4 𝛽20 0.29*** 0.07
Profit Inefficiency Model
Age of household head Constant 𝑑° -2143.20** 880.35
Education of household head lnCA 𝑑1 -2.04** 0.82
Total area of farm in acres. LnPFL 𝑑2 20.06** 8.27
Dummy variable if the farm is rented in LnFI 𝑑3 1.30** 0.53
Deviation of first quarter average rainfall Lnseed 𝑑4 126.74** 52.83
Deviation of second quarter average rainfall. Lnmat 𝑑5 -3.49** 1.42
Deviation of third quarter average rainfall Lnwag 𝑑6 -2.15** 0.93
Deviation of fourth quarter average rainfall Lnirri 𝑑7 1.71** 0.69
Deviation of first quarter average temperature. Dcw 𝑑8 21.30** 8.70
Deviation of second quarter average temperature Drw 𝑑9 -316.19** 128.98
Deviation of third quarter average temperature. Dmw 𝑑10 -111.46** 45.10
Deviation of fourth quarter average temperature. dt1 𝑑11 -36.42** 16.39
dt2 𝑑12 -169.05** 69.19
P1
P2 σ2 579.03** 238.90
P3 Γ 0.99*** 0.00
P4 -1458.531
Note: ***, **, * indicate significance at 0.01, 0.05 and 0.1 probability levels

The results of tests of hypotheses are reported in Table -3. The first null
hypothesis which was tested relates to H0 : γ = 0 specifying that the inefficiency
effects do not exists in the model. The value of key parameter, 𝛾, which is defined
𝛿 𝜇2
as , ranges between 0 and 1; 0 implies no inefficiency, and 1 indicates no
𝛿 𝑢 +𝛿 𝑣2
2

random noiseix. The null hypothesis was rejected implying that there exists profit
inefficiencies at the sampled farms. The magnitude of 𝛾 is close to 1 and is
significantly different from 0 shows the existence of high level of inefficiencies at
the sampled farms. Moreover, the corresponding variance-ratio parameter implies
that 99% of the differences between observed and the maximum frontier profits are
due to the existing differences in efficiency levels among farmers. The second null
hypothesis 𝐻° : γ = 𝑑° = … 𝑑𝑛 = 0, which specifies that the inefficiency effects are
not present in the model, was also rejected at the 5% level of significance. This
result confirms the above finding that a significant part of the variability in profits
among farms is explained by the existing differences in the level of technical
inefficiencies. The third null hypothesis,𝐻° : 𝑑1 = … … 𝑑𝑛 = 0, was again rejected.
This result implies that the variables included in the inefficiency model
significantly explain the variation in profit inefficiency. The fourth null hypothesis
is 𝐻° : 𝑑5 = … … 𝑑12 = 0 which specifies that climatic deviations jointly have no
impact on profit inefficiency. This hypothesis was also rejected implying that

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climatic shocks do explain the variations in farm profit inefficiencies statistically
significantly.

Table 3. Generalized Likelihood-Ratio Tests of Hypothesis for the Profit Frontier Model
Null Hypothesis LR DF Critical Value 𝑿𝟐 Decision
𝑯° : 𝛄 = 𝟎 164 1 3 Reject 𝐻°
𝑯° : 𝛄 = 𝒅° . . = 𝒅𝒏 = 𝟎 291 14 23 Reject 𝐻°
𝑯° : 𝒅𝟏 = … … 𝒅𝒏 = 𝟎 137 13 21 Reject 𝐻°
𝑯° : 𝒅𝟓 = … … 𝒅𝟏𝟐 = 𝟎 58 8 14 Reject 𝐻°
Note: These critical values are taken from Table 1 of Kodde & Palm (1986) at 5% level of
significance.

Based on the estimates of the profit frontier function, we computed basic

features of the production structure, namely, profit elasticities with respect to
changes in variable input cost and fixed factors. The material price index, wage and
irrigation rate are significant and carry expected signs that are negative. The
incremental contribution of farm capital, land, permanent family labor and seeds
contributed positively to farm profit. Results of the model also demonstrate that all
estimated coefficients of zone specific dummy variables are statistically significant
and carry positive signs indicating higher profitability in irrigated areas relative to
the rain-fed zone.
The results of climate variables show that precipitation normal significantly
contribute towards farm profit, except that of the October-December which is
affected negatively and significant—implying that better precipitation helps crop
productivity if the temperature stays at the historical mean. Also increased
precipitation results in high humidity that can cause high pests and diseases of crop
and ineffectiveness of weed control measures (ICARDA, 2011). The parameter
estimates of first and fourth quarter temperature variables are statistically
significant at least at the 5 percent level of significance. The rise in temperature
normal during April-June contributed negatively and January-March contributed
positively towards farm profit while July-September and October –December
temperature are insignificant.

3.2.Analysis of the Determinants of Profit Inefficiency

The impact of the socio-economic factors accounting for farm inefficiency is
listed in the lower panel of Table -2. The results show that education of head of the
household has significant positive impact on profit inefficiency—implying that
more educated farmer are less involve in farm production due to off farm jobs and
realizes less profit. The farm size also affects inefficiency significantly positively.
The impact of farm size on inefficiency is mystifying. The large farm area
positively contributed efficiency on the one hand and negatively on the other hand
because having larger planting area, enhance the ability of the farmers to apply
modern technologies such as tractors and irrigation while other group of
researchers is arguing that small farmers are more efficient in managing limited
available resources for their survival because of economic pressure. Therefore,
farmers with large farm size could be more efficient or less inefficient. The
parameter estimate of tenancy variable shows that the tenants are inefficient
relative to the owner and owner-cum-tenants.
Variations in temperature and precipitation from their respective long term
means have also been used to examine the impacts of climatic shocks. All
parameter estimates of climate related shock variables—temperature and
precipitation deviations, are significant at least at the 5 percent probability level.
The parameter estimates of rainfall deviation variables, April-June (DVp1) and July-
Sept (DVp2), carry negative signs implying that excessive rains had potential to
reduce farm level technical inefficiency during these periods that mostly covers
summer crops. However, our data shows average rainfall deviations for third
quarter DVp3 and fourth quarters DVp4 months (Oct-Dec and Jan-March) are
positive. These months cover winter crops season (rabi) and the results imply
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thatpositive rain shocks (positive deviations from the long term trends) would
reduce farm efficiency.
All parameter estimates of temperature deviation variables are statistically
significant and negatively contribute to inefficiency levels. Our data show that
average temperature deviations in fact are negative for DVt1, DVt2, DVt3 and DVt4
from long term means which imply that the lower temperature from long-term
means has reduced the level of technical inefficiency pushing farmers further close
the profit frontier. The impact of temperature deviations during the period of
October-December (DVt3) was though positive on efficiency and found statistically
significant. The deviations of January-February (DVt4) also contributed positively
to profit efficiency. (DVt3) and (DVt4) period represents mainly the sowing and
vegetative growth stages of winter crops i.e. wheat, peas and gram therefore the
negative temperature shocks have potential to reduce farm inefficiency. The mean
of the deviations during this period is negative implying negative temperature
shocks (cooling up weather compared to historical trends) leading us to conclude
that low temperature than the historical mean helps raise farm efficiency. This
result is consistent with the findings of Ahmed, et al., (2014).

3.3. Profit Efficiency Distribution

The average profit efficiency scores presented in Table 4 show that average
profit efficiency score is 0.72; the average farm could increase profits up to 28
percent by improving their technical efficiency. Results show that there exist a
widespread in profit inefficiency ranging from 95 percent to less than 0.02 percent.
The observed results are not unexpected; similar results were found by previous
empirical studies in Pakistan, e.g. Ali & Flinn (1989) stated mean profit efficiency
level of 0.69 (ranging between 13–95%) in Punjab while Ali et al., (1994) reported
0.75 (ranging between 4–90%) in KPK province for rice producers. However, the
results shows that a substantial amount of unexploited profit exists in agriculture
that can be realized by using even the existing technologies more efficiently in
production.
The distribution of profit efficiency of sampled farmers is presented in Table -5
that indicate that the proportion of famers having efficiency score below 0.80
slightly decreased in second year and increases in third year, while the proportion
of farmers having efficiency score of above 0.80 have declined. However, the
overall trend of profit efficiency measures slightly decreased overtime. And most
of the farmers are concentrated in efficiency range of 60 to 90 percent.

Table 4. Mean of Profit Efficiency Estimates for Each Year

Year Efficiency Scores
Year 1 0.77
Year 2 0.65
Year 3 0.74
Mean Profit Efficiency 0.72

Table 5. Profit Efficiency Estimates Distribution Using CD -SFA Model

PE Range Percent of Farms Year 1 Percent of Farms Year 2 Percent of Farms Year 3
<50 2 16 5
50-60 3 10 6
60-70 8 19 10
70-80 34 34 36
80-90 52 20 41
90-100 1 1 2
Total 100 100 100
Source: Author’s own calculations

4. Conclusions and Recommendations

The study also estimated the variable profit function applying the SFA
incorporating the profit inefficiency model. The results show the existence of wide

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range profit inefficiencies with an average score of 72 percent—highest efficiency
score was 95 percent leaving room for improvement in farm profits by 23
percentage points by using farm resources more efficiently. The results further
show that the climatic variables—long-term normal and short term climatic shocks,
significantly influence farm profits and efficiencies which have serious
implications for the agriculture sector of Pakistan. The results are suggestive of the
fact that fighting climate change through promotion of mitigation and adaptation
strategies and enhancing farm level production efficiencies with provision of
formal education, facilitating consolidation of lands, and securing tenancy, shall be
the key elements to improve the performance of the agriculture sector as well as the
farm household food security
The major objectives of the study were to quantify the impact of changes in climate
on the performance of farm. To this end the study confirms the premises that
climate change affects agricultural profitability considerably.
Therefore, there is a need to take steps:
 to handle the adverse effects of climate change on crop production, efficiency
and food security through devising and promoting mitigation and adaptation
strategies;
 to enhance off-farm employment and investment opportunities in order to
facilitate the exit of extremely inefficient farmers.
 to improve the educational system in rural areas making it more accessible to
the general public—particularly for those living in far flung areas;
 to re-orient the agricultural extension system to meet the challenges of climate
change, since extension agents are the one who could better train the farming
communities to improve their management skills under the changing scenarios
of the environment; and
 to modernize the weather information and forecasting system that could cope
with the information gap spurred by the vagaries of nature.
In addition to above, it is generally believed that the changing climatic
conditions would further worsen the shortages of irrigation water in the country.
The crops are already being grown under water stress and rise in temperature
would result in enhance water requirements by the plants. Therefore, it is crucial to
enhance water storage capacity in the country in order to ensure sustainability in
agricultural production system. Therefore, there is need to increase input and
output market efficiencies through better infrastructure and farmers friendly
policies that in turn would reduce the cost of production and make the sector more
competitive.

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Notes
i
Pakistan’s total GHGs emission in the year 2008 were 309 million tons (mt) comprising of CO2
(54%), methane (36%), nitrous oxide (9%) and one percent of other gases (TFCC, 2010) which is
due to emission of methane from rice paddies (Cicerone & Shetter, 1981) carbon dioxide and
greenhouse gases (GHG) from industrial production and burning of crop residues (Rehan & Nehdi
2005) and atmospheric brown clouds (ABC) from sea salt and mineral dust (Ramanathan et al.,
2007).
ii
‚The distinction between weather and climate is a measure of time. Weather is conditions of the
atmosphere prevailing over a short period of time while climate is over a relatively long periods of
time‛ (NASA).
iii
The studies like Adams et al., 1988; Cline 1996; Parry, et al., 2004; Lobell, et al., 2007; and Cabas et
al., 2010 among others found negative relation, while some others found positive association
between increase in temperature and agricultural production such as Gbetibouo & Hassan 2005.
iv th
Maplecroft Climate Change Vulnerability Index (CCVI) ranked Pakistan 24 in the list of countries
most vulnerable to climate change.
v
Include Pulses, Vegetable, Orchards, Groundnut, Gram, Fodder and Oil seed.
vi
‘Small-A defined as farms with farm size less than 5 acres; Small-B, farms with size between 5 to
12.5 acres; Medium, farms with size between 12.5 and 25 acres; and Large, farms with size 25 acres
or more.
vii
FPI is preferred indexing procedure to use. The difficulty with the LPI and PPI number formulas is
that they are consider similar but overall they will give different results. Diewert (1993) and Walsh
(1901) also proposed FPI index in one of his numerical examples while pointing the differences
between the Laspeyres and Paasche indices.
viii
We also estimated the model with one of the flexible functional form, such as the translog, but in
our case Cobb-Douglas performed better in terms of economically reasonable parameter estimates.
‚If γ is not significantly different from 0, the variance of the inefficiency effects is 0 and the model
ix

reduces to a mean response function in which the inefficiency variables enter directly (Battese &
Coelli, 1995)‛.

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Appendix

A1. Definition of Variables and their Descriptive Statistic

Variables Definition The Stats are in Actual (non-log)
Profit Frontier mean S.D min max
𝜋
natural log of restricted normalized profit 196755 290982 975 5024080
𝑝
Lnmat natural log of material price index normalized by output price. 1.14 0.37 0.00 4.88
Lnwag natural log of wage rate of hired labor normalized by output price. 81 131 0 1,250
Lnirri Natural log of price of irrigation normalized by output price 547 2352.68 0 26920
lnCA natural log of area under cultivation in acres 9.28 12.73 1.00 174.00
lnPFL natural log of permanent family labor in MAE 3.67 1.75 1.25 12.5
lnFI natural log of present value of farm implement 117,910 170,593 0 1,223,980
Lnseed natural log of seed index value 108.34 238.60 1.65 6983.03
Cropping zones Dummies
Dcw dummy variable assuming value of One if farm is located at cotton wheat zone , otherwise Zero; 0.32 0.47 0 1
Drw dummy variable assuming value of One if farm is located at rice wheat zone , otherwise Zero; 0.21 0.41 0 1
Dmw dummy variable assuming value of One if farm is located at mixed wheat zone , otherwise Zero; 0.22 0.41 0 1
Time Dummies
𝑑𝑡2 dummy variable assuming value of One if agriculture year is 2006-07, otherwise Zero; 0.33 0.471 0 1
𝑑𝑡3 dummy variable assuming value of One if agriculture year is 2007-08, otherwise Zero; 0.33 0.471 0 1
Climate variables-
T1 20 years moving average of mean temperature for first quarter months (April-June). 34.09 1.66 30.43 36.02
T2 20 years moving average of mean temperature for second quarter months(July-Sep) 31.13 2.33 27.51 34.57
T3 20 years moving average of mean temperature for third quarter months(Oct-Dec) 17.26 1.66 14.90 20.17
T4 20 years moving average of mean temperature for fourth quarter months(Jan-March) 16.46 1.36 13.50 18.70
P1 20 years moving average of mean precipitation for first quarter months (April-June). 35.24 12.23 18.63 68.89
P2 20 years moving average of mean precipitation for second quarter months(July-Sep) 89.22 29.11 40.78 161.39
P3 20 years moving average of mean precipitation for third quarter months(Oct-Dec) 16.68 8.75 8.10 50.22
P4 20 years moving average of mean precipitation for fourth quarter months(Jan-March) 9.77 5.98 3.32 27.50
Variables for inefficiency determinants-
age age of the head of household in years; 43.31 14.14 14.00 80.00
edu education of the head of the household in years of schooling; 6.44 4.66 0.00 16.00
farmsize total area of farm in acres. 39.38 56.02 1.00 581.00
dtenant dummy variable assuming value of One if the farm is rented in, otherwise Zero; 0.03 0.18 0.00 1.00
DVt1 Deviation of first quarter average temperature from 20 year moving average of these months (Celsius degree). -1.00 0.43 -2.42 -0.20
DVt2 Deviation of second quarter average temperature from 20 year moving average of these months (Celsius degree). -2.01 1.71 -5.90 -0.18
DVt3 Deviation of third quarter average temperature from 20 year moving average of these months (Celsius degree). -0.92 1.45 -4.63 0.69
DVt4 Deviation of fourth quarter average temperature from 20 year moving average of these months (Celsius degree). 0.72 1.96 -2.46 3.48
DVP1 Deviation of first quarter average rainfall from 20 year moving average of these months (mm). 23.51 23.54 -43.42 75.24
DVP2 Deviation of second quarter average rainfall from 20 year moving average of these months (mm). 23.52 26.09 -24.76 96.74
DVP3 Deviation of third quarter average rainfall from 20 year moving average of these months (mm). -0.29 7.56 -21.00 26.29
DVP4 Deviation of fourth quarter average rainfall from 20 year moving average of these months (mm). 4.74 11.76 -9.86 45.01

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