ASSESSING EFFICIENCY OF PRIVATE SHRIMP SEED PRODUCERS IN SELECTED HATCHERIES OF PENINSULAR MALAYSIA

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1 ASSESSING EFFICIENCY OF PRIVATE SHRIMP SEED PRODUCERS IN SELECTED HATCHERIES OF PENINSULAR MALAYSIA Mohd Ammarr Bin Mohd Aripin Institute of Agricultural and Food Policy Studies, Universiti Putra Malaysia, Serdang, Selangor, Malaysia. Md. Ferdous Alam Faculty of Arts and Social Sciences, American International University, Kemal Ataturk Avenue Banani, Dhaka , Bangladesh. dr.ferdous@gmail.com Mohd Mansor Ismail Institute of Agricultural and Food Policy Studies, Universiti Putra Malaysia, Serdang, Selangor, Malaysia. mmi@agri.upm.edu.my ABSTRACT This study aims at estimating technical, allocative and cost efficiency of shrimp/prawn seed producers of Malaysia and determining costs and return in shrimp/prawn seed production. Data collected from 19 hatcheries (comprising 10 brackishwater shrimp hatcheries and 9 freshwater prawn hatcheries) from the states of Penang, Perak, Terengganu and Selangor were used in the study. Data Envelopment Analysis was applied to estimate efficiency scores of the hatcheries. Besides, cost, return and profitability of hatcheries was examined using farm management procedure. The TE CRS (overall technical efficiency) was found to be for brackishwater shrimp hatcheries and for freshwater prawn hatcheries. Pure technical efficiency (TE VRS ) averaged for shrimp hatcheries and for prawn hatcheries indicating that inefficiencies to the level of 9-10 percent do exist. Allocative efficiency (AE) and cost efficiencies (CE) were 0.78 and 0.70 for brackishwater shrimp hatchery and 0.79 and 0.73 for freshwater prawn hatcheries suggesting that the realized level of spawn/fry could be produced by the hatcheries by spending percent less on inputs. Keywords: Cost Benefit Ratio, Data Envelopment Analysis, Shrimp and Prawn Hatchery 1. INTRODUCTION Fishery is an important sub-sector and plays a vital role in the national economy of Malaysia. The sub-sector provides direct employment to 89,453 fishers and 21,504 fish culturists. The figures are much higher if those indirectly involved in the sector are taken into consideration. Fish constitutes percent of the national animal protein, with per caput consumption of 53 kg in 2005, which is expected 109 to have increased to 56 kg in 2010 (Department of Fisheries Malaysia, 2010). The shrimp industry in Malaysia has developed rapidly since the early 1980s after the so-called successes experienced in neighbouring Thailand, Indonesia and Philippines. Malaysia, however, is not one of the major producers of cultured marine prawn in the world, as the area under marine prawn culture is about 5,100 hectares (2,627 hectares in 1995).

2 Despite this, the Government of Malaysia is very proud to claim that the country's average production (metric tonnes per hectare) is the third highest in the world, after Taiwan and Thailand. And plans for intensification and expansion have been drawn up. Table 1 shows the estimated production of Tiger Shrimp and White Shrimp for nauplii and fries in million pieces from private hatcheries in Malaysia ( ). Production of white shrimp is higher than Tiger Shrimp which is 12, million pieces for White Shrimp and 1, million pieces for Tiger Shrimp. Giant Prawn is a freshwater species native to the Indo- Pacific region, Northern Australia and Southeast Asia. This species is commercially important for its value as a food source. Table 1 also shows estimated production of Giant Prawn for Larvae and Juvenile in million pieces from Malaysia private hatcheries ( ). Production of larvae and juvenile Giant Prawn production in 2010 was billion pieces. Of the total production of private shrimp and prawn hatcheries in 2010, White Shrimp constituted percent comprising of percent of nauplii production and percent of White Shrimp fry. Giant Prawn larvae and juvenile produced in private hatcheries was only 0.25 percent of the total. On the contrary, nauplii and fry production of Tiger Shrimp constituted 0.98 percent and 8.18 percent of the total production. Thus White Shrimp seed production is most important in the private hatcheries in Malaysia. Table 1: Estimated Production of Private Shrimp and Prawn Seed Hatcheries by Species (Million Pieces), Year Tiger Shrimp White Shrimp Giant Prawn Nauplii Fry Total Nauplii Fry Total Larvae Juvenile Total TOTAL , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Source: Department of Fisheries Malaysia, METHODOLOGY 2.1 The input oriented DEA model: The DEA model used for calculation of technical efficiency is as follows: θ Subject to + Yλ 0 θ Xλ 0 N1 λ = 1, (VRS constraint) and λ 0 (1) where subscript i represent the i th hatchery; θ is the technical efficiency (TE) score having a value ranging from 0 to 1; λ 110 is a NX1 vector of constants (weights) which defines the linear combination of the peers of the i th hatchery; Y is a vector of output quantities and X is a vector of observed inputs. The first constraint is with respect to the output (fish seed). The term of the left hand side of the constraint is the vector of fish seed of the i th hatchery compared to the output (fish seed) vector of the theoretically efficient hatchery (Yλ). The constraint states that the theoretically efficient hatchery produces an amount of output that is greater than or equal to the actual fish seed produced by the i th hatchery given the same amount of inputs.

3 The second constraint is with respect to the input. The term Xλ represents the minimum quantity of input the theoretically efficient hatchery used, given the actual level of shrimp seed produced by the i th hatchery. The term θ in the left side on the second constraint represents the actual level of inputs of the i th hatchery multiplied by level of efficiency (θ). If the solution of the programming problem turns out to be θ = 1, then the level of input of that particular hatchery is as small as the quantity of input utilized by the theoretically efficient hatchery in producing the same level of shrimp seed. Hence, the hatchery is technically efficient. If the solution of the problem turns out to be θ < 1, then the level of input utilized by that particular industry can be further reduced to as low as Xλ to produce the same level of output. Hence there exists a degree of technical inefficiency of that particular hatchery. We considered the cost minimization by solving the following linear programming problem: * Subject to + Yλ 0 θ Xλ 0 N1 λ = 1, (VRS constraint) and λ 0 (2) where is a vector of input prices for the i th hatchery and * (which is calculated by the model) is the corresponding cost-minimizing vector of inputs quantities for the i th hatchery, given input prices and the output (shrimp seed) levels. NI and λ are as defined above. The total cost/economic efficiency of the i th hatchery is then calculated as the ratio of the minimum cost (computed using X* and actual prices) and observed cost. Mathematically, this can be easily written as: = * / (3) The allocative efficiency then is computed as: = / (4) The output sheet of the VRS Input Oriented Model provides information of CRS (constant returns to scales) TE, VRS (variable returns to scale) TE, SE (scale efficiency) and RTS (returns to scales). In fact, the CRS TE is decomposed into two components, one due to scale inefficiency and one due to pure technical inefficiencies (TE vrs ). Operationally, scale efficiency is to be calculated from the following formula: = / (5) Where SE = 1 implies scale efficiency or CRS and SE<1 indicates scale inefficiency Production Costs and Returns: This analysis is mainly concerned with the estimation and analysis of costs and return of hatchery operation. Various attributes of costs returns and profitability were measured. In calculating costs and returns, calculations may be done in terms of for producing 1000 of spawn in hatchery. Table 2 is a detail equation. Table 2: Equations for Calculating the Production Costs and Returns (RM$) for Spawn/Fry/Fingerling in Hatchery Total cost Variable cost Fixed cost Gross margin Net margin =Variable costs + fixed costs = Cost of brood value, fuel, electricity, plastic/polythene bag, oxygen cylinder, telephone bill, pond preparation, reexcavation of ponds, water treatment, brood feed, spawn/fry/fingerling feed, chemical (e.g. lime, poison, ovaprim) and hormone. = Cost of salary, license/permit and internet bill. = Total revenue total variable cost = Total revenue total cost Benefit cost ratio = Total revenue total cost Rate of hatchery income Break-even production Break-even price Net return per 1000 spawns = (Net margin gross margin) x 100% = Total cost per cycle price = Total cost per cycle output per cycle = Market price break-even price 3. RESULTS AND DISCUSSION The TE CRS is known as overall efficiency which is decomposed into pure technical efficiency (TE VRS ) and scale efficiency (SE). That means, TE CRS is the product of pure technical efficiency and scale efficiency. In this study, the

4 TE CRS has been found to be for brackishwater shrimp hatcheries and for freshwater prawn hatcheries which indicate that overall inefficiency associated with the overall efficiencies (TE CRS ) scores are about 42 percent and 31 percent respectively. These levels of overall inefficiencies could be reduced by operating at optimal scales and by eliminating pure technical inefficiencies via the adoption of the best practices of efficient hatcheries. The scale efficiencies are found to be and showing that considerable inefficiencies exist in these. Thus, the scale inefficiencies for the shrimp and prawn hatcheries make a greater contribution to overall inefficiency. The average pure technical efficiency (TE VRS ) is for brackishwater shrimp hatcheries, ranging from a minimum of to a maximum of 1.00 with a standard deviation of (Table 4.3). For freshwater prawn hatcheries, the mean pure technical efficiency, TE VRS, is ranging from a minimum of to a maximum of 1.00 having a standard deviation of These pure technical efficiency (TE VRS ) indices indicate that some moderate level of inefficiencies do exist which ranged from about 9 to 10 percent for the brackishwater shrimp hatcheries and freshwater prawn hatcheries respectively. These suggest that inputs application could be proportionally reduced by 9 to 10 percent to make the hatcheries efficient. In other words, the output that are realized by the existing hatcheries given the use of current levels of inputs use could be increased by 9 to 10 percent if the hatcheries would have operated efficiently. The mean pure technical efficiency is much higher than that of the overall efficiencies for both the brackishwater shrimp hatcheries and freshwater prawn hatcheries. In this study the overall technical inefficiency is quite considerable, i.e., about 42 percent for brackishwater shrimp hatcheries and about 31 percent for freshwater prawn hatcheries. The overall technical inefficiency could be reduced by 42 percent for brackishwater shrimp hatcheries and 31 percent for freshwater prawn hatcheries on average, by operating at optimal scale and by eliminating pure technical inefficiencies via the adoption of best practices of efficient hatcheries. Since the scale inefficiency is higher than pure technical inefficiency, the former in the production of spawn for the shrimp and prawn hatcheries make a greater contribution than that of the pure technical efficiency. 112 Operating at optimal scale and reduction of pure technical inefficiency are the sources of eliminating overall inefficiency. Thus inefficient hatcheries should follow the best practices of the efficient hatcheries to improve overall efficiency. Table 3: Efficiency Score of Hatcheries by Each Farm Firm(n) TECRS TEVRS SE AE CE Brackiswater Shrimp Mean SD Minimum Maximum Freshwater Prawn Mean SD Minimum Maximum TE, technical efficiency; SE, scale efficiency; AE, allocative efficiency; CE, cost efficiency; CRS, constant return to scale; VRS, variable return to scale; SD, standard deviation; IRS, increasing return to scale The mean AE level is for brackishwater shrimp hatcheries and for freshwater prawn hatcheries, implying that shrimp hatcheries of Peninsular Malaysia operate at 22.5 percent and 20.7 percent below the full AE level. This implies that brackishwater shrimp hatcheries and freshwater prawn hatcheries could have reduced their production costs by 22.5 percent and 20.7 percent respectively without affecting their current output level had they been operating at full TE and AE level. This means, the hatcheries remained less conscious about the input prices when they apply input quantities in the production process. Allocative efficiencies of shrimp and prawn hatcheries are concentrated in percent range and percent efficiency levels respectively. The mean scale efficiencies (SE) are and with a minimum of and and a maximum of About 40.0 percent of the brackishwater shrimp and percent of the freshwater prawn hatcheries achieved SE greater than 80.0 percent (Table 4.5). As far as return to scale is concerned, the study finds that 30.0 percent and percent operate at their optimal level (CRS) and 70.0 percent and percent at below optimal level (increasing returns to scale). Results of returns to scale suggest that an increase in overall technical efficiency can be improved by

5 eliminating the problem of operating at the increasing returns to scales. Table 4: Frequency and Technical Efficiency of Hatcheries by Returns to Sales Hatcheries Return to Scale CRS DRS IRS Number of Shrimp hatchery 3-7 Prawn Hatchery 5-4 Overall Technical Efficiency of Shrimp hatchery Prawn Hatchery Pure Technical Efficiency of Shrimp hatchery Prawn Hatchery CRS, constant return to scale; DRS, decreasing return to scale; IRS, increasing return to scale The mean overall technical and pure technical efficiency of these brackishwater shrimp hatcheries operating at increasing returns to scale (below optimal scale) are and respectively. For pure technical efficiency of shrimp and prawn hatcheries operating at IRS are much higher i.e., and respectively. This indicates that largest increase in overall technical efficiency could be achieved by eliminating the problem of operating at IRS i.e., by operating at below optimal scale. This implies that if spawn production efficiency is to be improved, increasing hatchery size would be appropriate. Table 5 shows the costs of returns for producing 1000 pieces of spawn in shrimp and prawn hatcheries. The average revenues per 1000 heads of spawn are RM 8.81 for shrimp and RM for prawn seeds which means that revenue per unit of output is higher for prawn seed. Gross margin and net margin per thousand pieces of spawn/fry were estimated at RM 6.57 and RM 5.63 for shrimp and RM and RM Net return per 1000 spawns for shrimp is RM 6.57 and prawn is RM However, benefit-cost ratio for prawn is only 1.95 compared to 3.30 for shrimp. This shows that investment in shrimp seed production is more profitable than the prawn seed production. The benefit-cost ratio (BCR) 1.95 indicating that a RM1.00 investment in prawn seed production provides a turnover of RM In case of shrimp seed production, a RM1.00 investment produces a gross return of RM Because BCRs of both shrimp and prawn seed production are greater than 1, production appears to be profitable and sustainable in the long-run. With the per cycle production achieved, the break-even price stands at RM2.24 and RM14.19 for producing 1000 pieces of shrimp and prawn spawn, whereas the actual hatchery gate prices received by the producers were RM3.18 and RM The break-even production came out to be only 4,031,703 pieces/heads and 249,810 pieces per cycle but their actual production is about 3 times higher those of the break-even level production. The lucrativeness of the enterprises is therefore very clear. Table 5: Cost of Return for Producing 1000 Pieces of Spawn in Hatchery Profitability and economic indicator Brackishwater Shrimp FreshwaterPrawn Total variable costs (TVC)(RM$ ) Total fixed costs (TFC)(RM$ ) Total costs (TC=TVC+TFC)(RM$ ) Total revenue (TR)(RM$ ) Gross margin (GM=TR-TVC)(RM$ ) Net margin (NM=TR-TC)(RM$ ) Benefit cost ratio (BCR=TR TC) Rate of hatchery income [RHI = (NM GM) x 100%] (% ) 85.73% 58.71% Total output per cycle 15,850, ,556 *Break-even Production (BProduction = TCcycle Price) 4,031, ,

6 *Break-even Price (Bprice = Tccylce Output Cycle)(RM$ ) Net Return per 1000 Spawns (NRPS = Market Price - BPrice)(RM$ ) CONCLUSION From this study it can be concluded that hatchery technology is acceptable by the hatchery owners as it a profitable business and its profitability has also been indicated through the participation of private sector in a large scale. REFERENCES Coelli, Prasada Rao D. S. and Bateese An introduction to efficiency and productivity analysis. Kluwer Academic Publisher. Massachusetts, United States of America. Coelli, T., Rao, DSP, Battese (2003). An Introduction to Efficiency and Productivity Analysis. Kluwer Academic Publishers, London p275. Department of Fisheries Malaysia Annual Fisheries Statistics Book, Department of Fisheries Malaysia, Putrajaya. 114