Efficiency and Profitability Analysis of Agricultural Cooperatives in Mpumalanga, South Africa
Abstract
Agricultural cooperatives are expected to generate sustainable profit as they are established as a vehicle of economic development. Efficiency and profitability analysis measures the performance of a firm, and assists management in decision-making through benchmarking with other firms (Marwa & Aziakpono, 2014). To understand the performance of agricultural cooperatives, our study analysed efficiency and profitability using an efficiency-profitability matrix to provide for multi-dimensional analysis. The study used secondary data from annual financial statements for the financial years 2015/16 collected from 19 agricultural cooperatives. Technical efficiency was estimated using Data Envelopment Analysis (DEA) and profitability was estimated using Returns on Assets (ROA). The median scores were 68% for technical efficiency and 10% for profitability. Using the 68% efficiency and 10% profitability benchmark, the matrix separated best performers from low performers. The matrix indicated that 26% of the cooperatives had high-efficiency levels with high profitability (stars), however there was an even distribution between the stars and sleepers: 5 out of 19 cooperatives were sleepers and 5 out of 19 were stars. The majority of the decision-making units (DMUs) at 42% (8 out of 19) are in quadrant 3, categorised as ‘question mark’. These DMUs had low-efficiency scores and low profitability ratios. Only 1 out of 19 cooperatives had high-efficiency levels and low profitability scores. The results demonstrate that technically efficient firms do not always translate to profitable firms: in this regard, management needs to investigate how best to allocate resources in order to remain relevant within the business context and competition. Policy makers need to investigate other drivers of efficiency and profitability when measuring the performance of a firm to influence future policy directives.
Downloads
References
Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of Finance, 23(4), 589-609.
Andor, M. & Hesse, F. (2011). A Monte Carlo simulation comparing DEA, SFA and two simple approaches to combine efficiency estimates. CAWM Discussion paper no. 51. Centre of Applied Economic Research, University of Münster.
Aoki, M. (1984). The co-operative game theory of the firm. Oxford University Press.
Batesse, G. E. & Coelli, T. J. (1991). Frontier production functions, technical efficiency and panel data: with applications to paddy farmers in India. In Gulledge, T. R. & Knox Lovell, C. A. (eds.), International Applications of Productivity and Efficiency Analysis (149-165). Netherlands: Springer.
Boussofiane, A., Dyson, R. G. & Thanassoulis, E. (1991). Applied data envelopment analysis. European Journal of Operational Research, 52(1), 1-15.
Bravo-Ureta, B. E. & Pinheiro, A. E. (1993). Efficiency analysis of developing country agriculture: a review of the frontier function literature. Agricultural and Resource Economics Review, 22(1), 88-101.
Camanho, A. S. & Dyson, R. G. (1999). Efficiency, size, benchmarks and targets for bank branches: an application of data envelopment analysis. Journal of the Operational Research Society, 50(9), 903-915.
Charnes, A. & Cooper, W. W. (1984). Preface to topics in data envelopment analysis. Annals of Operations Research, 2(1), 59-94.
Charnes, A., Cooper, W. W. & Rhodes, E. (1978). Measuring the efficiency of decision-making units. European Journal of Operational Research, 2(6), 429-444.
Chibanda, M., Ortmann, G. F. & Lyne, M. C. (2009). Institutional and governance factors are influencing the performance of selected smallholder agricultural cooperatives in KwaZulu-Natal. Agrekon, 48(3), 293-315.
Coelli, T. (1996). A guide to DEAP version 2.1: a data envelopment analysis (computer) program. Australia: Centre for Efficiency and Productivity Analysis, University of New England.
Coelli, T. J., Rao, D. S. P., O’Donnell, C. J. & Battese, G. E. (2005). An introduction to efficiency and productivity analysis. Springer Science & Business Media.
Cummins, J. D., Feng, Z. & Weiss, M. A. (2012). Reinsurance counterparty relationships and firm performance in the US property-liability insurance industry. Draft paper submitted to Temple University.
Debreu, G. (1951). The coefficient of resource utilization. Econometrica, 19(3), 273-292.
Department of Agriculture, Forestry and Fisheries (DAFF). (2015). The 5th annual report of the status of cooperatives in the sector 2015/16. Pretoria: Government Printer.
Efron, B. & Tibshirani, R. J. (1998). An introduction to the bootstrap. Monograph on statistics and applied probability. Washington DC: Chapman & Hall/CRC.
Emelianoff, I. (1995). Economic theory of cooperation: Economic structure of cooperative organizations, 1948, reprinted by the Center for Cooperatives. University of California.
Farrell, M. J. (1957). The measurement of productive efficiency. Journal of the Royal Statistical Society. Series A (General), 120(3), 253-29.
Halkos, G. E. & Salamouris, D. S. (2004). Efficiency measurement of the Greek commercial banks with the use of financial ratios: a data envelopment analysis approach. Management Accounting Research, 15(2), 201-224.
Hardesty, S. D. & Salgia, V. D. (2003). Comparative financial performance of agricultural cooperatives and investor-owned firms. NCERA-194 Research on Cooperatives, 2004 Annual Meeting, November 2-3.
Helmberger, P. G. & Hoos, S. (1962). Cooperative enterprise and organization theory. Journal of Farm Economics, 44(2), 275-90.
Hofstrand, D. (2009). Understanding profitability. Ag Decisions Makers, 2, C3-24.
Joo, S. J., Nixon, D. & Stoeberl, P. A. (2011). Benchmarking with data envelopment analysis: a return on asset perspective. Benchmarking: An International Journal, 18(4), 529-542.
Journal of Economics and Behavioral Studies (ISSN: 2220-6140)
Keramidou, I., Mimis, A., Fotinopoulou, A. & Tassis, C. D. (2013). Exploring the relationship between efficiency and profitability. Benchmarking: An International Journal, 20(5), 647-660.
Koopmans, T. C. (1951). Efficient allocation of resources. Econometrica, 19(4), 455-465.
Kumar, S. (2008). An analysis of efficiency–profitability relationship in Indian public sector banks. Global Business Review, 9(1), 115-129.
Kumbhakar, S. C. & Lovell, C. A. K. (2000). Stochastic frontier analysis. United States of America: Cambridge University Press.
Lerman, Z. & Parliament, C. (1991). Size and industry effects in the performance of agricultural cooperatives. Agricultural Economics, 6(1), 15-29.
Liu, J. S., Lu, L. L. Y., Lu, W. M. & Lin, B. J. Y. (2013). A survey of DEA applications. International Journal of Management Sciences, 41(5), 893-902.
Lovell, C. A. K. (1994). Linear programming approaches to the measurement and analysis of productive efficiency. Top, 2(2), 175-248.
Marwa, N. & Aziakpono, M. (2014). Efficiency and profitability of Tanzanian saving and credit cooperatives: who is a star? Journal of Economics and Behavioral Studies, 6(8), 658-669.
Marwa, N. & Aziakpono, M. (2016). Technical and scale efficiency of Tanzanian saving and credit cooperatives. Journal of Developing Areas, 50(1), 29-46.
Meeusen, W. & van Den Broeck, J. (1977). Efficiency estimation from Cobb-Douglas production functions with composed error. International Economic Review, 18(2), 435-444.
Moffat, B. D. (2008). Efficiency and productivity in Botswana’s financial institutions. PhD thesis submitted to the University of Wollongong.
Moller, L. G., Featherstone, A. M. & Barton, D. G. (1996). Sources of financial stress in agricultural cooperatives. Journal of Cooperatives, 11, 38-50.
Murilloâ€Zamorano, L. R. (2004). Economic efficiency and frontier techniques. Journal of Economic Surveys, 18(1), 33-77.
Ortmann, G. F. & King, R. P. (2007a). Agricultural cooperatives I: History, theory and problems. Agrekon, 46(1), 18-46.
Ortmann, G. F. & King, R. P. (2007b). Agricultural cooperatives II: can they facilitate access of small-scale farmers in South Africa to input and product markets? Agrekon, 46(2), 219-244.
Phillips, R. (1953). Economic nature of the cooperative association. Journal of Farm Economics, 35(1), 74-87.
Piesse, J., Doyer, T., Thirtle, C. & Vink, N. (2005). The changing role of grain cooperatives in the transition to competitive markets in South Africa. Journal of Comparative Economics, 33(1), 197-218.
Porter, P. K. & Scully, G. W. (1987). Economic efficiency in cooperatives. The Journal of Law and Economics, 30(2), 489-512.
Republic of South Africa. (2005). Cooperative Act 14 of 2005. Pretoria: Department of Trade and Industry.
Schrader, L. F. (1989). Equity capital and restructuring of cooperatives as investor-oriented firms. Journal of Agricultural Cooperation, 4, 41-53.
Schwettmann, J. (1997). Cooperatives and employment in Africa. Geneva: ILO.
Sexton, R. J. & Iskow, J. (1988). Factors critical to the success or failure of emerging agricultural cooperatives. Giannini Foundation Information Series No. 88-3. Davis: Division of Agriculture and Natural Resources, University of California.
Simar, L. & Wilson, P. W. (2000). Statistical inference in nonparametric frontier models: The state of the art. Journal of Productivity Analysis, 13(1), 49-78.
Soboh, R. A., Lansink, A. O., Giesen, G. & Van Dijk, G. (2009). Performance measurement of the agricultural marketing cooperatives: the gap between theory and practice. Review of Agricultural Economics, 31(3), 446-469.
Staatz, J. M. (1987). The structural characteristics of farmer cooperatives and their behavioral consequences. Cooperative Theory: New Approaches, 18, 33-60.
Sykuta, M. E. & Chaddad, F. R. (1999). Putting theories of the firm in their place: A supplemental digest of the new institutional economics. Journal of Cooperatives, 14(1), 68-76.
Tipi, T., Yildiz, N., Nargelecekenler, M. & Cetin, B. (2009). Measuring the technical efficiency and determinants of technical efficiency of rice farms in Marmara region, Turkey. New Zealand Journal of Crop and Horticultural Science, 37(2), 121-129.
Yeh, Q. J. (1996). The application of data envelopment analysis in conjunction with financial ratios for bank performance evaluation. Journal of the Operational Research Society, 47(8), 980-988.
Copyright (c) 2018 Thembi Xaba, Nyankomo Marwa, Babita Mathur-Helm
This work is licensed under a Creative Commons Attribution 4.0 International License.
Author (s) should affirm that the material has not been published previously. It has not been submitted and it is not under consideration by any other journal. At the same time author (s) need to execute a publication permission agreement to assume the responsibility of the submitted content and any omissions and errors therein. After submission of a revised paper in the light of suggestions of the reviewers, editorial team edits and formats manuscripts to bring uniformity and standardization in published material.
This work will be licensed under Creative Commons Attribution 4.0 International (CC BY 4.0) and under condition of the license, users are free to read, copy, remix, transform, redistribute, download, print, search or link to the full texts of articles and even build upon their work as long as they credit the author for the original work. Moreover, as per journal policy author (s) hold and retain copyrights without any restrictions.
