Economic Profitability and On-Farm Income Diversification Among Smallholder Cocoa Farmers in the Western and Ashanti Regions of Ghana

Abstract

Cocoa is of utmost importance to the economy of Ghana and to over 850,000 cocoa farming households who derive their livelihoods from cocoa production. In recent years, there has been an increase in diversification by cocoa farmers into other farm-based livelihoods with cocoa or out of cocoa into other competing perennial tree crops such as oil palm and rubber, often in pursuit of higher returns. Most studies focus on financial profitability and not economic profit, thus failing to estimate or ascertain if the opportunity cost of producing cocoa outweighs its benefits. Also, with the resources available to farmers, it is important to examine how efficient cocoa farmers are in using these resources to generate profit. Studies also examine the determinants of profitability and on-farm income diversification separately; however, it is important to establish if there is a relationship between on-farm income diversification and profitability. Theories such as the Resource Based View Theory of the Firm, Walker’s Theory of Profit and Hawley’s Risk Theory of Profit form the theoretical underpinnings of this study. This study sought to estimate the financial and economic profitability of cocoa farm plots in the Western and Ashanti regions of Ghana, estimate the profit efficiency associated with these cocoa farm plots and the factors affecting it as well as establish the relationship between the on-farm income diversification status of farmers and the profitability of their farm plots. For the study, data was collected from 402 farmers with 513 farm plots under the Cocoa4Future Project implemented in the Elembelle, Wassa Amenfi Central (Western Region) and the Afigya Kwabre North districts (Ashanti Region). Financial profit expressed as gross profit per hectare was GHS3,311.72 for cocoa farm plots in the Western region and GHS3,176.59 for plots in the Ashanti region. The observed difference in financial profit across different plot age groups was found to be statistically insignificant. The economic profit estimations indicate that cocoa production is generally economically profitable. However, farmers are worse off for producing cocoa over rubber for the Western region when cocoa trees are over 16 years old but are better off for producing cocoa over oil palm in the Ashanti region after cocoa trees are over 7 years old. However, sensitivity analysis shows that if farmers were to achieve on average a yield of 1000kg/ha, both financial and economic profitability would improve significantly by about 120%. The study also found that while generally cocoa farm plots were profit inefficient, cocoa farm plots in the Ashanti region were significantly more profit efficient as compared to cocoa farm plots in the Western region with estimated profit efficiency scores of 40.60% and 44.26% for the Western and Ashanti regions respectively. Also, it was found that for both regions, cocoa farm plots of diversified farmers were more profit efficient. Age and cocoa farm plots located in the Wassa Amenfi Central district as against Elembelle district, were found to have a significant effect on cocoa farm profit inefficiency. The study also found that higher profits are likely to be associated with diversified farmers. Based on the results, the study concludes that the benefits of producing cocoa, outweigh the opportunity cost involved. The study recommends improving strategies for the distribution of inputs such as seedlings, fertilizer and agrochemicals to farmers to help increase yields. Also, it is recommended that cocoa trees, especially hybrid varieties, be replaced after at most 20 years. To increase farmer profit efficiency, the study recommends encouraging the adoption of hybrid cocoa varieties and sensitization on proper hybrid cocoa plot management. Also, the study proposes encouraging farmers to diversify into other on-farm livelihoods with cocoa.