Factors affecting profit analysis of beef cattle farming in East Java, Indonesia

L S Kalangia, Y Syaukat¹, S U Kuntjoro¹ and A Priyanti²

Department of Social Economics, Animal Husbandry Faculty, Sam Ratulangi University,
Jl. Kampus Selatan, Unsrat. Manado 95115, Indonesia
lidyaskalangi1512@gmail.com
¹ Faculty of Economics and Management, Bogor Agricultural University, West Java, Indonesia.
² Indonesian Center for Animal Research and Development, Bogor

Abstract

The aims of study were to determine factors affecting profit of beef cattle farming in East Java, Indonesia and to quantify the profit gained by farmers in lowland and upland areas. East Java is a province with the highest beef cattle population in Indonesia.  A survey was conducted in District of Probolinggo (representing lowland areas located on 25-50 m asl) and Malang (representing upland areas located on > 500 m asl) during the period of one month from February to March 2013.  Respondents consisting of 89 beef cattle farmers raising Ongole crossbreed (PO) in each areas were questioned using structural questionnaires. Data were analyzed by a Unit Output Price Cobb-Douglas Profit Function (UOP-CDPF) model and estimation was conducted by using an Ordinary Least Square (OLS) method.

Average profit gained by farmers in the upland area was higher than that gained by farmers in the lowland area.  In order to improve profit of beef cattle farming business, the use of AI, calving rate per cow,  number of cattle ownership, and cattle selling price needed to be increased and animal health examination by animal paramedics needed to be done. 

Keywords: lowland areas, OLS, ongole crossbred, upland areas

Introduction

The development of beef cattle farming through population improvement is an effort that should be done to support the beef meat self-sufficiency program by reducing the gap between production and consumption.  Beef cattle farming is commonly practiced by farmers for cow-calf production under a small scale operation.  There are only a small portion for fattening operation due to a capital intensive program (Yusdja et al 2003).

East Java is a potential province for the development of beef cattle industry as it has a high number, about 4.96 million, of beef cattle population.  In addition, these local resources are supported by the abundant availability of biomass from agricultural wastes.  In this province, in 2013, there was about 2 million hectares of paddy field with its potential production of 12 million tons (BPS, 2013).  Therefore, using their cattle as a saving tool, farmers have an opportunity to develop their beef cattle farming as a source of extra income (Winarso et al 2005).   

Traditional farming system which does not pay considerable attention to production factors is suspected to be the factor hampering the productivity of cattle farming businesses.  In other words, beef cattle farming have not been profit oriented (Prasetyo et al 2012).  The success of an animal farming business is generaly seen from its loss and profit.  Therefore, profits has become the main objective in every animal farming business.  Every animal farming business expects to get profit from all production factors used.  The profit is determined by the sales value of the products and the production cost.

Studies in beef cattle farming showed that feed shares the highest cost component and can affecting profit (Jones 1997; Demircan et al 2007; Priyanti et al 2012). Meanwhile, for beef cattle farmers in rural areas, forages and agricultural wastes as animal feed are easily obtained without the need to spend any cash cost.  However, farmers still need to pay for feed procurement cost, especially during the dry season.  They also need to cover the costs of artificial insemination (AI), drugs and vitamins, and animal housing and equipment.  In this matter, it is very rarely that farmers keep a neat record of expenses and revenues of their beef cattle farming. 

Results of previous studies by Tahir et al (2010), Mandaka and Hutagaol (2005), and Tajerin and Noor (2003) showed that the actual profit was not only affected by prices of production inputs, but also by management and socioeconomic factors including age, education, experience, and capital.  The aims of this study were to (1) compare the profits gained in beef cattle farming done in lowland and upland areas in East Java and (2) analyze factors affecting the actual profit of beef cattle farming. 

Method

Location of survey

The research was conducted in Probolinggo district, representing lowland area, and Malang district, representing upland area, during one month from February to March 2013. Data were obtained from interviews using a structured questionnaire with farmers rearing beef cattle of Ongole crossbreed (PO). The two selected districts were purposively determined based on agro-ecosystem zones (lowlands and uplands) and the total population of PO cattle (both districts have the highest PO cattle population in East Java Province).  Probolinggo is located in an altitude of 0 to 250 meters above sea level, while Malang is in an altitude of about 500 meters above sea level.

Sampling methods

One sub-district with the highest population of PO cattle was selected from each district. The selected sub-districts were Tongas in Probolinggo and Bantur in Malang. Sample villages were also selected based on the highest PO cattle population. The selected villages were Curahtulis and Tambakrejo in Probolinggo and Srigonco in Malang.

Since the information about farmers who have PO cattle was not available, the samples were taken by applying a snowball sampling technique.  It is one of purpossive sampling techniques, in which selection of a sample is based on the previous one (Sukandarrumidi 2012; Sunyoto 2013).   One-hundred-and-seventy-eight respondents consisting of 89 respondents from each lowlands and uplands were interviewed.  They were selected based on two conditions, namely (1) they were farmers who had been raising PO cattle for more than 2 years and (2) they had ever sold their cattle and still had at least one mated cow. 

Analysis of cobb-douglas profit function

Profit is the difference between revenues and costs (Prasetyo et al 2012; Sarma and Ahmed 2011; Beattie and Taylor 1994; Jones 2000; Teegerstrom and Tronstad 2000).  The comparison of profit in lowlands and uplands in East Java was measured by using the average cost, revenue, and profit per farmer.  Profit in this analysis was obtained from the difference between revenue and total variable cost paid in cash by farmers (Cherchye et al 2010).  The Unit Output Price (UOP) Profit Function states that the optimal use of variable production factors is obtained by dividing profit with production unit price (Yotopoulos and Lau 1973).  The type of profit function which is often used is Cobb-Douglas profit function.  The specification of profit function used in this study was Cobb-Douglas profit function derived from Cobb-Douglas production function.  This type of function is known as Unit Output Price Cobb-Douglas Profit Function (UOP-CDPF) and is transformed into a natural logarithm form (Tahir et al 2010; Mandaka and Hutagaol 2005; Tajerin and Noor 2003) as follows : 

Ln π* = ln α₀* + α₁ ln PJER* + α₂ ln PPS* + α₃ ln PIB* + α₄ ln PTK* + α₅ ln KND + α₆ ln PI + α₇ ln STS + α₈ ln OFFARM+ α₉ ln AK + α₁₀ ln PND + β₁ DUMJU + β₂ DMLK + β₃ DKESWAN + u …………………………………………………………………........……   (1)

where:

π*                 :             Normalized farmers’ profit (IDR/year)

α₀                  :             Intercept

α_i                   :             Coefficient of fixed and variable inputs

β_i                   :             Coefficient of dummy variable

PJER*          :             Normalized price of rice straw (IDR/kg/year)

PPS*             :             Normalized price of supplemental feed (IDR/kg/year)

PIB*             :             Normalized price of artificial insemination (IDR/straw)

PTK*            :             Normalized cost of labor (IDR/year)

KND            :             Depreciation cost of barn (animal housing) (IDR/year)

PI                  :              Depreciation cost of cows (IDR/year)

STS               :             Number of cattle owned (head)

OFFARM     : Off farm income (IDR/year)

AK               :             Number of labor force (person)

PND             :             Length of education of head of household (year)

DUMJU       : Dummy for age of cattle sold (calf =1)

DMLK         : Dummy status of ownership (one’s own =1)

DKESWAN   :           Dummy of animal health examination (yes=1)

Estimate of a coefficient of profit function of the used model was done by using a ordinary least square method (OLS) and a Statistic Analysis System (SAS) software. 

Results and discussion

Cost components in beef cattle farming in East Java

Costs in beef cattle farming include variable cost covering rice straw, feed, drugs and vitamins, artificial insemination (AI) and equipment, and fixed cost covering depreciation of cow and depreciation of animal housing.  Animal growth depends not only on genetic factor but also on feed management and rearing management.  In the site of study, cattle were fed various types of feed including forage (grass and legumes), agricultural wastes (rice straw, corn, and sugarcane), and other types including rice bran, tofu waste, and salt.  Jones (2000) found that in addition to labor and capital, feed shared the biggest input cost.  However all farmers in the study location did not spend any cost for feed and labors came from family members.  Labor was used to get grass and forages, taking care of animal feed and drink, cleaning the barn and sometimes prepare herbal drinks as medicine or supplement for the animals.  Kuswaryan et al (2004) explained that the farmers’ income was a kind of saving from the daily work they did so that it would be difficult to implement the beef cattle farming business if they had to buy all of the production factors they needed. 

Details of the average input use cost by respondent farmers in beef cattle farming based on land location are given in Table 1.  It was shown that most respondents has spending on rice straw cost as an input in their beef cattle farming businesses.  Average rice straw cost in uplands (IDR 37,976 per year per respondent) was lower than that in lowlands (IDR 49,436).  This was caused by the abundant availability of sugarcane straws in upland area so that farmers could get them for free from their sugarcane plantation or from the other people’s plantations in where the farmers worked as farming laborer.  Several farmers who owned motorcyles were also found to spent some cost on fuel for the transportation of rice straw to the farms.  In certain time, farmers looked for rice straw in groups to areas where there were many rice farmings and for this purpose they only spent some cost on truck rent.

Farmers in lowlands often fed their cattle with rice straw they collected during rice harvesting time.  For farmers who had no rice farming land, they looked for rice straw in the other farmers’ land in where they worked as farming labor.  In general, when there was no rice harvest or during long dry season, rice straw was available for purchase.  Ironically, there were many farmers who had abundant rice production had to purchase rice straw as they did not have any store room to keep the abundant rice straw they got during rice harvesting time. 

Cattle farmers in lowlands, on average, spent more cost on feed  supplements (IDR 236,930) per year than did farmers in uplands (IDR 58,564).  This cost of concentrate in lowlands was 43 percent of the total variable cost.  This concenrate was found to consist of rice bran, tofu waste and salt.  This important feed cost found in this study was in line with Featherstone et al (1997) who stated that compared to drug and equipment cost, feed cost was very important in explaining technical efficiency.  On average, the least costs spent by farmers in both uplands and lowlands were found on drug and vitamins and rice straw. 

In general, farmers in uplands had difficulties in mating their cows naturally as there was no bull available and the selling value of crossbreed cattle was high.  Therefore, farmers preferred to do artificial insemination to increase their income.  Most farmers in upland were aware that AI was needed to get calves of imported breeds. 

In uplands, farmers generally used herbs of their own, and eggs for some cases, as sources of traditional animal drugs and supplements.  In contrast, farmers in lowlands got them from manufactured products freely sold in the market.  On average, for animal drugs and supplements, lowland farmers spent more cost (IDR 76,178) than did upland farmers (IDR 24,388).  Turmeric, Javanese ginger (Curcuma zanthorrhiza), white turmeric (Curcum alba), and egg were found as the most common ingredients used to formulate herbal animal drugs and supplements by upland farmers.  These were usually given to postpartum cows while helminthic was given to calves. 

The calculation of depreciation of cows which were entirely owned by a farmer and partially owned (ownership of the cattle is shared with other persons/calf sharing system) was different.  This depreciation was calculated as the difference between productive cow value and culled cow value divided by the average calving frequency.  For calves sharing system, as calves of these cows were to be owned in turn by the sharing farmers, the depreciation cost of these cows was higher.  The depreciation cost of cows was the biggest component of the total fixed cost spent by respondent farmers, namely 80 percent in lowlands and 85 percent in uplands. 

Depreciation cost of animal housing was calculated as the total construction cost of the housing divided by the useful life of it.  In uplands, woods used for animal housing were generally obtained from the farmers own plants so that they only needed to pay the cost on labor wage and equipment.  In uplands, the distance between animal housing and the farmer house was about 3-50 meters while in lowlands it was only 3-5 meters.  Even, many farmers in lowlands reared their animals in the kitchen area or in an area attached to the kitchen of their houses.  Equipment cost was spent for the purchase of ropes, pails, sickles, and hoes. 

Different profits of beef cattle farming businesses in lowland and upland areas

In this study, revenues of respondent farmers were originated from sales of calves and young animals resulted from the mating of PO crossbreed cows and local or imported bulls by AI within a year prior to the time of survey.  It was found that the average revenue of farmers in uplands was higher than that of farmers in lowlands (Table 1).  This was caused by the fact that most upland farmers sold their calves when the calves aged more than a year. 

The biggest average variable cost paid by farmers in lowlands was on concentrate feed (rice bran, tofu waste, molasses, and salt).  In uplands, meanwhile, farmers only paid this cost on mineral source (salt) making their average concentrate feed cost lower than that of farmers in lowlands.  The average variable and fixed costs in lowlands were higher making the profit gained by farmers in these areas (IDR 3,653,646) lower than that gained by their counterparts in upland areas (IDR 5,179,934).  This finding was in line with the work of Dhuyvetter and Langemeier (2010) who found that higher cost reduced profit.  They also stated that profit differences were attributable more to production (body weight) and price than to cost when the two were found to have effects on profit.  Jones (1997) stated that production cost and and the selling price of calves were identified as factors affecting the profit of a beef cattle farming.  Furthermore, Boggs and Hamilton (1997) stated that producers who are interested in improving the profitability of their cows need to have an accurate measurement of the costs, and can implement management strategies to lower the production cost.

Factors affecting the profit of a beef cattle farming

Results of the study showed that the estimate of profit function by using an OLS method had a coefficient determination (R²) of 0.52 and 0.56 in lowlands and uplands, respectively.  This meant that 52% and 56% of the UOP actual profit was significantly affected by variables in lowlands and uplands, respectively, while the remaining was affected by other factors not included in the model. 

Based on the results of the analysis, it was found that some variables had sign which were not as expected and some variables did not give significant effects on the profit.  Results of the estimate of profit function were given in Table 2.  The coefficient signs of rice straw price in  both  lowlands  and  uplands  were  as  expected  (-0.00624  and  -0.00850) but statistically they did not significantly reduce the actual profit. 

The increasing price of supplementary feed was found to significantly decrease the profit in lowlands.  This might be related to the labor variable and the farmers’ income when they worked as off farm labors.  Wages were found to give positive effects on profit.  This was related to the number of working hours spent by farmers looking for grass and forage.  To increase profit, farmers in uplands would prefer spending more time looking for grass and forage to buying supplementary feed.  The increasing income of farmers from working as labors in agricultural sector and from renting agricultural tools (off farm income) significantly increased the actual profit of beef cattle farmers in lowlands but not in uplands.  Most farmers in lowlands did not have paddy field or farm land so that by working as labors they could get extra income to buy supplementary feed for their cattle. 

Suryana (2009) stated that AI was done to improve reproduction.  In this study, the actual profit gained by farmers in both areas was significantly affected by AI price.  AI variable in uplands and lowlands was found to have positive and significant signs (Pr<0.05) on affecting profit.  This meant that increased AI price would improve the AI quality which in turn would increase the conception rate and the birth weight of calves.  This condition was also related to the number of cows being inseminated.  More cows to be inseminated increased AI cost and cows depreciation cost.  Higher cows depreciation cost indicated a better performance and higher selling price.  This would increase profit if during her productive age, a cow could produce more calves. 

With regard to the selling age of cattle, selling calves of ≤1 year old resulted in lower revenue than did selling older calves (1-2 years old).  Longer raised cattle would result in better performance, higher selling price, and higher farmers’ revenue.  However, some farmers in the study areas prefer selling steers or heifers with lower prices to selling calves as many young steers or heifers were found to be underweight and unhealthy. 

Animal housing depreciation, number of manpower in farmer households, and education were not found to significantly affect profit level.  Therefore, those factors were not considered as important factors affecting the level of actual profit gained by farmers in lowlands and uplands.  However, as education is a human capital (Ward et al 2008), it is still relevant to include it in a model to assess its effect on the level of actual profit in beef cattle farming business.  It is expected that having higher educational level would make one more rational in running his/her business.  The positive sign was found on education in uplands and in lowlands, implying that farmers had formal education, it was guaranteed that they would apply the animal farming technology they knew in running their business, so the higher the level of education, the more the profit (Mumba et al 2012).  Number of cattle stock significantly affected the actual profit gained by beef cattle farmers in uplands (Pr<0.005) and lowlands (Pr<0.091). 

Although it was not significant, the relation of animal housing depreciation cost to the profit was found to be negative in lowlands but positive in uplands.  These different findings might be caused by the fact that the cost to build the animal housing in lowlands was higher than that in uplands.        

The dummy status of cow ownership and animal health examination had a positive sign and significant effect on the actual profit of beef cattle farming business in both lowlands and uplands.  This indicated that rearing one’s own cows was more profitable than doing it in a profit sharing system.  A similar significant effect on profit was also found in animal health examination by an animal paramedic or a field officer of animal husbandry service office.  Health examination helped farmers with the health maintenance of their animals, especially the productive cows to improve the profit.  

Conclusions

• The average profit in uplands was higher than in lowlands.

  
  

• Important factors affecting the actual profit of a beef cattle farming business in lowlands and uplands included AI price, depreciation of cows, number of cattle, age of cattle sold, ownership status of cows, and animal health examination. 

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Received 27 August 2016; Accepted 18 September 2016; Published 1 December 2016

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