FINANCIAL EFFICIENCY ANALYSIS OF SMALLHOLDER FARMING SYSTEMS USING DATA ENVELOPMENT ANALYSIS (DEA) AND PROFITABILITY INDICATORS

Abstract

Smallholder farming systems play a pivotal role in global food security, yet they remain economically vulnerable due to structural constraints, limited resource access, and market inefficiencies. This study evaluates the financial efficiency of smallholder farms by integrating Data Envelopment Analysis (DEA) with profitability indicators, providing a comprehensive framework that captures technical, allocative, scale, and economic efficiency dimensions. DEA is employed as a non-parametric frontier approach to measure relative efficiency in transforming inputs into outputs, while profitability measures such as gross margin, net return, and benefit-cost ratio complement the analysis by capturing actual financial performance. The study further decomposes efficiency using CCR and BCC models to distinguish constant and variable returns to scale, enabling identification of managerial inefficiencies and structural constraints. In addition, the role of slacks is examined to highlight specific input redundancies, offering actionable insights for resource optimization. Comparative discussion with Stochastic Frontier Analysis (SFA) underscores the robustness of DEA in handling multiple inputs and outputs, despite its sensitivity to noise. The framework also incorporates socio-economic determinants such as education, credit access, gender disparities, and labor dynamics, alongside emerging challenges including climate change, environmental degradation, and digital transformation in agriculture. Findings from global case studies indicate that while many smallholders operate near technical efficiency frontiers, their financial inefficiency is largely driven by scale limitations, poor market integration, and institutional barriers. The integration of eco-efficiency and climate-smart agriculture further highlights the need for sustainable productivity improvements. Overall, the study demonstrates that combining DEA with profitability and contextual indicators offers a powerful analytical tool for policy design aimed at improving smallholder viability, promoting resource efficiency, and ensuring sustainable agricultural development.