Optimal investment decisions of coffee farmers in Vietnam

[Truncated abstract] For perennial crops like coffee, identifying the prices at which farmers should cut or replant is a key investment decision. Optimal cutting and replanting can help farmers use their resource to maximise income. The response of individual households may also significantly affect the supply response at the aggregate level. In addition, knowledge of how supply responds to different variables can help planners forecast supply. While coffee is a major crop in Vietnam, the number of studies on the aggregate supply response, or on optimal production decisions at farm level, is limited. In this study, two types of models are developed to analyze the supply response of coffee in Vietnam and identify optimal investment and production decisions of coffee farmers. The first model uses the fixed form optimization method to solve a stochastic optimal control model of the household’s cutting and replanting problem. The model identifies optimal ‘trigger’ coffee prices for cutting and replanting. The second predictive model estimates an aggregate coffee supply function. This model gives the determinants of coffee area variation in Vietnam. The results from the stochastic optimal control model explore the optimal trigger prices in different scenarios. The first result shows that coffee farmers can have a low ‘trigger’ price for cutting and a high trigger price for replanting. Between these two values is a range of price values for which there is a ‘hysteresis effect’ where neither cutting standing trees nor replanting occurs. Second, if this model extends to allow age dependent trigger prices, as opposed to fixed trigger prices, the income is significantly increased. These results reckon that farmers should not cut the trees before the 11th year of planting A third set of simulations analyse the importance of credit on the availability of working capital.