Agricultural transformation is critical to develop economies and achieve the Sustainable Development Goal (SDG) 2 to “end hunger, achieve food security and improved nutrition, and promote sustainable agriculture” (UN, 2015). Agricultural transformation opportunities and needs vary across the Global South. Here we focus on the case of Nepal—a landlocked country in South Asia, with a challenging mountainous terrain and market infrastructure where agriculture continues to provide livelihoods for two-thirds of the population, largely at a subsistence-level (ADB, 2019; IBN, 2019). Nepal's agricultural sector is variously challenged by declining per capita arable land, limited access and use of new technologies, and inadequate input supply chains that often limit timely availability of critical inputs like fertilizer, irrigation, and machinery (Timsina and Connor, 2001; Paudel et al., 2019; Tripathi et al., 2019; MoALD, 2020).

Nepal's food security depends on the production of staple cereals with rice being the main cereal. Rice is grown on 1.49 million ha in Nepal with an average productivity of 3.5 t/ha and total annual production of 5.6 million tons in 2018 (MoALD, 2019). The total annual demand of milled rice in Nepal is estimated at 4.08 million tons (6.56 million tons of paddy) against a production of 3.25 million tons milled rice (5.2 million tons paddy) in 2017. Nepal imported 0.75 million tons of milled rice in 2019 (TEPC, 2020). Gairhe et al. (2021) reported rice import quantity and value to be increasing at the rate of 24.48 and 38.11 percent per annum, respectively, while production growth was <2% per annum. The Government of Nepal has prioritized increasing domestic rice production to reduce the import bill of USD $300 million each year.

Rice is cultivated in three distinct agro-ecological regions viz., Terai (the Gangetic plains), mid hill and high hill with a share of 68, 28, and 4%, respectively (Gauchan et al., 2014; MoALD, 2020). The per capita consumption of rice in Nepal is 138 kg, and it contributes 16% to the agriculture GDP and 52% to the total cereal consumption in the country (Yadav and Chaudhary, 2017). Nepal ranks 17th in rice production and 64th in rice productivity in the world. Till date, the Nepal Agriculture Research Council (NARC) has developed 82 rice varieties and an additional 48 hybrid rice varieties have been registered with the Government of Nepal. Nevertheless, the productivity of the rice sub-sector in Nepal (3.5 t ha⁻¹) lags in comparison to other neighboring countries Bangladesh (4.4 t ha⁻¹) and China (6.7 t ha⁻¹) albeit at par with India (3.7 t ha⁻¹), and Pakistan (3.5 t ha⁻¹). Between 1960 and 2017, the annual growth rate of rice yield in Nepal was 1.14% which is substantively less than the neighboring countries such as India (2.5%), Bangladesh (3%) and China (4.2%), and world average (4.5%) (FAOSTAT, 2019). There is also high yield gap (50%) among farmers (NRRP, 2019).

Over the last decade, increased access to improved rice varieties (including hybrids) and other technological interventions have helped farmers to increase rice production. Still land productivity (yield) is relatively low in Nepal compared to neighboring countries like Bangladesh (MoAD, 2014), which also successfully progressed to self-sufficiency. Despite several plans and programs to boost rice sector growth, realized growth has not resulted in the policy goal of achieving national self-sufficiency in rice production. Horizontal expansion by bringing more area under rice cultivation is untenable given the limited arable terrain which is already intensively used for food production and settlements.

Nepal potentially can become self-sufficient in rice, but this is possible only through rapid productivity increases and closing yield gaps. Such radical changes will require accelerating the agricultural transformation process. Despite agricultural practices in Nepal being largely traditional, agricultural systems are changing rapidly with mechanization, use of improved seeds and inputs becoming increasingly common (Thapa et al., 2020a), although they are rarely applied at the agronomic optimum.

The focus of this research is on rice which is the major staple crop of Nepal. Agricultural transformation (AT) implies farmers rapidly change their mode of production, typically embracing intensified use of critical inputs (e.g., new varieties, balanced fertilizer, mechanization, and irrigation) enabled by improved access to finance, markets and transport networks (Schultz, 1964). Understanding the status and changes in rice production and commercialization can provide a better understanding of the transformation of cereal systems and to a larger extent on AT in Nepal. Over time with the broadening of the AT concept, it can also mean increased productivity and commercialization in agriculture alongside economic diversification and growth (Vos, 2018; Achim and Fan, 2019).

The AT drivers and enabling factors are multidimensional, interrelated, and change over time. The first and foremost element is the government institutional framework and policy programs or “transformation readiness” (Timmer, 1988). The Government of Nepal has launched its Agriculture Development Strategy (ADS 2015-35) that aims to promote linkages between agriculture and other sectors in the economy for the growth of an overall robust economy, a more balanced rural economy, and employment generation. AT is a complex process and not easily implemented or promoted, even if agriculture is prioritized by the governments in the national development plan. Part of the problem is because agricultural programs are broadly focused with multiple goals (Boettiger et al., 2017). A conducive enabling environment must be provided by the government that increases access to modern technologies, attracts private sector investments, improves connectivity between rural and urban centers, and expands road and communication networks in addition to systems that overcome barriers to equal access by smallholder and marginalized farmers. From the 12th Plan (2010/11–2012/13) the Government of Nepal (GoN) has provided high priority to paddy production, focusing on agricultural inputs subsidies (CDD and ASoN, 2017) and investment in irrigation infrastructure (Tripathi et al., 2019). From the 13th Plan (2013–2017), subsidies were provided for machinery and equipment to overcome labor shortages and crop insurance schemes were introduced. In the 13th plan, the GoN has also provided increased attention to rice by launching Fine and Aromatic Rice Promotion Programme and Mega Rice Promotion Programme (CDD and ASoN, 2017). The Prime Minister Agriculture Modernization Project (PMAMP) was developed by setting up a rice super zone, with post-harvest, laboratories, custom hiring facilities (CDD and ASoN, 2017).

In Nepal, there is limited information available on farmers' rice production systems with the aim to highlight agricultural transformation. Nepal has seen rapid changes in agricultural services, infrastructure, access to finances, and communication off late in the Terai and hills, but many of these changes are yet to be analyzed or their implications understood. Considering the Government of Nepal's quest for food and nutritional security there is a need for deeper insights into the rice production systems and farmers efficiency. Several AT studies are at the macro level or aggregate studies carried at the country or regional or provincial levels (Dawe, 2015; Ecker, 2018). This paper provides such insights for two contrasting rice producing locales in the mid-hills and Terai by using household data to describe farmers' rice production systems and analyses rice production efficiency to understand how to further the transformation of Nepal's rice sector. We use these empirical findings to explore the challenges toward the further transformation of Nepal's rice sector. The remainder of this paper is divided into three sections. Section 2 on materials and methods describes the research methodology and data collection. Section 3 presents the results on rice production systems and farmers efficiency. Sections 4 discusses the results and provides conclusions to further transform the rice sector.

The study uses Nepal's Nuwakot and Chitwan districts as two study locales. Paddy cultivation is a major agricultural activity in each district, but Nuwakot is located in the mid-hills and Chitwan in the Terai. The two sites also differ in road access, commercial output and input markets, wider transport network and services, and availability of private and public sector institutions that provide goods and services including financial to farmers. Chitwan is centrally located along Nepal's east-west highway in the Terai and has large market centers and connectivity to Indian markets. Nuwakot is in the central mid-hills, with a relatively limited road network and access to markets, albeit its in relative proximity from Kathmandu in the central valley.

In Chitwan, six rural municipalities—Bharatpur, Kalika, Madi, Khairhani, Rapti and Ratnanagar were selected for study in consultation with the faculty members of the Agriculture and Forest University at Rampur, Chitwan. In Nuwakot, four rural municipalities (Thansing, Dhikure, Dobate, and Kalimati) were selected in consultation with the Krishi Gyan Kendra (Agriculture Knowledge Center) of Bagmati Province. Five focus group discussions with farmers and two key informant interviews with agrodealers were organized to obtain information on general rice production practices and marketing to design the questionnaire. Focus group discussions and interviews were also to used understand the macro aspect of the agricultural transformation process related to the availability of modern inputs, price, government subsidy etc. The information was also used to complement discussions of the results. In both the study areas, most farmers were already using modern inputs such as improved seeds, chemicals, and agricultural equipment.

A questionnaire was drafted and tested with households in the study areas which helped to clarify and rephrase the several questions. A one-day orientation program was organized for the enumerators which helped them to understand the questions. After adjusting the questionnaire to the local situations, face to face interviews was used to collect information on farmers' rice production practices, inputs used and marketing using a structured questionnaire through the Open Data Kit (ODK). A purposive random sampling approach was adopted to survey 310 households (210 in Chitwan and 100 in Nuwakot) in 2019, with 197 households with complete data retained for the econometric analysis. Purposive sampling is a cost-effective and time-effective sampling method that allows a researcher to identify respondents whose availability and attitude are compatible with the study. The respondents were the head of the household. During the interviews it is common among the farming community to have other people sit around the respondent and share their opinions. The final answer provided by the respondent was only noted.

The size of holding or area cultivated is small in Nepal with many farmers cultivating or owning <0.5 ha of land. For analytical purposes the farmers were divided into three structural farm size classes viz., marginal and small <0.5 ha; medium 0.51–0.7 ha; large >0.71 ha. Farmers are often grouped into five groups based on the size of their land holdings or area cultivated if the sample size if large, but when sample size is small the groups are reduced as done in the present study. Production efficiency is one of the metrices for agricultural development. Technical inefficiency implies that for a given bundle of technology, input prices and other socioeconomic variables, farmers are unable to maximize outputs. The stochastic frontier enables to estimate this deviation across farms and also analyses variables that are influencing this deviation. Technical efficiency is estimated using a stochastic frontier production function following Aigner et al. (1977) by using STATA 15. It became popular in the econometric literature after the pioneering studies by Aigner et al. (1977) and later by Coelli and Battese (1996). Many studies measuring technical inefficiency have since followed (Huynh-Truong, 2009; Piya et al., 2012; Khanal and Maharjan, 2013; Mango et al., 2015; Boubacar et al., 2016). To allow for the measurement of the technical inefficiency the stochastic frontier production function (Equation 1) consists of two error components: a Gaussian error term and a truncated error term. While the Gaussian error component (V) is assumed to be distributed normally with a constant variance, the second error component (U) is assumed to have a non-negative truncated distribution implying that technically inefficient points lie below the production frontier (Kumbhakar et al., 2015; Mango et al., 2015).

Where,

Y_i is the observed output of the ith paddy producer/farm;

f is the production frontier technology assumed to characterize paddy production;

Xi is the vector of the variable inputs used by the farms.

β's is a vector of parameters to be estimated.

V_i represents the symmetrically distributed random error component beyond the farmer's control and is distributed normally with a mean of zero and a constant variance (sigmav2); and

U_i are one sided positive stochastic error terms representing deviations from the frontier responsible for inefficiency and values range between 0 and 1. This term follows the half normal distribution with a zero mean and variance (sigmav2).

Technical Efficiency in paddy production (TE) is the ratio between observed paddy output (Y) and maximum possible paddy production (Y^*) and the difference in (Y^*-Y) is the result of inefficiency U_i.

Technical inefficiency is assumed to be determined by the variables listed in Equation 4 and described below.

U_i is technical inefficiency, d_i are parameters associated with the socio-economic characteristics of the farm households and w_i is a random error term. The stochastic production frontier (Equation 1) and the technical inefficiency equation (4) are jointly estimated by the maximum likelihood method, assuming a half normal distribution of random error term w_i.

The dependent variable is the total paddy output produced by the farm households expressed in natural log form (Equation 3). Cost information was collected over nine cultivation activities and aggregated into seed, chemical fertilizer, capital services and labor¹. Labor is the primary input and cost—with reported labor scarcity and rising wages. Households use different forms of capital such as pump sets and sprayers and most hire tractors and power tiller services. Expenses on fertilizer and other chemicals such as insecticides and pesticides are the third cost component. Majority of the farmers purchase either hybrid or improved seeds and the use of older cultivars is negligible.

Variables commonly assumed to affect technical inefficiency in farming (Equation 4) relate to the socio-economic characteristics of the household head (such as experience, age, gender), linkages to extension services and farm structure (such as land fragmentation, ownership of livestock) (Coelli and Battese, 1996; Mango et al., 2015; Tleubayev et al., 2017; Rana and Bapari, 2018). In this study nine variables have been considered (Table 1).

The functioning of the rice market system and their underlying factors was analyzed qualitatively based on personal observation, results of focus group discussions; interviews with stakeholders, agro-dealers, and cross verification. Household data and information collected from group discussion with farmers and key informant interviews with market actors and facilitators was analyzed based on descriptive statistics. Simple linear regression was conducted to assess the relationship between farm size and yield. The F test was used to compare results across groups.

In Nepal, an improved technical efficiency overhaul within agriculture remains is a development priority (Paudel and Wagle, 2020). Measuring efficiency is one of many approaches to assess farmers' capacity to allocate resources (land, labor and capital) to improve productivity and identify factors influencing (in)efficiency that can be addressed through agronomic management and supportive policy and development actions. We found a similar technical efficiency across paddy farmers of 76% in our two contrasting study areas, Nuwakot in the mid hills and Chitwan in the terai. Piya et al. (2012) found technical efficiency of rice farmers 67% in Dhading and 74% in Chitwan while carrying out a survey about 10 years back. Similarly, Khanal and Maharjan (2013) found a quite high technical efficiency of rice seed growers' farmers from Chitwan (85%). Moreover, Kyi and Oppen (1999) found average efficiency of farmers was 88%, ranging from 39 to 93%, in irrigated rice of Myanmar. Idiong (2007), shows Nigerian rice farmers were 77% efficient, ranging from 48 to 99%.

The efficiency of farmers could still increase further, particularly in the tail end of the distribution and for the marginal and small farm sizes. Yet agricultural transformation is not only about the more efficient use of these productivity factors; it also addresses the need to create an enabling environment to support sustained change over time. Results indicate that many factors that can influence agricultural transformation process such as access to improved seeds, irrigation, extension services, productivity, marketable surplus, and access to markets has improved in the study areas. Farm labor is rapidly moving out to the non-farm sector, farm mechanization is on the rise, agricultural investment funds are being made available to farmers and the road network has improved. Growth in access to information technologies and particularly mobile phones is enabling farmers in Chitwan to innovate and increase farm productivity. Improving mobile networks in the hills is a priority to improve access to information.

Cereals currently are and will continue to be major staple food in Nepalese diet (Krupnik et al., 2021). Fine rice demand constitutes one-fourth of total rice demand in Nepal and coarse rice demand is projected 3.5 Mt by 2025 and to rise to 4 Mt by 2035 (Kumar et al., 2020). Our results suggest that poor access to necessary inputs and farmers' socioeconomic characteristics are some of the factors preventing the achievement of improved efficiency in rice production. Labor was identified as a major constraining factor, in line with considerable literature on this topic in Nepal (Gartaula et al., 2012; Bhandari and Ghimire, 2016). Yet despite its largest share in the cost of production, our models suggested that availability of household members was unlikely to be effective in increasing technical efficiency in production. The increasing level of education among youths, and off farm employment opportunities, explains youth's preference to work off farm, even if they live in the farm households. This may be because work in the non-farm sector is more preferred, and income is relatively better. Labor scarcity is pushing up wages (Paudel et al., 2019), and farmers face increasing challenges in accessing labor when and where it is needed, particularly for labor-intensive paddy production operations like transplanting and harvesting. A potential policy option to address this challenge is to incentivize domestic investment in agriculture and more crucially, channel foreign direct investment in agriculture with an appropriate minimum wage to help curtail the large-scale out-migration that occurs annually in Nepal as laborers seek more remunerative employment abroad (Paudel and Wagle, 2020). The wage gap between agriculture and the non-agricultural sectors does not appear to be very high and based on the National Salary and Wage Rate Index, the agricultural laborer wage index has remained higher than the industrial or the construction sector laborer wages. However, agricultural employment is seasonal and with higher education, youths prefer to work in the non-agricultural sector or seek foreign employment, which generally are full time. There is a need for additional research on unorganized labor markets and access to smallholder farm households.

Despite constituting a significant portion of the farmers' paddy cultivation budgets, there is great uncertainty in the availability of capital inputs. Farmers are unable to plan production and depend on hiring services. The low frequency of the use of bank services by households indicates that financial transactions in agricultural sector may still be governed by cash or informal borrowings rather than through the formal banks. While the GoN of Nepal has incentivized the access to loans for small machineries it is still not accessible (financial and physical) to the small holders farmers. It is important to encourage the private sector led custom hiring services in rice producing areas that are already facing labor shortages.

As agricultural transformation progresses it is important to understand the reasons for farm level inefficiency. Result from the technical efficiency across farm size groups shows a positive relation between technical efficiency and farm size. Land size is directly related with economies of scale which will enable farmers to use capital and other inputs more effectively to enhance their efficiency. Some reasons for the diseconomies of scale faced by the smaller farmers could be weak bargaining power in negotiating labor contracts or hiring farm machines, transport, and transaction costs etc. Access to financial resources are less available to smaller farmers relative to the larger farms and even if available these farms have to rely on informal financial markets where interest rates are higher. While the prominence of agriculture is declining, the number of farms is increasing, and the average farm size is decreasing (Paudel and Wagle, 2020). Hence, having larger farms, relative to present size, can help farmers reduce inefficiency. The GoNs interest in land consolidation and cooperative farming can thus be useful in increasing efficiency.

With the recent changes in the administrative structure of the country, which emphasizes urbanization, the connection between rural and urban areas is also likely to further develop and strengthen the relationship among farmers, millers, service providers consumers, and other stakeholders. Small market towns are also an important element for AT. They perform functional linkages by serving as nodes for food producers and processors many of whom lack other livelihood options (Tacoli, 2017). They serve as providers of goods and services and employment opportunities through processing and value addition to surrounding rural areas in addition to its own. Resulting employment opportunities can be especially important for seasonal agricultural labor and reduce outmigration.

There is a need to adopt a market system development approach to support small holder farmers to generate efficiency. A strong coordination between market actors involved in the farm to table chain for rice needs to be promoted with the facilitation of GoN programs. Further commercialization of agriculture is the need of the hour and there is a need for a strong private sector led service delivery system for production, agronomy, post-harvest and processing (Kumar et al., 2020). A dynamic private sector has been recognized as important for driving productivity, growth, and creating value and jobs in supply chains (Ferroni and Zhou, 2017). Technologies from private research including but not limited to advances in plant genetics and seeds, fertilizers and plant protection etc. has contributed to agricultural development (Pray and Naseem, 2007). Private sector is also important in food processing, wholesale and retail industries (Dubbeling et al., 2016; Ferroni and Zhou, 2017). Such service provides choice to consumers and also helps create jobs, investment opportunities, intra-industry linkages, and opportunities to link farmers to markets.

The extension services need to facilitate the process of building bridges between local and scientific knowledge, and promote site-specific, tailor-made sustainable production systems (Joshi and Joshi, 2020). Access to information also plays an important role in AT. Farmers who have access to extension services and information can improve their knowledge on improved crop and livestock breeds, production techniques, and administrative procedures of obtaining loans and land acquisition, weather forecasts etc. and hence, can make informed decision (Ullah et al., 2016). There is a need to engage youth in upgraded market systems by supporting the growth of agro enterprises along the value chain. Improving agricultural productivity is undeniably crucial to the growth of rural and national economies. Promoting this transformation requires creating markets where they are missing or weak, supporting economies of scale, and expanding and deepening rural banking, insurance, and financial systems (Thapa et al., 2020b).

The input market systems need to be further developed in Nepal. The national research system is underfunded at present, and challenged to generate technologies required for diverse enterprises, ecological settings, and different categories of farmers (Ghimire et al., 2015; Joshi and Joshi, 2020). The growing economy, structural change and people's increased preference for fine rice should be addressed in the rice research and development strategies. There is a need to develop industry preferred varieties and facilitate their multiplication by seed companies (Gairhe et al., 2021). The supply of imported varieties is sometimes challenged with irregular supplies of farmers' preferred varieties, border disruptions and also COVID-19 related supply chain distortions. Hence a strong domestic seed sector as envisaged by the National Seed Vision of the GoN is imperative. Similarly, although the budget for importing fertilizers has been increased by the GoN, there is still a shortage and inadequate supply for rice production (Ghimire et al., 2015). The procurement process for fertilizers must be improved with establishment of buffer stocks to meet the demand during peak season. Additionally, the private sector may be encouraged to import and meet the deficit in fertilizer supplies. Nepal needs to continue to enhance its food security by increasing the public investment in irrigation, rural infrastructure and rapid spread of modern technology with improved food production practices (Kumar et al., 2020). Adhikari et al. (2017) also point out that higher temperature and erratic rainfall, might have negative impact in future paddy yields. Devkota and Paija (2021), highlight the importance of developing stress tolerant rice varieties. Devkota et al. (2018) highlighted capital inadequacy, high cost of agricultural inputs, poor access to adaptation information, inadequate access to credit facilities and inadequate awareness about adaptation as barriers to adapt to a changing environment in Nepal. In the context of the COVID-19 related changing labor market and reducing income from remittances, agriculture may provide a more important source of economic growth through agricultural transformation and farmers adaptation.

In the end, efforts must be made to ensure the agricultural development is inclusive and equitable, and includes both women, men and youth and disadvantaged communities and regions. AT also can have heterogeneous implications—e.g., changing roles for women involved in weeding and harvesting (Team and Doss, 2011; Akter et al., 2017). Men are also migrating to rural non-farm and urban areas within and outside of Nepal, increasing the responsibilities of women and feminization of agriculture (Gartaula et al., 2017). There remains an imbalance in access to resources such as finance and services for females relative to males. Our two study areas—albeit contrastingly located in the mid hills and terai—are still relatively centrally located in Nepal and compared to other geographies, have a reasonable access to markets and services. More remote areas may have even more disproportionate challenges in terms of access to seed and fertilizers, information technology, transportation, education, services, and markets.

The research findings have implications on overall food security in the country and South Asia. As it stands now, the role of the agricultural system in ensuring food availability is the dominant research topic currently bridging agricultural systems and food security concerns (Stephens et al., 2017). In recent years, a more holistic concept of a “food system” has gained traction amongst both scholars and policy-makers with a perspective that integrates all the elements (environment, people, inputs, processes, infrastructures, institutions) and activities that relate to the production, processing, distribution, preparation and consumption of food, and the output of these activities, including socio-economic and environmental outcomes (Béné et al., 2019).

Hunger and malnutrition are likely to rise in 2020 as the pandemic impacts all aspects of food systems. To reduce the impact of such shocks in the long term, there is a need to build more resilient and inclusive food systems (Fan and Swinnen, 2020). Increasing women's decision-making power and control over assets within their households and communities is a key step toward inclusive food systems (Malapit et al., 2020). These authors also point out that youth are also marginalized in many countries, lacking sufficient employment opportunities, land if they choose to stay in agriculture, and financial capital if they attempt to enter the rural non-farm economy. Better integrating small holders farmers including youth and marginalized communities into national food systems, by linking subsistence-level farmers to markets is perhaps the most effective way to achieve inclusive economic growth (Fan and Swinnen, 2020). Understanding better food system drivers—both what they are and how they function—is therefore one of the first steps toward supporting policy-makers at the global, national and subnational/municipality levels in designing and implementing appropriate policies and interventions (Béné et al., 2019).

Investment needs and potential economic synergies are probably best addressed through a territorial or geographic approach such as agro-industrial parks, agro-based special zones, incubators, clusters, and agro-corridors (Vos and Cattaneo, 2020). There is a need for developing an evidence-based targeting strategy and develop adequate infrastructure and public and private sector investments in such areas with advantages in returns on investments. Public programmes such as the Prime Ministers Agriculture Modernization project can develop appropriate strategies in the designated rice “super” zones for making available quality seeds, processing facilities and equipment services to extend the reach and benefits of agricultural transformation.

The raw data supporting the conclusions of this article will be made available by the authors, without undue reservation.

The studies involving human participants were reviewed and approved by the Institutional Research Ethics Committee, CIMMYT. Written informed consent for participation was not required for this study in accordance with the national legislation and the institutional requirements.

All authors listed have made a substantial, direct, and intellectual contribution to the work and approved it for publication.

This study was elaborated in the framework of the Nepal Seed and Fertilizer Project and Cereal Systems Imitative for South Asia (CSISA) project, funded by the United States Agency for International Development (USAID).

The views expressed in this paper are those of the authors.

The authors declare that the research was conducted in the absence of any commercial or financial relationships that could be construed as a potential conflict of interest.

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