International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 139

Volume 2, No. 8, August 2013

Illustrative Optimal Portfolio Selection for Agroforestry

Crops: A Linear Programming Approach
Zira, B.D., Department of Forestry and Wildlife, University of Maiduguri, Nigria
Ghide, A.A, Department of Agricultural Economics, University of Maiduguri, Nigeria

ABSTRACT programming in the portfolio selection of agroforestry

crops and livestock.
Discussion on agroforestry investment business often
appears difficult. The difficulty seems to lie in the absence METHODOLOGY
of coherent theory of portfolio selection information per
se, as well as lack of clarity on the potentials of linear An application of linear programming for evaluating
programming methods. As a result, we focus on investment primary crops and livestock for agroforestry farm is
combinations and their mathematical programming described. The analysis incorporates human activity
solution. This paper describes some structures in the patterns and the naira invested on agroforestry farms’ crop
design of linear programming for the portfolio selection of and livestock combinations. The objective function for the
a hypothetical Danquah Agroforestry Farms (DAF). On problem must be optimization of expected return.
one hand, agroforestry farm owners are responsible for Constraints must take the form of restrictions on the type
clearly defining their forms of management constraints of permissible investments.
and the projected annual returns on permissible
investments. The optimal results of subsequent fictitious Maximum crop selection problem can be formulated and
DAP portfolio selection problem confirmed the reliability solved using a variety of mathematical programming
of sufficiently high rate of return of investments; Beans techniques. However, if in a particular portfolio selection
(19%), Maize (25%), poultry (19.4%), and fuelwood problem, it is possible to formulate a linear objective
(13.8%) to justify the practice of agroforestry. function and linear constraints, then linear programming
can be used to solve the problem (Anderson, et al., 1983)
Keywords:
Optimal portfolio selection, Agroforestry, linear PROBLEM SET
programming approach.
To illustrate the best selection for agroforestry crops
INTRODUCTION combinations, consider a fictitious Danquah Agroforestry
Farms (DAF) located in Michika, in Adamawa State. The
The increasing importance and profitability of agroforestry farm has just obtained N1000000.00 loan from an
system necessitate the need for a change in its present day agricultural bank, and now is looking for investment
crop selection techniques, crops planning methods and opportunities with the fund. Assumed the farm’s
financial procedures. Agroforestry, as a means requires management recommends four crop combinations plus
various inputs such as land, labour, materials, capital and poultry and piggery farms. In addition, the management
management. In consequence, Zira et al., (2013) suggested identified and projected annual investment returns for both
the application of business method and technical forestry crops and livestock. The investments and rate of return are
principles (into agroforestry practices) to enhance profit shown in Table 1. Specific procedures for computing the
maximization; the central assumption of agroforestry. rate of return have been discussed by Clutter,e et
al.,(1983).
Optimal crop and livestock portfolio for agroforestry
farms via linear programming can show the combinations’ Portfolio selection problems are financial situation in
attractiveness based on ratings of such factors like market which an owner (agroforestry farmer) must select specific
growth rate, market size, profit margin, competitive investments. Assume the owner of DAF imposed that
intensity, and scale welfare economics of agroforestry neither (agricultural crop or livestock) investment should
productions. Very little if anything at all, has been done receive more that 50% of the total new investment,
about agroforestry crop portfolio selection. The purpose of fuelwood should be at least 25% of the crop investments
this paper is to demonstrate the potential of linear and that the investment in maize farm cannot be more
than 60% of the total agricultural investment.

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International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 140
Volume 2, No. 8, August 2013

Table 1: Investment Opportunities for Danquah Agroforestry Farms

Investment Projected Rae of return (%)
Beans 19
Maize 25
Piggery 17.2
Poultry 19.4
Fuelwood 13.8

MATHEMATICAL STATEMENT OF THE X1 = Naira invested on Beans

DAF PROBLEM X2 = Naira invested on Maize
X3 = Naira invested on Piggery
X4 = Naira invested on Poultry
According to portfolio principle, investments and amounts X5 = Naira invested on fuelwood
should be made for available N1000000.00. Given the
objective of optimizing projected return subjected to the
budgetary and managerially imposed constraints, one can The linear programming model of the DAF portfolio
solve the problems by formulating a linear programming selecting problem will be as follows:
model of the investment case:
Let

Objective function:
Maximize Z = 0.190X1 + 0.250X2 + 0.172X3 + 0.194X4 + 0.138X5
Subject to:
X1 + X2 + X3 + X4 + X5 =1000,000.00 Available loan
X1 + X2 ≤ 500,000.00 Agricultural crop maximum
X 3 + X4 ≤ 300,000.00 Livestock maximum
0.50X3 + 0.50X4 + X5 ≥ 0 Fuelwood minimum
1.2X1 + 0.8X2 ≥ 0 Maize restriction
X1 , X2 , X3 , X4 , X5 ≥0

We have now succeeded in formulating the objective and the agroforestry farmers, business head and the like seek
constraints of the DAF problem into a set of mathematical to maximize their profits.
model. Solution of DAF problem can be done manually
using the simplex operating rules and the mathematical Optimal basic solution to the DAF linear programming
manipulations can be found in Duckword, et al.,(1978) was reached in five (5) iterations. The investment
and Taha (1982). However , in some situations the number variables varies (X1, X2 ,X3….. X5) appeared with the
of equations and the decimal nature of many digits optimal amount of money to be invested on each portfolio.
involved may be complex and make manual solution too According to Table 2, N500,000.00 which is the 50% of
laborious. LINDO, MPS/370, etc have been written for the total N1000,000.00 loan Danquah Agroforestry Farms
these complex linear programming problems. (DAF) got for 5 investment goes to poultry (X4) Maize
(X2) is allocated with N225,000.00 Beans is given
RESULT INTERPRETATION N150,000.00 while N125000.00 is earmarked for
fuelwood (X5). Investment on piggery (X3) is not feasible,
Systematic planning for the future usually involves hence, no amount of Naira is allocated for it.
forecasting relevant future conditions. In many situations
significant features of the future are uncertain, and it is Each optimal amount of money corresponding to X1, X2,
desirable to explicitly account for these uncertainties in X4, X5 indicates the fraction of the N1000,000.00 loan that
planning. The use of portfolio selection in the practice of must be invested on the portfolio selection optimal are
agroforestry system is to give an internally consistent N14,250.00,N28,124.00, N485,000.00 and N8,624.00 for
descriptions of agroforestry business, possible conditions Beans (X1), maize (X2) Poultry (X4) and fuelwood (X5)
and events via the linear programming method. Workers respectively.
seek the highest reward for their exertion and skill, while
Investments on Beans, maize, poultry and fuelwood would
give an expected annual return of N535,988.00k 05 54%.

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International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 141
Volume 2, No. 8, August 2013

Table 2: Optimal portfolio selection for DAF bank loan.

Investment Amount Expected Annual Return
X1 150,000.00 14,250.00
X2 225,000.00 28,124.00
X4 500,000.00 485,000.00
X5 125,000.00 8,624.00
Expected Return of N535,998.00k=5
[2] Clutter,J.L., Fortson,J.C.,Plenaar,L.V., Brister, G.H.
CONCLUSION and Bailey, R.L. (1983): Timber
[3] Management: A Quantitative Approach. John
The advantages of linear programming in the portfolio Willey and Sons. Pp.333.
selection for agroforestry crops go beyond adequate [4] Duckwork,W.B., Gear, E.A. and Lockett,A.G
description of the possible investment on agroforestry (1988): A Guide to Operation Research. London:
farms. It allow one to influence and manipulate preference Chapman and Hall.
of an owner. It calculates, for instance, the business [5] Taha,H.A., (1982) Operation Research: An
strength or ability of agroforestry farmer to identify the Introduction. New York: Macmillan Publishing
major strategic issues and opportunities the farmer faces. Company Inc.
Using linear programming one can evaluate other situation [6] Zira,B.D, Ghide, A.A and Zirah, T. (2013).
such as effects of change in price and taxes, on Economic Effects of Agroforestry farms in Nigeria:
agroforestry product. The approach has been used to solve A case study of Southern Nigeria (Popoola,
numerous forest management problems. L.,Ogunsanwo, K. and Idumah, F.eds) Proceeding
of the 35th Annual Conference of the Forestry
Association of Nigeria held in Sokoto, Sokoto
REFERENCE State, Nigeria on 11-16th February, 2013. Page
765-769
[1] Anderson, D.A., Sweeney,D.J. and Williams,T.A.
(1982): Quantitative methods for business. St. Pau
(NY): West Publishing Company. Pp.647

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