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Near East and North Africa Land & Water Days15-18 December 2013, Amman, Jordan
Policy Analysis MatrixAssessing Land and Water Productivity and
Agriculture Competitiveness
Dr. Mahmood AhmadFAO Consultant on Water Scarcity Initiative
Session : Market Café (I13)
2
Why do we need Policies?Policies are the instruments of action that governments
employ to effect change.
Demand emerges at different levels for introducing:
–A change ( A demand driven extension)
–A review (wheat procurement ?)
–A new issue (Alternative energy)
–Not all demands are satisfied (Food security)
PAM A simple tool, powerful to communicate
with policy makers but data needs are largeProvides better understanding the relationships between a country’s policies affecting its food economy and the underlying efficiency of its agricultural systems.
FAO/RNE used PAM for supporting member countries in preparing agriculture strategies or policy review often with for donor (World bank, UNDP and others) support for Egypt, Iran, Syria, Jordan, and Palestine. Policy review for Oman, Yemen, Kazakhstan and Kyrgyzstan.
Few policy analysis cases/briefs would be highlighted in second half presentation
PURPOSE: Ranking of 1.COMPETITIVENESS and EFFICIENCY SYSTEM (2) MEASURES THE TRANSFER
EFFECTS OF POLICIEs Also : address three central issues of agricultural policy analysis
competitiveness and farm profits – before and after policy change
whether farmers, traders, and processors earn
profits, comparison of before and after the
policy change
Countries achieve rapid economic growth by
promoting activities that generate high social
profits (large positive H).
efficiency and public investment – before and after public investment
Successful public investment (in irrigation) would raise the value of output or lower the costs
of inputs.
Tradeoffs: Water productive efficiency
versus allocative efficiency
efficiency and agricultural
research – before and after new
technology
public investment in new farming or processing
techniques, would enhance farming or
processing yields and thus increase revenues or
decrease costs.
Approaches issue of food security (domestic
production versus imports) in a scientific
way
Where Distortion Comes FromPrincipal source of distortion are Market Failure: • Monopolies or Monopsonies (sellers and buyer control over the
market) • Externalities Negative ---costs for which the imposer cannot be
charged or Positive ---benefits for which provider cannot receive compensation or factor market imperfection (inadequate development of institutions to provide competitive services and information)
• Policy enacted to improve market failure
Distorting government policy
Commodity Specific Policy (taxes, subsidy, direct regulation), import duty
If market failure does not exist, then all divergence between private and social prices of tradable outputs and inputs are caused by distorting policies.
Estimating Efficiency prices for partly importable/ exportable and domestic factor
• The value (social opportunity cost) of producing an additional ton of an importable commodity or exportable (e.g., rice in Egypt) is the amount of foreign exchange saved or generated by replacing a ton of imports – given by the import or export price.
• The social (efficiency) prices for domestic factors of production estimated also by application of the social opportunity cost principle --- estimated through observations of rural factor markets. The intent is to find how much output and income are foregone because the factor is used to produce the commodity under analysis (e.g., rice) rather than the next best alternative commodity (e.g., sugarcane).
Steps in Constructing PAMData Collection
Divide country into its ecological zones
Identify important crops in each farming system
Technology levels (TvA), farm size (SML)
Find out that if latest cost of production data exists and its breakdown according to region
Establish its adequacy (in prices and quantities)
Recommend field survey, if not adequate
Revenues Cost traded inputs
Cost Domestic Factor
Profits
At Private Prices A B C D
Revenues Cost traded inputs
Cost Domestic Factor
Profits
At Social Prices E F G H
Traded outputs and inputsPrepare Import or Export Parity Prices
Domestic Factors based on shadow prices
Import Parity Prices Import Parity Price (IPP) = (CIF *
SER) + (HCB) + (TCBM + MCBM) - (TCFM + MCFM)
Where:
CIF = Cost, Insurance and Freight at the Border;
SER = Shadow Exchange Rate;
HCB = Handling Cost at the Border;
TCPM = Transport Cost from Border to Market;
MCBM = Marketing Cost from Border to Market;
TCFM = Transport Cost from Farm to Market, and
MCFM = Marketing Cost from Farm to Market.
Case of Wheat Unit Value
Exchange Rate % 3
World Price, U.S Gulf LE/US$ 119Freight, U.S. Gulf to Alexandria $/Ton 15
World Price, Alexandria % 134
Import Duties $/Ton 0
Other Fees $/Ton 0
Total Duties, Tax and Fees $/Ton 12
World Price, Alexandria % 146
World Price Equivalent at Alexandria $/Ton 496Transport, Alexandria to Market $/Ton 22
Transport, Market to Farm LE/Ton 22
World Price at Farm LE/Ton 452
Quality Adjustment % 1
World Price at Farm LE/Ton 429
what a commodity can cost as an import commodityFor correctly comparing (i) the commodities are exactly comparable in physical terms; and (ii) the commodities are compared at the same location.
Incentives & Efficiency All four countries have tremendous comparative in growing cotton, but other than
Kyrgstan, all are taxing farmer with prices ranging from 60 to 70 % of the world price
Egypt Cotton, 1998
Values Basis Revenues Costs of Production Profits
Tradable Non-tradable
Private Values 543.61 138.39 374.92 30.31
Social Values 889.23 168.43 422.32 298.48
Divergence -345.62 -30.04 -47.40 -268.17
Coefficients NPC = 0.61 NPI = 0.82
EPC = 0.56 DRC = 0.59
Pakistan Cotton, 1998
Values Basis Revenues Costs of Production Profits
Tradable Non-tradable
Private Values 232.91 99.66 122.66 10.60
Social Values 333.81 84.78 113.07 135.97
Divergence-100.90 14.88 9.59 -125.36
Coefficients NPC = 0.70
EPC = 0.54 DRC = 0.45
Kyrgstan Cotton, 1999
Values Basis Revenues Costs of Production Profits
Tradable Non-tradable
Private Values 346.06 108.91 107.67 129.48
Social Values 355.90 119.16 112.83 123.91
Divergence -9.84 -10.25 -5.16 5.58
Coefficients NPC = 0.92
EPC = 97.00 DRC = 0.55
Tajikistan Cotton, 2001
Values Basis Revenues Costs of Production Profits
Tradable Non-tradable
Private Values 731.40 201.23 300.88 229.28
Social Values 790.52 246.06 303.32 241.15
Divergence -59.12 -44.82 -2.43 -11.87
Coefficients NPC = 0.61 NPI = 0.82
EPC = 0.56 DRC = 0.59
Pakistan Cotton, 1998
Values Basis Revenues Costs of Production Profits
Tradable Non-tradable
Private Values 232.91 99.66 122.66 10.60
Social Values 333.81 84.78 113.07 135.97
Divergence-100.90 14.88 9.59 -125.36
Coefficients NPC = 0.70
EPC = 0.54 DRC = 0.45
Assessing Land and Water Productivity and Agriculture Competitiveness
Factor - Driven Economy
Low Cost Inputs: Labour, Natural
Resources
Iran, Egypt, Morocco China, India, Turkey
Efficiency Through Heavy Domestic and Foreign Investment
Investment Driven Economy
Innovation Driven Economy
Unique Value
USA, Japan, Korea
0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
Water versus Land ProductivityAdopted from ICARDA
Land Productivity (Tons/ha)
Wat
er P
rodu
ctiv
ity
(Kg/
m3*
10)
Max WP
Max Yield
“NENA Region has good Comparative Advantage in producing high value crops but needs to translate this to competitive advantage” PAM Analysis
Case Studies Highlighting
Incentive Structure: Egypt &Iran
Water Productivity: Egypt, Syria, Iran, Palestine
Impact Analysis: Egypt, Oman , Kazakhstan
From CA to CA:
Incentive StructureIran: Wheat Policy Brief
Irrigated wheat is competitive and carries reasonable comparative advantage
Rain-fed wheat can be competitive if yields are increased and cost are reduced
At national level, incentive policy almost neutral, carries comparative and competitive advantage, the present support is not inconsistent with overall policy environment
Nominal Protection coefficient (slight tax) = .81Effective Protection coefficient ( neutral) = .98Domestic Resource Cost ( as < 1) carries CA= .65
Egypt: Competiveness
Ranking by Profitability LE/feddan
Cotton 1786
Long Berseem 1605
Sugarcane 1482
Rice 1227
Wheat 924
Short Berseem 712
Boad Beans 583
Maize 543
Sorghum 311
Ranking by Cost/Benefits Ration
Cotton 2.20
Wheat 1.85
Maize 1.48
Long Berseem 1.48
Boad Beans 1.46
Short Berseem 1.11
Rice 0.99
Sorghum 0.99
Sugarcane 0.95
Water productivities are much higher in vegetable compared to fruits and very low in livestock products.
Beef Lentils Wheat Olives Tomato0
1
2
3
4
5
6
Comparison of water productivity for different commodities- Livestock
products carries the lowest
LF-river LF-well 100 LF-well 200 MF- river MF- well 100 SF- river SF- well 500
5
10
15
20
25
30
35
40
Water Productivity, farm size and technology: Net Margin m3
traditional sprinklers drip
SyriaDrip Irrigation shows higher water productivity than Sprinkler,
and Small farmers are obtaining much higher productivity
NENA region’s water productivities are higher than global averageand water productivity is much higher in horticulture than cereals
Yemen
Oman
Jordan Valley
Gaza
0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60
Horticulture crops in Palestine ($/m3)
Case of Palestine Saving (values) of water determines the rate of return on investments,
in Jericho (low water values), it takes 8.46 years as pay back time ,where as in high water values area (Jenin ) only 2.80 years
Scaling up --- farmers may well be aware of technological options, but do not invest in unless pushed by cost incentives (rising water prices ) or pulled by profitable market opportunities.
Maize Rice Sorgum
0.5
0.325
0.175
Water applied (WPirrig)Water Productivity Kg/m3
Wheat Maize Rice Sorgum Potato
1.251.75
0.8
7.5
8.9
Evapotranspiration (WPET)Water Productivity Kg/m3
Or water productivity varies depending how we budget water use (the denominator in the equation), the applied water or consumed water
Water Output AP=O/W MP=dO/dw E=MP/AP
Input Total Average Product Marginal Product Elasticty Stages
0 0 0 0 Irrational
1 5 5 5 1.00 Irrational
2 14 7 9 1.29 Irrational
3 21 7 7 1.00 Irrational
4 26 6.5 5 0.77 Rational
5 30 6 4 0.67 Rational
6 33 5.5 3 0.55 Rational
7 35 5 2 0.40 Rational
8 36 4.5 1 0.22 Rational
9 36 4 0 0.00 Rational
10 35 3.5 -1 -0.29 Irrational
Water OutputTotal Rvenvues Total Cost
Net Rvenues
Marginal Product Mar Val Prod Change In Cost
Change in Output MC MR
W O O*Po C=W*Pw NR=TR-TC MP=dO/dw MVP= MP*Po dC=(E8-E7)….. dO=(C8-C7)… dC/dO dTR/dO
0 0 0 0 0 0 0 0 0 0.00 0
1 5 10 5 5 5 10 5 5 1.00 2
2 14 28 10 18 9 18 5 9 0.56 2
3 21 42 15 27 7 14 5 7 0.71 2
4 26 52 20 32 5 10 5 5 1.00 2
5 30 60 25 35 4 8 5 4 1.25 2
6 33 66 30 36 3 6 5 3 1.67 2
7 35 70 35 35 2 4 5 2 2.50 2
8 36 72 40 32 1 2 5 1 5.00 2
9 36 72 45 27 0 0 5 0 0.00 2
10 35 70 50 20 -1 -2 5 -1 -5.00 2
Policy Impact Analysis
Egypt- SugarcanePolicy Change- Investing modern technology
Before After
Water Use (cubic meters fedan) 12000 9500
Yield (tons/fedan) 46.73 56.07
Cost of Improvement (Le /Fed) 0 194
Impact of Policy
Profitabilty (Le/Fed) 1482 2129
Domestic Resource Cost 1.07 0.81
Ahmad-Kieth (2002)
Jenin, Tulkarem, Qalgilya
Jericho
0 1 2 3 4 5 6 7 8 9
Palestine: Water Values and invest-
ment payback period
Years
FAO/RNE POLICY ANALYSIS
CASES/ BREIFS
EgyptPalestine
Saving (values) of water determines the rate of return on investments, in Jericho (low water values), it takes 8.46 years as pay back time ,where as in high water values area (Jenin ) only 2.80 years
Sugarcane: Better Irrigation Practices >>> Water Saving >>> Enhanced Profitability and now carries comparative advantage (DRC< 1)
BaseRent
BaseProfitability
New Rent500
New Rent700
NewRent 900
Rice 269.51 1262.22 1031.73 831.73 631.73
Maize 223.21 461 184 -16 -216
Cotton 425.22 1656 1581 1381 1181
Wheat 305.45 626 431 231 31
Sugarcane 632.30 1473 1606 1406 1206
Impact of Rent Decontrol on Wheat
0
200
400
600
800
1000
1 2 3 4
Pro
fita
bilty
/Le
/Fe
d
0100200300400500600700
Re
nt/
Le
/Fe
dd
an
Rent Private Profitability
Case of Egypt: Rent decontrol a major land policy shift
Impact of Energy Cost on Efficiency of Resource Use: Case of Al-Batinah region of Oman
0 1 2 3 4 5 6 7 8
Cherry Tomatoes
Okra
Strawberry
Carrots
Alfalfa
Cauliflower
Tomato
Cabbage
Eggplant
Chicko
Pumpkin
Date (H)
Capsicum
Cucumber (PGH)
Cucumber
Squash
Rhodes Grass
Peper (PGH)
Peper
Date (M)
Water Melon
Date (A)
Onion
Potato
Banana
Lemon
Mango
Orange
deterioration in DRC
Very high sensitive crops for changes in
electricity price
Quite low sensitive crops for changes in electricity price
Shift from low income, high water use crops to high income, low water use crops
How?
Removing water/energy subsidy is most the effective tool
Energy, water and food security nexusIs becoming critical in energy deficit countriesand the environmental cost of cheap energy is Evident in many countries
Kazakhstan: Rice policy cost to the nation (tax payers) was very high and leading to
environmental disaster (Aral Sea)
Rice: Area, Production and Yield
050
100
150200250300350
400450500
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Years
Th
ou
san
ds
0,00
0,50
1,00
1,50
2,00
2,50
3,00
3,50
4,00
4,50
To
n p
er H
a
Area Harv (M Ha) Production (M Mt) Yield (Tons/Ha)
Rice: Cost StructureTraded 66 and Non Traded 34%
Fertiliers
5%
Seed
18%
Hired labor
7%
Machinery
54%
Chemicals
2%
Water
11%
Land rent
3%
Policy Indicators Rice Small Rice Medium Rice Large
Yield (c/ha) 32.36 27.52 33.57
Private Returns to Water KZT/cm
0.80 1.29
1.16
Private Profits (KTZ/ha)
6415 8953
12080
DRC -4.38 2.71 3.36
Average Private Profitability
Crops KZT/ha
Potatoes 55763,9
Grapes 47270,5
Apples 18659,9
Cotton 18463,6
Sunflower 16230,9
Sugar beet 9821,9
Rice 9149,82
SoyaBean 4972,5
Wheat 4069,35