White Paper on Agribusiness Innovation in Macedonia

8/10/2019 White Paper on Agribusiness Innovation in Macedonia

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ECONOMIC IMPACT ASSESSMENT OF A

GOVERNMENT FUNDED PROGRAM FOR

THE INTRODUCTION OF DRIP IRRIGATION

IN CORN PRODUCTION WITHIN THE

MACEDONIA DAIRY SECTOR

2014

WHITE PAPER ON

AGRIBUSINESS

INNOVATION IN

MACEDONIA


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Publisher:

The USAID Small Business Expansion Project

For the Publisher:

Carl Larkins, Chief of Party

Author:

PointPro Consulting LTD

Expert Contributors:

Dimche Damjanovski

Martin Trajchev

The publishing and printing of this publication is made possible by:

USAID United States Agency for International Development

Design:

koma.mk

Circulation:

50

SMALL BUSINESS

EXPANSION PROJECT


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TABLE OF CONTENTS1 EXECUTIVE SUMMARY ............................................................. ........................................................................ ..............6

1.1 Purpose and Methodology of the White Paper ............................................................. ....................................................................... 6

1.2 Current State of Irrigation and Corn Cultivation in Macedonia ............................................................. ...............................................6

1.3 The Drip Irrigation Technology and Corn Yields Increase Potential ................................................................... ...................................7

1.4 Assessment of Economic Impact from Program for Drip Irrigation for Growing Corn (DIGC) ...............................................................8

1.5 Policy Recommendations for the Implementation of the Program for Drip Irrigation for Growing Corn (DIGC) ....................................9

2 STRATEGIC OBJECTIVES ..............................................................................................................................................12

2.1 Overall Purpose and Objectives of the White Paper ................................................................. ......................................................... 12

2.2 White Paper Outcomes and Preparation Methodology .....................................................................................................................12

3 STATE OF PLAY AND SYSTEMIC SOLUTION DRIP IRRIGATION CONCEPT APPLIED TO CORN PRODUCTION IN MACEDONIA........14

3.1 Current State of Irrigation and Corn Production Performance in Macedonia ..................................................................................... 14

3.1.1 Current State of Irrigation in Macedonia ....................................................................... .......................................................... 14

3.1.1 Current State of Corn Production Performance in Macedonia ................................................................................................. 16

3.2 Corn Production Yields Comparison ................................................................. ....................................................................... ..........17

3.3 The Drip Irrigation Technology and Corn Yields Potential .................................................................................................................. 18

4 ASSESSMENT OF THE ECONOMIC IMPACT FROM DRIP IRRIGATION ............................................................ ........................24

4.1 The Rationale behind the Economic Cost-Benet Model (Corn Production vis--vis Dairy Value Chain)...........................................24

4.1.1 Shared Underlying Assumptions for all Stages of the Economic Model ....................................................................... ...........28

4.1.2 Cost-Benet Analysis of Primary Corn & Silage Producers - With and Without Drip...............................................................294.1.3 Combined Primary Production Fodder and Milk ................................................................... ...............................................30

4.1.4 Categorization of Combined Producers by Size of Farm (5 Target Groups) ................................................................... ...........32

4.1.5 Cost-Benet Analysis of Combined Producers - With and Without Drip..................................................................................33

4.2 The Economic Framework Description (Denition of Economic Model Structure, Internal Linkages

and Metrics of Ultimate Economic Impacts)...........................................................................................................................................35

5 THE CASE FOR GOVERNMENT INTERVENTION COMPOSITION AND MAGNITUDE OF THE POSITIVE

ECONOMIC IMPACT INDUCED BY THE DRIP IRRIGATION PROGRAM .......................................................................................38

5.1 Target Hectares under Drip and Investments.................................................................................................. ..................................38

5.2 Estimated Value-Adding Potential....................................................................................................................................................405.2.1 Primary Corn Production and Import Substitution Potential .................................................................. ..................................40

5.2.2 Primary Milk Production and Import Substitution Potential .................................................................. ..................................41

5.2.3 Dairy Processing Industry, Wholesale and Retail Eects........................................................................................................42

5.3 Water Savings and Avoided Investments in Irrigation Systems ....................................................................... ..................................44

5.4 The Aggregate Monetary Value of Economic Impact to the National Economy.................................................................................45

5.4.1 Scenario Analysis ..................................................................... ....................................................................... .......................46

5.5 Overview of Other Potential Economic Benets ..............................................................................................................................47

6 MAIN CONCLUSIONS SUMMARY OF ECONOMIC IMPACT FROM NATIONAL FISCAL PERSPECTIVE .........................................50

7 POLICY RECOMMENDATIONS FOR THE IMPLEMENTATION OF THE PROGRAM FOR DRIP IRRIGATIONFOR GROWING CORN DIGC ...........................................................................................................................................52


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LIST OF TABLES:

Table 3.1 Water consumption per hectare of corn (with/without drip irrigation) ................................................................................... ........21

Table 4.1 Summary of metrics and present value of benets.......................................................................................................................26

Table 4.2 Main assumptions, inputs and expected outputs ................................................................... ........................................................ 30

Table 4.3 Categorization of combined farms farms that produce ALL types of cereals ..................................................................... .........31

Table 4.4 Total number of farms...................................................................................................................................................................31

Table 4.5 Total number of farms that produce corn .................................................................. .................................................................... 32

Table 4.6 Total number of farms that produce fodder ............................................................... .................................................................... 32

Table 4.7 Main assumptions and inputs to dairy farm model ................................................................ ........................................................ 34

Table 4.8 Specic feed productivity increase per farm size due to drip irrigation...................................................................... ....................34

Table 4.9 Net expected eects per farm.......................................................................................................................................................35

Table 5.1 Recommended distribution of government nancial support.........................................................................................................40

Table 5.2 Macro level economic impact of primary corn production with drip ...................................................................................... ........41

Table 5.3 Macro level economic impact of combined milk and corn production with drip.............................................................................42

Table 5.4 Macro level economic impact on dairy processing industry, 2013 ................................................................. ................................43

Table 5.5 Value added for the dairy sector 1 year .....................................................................................................................................43

Table 5.6 Value added for the dairy sector total........................................................................................................................................44

Table 5.7 Water savings impact from drip irrigation ................................................................................................................. ....................44

Table 5.8 Comparative overview of economic impact .............................................................................................................. .....................45

Table 5.9 Comparison of economic impact for alternative scenarios.................................................................. ...........................................46

Table 7.1 DIGC Program Proposed Monetary Allocations ...................................................................... ........................................................ 54

LIST OF FIGURES:

Figure 3.1 Structure of land area..................................................................................................................................................................14

Figure 3.2 Types of irrigation ........................................................................................................................................................................15

Figure 3.3 Area under irrigation ............................................................. ........................................................................ ...............................15

Figure 3.4 Annual freshwater withdrawals by sector ............................................................... .................................................................... 15Figure 3.5 Area under corn, annual production and yields .................................................................... ........................................................ 16

Figure 3.6 Corn Yields Comparative Overview Balkan Region (kg/ha) ............................................................ ............................................17

Figure 3.7 Corn Yields Benchmarks (kg/ha) .................................................................. ....................................................................... .........17

Figure 3.8 An example of a drip irrigation system layout ...................................................................... ........................................................ 19

Figure 3.9 Yield per ha (with and without drip irrigation) ...................................................................... ........................................................ 20

Figure 4.1 Simplied model of dairy value chain in Macedonia ....................................................................................................................24

Figure 4.2 Rationale behind the Economic Model .........................................................................................................................................27

Figure 4.3 Value adding potential (EUR)........................................................................................................................................................28

Figure 4.4 Total number of farmers per category .........................................................................................................................................31Figure 4.5 Key steps for economic impact analysis .................................................................. .................................................................... 36

Figure 5.1 Increase in RM average yield due to drip irrigation .................................................................................................. ....................39


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EXECUTIVE SUMMARY

ITS BETTER TO FARM ONE

HECTARE OF LAND UNDER DRIP

IRRIGATION, THAN TWENTY

HECTARES WITHOUT DRIP

IRRIGATION

FERHAN BIBEROVIC,

CORN AND DAIRY FARMER


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1 EXECUTIVESUMMARY

1.1 Purpose and Methodology of the White Paper

This White Paper serves as the key policy document to the Government of the Republic of Macedonia to

formulate an eective funding program introducing drip irrigation systems for corn production in theMacedonian dairy sector.

To adequately assess the desired outcomes of the proposed program, the White Paper follows the analyticalprocess described below:

Executive Summary

Carry out a

structured and

cross-cutting anal-

ysis within the body

of the macedonian

statistics and datarelated to the

agriculture farming

in dairy (cow) and

corn farms.

Determine the

size, structure,

and key factors

within Macedo-

nian dairy valuechain.

Formulate the

economic impact

model for each

stage within the

value chain posi-tively impacted by

the incremental

corn production

such as: (i) corn

and dairy farms,

(ii) dairy pro-

cessors and (iii)

wholesalers and

retailers of dairy

products.

Calculate aggre-

gate economic

benet to the na-

tional economy to

be induced by theimplementation

of the pilot drip

irrigation program

in Macedonia for

advanced corn

production, and

the eective

leverage on the

public funds to

be used in the

program.

Propose policy

recomendations

based on the

economic impact

assessment.

1.2 Current State of Irrigation and Corn Cultivation in Macedonia

Based on the land use structure, Macedonia has a solid potential for high-value agricultural output ifadequate irrigation systems are provided. Irrigation water demand is high and makes agriculture the topwater consuming sector in Macedonia. Macedonia has approximately 170,000 ha of arable land undervarious irrigation infrastructure schemes, yet with inadequate status: assets are old and not operational;the locations of pipes and canals are inadequate considering the current farm size.

Thus, even though Macedonia has a solid agricultural potential, the future national agro-economical policies

must take into the account two vital and inter-locked courses of actions: (1) fundamental reconstruction andupgrade of existing water irrigation infrastructure, and (2) state programs for development of sustainableand proven water irrigation techniques and practices. This White Paper addresses the second issue appliedto corn cultivation in Macedonia and the upward eect its introduction has across the entire dairy value chain.

STEP 1: STEP 2: STEP 3: STEP 4: STEP 5:

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The average harvested area under corn in Macedonia over the last ve 5 years (2008-2012) is around 30,000hectares which produces only 70% of the Countrys needs; the remaining 62,000 tons are imported. Thesignicant role that imports play in satisfying Macedonian annual corn consumption demonstrates thepotential economic impact that a signicant increase in yields could have on the domestic corn market, i.e.import substitution. Furthermore, the low baseline of 4.3 tons/ha in average yields puts Macedonia at thebottom of productivity in both European and regional contexts.

15.000

10.000

5.000

0

Greece

11.913

8.6867.131

5.987 5.682 5.531 5.1494.270

4.177 3.899

SloveniaTurkey

AlbaniaCroatia Bulgaria Serbia

Montenegro Bosna & Herzegovina

Wester Europe

European Union Southern Europe

Europe Eastern EuropeWorld

Macedonia

5,1615.538

6.6587.4907.5477.578

10.298

15.000

10.000

5.000

0

1.3 The Drip Irrigation Technology and Corn Yields Increase Potential

USAID Macedonia Small Business Expansion Project (SBEP) started with the implementation of theGMCI (Grow More Corn Initiative) with the purpose of demonstrating that through the introduction of newtechnologies and good agricultural practices - such as advanced drip irrigation and fertigation solutions-productivity can be signicantly increased, thereby creating a positive eect on a macro-economic (but alsomicro) level more specically, by increasing corn yields, directly contributing to import substitution of corn,condensed milk, while concurrently growing the upward dairy supply chainin Macedonia.

The results from the GMCI pilot drip program are truly impressive. The initial season average yields achievedwith the pilot portfolio amount to signicant 11.4 tons/ha. Compared to the Macedonia average corn yield ofderived 4.3 tons/ha, the aer-drip yield is a multiple of 2,65. So far, this is an unprecedented corn productionoutcome given the Macedonian agricultural context. The SBEP built on these experiences and has so far laid

120 drip systems covering 120 hectares of corn and farmers have additionally installed another 80 hectaresof equipment bringing the number to 200 hectares.

Corn yields comparative overview (kg/ha)

Corn yields benchmarks (kg/ha)

Northern Europe

Source: FAOSTAT, Production/Crops, 2014


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In addition, the total amount of water consumption with drip irrigation systems is on average 30% lowerthan the amount required under conventional irrigation systems, such as linear and sprinkler systems.This is also a core comparative advantage of drip irrigation resulting in sustainable irrigation practices andsignicant capital cost saving in development of additional infrastructure.

1.4 Assessment of Economic Impact from Program

for Drip Irrigation for Growing Corn (DIGC)

As already mentioned, this White Paper formulates the rationale and analytical framework applied for soundassessment of the positive impact that the Program could bring to the national economy of Macedonia,taking into account the upward linkages between the corn cultivation and the entire dairy value chain.The monetary allocation projected for the implementation of the DIGC (based on the economic model) is17,500,000.00 EUR invested over a seven year period, covering 7,000 hectares planted with corn with dripirrigation systems and, as a result, eectively substituting 97% of the total corn that is currently imported.

Therefore, the economic cost-benet model presented isbased on the following: (i) combined dairy farms producingtheir own corn and silage as core fodder inputs, (ii) dairyprocessors that are direct buyers of raw milk, and (iii)the trading sub-chain comprised of both wholesalers andretailers who supply products to the nal customer.

The key growth driveracross the dairy value chain is the

productivity of corn production, directly inuenced by theaverage yields per hectare of agricultural land. Most ofthe medium and large size dairy farms produce their ownfodder, especially corn and silage since their contribution

to overall farm operating costs is instrumental for aneconomically viable farming. Therefore, the outputand growth of dairy farms is directly inuenced by theavailable fodder, or given the same available agriculturalland, the average yields of corn growing.

Given the signicant results and potential for increasedcorn yields by introduction of drip irrigation (estimated atrealistic 13 tons per hectare), the economic cost-benetmodel enables the calculation of the incremental value

added at each stage of the dairy value chain. In conceptualterms, the logic behind the model is the following:

Yield per ha (with/without drip irrigation)

Average MK (RM Stat)

SBEP 2013 drip farmers

11,400

4,325

163% increase

Source: SSO 2014, SBEP Data 2013

Executive Summary

Trade

Wholesalers

Retailers

Agriculture(farming)

Foodprocessing

Corn Cultivation

Dairy Farms

Dairy Processors

Model of dairy value chain in Macedonia


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Net benet (economic impact cost) or NPV

1. The higher the corn yields at corn growing farms or dairy farms producing their own corn higher their economicoutput and corresponding earnings (value added);

2. The higher the output, or simply the volume of raw milk produced at dairy farms due to more available fodder higher the volume of dairy products, economic output and earnings (value added) at dairy processors;

3. The higher the output of dairy processors higher the volume of traded goods and corresponding trade margins inabsolute amounts achieved by traders while supplying goods to the nal customer groups.

There are also several other positive economic externalities resulting from the execution of the Drip Program,such as: (a) corn import substitution worth 11.3 mil EUR P/A, (b) incremental employment of 2,800 new jobsalong the entire dairy value chain, and (c) capital cost savings due to water savings achieved by the dripirrigation compared to the more conventional systems worth 8.4 mil EUR.

For each key segment within the dairy value chain in Macedonia (farming, processing, trading) a cost-benetmodel for calculating annual benets was prepared, across a 7-year forecasting horizon. The economicbenet is summarized as a single aggregate present value gure, derived by discounting each annual benetto the present. The total net benet ( 110 million EUR), calculated as present value of all benets over7-year period ( 128 million Euro) minus the original investment (17.5 million Euro), is highest under the100% combined dairy farmers/corn growers scenario. This indicates the full potential of economic return of7.3 Euro for each 1 Euro(under high impact scenario) invested in the DIGC Program, if the program is fullyimplemented (7,000 ha) over the 7-year horizon. This is an impressive economic return and demonstrates theoutstanding use of the national economy resources.

Retail of dairy products

Wholesale of dairy products

Dairy industry

Combined farms (Dairy + Fodder)

11.842.662

24.711.943

14.209.367

8.400.000

Avoided CapEx due to water savings

51.483.214

1.5 Policy Recommendations for the Implementation

of the Program for Drip Irrigation for Growing Corn (DIGC)

Background

The DIGC Program is designed to induce governmental nancial support for investments in drip irrigationfor corn production and at the same time to increase awareness among farmers about the importance oftechnology of drip irrigation/fertigation in corn production.


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Financial support should be provided for

implementing drip irrigation/fertigation

on combined farms.

Farms with more than 5 heads of cattle per farm

that are part of the dairy value chain and at least

1 plot of 1 hectare planted with corn should be

included with the measure for nancial supportfor investment in drip irrigation.

DIGC Program monetary allocations

Target

The size of the funds should have the target to nancially support investments for drip irrigation for 7.000hectares of land under corn.

Measures for the implementation of the DIGC Program

Measure 1 (2015):Introduction of a drip irrigation pilot program that is to be carried out in 4 regions (Skopje, Eastern,Southeastern and Southwestern), covering 20 hectares of land planted with corn, per region, in order to even outthe eorts made by the SBEP so far. 1Measure 1 is estimated at 475,000.00 EUR; 200,000.00 for procurement of dripirrigation systems, 15,000 for GPS equipment, training for NEA advisors that will implement the measure educational

workshops for farmers and 260,000.00 EUR for a government national campaign promoting the DIGC (advertisement onNational and local TV stations, billboards, posters and iers that are to be disseminated among the farming community)Target:80 combined farms2

Measure 2 (2016):Increase of the amount for drip irrigation for corn in the Program for Financial Support of RuralDevelopment (PFSRD) and widening it with drip irrigation for sunower3to 300,000 EUR.Target:300 hectares (combined farms)

Measure 3 (2017-2021):Introduction of a 5 year plan (as part of the 7 year plan envisaged with the economic model onwhich the Paper bases its recommendations) that will gradually increase the amounts allocated in the PFSRD for dripirrigation for corn/sunower and will reach the area targeted with the White Paper4.Target:6,500 hectares (combined farms)

Year

Amount (50/50 combination)

EUR Hectares

Previous SBEP/NEA

eorts-hectares (2013-2016) Total (Hectares)

2017 1,200,000 600 731 1331

2018 2,400,000 1200 1200

2019 2,400,000 1200 1200

2020 3,500,000 1750 1750

2021 3,500,000 1750 1750

13,000,000 6500 7231

The introduction and implementation of the Drip Irrigation for Growing Corn Program can have a signicant eectnot only on the dairy sub-sector but on the Macedonian economy in general. The numbers that are provided by themetrics applied in the economic impact assessment are very convincing, with each of the three scenarios providedwith this White Paper. If the High Impact Scenario materializes, as is expected due to the signicant increases in yieldsand the subsequent investments along the entire value chain, 101.2 million Euros Net Present Value over a sevenyear period will be added to the dairy sector and 8.4 million Euros in capital investments for irrigation infrastructurewill be avoided. In addition, other externalities that will be made possible with the implementation of the DIGCProgram such as annual import substitution of corn worth 11.3 million Euros and the possibility of the creation ofnew 2,800 jobs along the entire value chain. All of the above makes the DIGC Program a key government policy forthe strengthening and revival of the Macedonian Dairy Sector. The program is also expected to have a knock-on eecton other industries such as the poultry and meat sectors, and not least on the sunower industry with the potential

to substitute 34 million worth of imports of crude sunower oil.

1The amounts and the cost justication are listed below in the policy recommendations2Combined farms means both dairy and fodder farms3Sunower should also be included in the program for several reasons: crop rotation with corn, high yields and improved quality, thedrip irrigation system for corn is the same for sunower and has great potential to also substitute imports and even induce exports4DIGC Program monetary allocations


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STRATEGICOBJECTIVES


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2 STRATEGICOBJECTIVES

2.1 Overall Purpose and Objectives of the White Paper

This White Paper serves as the key policy document to the Government of the Republic of Macedonia to

formulate an eective funding program introducing drip irrigation systems for corn production in theMacedonian dairy sector.

The White Paper eectively demonstrates: (i) the core problem to be addressed, (ii) the essence of the

proposed solution, and (iii) the eects and monetary value of the related public benets (across the entirevalue chain impacted by the increase in corn yields) to be brought into the Macedonian national economy viaimplementation of the proposed Financial Support Program.

2.2 White Paper Outcomes and Preparation Methodology

The White Paper analyzes and evaluates the specic economic benets generated along the entire dairyvalue chain, from the implementation of a well-structured Financial Support Program of the MacedonianGovernment to a selected category of dairy farms involved in dairy farming and corn production.

The process of preparation of the White Paper enabled the delivery of the following outcomes:1. Analyzed Macedonian statistics and data related to dairy (cow) farms and corn farmers, including imports of

both milk (evaporated, concentrated, and nal products), and corn. The analysis revealed the size, structure,and distribution of Macedonian dairy and corn/silage production practices. More specically, it identied thebaseline data as well as illuminated the optimal target for implementation of the pilot nancial supportprogram.

2. Determined size, structure, and key factors within the Macedonian dairy value chain.

3. Formulated an economic impact model for each representative player within the value chain impacted bythe incremental corn production, including primary agricultural holdings involved in corn farming, dairy (cow)farmers, dairy processors reliant on raw material supply (milk), and dairy product wholesalers and retailers.

4. Calculated the aggregate economic benet to the national economy (including import substitution of bothcorn and milk and the ensuing eects on the trade balance) added by implementation of the pilot nancialsupport program for drip irrigation introduction in Macedonian corn production, as well as the eectiveleverage on the public funds to be used in the program.

5. Proposed policy recommendations based on the economic impact assessment ndings.

The rationale behind this White Paper is aligned with the fundamental economic principle of any publicscal policy: each denar invested in any Government program from the national budget, infact does buy acertain magnitude of the desired result. In more general terms, it buys an economic benet that should be a

multiple of the original investment/cost. The economic impact elaborated here follows this logic. Therefore,the ultimate outcome of this White Paper is to properly assess the scope and evaluate the monetary value

of all the benets to be brought back to the national economy over a certain time horizon by the up-frontinvestment from public funds into the DIGC Program in Macedonia.

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STATE OF PLAY AND

SYSTEMIC SOLUTION DRIP IRRIGATIONCONCEPT APPLIED TO CORN

PRODUCTION IN MACEDONIA


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3 STATE OF PLAY AND SYSTEMIC SOLUTION DRIP IRRIGATION CONCEPT APPLIED TOCORN PRODUCTION IN MACEDONIA

3.1 Current State of Irrigation and Corn Production Performance in Macedonia

3.1.1 Current State of Irrigation in Macedonia

The total land area of Republic of Macedonia (Macedonia) amounts to 25,713 km2, or 2,571,300 ha. Macedoniahas a diverse land use as determined by the country geographical conditions with the following distribution:

Macedonia has high agricultural potential, with arable land amounting to 26.1 % of total land area, 5.Approximately 400,000 ha of total available arable land (16% of the total land) are categorized as suitablefor irrigation. This is a solid foundation for future high-value and high-yield agricultural output if adequateirrigation systems are provided.

With regard to the existing irrigation infrastructure in Macedonia, data from the FAO 6Aquastat databaseindicates that only 127,800 ha are currently equipped for irrigation; only 79,638 ha of these are actuallyirrigated. These data on currently irrigated exactly match those from the State Statistical Oce gatheredfrom the Census of Agriculture 2007.

5CIA 2011 Factbook6FAO = Food and Agriculture Organization of the United Nations

Figure 3.1 Structure of total land area

Unproductive land

Arable land

Grasslands

Forest area11%

26%

28%

35%

Source: Irrigation Systems in the Republicof Macedonia Aleksandar Radevski, 2009

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Figure 3.2 Types of irrigation

Figure 3.4 Annual freshwaterwithdrawals by sector

Figure 3.3 Area under irrigation

Unproductive land

Agriculture

Power

Industry

Domestic

Area actually

irrigated (ha)

Unirrigated

area suitable

for irrigation

Area equipped

for irrigationUnproductive land

4%

96%

20%

Source: Irrigation Systems in the Republic ofMacedonia Aleksandar Radevski, 2009

49%

31%

43%

27%

29%

1%

However, two other sources of data indicate a ratherdierent situation concerning the area equipped for andunder irrigation. The rst by an experienced Macedonianwater expert7, indicates that Macedonia has built atotal of 173,000 ha of water irrigation infrastructure.

The other source, a recent World Bank Report8states asimilar conclusion:

Since the 1980s, irrigated area in the country hasshrunk, and the majority of irrigation infrastructurehas been abandoned. Currently, only one-quarter ofland suitable for irrigation is actually irrigated, andmuch of that depends on local groundwater wellsfor supplemental water. i.e. 162,500 ha have or hadinfrastructure for irrigation, but only 127,000 ha areconsidered suitable for irrigation.

According to the same study, irrigation water demand ishigh; agriculture is the top water consuming sector in Macedonia with 43% of total freshwater withdrawals.Municipal water demand follows with 29%, then industry (particularly mining, metallurgy, chemicals, andtextiles) with 27%, and nally cooling water demand for the thermal power sector with 1% (Figure 3.4).

The World Bank report continues, Water availability is a critical issue for agriculture, with inadequateirrigation already limiting productivity, and climate change expected to exacerbate the problem. The countryis already experiencing moderate water stress, and climate change is pushing up water demand in agriculture.The rising frequency of water shortages is undermining the dependability of irrigation and, consequently,pushing down crop yields. Irrigation is critical to achieve expansion of production of high-value crops,for which Macedonia has a comparative advantage. However, the Macedonian irrigation system is highlyinecient: assets are old and not operational, the location of pipes and canals is inadequate considering the

7Irrigation Systems in the Republic of Macedonia Aleksandar Radevski, 20098FYR Macedonia Green Growth Country Assessment 2014 THE WORLD BANK GROUP


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current location of farms, and the system is designed to serve large-scale farms, while todays agricultureis based on small farms.

As a result, only 20 percent of the available irrigation infrastructure is actually used and farmers investin their own independent irrigation systems, usually based on wells. These individual schemes are rarelyregistered, and the groundwater is oen used without being paid for, which leads to overuse. Sustainabilityof this system is questionable.9

Even though Macedonia has great agricultural potential, based on total percentage of arable land andpreviously developed water irrigation systems, future agro-economic policies must take into account thefollowing inter-connected courses of action: (1) fundamental reconstruction and upgrade of existing waterirrigation infrastructure, and (2) state support programs for introduction of sustainable and proven waterirrigation techniques and practices. This White Paper addresses the second issue, applied to corn productionin Macedonia and the upward eect its introduction will have across the entire dairy value chain.

3.1.1 Current State of Corn Production Performance in Macedonia

The average area dedicated to corn production in Macedonia over the last ve 5 years (2008-2012) is around30,000 hectares (Figure 3.5). The compounded annual growth rate (CAGR) for the same 5-year period (-1.5%)indicates a slight downward annual trend in the harvested area under corn with a standard deviation of 1,580ha or +/- 5% from the average. Total corn production and yields also have the similar declining trend (seeFigure 3.5).

9 FYR Macedonia Green Growth Country Assessment 2014 THE WORLD BANK GROUP

Figure 3.5 Area under corn, annual production and yields

30.000

40.000

20122011201020092008

20.000

10.000

0

31 582 32 737 32 466

28 644 28 62329 390 29 369 29 198 29 180

31 013

Sown (ha) Harvested (ha)

140.000

160.000

20122011201020092008

120.000

100.000

0

127 125 154 237

129 045 126 096

115 928

Production (tons)

6000

20122011201020092008

4000

2000

0

4 751 4 508 4 2944 099

3 973

Yield (kg/ha)

Source: SSO, 2014


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2012 annual production amounts to 115,928 tons, covering only 65% of total corn consumption over thesame period (178,636 tons). The remaining 35% was covered through imports from Serbia (88.7%), Bulgaria(6.0%), Greece (3.1%), and Argentina (1.7%), together representing 99.5% of Macedonias total corn importsfor the same year (62,832 tons).

The signicant role that imports play in satisfying annual corn consumption in the country (30% on average)demonstrates the potential economic impact an increase in yields could have on the domestic corn market.

Import substitution with higher quality domestic corn and increased domestic production could ultimately

result in increased production of milk and dairy products(See Chapter 4 for details). Furthermore, the lowbaseline in average corn cultivation yields (4.27 tons/hectare) indicates signicant room for improvement inthe sector. Production can be easily increased through systemic implementation of highly eective, advanceddrip irrigation systems in combination with eective supply of nutrients, i.e. fertigation. See Chapter 3.3 formore details on actual performance achieved by drip irrigation so far in Macedonia.

3.2 Corn Production Yields Comparison

Available data on corn yields from the FAO database puts Macedonia in the lowest performing group whencompared to the wider Balkan region, led by Greece (with above average yields even when compared to thebenchmarks of the highest performing regions).

Although 2012 data was available from the FAOSTAT database, 2011 was taken as a more representativeyear, since in 2012 a signicant part of the Balkan region had a problem with aatoxin in the corn and averageyields decreased dramatically. For example, Serbias corn yields in 2012 have decreased by 46% compared to2011 which is the highest decline from all the 10 countries in the group. Only Macedonia, Greece and Turkeydisplay one-digit percentage changes in yields from 2011 to 2012, and they are (-7%), (-8%), and (+4%)

respectively, whereas all the other countries display double-digit declines (except for Albania which has adouble-digit growth in yield (+12%)). Macedonia is at the very bottom of the group) with yields under 5 tons/ha. This falls below the world average of 5.2 tons/ha; in comparison the European production average is over

Figure 3.6 Corn Yields Comparative Overview Balkans Region (kg/ha)

Figure 3.7 Corn Yields Benchmarks (kg/ha)

Greece Western Europe

European Union

Southern Europe

Northern Europe

Europe

Eastern Europe

World

Slovenia

Turkey

Albania

Croatia

Bulgaria

Serbia

Macedonia

Montenegro

Bosnia & Herzegovina

0 05000 200010000 400015000 6000 8000 10000 12000

11,913 10,298

7,578

7,547

7,490

6,658

5,538

5,161

8,6867,131

5,987

5,682

5,531

5,149

4,270

4,177

3,899

2011

2012

2011

2012

Source: FAOSTAT, Production/Crops, 2014


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6.6 tons/ha. The USA is the worlds largest corn producer with yields over 10 tons/ha, similar to the yieldsin Western Europe. This seems to indicate that the long-term investment in modern agronomy practices andscience delivers a high return.

Comparing Macedonian corn yields with the Balkan and EU countries suggests that Macedonian agriculturalpractices and technologies are far behind those applied in both neighboring Balkan countries and acrossEurope. This trend is the key rationale behind the idea of implementing of advanced drip irrigation andfertigation across Macedonia.

3.3 The Drip Irrigation Technology and Corn Yields Potential

As a brief introduction, drip irrigation is the slow, even application of low pressure water to soil and plants in aprecise and targeted way so that the exact amount of water reaches the specic location at the root of the plant

that is most eective in supporting growth and development. Drip irrigation uses a system of plastic tubing withembedded water emitters placed throughout the tubing (drippers), enabling release of water at the plant to (a)maximize water utilization and (b) prevent water evaporation, runo, and waste. Not only does water run throughthe irrigation tubing; farmers can also channel fertilizers and nutrients through the same tubing, thereby enablingthe same precision application of fertilizers and nutrients. This is oen called fertigation or nutrigation. So far,it represents the most eective way to increase the yield and quality of a crop by feeding the plant accordingto its specic, ever-changing needs. So far, only surface drip irrigation has been applied in Macedonia, as thesimplest, least expensive method of drip irrigation, requiring the placement of dripper lines on the surface of theagricultural eld at a dened distance from the base of the crop. However, SBEPs Grow More Corn Initiative hasbegun to implement advanced drip irrigation in combination with controlled fertigation as described above.

USAID Macedonia Small Business Expansion Project (SBEP)is a four-year project, implemented by CARANACorporation, focused on strengthening private sector capacity to drive regional economic development andjob creation in Macedonia. It aims to engage business leaders, local governments, regional developmentcenters, and other institutions to identify market opportunities for growth and job creation, upgrade thecapacity of micro, small, and medium-sized enterprises (MSMEs), respond to new market opportunities, andstrengthen the capacity of business service organizations (BSOs) to better identify and serve the needs ofthe MSMEs while building necessary workforce. In its two years of operation to date, the Project has starteda number of initiatives, including the Grow More Corn Initiative (GMCI) in 4 targeted regions. GMCI waspiloted in Polog and Pelagonija, and has now expanded to the Northeastern and Vardar regions.

The Small Business Expansion Project began the GMCI to demonstrate that the introduction of newtechnologies and good agricultural practices - such as advanced drip irrigation and fertigation solutions cansignicantly increase productivity and positively aect the macro economy. More specically, increasing cornyields not only directly contributes to corn import substitution, but also import substitution of condensedmilk, while concurrently growing the locally signicant upward dairy supply chain,. The Macedonian dairysupply chain links dairy farms (who largely produce their own corn and silage as basic fodder inputs) to thedairy processors, to wholesale and retail traders that make dairy products available to the consumer. Priorto the commencement of the Initiative, the SBEP held numerous discussions with all stakeholders, startingfrom farmers who had lowered the number of dairy cows due to expensive feed, through dairy companiessuch as Zdravje Radovo, BiMilk, Ideal Shipka, Sutash who had lowered their production due to lower milkyields on farm level, to wholesalers and retailers who started distributing and selling more imported dairy

products, and they all agreed that if the domestic corn production (both grain and silage) and productivitycan be increased, a great impact on the entire dairy industry can be achieved.


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Prior to the introduction of the GMCI in Macedonia, drip irrigation for growing corn was virtually unknown inthe country and was initially received with a great degree of doubt, by both individual farmers and the largeragricultural/food community. The GMCI began with a carefully planned process of selecting a supplier of dripsystems and services (such as installation, training and subsequent monitoring and extension), and a pre-

selection process of a number of corn/dairy farmers who would agree to the installation of the equipment.The results for the 2013 growing season, for 42 hectares under drip irrigation, were astounding and set a newbaseline for corn production in Macedonia, averaging yields of 11.4 tons/ha.

The SBEP built on these experiences and has so far laid 120 drip systems covering 120 hectares of corn;individual farmers have installed another 80 hectares of equipment, bringing the total to 200 hectares.

Drip irrigation in many diverse agro-ecological situations registered higher yields (GMCIs achievement of11.4 tons/ha represents an increase of almost 200% over the national average)) and set a naonal record of17 tons/ha of grain and 112 tons/ha of silage. Multiple accomplishments such as water savings (a 25%-35%reduction compared to furrow and sprinkler irrigation), signicantly better grain quality, lower labor costsand hours (in comparison to conventional furrow irrigation), precise fertilizer application, and low operating

pressures (in comparison to the centre pivot sprinkler irrigation method) demonstrate that the drip irrigationsystem for growing corn has wider implications for the vertical supply chain in the dairy and other corn-reliant industries.

Drip technology provides for precise irrigation and fertigation/nutrigation: 95% of the water, fertilizers, andnutrients are directly applied to the root of the plant thereby creating a stress-free growing environmentenabling maximum yields. The SBEP has created an important messaging system to notify farmers whento irrigate and/or fertigate and what fertilizers to use. This practice was highly recommended by the WorldBanks FYR Macedonia Green Growth Country Assessment, which stressed the importance of optimizingagronomic practices (including timing of water and fertilizer application) across the country.

10 Source: Netam irrigation systems - NetaKit

Figure 3.8 An example of a drip irrigation system layout10


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The drip irrigation system consists of a main water supply pipe connected to a water source (hydrant, well,river, or water tank), followed by attached lters and a small injector for fertilizer application. The lters areconnected to a system of plastic water supply tubing with embedded water emitters (small plastic drippers),with appropriate valves - serving as a secondary network and directly providing water and fertilizers.

The system is very easy to maintain and has a 10 year warranty, even though its economic life in the economicmodel is estimated at 7 years.

For Macedonian weather and soil conditions, approximately 28 m3 of water per hour are needed for irrigationof 1 hectare of corn or a total of 2,750 m3 for the entire corn growing season, a reduction of at least 25%when compared to conventional irrigation methods (3,750 m3). The drip irrigation system itself is very easyto install taking about 4 hours in total.

The system saves many labor hours during operation, making it even more advantageous in comparison toconventional irrigations systems. Drip irrigation requires only 10 hours of labor when compared to the 50hours of labor when another method of irrigation is used.

Based on data from the State Statistical Oce and progressive farmers monitored by the SBEP, the averageyield of corn per ha is 6.113 kg (Figure 3.9). Farms that have implemented drip irrigation & fertigation systemshave on average achieved 86% higher yields from the Macedonian derived average taken as the comparisonbasis, or over 1.5 times the yields of the average Macedonian farmer.

The results from the GMCI pilot drip program are truly impressive. The initial season average yields achievedduring the pilot amount to 11.4 tons/ha. Compared to the current Macedonia progressive farmers averageof 7.9 tons/ha, it denotes an 44 % increase, while compared to the Macedonia 5-year average corn yield ofderived 4.3 tons/ha, the aer-drip yield is a multiple of 2,65. So far, this is an unprecedented corn productionoutcome in the Macedonia agricultural context.

The achieved growth in yield per hectare can vary depending on the baseline agricultural conditions andpractices, i.e. the lower the starting point the higher the dierence in achieved yield growth. Based on thetwo SBEP pilot seasons (2013 and 2014) in Polog and Pelagonija, it is possible to conclude that a farmer

implementing a drip irrigation system over the course of the next 7-year time horizon can achieve an average

Figure 3.9 Yield per ha (with and without drip irrigation)

SBEP 2013 drip farmers

kg/ha yield with conventional irrigat ion kg/ha yield increase with drip irrigation

National average

Progressive farmers13

11,400

3,500 (+44%)

7,075 (+164%)4,325

7,900

Source: SSO 2014, SBEP Data 2013


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Stage 2

Stage 1

Table 3.1 Water consumption per hectareof corn (with/without drip irrigation)

yield of approximately 13 tons per hectare. The yield of 13 tons per hectare is derived on the premise that, ifsmall farmers that currently produce corn at the national average of 4.3 tons double their production in therst year to 8 tons (as current results of SBEP eorts demonstrate), while progressive farmers go up to 14tons in the same year, improved practices over the course of seven years will result with a 7-year average

of 13 tons per ha across the board. Of course, this assumption represents the progressive scenario based oncurrent experiences. However, in order to present the fair sensitivity of program outcomes in relation to thekey variables, such as baseline and aer-drip corn average yields, several scenarios have been developedwithin the economic cost-benet model, elaborated in the next chapter.

The total amount of water consumption with drip irrigation systems is on average 30% lower than thatrequired under conventional irrigation systems, such as linear and sprinkler systems (Table 3.1). Overall, thetotal amount of water needed for the entire corn season is in the range of 3,500-4,000m for conventionalirrigation compared to 2,300-2,700 m for drip irrigation. The experience of the SBEP with farmers from Pologand Pelagonija indicates that 2,750 m/ha is a realistic and achievable level of water consumption with thedrip irrigation system, implying a decrease of 27% compared to average consumption with conventionalirrigation (3,750 m/ha).

Based on the corn yields increase by the GMCI, and the potential that this the drip irrigation system has, thefollowing chapter formulates the fundamentals of the economic impact that a likely Government supporteddrip program applied for corn cultivation in Macedonia could have along the entire dairy value chain withinthe national economy.

Phase of corn production

Conventional irrigation

(m3/ha)

Drip irrigation

(m3/ha) % decreaseStage 1 - Germination and emergence 20 14 -30.0%

Stage 2 Stalk rapid growth phase 40 28 -30.0%

Stage 3 Corn tasseling and silking 55 39 -29.1%

Stage 4 - Pollination and fertilization 60 42 -30.0%

Source: Faculty of AgriculturalSciences and Food (FASF) 2014

Stage 4

Stage 3


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ASSESSMENT OF THE

ECONOMIC IMPACT FROMDRIP IRRIGATION


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4 ASSESSMENT OF THE ECONOMIC IMPACTFROM DRIP IRRIGATION

4.1 The Rationale behind the Economic Cost-Benet Model

(Corn Production vis--vis Dairy Value Chain)

This chapter elaborates on the positive impact the likely Government Drip Irrigation Program could bringto the national economy of Macedonia, including the upward linkages between the corn cultivation and

entire upward dairy value chain. This approach denes both the key drivers that induce growth to variousinter-linked segments of the Macedonia dairy value chain and the metrics to calculate the magnitude of thepositive economic impacts compared to the initial investment or cost from the national economy point ofview.

Eectively, the rationale behind this White Paper is very much aligned with the fundamental economicprinciple of any public scal policy, that each denar invested from the national budget in any Governmentprogram, infact buys a certain magnitude of the desired result, or in more general terms, buys an economicbenet that should be a multiple of the original investment/cost. The economic impact elaborated herefollows this logic.

Therefore, the economic cost-benet model presentedhere is based on the following model of the Macedoniadairy value chain, starting with the (i) corn growingfarmers or combined dairy farms producing theirown corn and silage as core fodder inputs, followedby the (ii) dairy processors, that are direct buyers ofraw milk, nally followed by the (iii) trading sub-chaincomprised of both wholesalers and retailers whosupply products to the ultimate customer.

Trade

Wholesalers

Retailers

Agriculture(farming)

Foodprocessing

Corn Cultivation

Dairy Farms

Dairy Processors

Figure 4.1 Simplied model of dairy value chain in Macedonia

Dairy processing companies represent the core of this

particular value chain. They are direct buyers of raw milkproduced at the dairy farms, and direct vendors to tradersup the value chain. Hence, their growth is directly inuenced(and limited) by the growth of raw milk produced at the farms.Not surprisingly, there are many strategic alliances betweenthe dairy processors and farms. As a general practice, mostof the dairy farms, especially the economically viable ones,grow their own corn and silage as key fodder inputs.

Dairy processors convert the raw milk in various nalconsumer product categories, which are then distributedto customers via the trading sub-chain comprised of

wholesalers and retail outlets.

Value is added at each stage of this food chain. Even thoughin many cases stages might be overlapped and performedby the same player, the value-adding concept remains thesame.

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The key growth driver across the dairy value chain is corn production, directly inuenced by the averageyields per hectare of agricultural land. Most of the medium and large size dairy farms produce their ownfodder, especially corn and silage, since their contribution to overall farm operating costs is instrumental tobe an economically viable operation. Therefore, the output and growth of dairy farms is directly inuenced bythe available fodder, or given the same available agricultural land, average corn yields. Given the potential

for increased corn yields through the introduction of drip irrigation, the economic cost-benet model enablesthe calculation of the incremental value added at each stage of the dairy value chain, beginning with theimplementation of the wider Drip Irrigation Program. The exact metrics of the value added are elaboratedlater in the text; the logic behind the model is the following:

` The higher the corn yields at corn growing farms or dairy farms producing their own corn, the highertheir economic output and corresponding earnings (value added);

` The higher the output (volume of raw milk produced at dairy farms due to more available fodder), thehigher the volume of dairy products, economic output and earnings (value added) for dairy processors;

` The higher the output of dairy processors, the higher the volume of traded goods and correspondingtrade margins in absolute amounts achieved by traders supplying consumers.

There are also several other positive economic externalities resulting from the execution of the Drip IrrigationProgram, including corn import substitution, incremental employment, and capital cost savings due to dripirrigations relative water eciency.

The economic impact analysis model rst assesses the value added to the economy that drip irrigationstimulates per hectare of arable land under corn, grain, and silage (NPV/hectare), i.e. the incremental increasein yields in cultivating corn, grain, and silage and the benet for the farmer. The analysis then replicates theeect on a macro level by entering the target number of hectares to be nanced by a potential Governmentprogram.

A separate analysis across a category of combined farming operations that produce both fodder and raw milk

was undertaken as well, in order to provide insight into the eects that drip irrigation could stimulate on avertically integrated model of farm, i.e. : (a) the increase in yields of corn and silage production, (b) the costsavings due to increased own production of corn and silage, as well as (c) the increase in milk production dueto the investment in additional cattle heads that would be fed with the increased volume of fodder, based onincremental corn grain and silage yields per hectare.

For each key segment of the dairy value chain in Macedonia (farming, processing, trading) a cost-benetmodel for calculating annual benets was prepared, across a 7-year forecasting horizon. The economicbenet is summarized as a single aggregate present value gure, derived by discounting each annual benetto the present. Table 4.1 summarizes the metrics and present value of benets for each segment within thevalue chain:

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Segment of the Value Chain Key Value Drivers Economic Benet Metrics

Agriculture:Corn Growers

` Increased corn yields

` Increased earnings

` Net Present Value (NPV) of

incremental free cash ow to rm over7-year forecast horizon

Agriculture:Dairy Farms

` Increased corn yields

` Cost savings due to avoidedpurchase of fodder

` Increased milk production

` Net Present Value (NPV) ofincremental free cash ow to rm over7-year forecast horizon

FoodProcessing:Dairies

` Increased output

` Increased earnings

` NPV of value added of the dairyindustry to the national economy

(Income GDP method) over 7-yearhorizon

Trade:Wholesalersand Retailers

` Increased trade volume

` Increased trade margins andearnings

` NPV of value added of the tradingindustry to the national economy

(Income GDP method) over 7-yearhorizon

The entire logic behind the model explained in the subsequent sections of the report is as follows:

Table 4.1 Summary of metrics and present value of benets

dairy farmer and his corn, double his height


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1600NEW JOBS11,8MIL EUR

700NEW JOBS51,5MIL EUR NPV

30.000TONS OF DAIRY PRODUCTS

24,7MIL EUR NPV

14,2MIL EUR NPV

EUR 101,2 MIL2.800 NEW JOBS

70.000TONS OF MILK

COMBINED PRIMARY PRODUCTION

DAIRY PROCESSING INDUSTRY

WHOLESALE

RETAIL

TOTAL

500NEW JOBS

NET PRESENT VALUE (NPV)

Figure 4.2 Rationale behind the Economic Model

Source: Internally developed cost-benet model


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Although the incremental () value added on a macro level from the combined farmers alone (nearly 12million Euro) is smaller compared to the incremental value added to the corn growing farms (41 million Euro),(the NPV of 7-year economic benets from the corn growers was over 3.5 times the NPV of the combinedfarmers), the increase in milk production provided an additional opportunity for leveragingthe positive eects

of the drip irrigation up the dairy value chain, i.e. in the dairy processing industry, through the wholesalersdistribution system, and nally to the ultimate consumers from the retail outlets as end beneciaries, makingthe combined and vertically integrated farms the target group for the Government support (Figure 4.3). Thus,the combined added value induced by the Drip Irrigation Program up the entire dairy value chain is ultimatelyof a higher magnitude than the added value from the corn growers alone.

The following section summarizes the structure of the model, key input variables, as well as the monetaryvalue of the economic benets elaborated in this chapter, separately for each segment of the entire dairychain: (i) corn growers, (ii) vertically integrated dairy farms, (iii) dairy processors, and, (iv) traders of dairyproducts.

4.1.1 Shared Underlying Assumptions for all Stages of the Economic ModelAlthough the integrated model aggregates the separate economic cost-benet models of each stage withinthe dairy value chain there are a number of assumptions in common for all stages, as follows:

Forecast horizon of 7 years, taken as the average economic life of the drip irrigation system;

Capital cost of drip irrigation system per 1 [ha] of 2,500 EUR11;

Discount rate of 10% for calculating NPV (net present value);

Return based on net added value expressed as the incremental NPV [Euro]/ha;

11This is the maximal price for the rst hectare; the subsequent 5 hectares installed are 1,500 EUR each

0

20000000

40000000

60000000

80000000

100000000

120000000

Figure 4.3 Value adding potential (EUR)

Corn growers Dairy Value

Chain

Combined

farmers

Dairy industry Wholesale of

dairy products

Retail of dairy

products

14209367

24711943

51483214

102247186

11842662

41151196


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The economic return indicators used are as follows:

Incremental net present value @ 10% discount rate per hectare (based on incremental revenues,cost savings and earnings);

Internal rate of return (IRR), the discount rate that produces a zero NPV;Benet-cost ratio (BCR) as the ratio of the benets of a project or proposal, in monetary terms,relative to its costs, also in monetary terms expressed in discounted present values;

Payback period, as the period of time required to recover the up-front investment, or to reach thebreak-even point; and

Return on investment (ROI) multiple as a ratio derived as NPV divided by the total investment tocalculate and compare the share of the net return to the original value of the investment at presentday.

4.1.2 Cost-Benet Analysis of Primary Corn & Silage Producers - With and Without Drip

All analyses and forecasts are done on per hectare basis, i.e. investment costs, operation costs, yields(before and aer investment), revenues, and returns per hectare.

The main inputs to the cost-benet analysis model for the primary producers of corn and silage refer to thefollowing:

` Size of investment in drip for both corn grain and corn silage (2,500 EUR/ha);

` Increase in yield per hectare with drip irrigation, from an average for RM of 4.3 tons/ha to 13 tons/ha, and23.1 tons/ha to 70 tons/ha for corn grain and corn silage respectively, or an approximately 200% increasein yields for both cultures, resulting in a 200% increase in sales revenues per hectare for both corn grainand silage;

` Increase in variable expenses for water soluble liquid crystal fertilizers; however, adecrease in xed laborbudget and operating costs for irrigation (water savings);

` Decrease in production price per unit of output (primarily due to yields increase), from a RM average of12.95 to 4.17 MKD/kg for corn grain; a total decrease in overall production costs for hectare with dripirrigation, from 911 EUR/ha to 882 EUR/ha.

` Decrease in production price per unit of output, from a RM average of 2.75 to 0.79 MKD/kg for corn silage;a total decrease in overall production costs for hectare with drip irrigation, from 1,034 EUR/ha to 894EUR/ha.

The main outputs or results of the cost-benet analysis model for corn grain and silage were replicated on a

macro level based on the micro level models (per hectare) to provide an estimate of the required investmentand the economic return for the corn growers.

Table 4.2 summarizes both the main inputs and outputs of the cost-benet analysis leading to the conclusionthat an investment in just 1 hectare of land under corn could provide a return of 5,879 EUR in NPV (over 2.3times the initial investment), almost 67% in IRR, a benet-cost ratio of 3.3 and a payback period of less than1.5 years over the 7 year time horizon. This is an impressive economic return, and positions drip irrigation asa priority investment for average corn growers in Macedonia.


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Since the analysis was conducted on a per hectare basis, the same results were then replicated on a macrolevel, requiring a total investment of 17.5 million EUR for an NPV of over 41 million EUR and the same returnmetrics applied at the micro-economic analysis. Because of insucient data on the planted hectares undersilage in RM, the main focus of the analysis was placed on the primary production of corn grain, even thoughthe estimated results for the silage were even greater (Table 4.2).

4.1.3 Combined Primary Production Fodder and Milk

The main focus of the analysis of the eects of drip irrigation in the corn production was placed on thehereinaer called combined farms. In this case, the term combined farms is used for farms that areregistered as farms for milk production but also own or rent land for their own feed production, especially

corn and silage as key inputs and major cost drivers.

The combined farms were identied based on a 2013 AFSARD12database of all the farmers that have appliedfor subsidies for cattle breeding, milk, and crop production. The database included 64,999 farms (producersof dierent kinds of crops) and 20,617 cattle-breeding farms (Figure 4.4). The two types of farms werematched based on the id-number of the application. The result showed that 7,223 farmers were repeated inboth lists; therefore, they could be considered combined farms.

12AFSARD = Agency for Financial Support of Agriculture and Rural Development

Table 4.2 Main assumptions, inputs and expected outputs


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Figure 4.4 Total number of farmers per category

Table 4.3 Categorization of combined farms farms that produce ALL types of cereals

Table 4.4 Total number of farms

ALL GROWERS All types of cereals

Cattle farm size 1 >1 3 >35 >510 >1020 >2030 >3050 >50100 >100

TOTAL

Matched

Number of farmers 867 2,348 1,384 1,388 769 247 160 50 10 7,223

Number of cattle 867 5,660 6,122 10,391 11,012 6,118 6,231 3,430 4,551 54,382

Land under crops 597 1,784 1,126 1,363 1,078 431 401 131 2,441 9,351

Average ha / farm 0.7 0.8 0.8 1.0 1.4 1.7 2.5 2.6 244.1 1.3

Average # cattle / farm 1.0 2.4 4.4 7.5 14.3 24.8 38.9 68.6 455.1 7.5

Number of farmers 12% 33% 19% 19% 11% 3% 2% 1% 0% 100%

Land under crops 6% 19% 12% 15% 12% 5% 4% 1% 26% 100%

Source: AFSARD, 2014

Additional arguments supporting the signicance of the sample of combined farms is the fact that, they takeup 35% of the total number of farmers that have applied for subsidies and 32% of the total number of cattlesubsidized (Table 4.4).

Categories TOTAL Matched All cereals % of total

Total number of farms 20,617 7,223 35%

Total number of cattle 168,697 54,382 32%Source: AFSARD, 2014

Crop Farmersall cereals

CattleFarmers

CombinedFarmers

64,999 20,6177,223


The combined farms were categorized in 9groups based on the number of cattle on

the farm (Table 4.3). In the sample of 7,223combined farms, the total number of cattle is54,382 and the total crop cultivation area is9,352 hectares. It can be concluded that smallfarms dominate the sample, both based onthe number of cattle and the land cultivation

area. The sample is considered a reliable

representation of the population because it

is backed by data from the Macedonian State

Statistical Oce.


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4.1.4 Categorization of Combined Producers by Size of Farm (5 Target Groups)

To better understand the distribution of drip irrigations incremental eects along the entire value chain, categorization of the combined farms based on the number of cattle (Table 4.3 and Table 4.4) was conducted.The main goal of this categorization was to identify the total land under fodder and its distribution in each

category of farm.

The study initially aimed at identifying the land under corn production on the combined farms. The resultsfrom the database showed that only 315 farms matched this prole; the group only used 240 hectares forcorn cultivation. This was neither a signicant sample for in-depth analysis nor a suitable target for theproposed Government support program (Table 4.5).

Cattle farm size

CORN PRODUCER 1 >1 3 >35 >510 >1020 >2030 >3050 >50100 >100

TOTAL

MatchedNo. of farmers (c ) 32 98 53 64 34 18 14 2 0 315

Number of cattle (c ) 32 231 230 457 507 468 524 110 0 2,559

Land under crops corn 14 48 33 46 28 26 37 9 0 240

Average ha / farm corn 0.4 0.5 0.6 0.7 0.8 1.4 2.7 4.3 0.8

Average # cattle / farm 1.0 2.4 4.3 7.1 14.9 26.0 37.4 55.0 8.1


Land under crops 6% 20% 14% 19% 12% 11% 16% 4% 0% 100%

Average ha/cattle head 0.4 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1


Therefore, for the purpose of the analysis the nal sample is the segment of matched farms that consists ofdairy farms that also produce any types of fodder considered to be potential corn growers (Table 4.6). Hence,further in the text, combined farms refer to this type of farms.

Cattle farm size

FODDER PRODUCER 1 >1 3 >35 >510 >1020 >2030 >3050 >50100 >100

TOTAL

Matched

No. of farmers (f) 565 1.691 1.043 1.129 652 207 140 45 10 5.482

No. of cattle 565 4.097 4.629 8.454 9.381 5.149 5.451 3.094 4.551 45.371

Land under crops (f) 340 1.213 807 1.055 890 356 342 123 2.441 7.567

Average ha 0,6 0,7 0,8 0,9 1,4 1,7 2,4 2,7 244,1 1,4

Average no. cattle 1,0 2,4 4,4 7,5 14,4 24,9 38,9 68,8 455,1 8,3


Land under crops 4% 16% 11% 14% 12% 5% 5% 2% 32% 100%

Average ha/cattle head 0.6 0.3 0.17 0.12 0.09 0.07 0.06 0.0 0.5 0.2


Table 4.5 Total number of farms that produce corn

Table 4.6 Total number of farms that produce fodder


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The categorization of the combined farms and the analysis of the ratio of land per head of cattle showed thatland per cattle decreases with the size of the farm. This conclusion was the main incentive to continue theanalyses of the economic eects from the implementation of drip irrigation based on particular farm size. Thegoal was to incorporate the dierent level of farm productivity (based on their relative size), being the keydriver of the investment payback potential.

4.1.5 Cost-Benet Analysis of Combined Producers - With and Without Drip

The main inputs to the cost-benet analysis model for the dairy farms combined with corn grain and silageproduction refer to the following:

` Initial investment per ha for both corn grain and corn silage (2,500 EUR/ha);

` Same expected increases in yields of corn and silage per ha (see section 4.1.2);

` Same yield per cow for all sizes of farms (4,82513 l/head);

` Same average wholesale price of milk for all farms (19.6814 MKD/l);

` Dierent productivity factors based on the size of the farm expressed in the form of average number ofhectares per cattle head (ranging from 1.2 to 0.7, starting from the smallest with 3 to 5 cattle heads, tothe largest with 30 to 50 heads, or 10 times the size of the smallest);

` Decrease in feed costs with drip irrigation for corn grain (from 12.9 to 4.2 MKD/kg) and silage (from 2.7 to0.8 MKD/kg) per kg, due to increased yields and own production quantities, and the same consumptionper cattle head for all types of farms;

` The same other variable costs per cattle head for all sizes of farms15(see Table 4.7);

` Same xed cost per hectare for all farm sizes (50 EUR/ha);

` Investment in additional dairy cows depending on the incremental feed availability due to increased corn

and silage yields on the same piece of land owned by the farm (2,000 EUR/ head);

13Source: Strategy for Improvement and Tracking the Quality of Milk 2013-202014Source: Agricultural Market Information System Annual Report, 201315Source: Strategy for Improvement and Tracking the Quality of Milk 2013-2020


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A summary of the most important inputs to the forecast model can be found in Table 4.7.


A detailed cost-benet analysis was conducted for each type of farm under two scenarios in order to be ableto calculate the incremental net benets per farm from the drip irrigation, i.e. Scenario 1 AS IS reectingbusiness as is with usual performance, and Scenario 2 DRIP reecting an investment in drip irrigation andcorresponding yields for the entire land the farm owns (for full eects). One of the major improvements in theperformance of the combined farms is the increase in productivity, expressed as number of hectares of landper cattle head, and it is dierent for dierent sizes of farms (Table 4.8).

Hectares/cattle head (milk cow)Scenario 1

AS IS>

Scenario 2 DRIP

3


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Table 4.9 Net expected eects per farm

NET EFFECTS PER FARM / FARM SIZE UNIT > 3 5 > 5 10 > 10 20 > 20 30 > 30 50

Net increase in number of cows # 9.0 17.0 31.0 51.0 81.0Average yield per cow l/head 4,825 4,825 4,825 4,825 4,825

Net increase in litres milk (# cows)*(l/head) litres 43,422 82,020 149,566 246,059 390,800

Net revenues per cow - RM Stat EUR/head 17 21 25 29 38

Net revenues per cow - DRIP EUR/head 490 495 505 523 557

Average INCREMENTAL NPV per hectare EUR/ha 585 819 1,168 1,783 3,378

The above results were used to calculate the macro eects of the increased yields and number of cows onthe production of milk in the total sector, as well as the additional eects on the dairy industry (see section5.4).

4.2 The Economic Framework Description (Denition of Economic Model Structure, Internal

Linkages and Metrics of Ultimate Economic Impacts)

Economic impact analysis provides a quantitative method to estimate the economic benets that a particularproject or industry brings to the national economy and surrounding communities where the specic projector industry is located.

Typically, economic impact studies use nancial and economic data to generate estimates of output, GDP,employment, and tax revenues associated with changes in the level of economic activity resulting from the

project or industry being analyzed.

This particular model focuses on measuring the economic impact output using a more conservative measure,which is the Gross Domestic Product (GDP) calculated on industry level by Income Method (or value-addedapproach). The Income Method for GDP calculation applied to a selected industry, refers to the value-added,i.e. the additional value of a manufactured good (or service) within that industry, over the cost of intermediateinputs used to produce it from the previous stage of production or supply.

The Income Method for GDP to evaluate the potential economic impacts of the drip implementation on thedairy supply chain (farms, dairies and traders) was chosen due to the following advantages:

` GDP per industry (farming, dairy processing or trading) equals the net economic eect of that industry,

or the dierence between the economic output (revenues) and intermediate consumption (expenses onintermediate inputs). Thus, it is a relevant metric used for estimating gross value added from a particularindustry and comprises the following sub-categories of income in key economic sectors (enterprises,households, and government):

` Net Operating Surplusin corporate sector (Income to enterprises)

` Gross Employee Compensation(Income to households, i.e. individuals)

` VAT, Corporate and Product Taxes minus Subsidies(Income to the Government).

` GDP is the incremental value created through mechanical processes, labor and knowledge in each industrycategory (farming, manufacturing, trade)

` Total GDP is a more meaningful measure of economic impact than output, as it avoids double counting

during each round of impacts.` GDP is smaller than total Economic Output but is more important to government stakeholders, since it

aggregates the value added across a specic supply chain.


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The main inputs of the model as follows:

` Data used as inputs to the model are current expenditures; either capital expenditures or operatingexpenditures as outputs from the model are static.

` A distinction between capital expenditure associated with drip irrigation execution and recurring annual

operating costs has been made - CapEx vs OpEx.

` Only the incremental cash ows directly inuenced by the proposed project implementation are takeninto account.

` Secondary data from state statistics agencies are used to support the expenditure inputs in the economicbenet-cost model.

Estimate

required capital

and operating

expenditures for the

project

Build input-out-

put model

based on project

expenditures

Derive impacts

from built model

Generate impact

results from the

model

Stakeholder

communications -

Reporting

STEP 1: STEP 2: STEP 3: STEP 4: STEP 5:

Figure 4.5 Key steps for economic impact analysis

Source: Adapted from the PWC Economic Impact Analysis 2012 Americas School of Mines


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THE CASE FOR

GOVERNMENTINTERVENTION COMPOSITION AND

MAGNITUDE OF THEPOSITIVE ECONOMICIMPACT INDUCED BY

THE DRIP IRRIGATIONPROGRAM


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5 THE CASE FOR GOVERNMENT INTERVENTION COMPOSITION AND MAGNITUDE OF THEPOSITIVE ECONOMIC IMPACT INDUCED BYTHE DRIP IRRIGATION PROGRAM

5.1 Target Hectares under Drip and Investments

The purpose of the economic assessment model is two-fold: to provide a platform for designing an ecientGovernment-funded drip irrigation program in corn production, and to initiate the implementation of aprogram that will eectively demonstrate its positive eects to a sucient number of farmers (explained inmore detail in Chapter 7). Additionally, if the measure proves successful then it can be used as a universalmodel which can be further adapted and replicated for other similar Government funded programs, such asdrip irrigation for sunower or other cultures signicant to Macedonian agriculture.

The models main nding suggests that the proposed drip irrigation program should focus on combineddairy farms producing their own feed. The rationale behind this conclusion is that through support of suchcombined farms, higher added value in the agriculture sector is feasible in comparison to focusing solelyon corn-producing farmers. Furthermore, supporting this type of vertical integration of fodder and milkproduction, would considerably contribute to higher milk production, increased supply of raw milk from localproducers, condensed milk import substitution, increased dairy processing production capacity, improved

competitiveness of domestic production in comparison to imported milk, and job creation potential at the

farm and industry level.

The previously presented cost-benet analysis was conducted according to the above mentioned conceptof supporting combined farms. The focus was on the pre-selected 5 categories of combined farms basedon their size and productivity, from 3 to 50 cattle (Table 5.1). The aim was to provide the logic behind thedistribution of the nancial support for the targeted total land of 7,000 ha, in turn chosen as a target basedon the corn import substitution potential a land plot of this size possesses through increased output. A landtotal of 7,000 ha represents approximately 24% of the total land under corn (29,198 ha - SSO 2012); if drip

irrigation is installed on this land, the incremental increase in corn production would provide the opportunityto substitute 97% of total corn imports (average of 62,700 tons for 2011/2012). Furthermore, if the totalharvested area under corn remains the same as in 2012 (29,180 ha), the same target hectares of 7,000 withan average yield of 13,000 kg/ha would cause the average country yield to grow to approx. 6,400 kg/ha,raising the national average by 48% from the current 4,325 kg/ha and reaching the European average of6,658 kg/ha (Figure 5.1).

38


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Another important aspect of the model is that smaller size of farms (fewer than 3 cattle) and large farms(larger than 50 cattle) are excluded from the model. The nal analysis showed that, the rst category ofcombined farms (3-5 cattle) has the lowest NPV per hectare and therefore is the least economically feasible.The results showed that the NPV of the investment increased in the bigger size of farms, as a result of higherlevel of productivity in the farms as an inuence of the economies of scale, experience, and better positionon the wholesale market. With this in mind, the distribution of the land that will be nancially supported for

installation of drip irrigation is 10% for the second category of combined farms, 20% for the following twocategories of farms, and 25% for the last category. The total number of farms included in the total targetland is 462 farms; the average number of hectares per farm that will be nancially supported is 15.2 ha.

Figure 5.1 Increase in RM average yield due to drip irrigation

7,00

0

22,1

80

Target hectares Remaining hectares

2012

91,

000

,00

09

5,

928

,500

Production

13

,000

4,32

5

Yield (kg/Ha)


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DISTRIBUTION OF FINANCIAL SUPPORT Unit per ha Target ha Corn Possible import substitution

Government investment EUR 17.500.000 2.500 7.000 60.725 62.700 96,8%

Structure of target farmers 100%

Corn growers % 0% 0

Combined farms (Dairy + Fodder) % 100% 7.000

Size - # of cattle per farm # > 3 5 > 5 10 > 10 20 > 20 30 > 30 50

% 0% 10% 20% 20% 25% 10%

Structure of combined farms % 0% 19% 41% 19% 21% 100%

# of hectares per size of group # 0 1.305 2.845 1.364 1.486 7.000

# cumulative hectares # 0 1.305 4.149 5.514 7.000

# of farmers/farms per size of group # 0 162 190 60 50 462

Average # of hectares per farm # 8,1 15,0 22,7 29,5 15,2

Average return per ha (NPV/ha)

Corn growers EUR/ha 5.879

> 3 5 > 5 10 > 10 20 > 20 30 > 30 50

Combined farms (Dairy + Fodder) EUR/ha 585 819 1.168 1.783 3.378

EUR 0 1.068.569 3.321.583 2.432.473 5.020.036

Dairy industy EUR/ha 7.355

Wholesale of dairy products EUR/ha 3.530

Retail of dairy products EUR/ha 2.030

Table 5.1 Recommended distribution of government nancial support


5.2 Estimated Value-Adding Potential

The macro eects calculated based on primary production of corn by corn growers al

Documents

White Paper on Agribusiness Innovation in Macedonia