Policy Analysis Matrix "Assessing Land and Water Productivity and Agriculture Competitiveness"

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



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



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


EPC = 97.00 DRC = 0.55

Tajikistan Cotton, 2001



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



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


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



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

Education

Policy Analysis Matrix "Assessing Land and Water Productivity and Agriculture Competitiveness"