Cost-benefit analysis of policy reform options: an application to the Farm Input Subsidy and maize value chain in Malawi

Lucia Battaglia and Valentina PernecheleMonitoring and Analysing Food and Agricultural Policies

Lilongwe, Malawi4-5 June 2015

Outline

• Farm Input Subsidy Programme• Methodology• Data• Results• Conclusions

Farm Input Subsidy Programme• Large-scale input subsidy programme initiated in the 2005/06 cropping

season with the aim of increasing maize production, promoting household food security, and enhancing rural incomes

• Maize production has always been the core of the programme because of the importance of the commodity as a staple crop in the country

• Provision of coupon allowing smallholder farmers to access the main inputs necessary to the cultivation if maize

Issues related to the programme:• Mixed evidence on the effectiveness of the programe at farm level• Targeting problems• Large share of public expenditures allotted to the FISP amounting at 50%

of the expenditures in support of food and agriculture during 2006-2013

Potential FISP reforms

1. Increase farmers’ contribution to fertilizer and seeds from 5 to 50 percent in order to reduce the cost of the programme and reallocate savings to other longer-term agricultural investment, such as the development of rural infrastructure;

2. Revise FISP objectives, focusing on production and productivity increase and change beneficiaries by targeting more productive households who are considered to make best use of the fertilizer and improved seeds;

3. Revise fertilizer procurement in order to limit the number of suppliers, thereby reducing the transaction costs of the programme and the logistical burden;

4. Promote diversification and encourage the cultivation of other crops by reducing the expanding the focus beyond maize to including other key staples in the programme.

Methodology“The value chain is described through the definition of the physical and monetary flows identifying the “representative agents”, namely groups of individuals pooled by common characteristics and by a set of activities they engage in” (Bellú 2013)

i. Identify the basic units operating in a given value chain (=agents) and the activities they undertake;

ii. Accounting framework allowing to quantify the total output value, value added creation and profits of every agent and value chain as a whole;

iii. Market and reference pricesiv. Build different scenarios and measure changes in revenues, value added creation and

profits for the different scenarios; v. Build a Policy Analysis Matrix (PAM) to analyze three dimensions of the value chain

through a set of indicators:– Profitability

– Competitiveness – Protection

Counterfactual analysis: Base scenario vs scenarios with policies

Maize value chain in Malawi

DataRepresentative agents:• Smallholders cultivating less than 1 hectare of land and producing mainly for self

consumption• Rain-fed cultivation• No mechanization• Few pesticides

Data sources• Study period: rainy season 2012/2013• Third Integrated Household Survey (IHS3) collected between 2012 and 2013 by the

Malawi National Statistic Office in collaboration with the World Bank • FAOSTAT • Monitoring and Analysing Food and Agricultural Policies (MAFAP) database.

The analysis has been conducted by means of the FAO VCA-Tool Software

Results: the base scenario

Indicators Values

Private Cost Ratio (PCR) 0.42

Private Value Added Ratio (PVAR) 0.77

Domestic Resource Cost Ratio (DRC) 0.62

Social Value Added Ratio (SVAR) 0.64

Nominal Coefficient Protection on Outputs (NPCO) 1.23

Nominal Coefficient Protection on Inputs (NPCI) 0.78

Effective Protection Coefficient (EPC) 1.48

PoliciesScenario 1• Increase in the contribution of the farmers to the purchase of the main inputs

(fertilizers and seeds) from 95% to 50%: – Increase in the prices of the subsidized inputs from MWK500 to MKW8300 for each 50kg

bag of fertilizers and from MWK150 to MWK750 for each bag of seeds. – Reduction in the cost of the FISP for the government from 52 billion MWK to 27 billion

MWKScenario 2

• Retargeting of the FISP toward the more productive households:– The targeting of the programme has been switched toward the more productive

households who are supposed to make best use of the inputs available.Scenario 3• Retargeting of the FISP toward more productive households and increase the

contribution to the purchase of the main inputs for the new target of beneficiaries:

– the increase in the contribution for the purchase of the subsidized inputs has been applied to the more productive households in order to understand the joint effects of the two policies.

Policies impact on the profitability of the maize producers sector

Policies impact on the degree of competitiveness of the maize producers sector

Policies impact on the degree of protection of the maize producers sector

Conclusions

• Base scenario:– The maize producers sector has been shown to be profitable and incentivized to produce

maize for self consumption. The massive provision of subsidies by the government highly encourages the production of maize.

• Scenarios with policies– The reduction of the subsidies, decreases the overall profitability of the producers sector,

but increases its comparative advantage on the international market. The degree of protection of the value chain decreases, but it still results to be protected.

– The retargeting of the programme leads to an increase in the profitability of the chain and on its degree of protection.

– The combination of the two policies increases the profitability and competitiveness of the value chain. Its degree of protection is slightly reduced, but the agents still result to be protected form the market.

– Disaggregated effects on the accounts of the single agents