Assessing Land and Water Productivity and Agriculture Competitiveness, By Dr. Mahmood Ahmad, FAO Consultant on Water Scarcity Initiative, Session : Market Café (I13), Land and Water Days in Near East & North Africa, 15-18 December 2013, Amman, Jordan

1. Policy Analysis Matrix
Assessing Land and Water Productivity and
Agriculture Competitiveness
Dr. Mahmood Ahmad
FAO 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)
2

3. PAM
A simple tool, powerful to communicate
with policy makers but data needs are large
Provides 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

4. What is PAM?
How PAM helps policy makers
address three central agricultural
issues ?
Policy Analysis Matix
or PAM
Policy Analysis Tool based on a very simple
basic equation.
Profit = Revenues –
osts’
Agriculture Policy
Environments
Estimation is based on private (financial
es) and social prices (economic).
Impact of new
public
investment
Mostly the divergence between two types
rofitability comes from policy intervention.
Insight into issue
of virtual water
The analysis is often based on preparing
crop budgets, and the fact most price distorare largely embedded in water ---- excellent
to assess water productivity in physical and
ue terms and to assess allocative efficiency.
OLICY ANALYSIS
RAMEWORK
AM estimates the competitiveess and farm-level profits (D)
fluence of investment policy
n economic efficiency and
omparative advantage (H)
olicy transfers, incentive or
otectionist policy (L)
Revenues
At Private
Prices
At Social
Prices
Divergence
Traded
Inputs
Costs
Domestic
Factors
Profits
A
B
C
D
E
F
C
H
I
J
K
L
Policy Indicators
Nominal Protection Coefficient (NPC) = A/E Effective Protection Coefficeint (EPC)
= A-B/E-F

5. PURPOSE: Ranking of
1.COMPETITIVENESS and EFFICIENCY SYSTEM (2) MEASURES THE TRANSFER
EFFECTS OF POLICIEs
Also : address three central issues of agricultural policy analysis
efficiency and
public investment
– before and after
public investment
efficiency and
agricultural
research – before
and after new
technology
whether farmers, traders,
and processors earn
profits, comparison of
before and after the
policy change
Successful public
investment (in irrigation)
would raise the value of
output or lower the costs
of inputs.
public investment in new
farming or processing
techniques, would
enhance farming or
processing yields and
thus increase revenues or
decrease costs.
Countries achieve rapid
economic growth by
promoting activities that
generate high social
profits (large positive H).
Tradeoffs: Water
productive efficiency
versus allocative
efficiency
Approaches issue of
food security (domestic
production versus
imports) in a scientific
way
competitiveness
and farm profits –
before and after
policy change

6. Where Distortion Comes From
Principal 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.

7. 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).

8. Steps in Constructing PAM
Data 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

9. inputs
At Private Prices
A
Factor
B
C
D

10. Domestic Factors
based on shadow prices
Traded outputs and inputs
Prepare Import or Export
Parity Prices
Revenues
At Social Prices
E
Cost traded
inputs
F
Cost Domestic
Factor
G
Profits
H

11. 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.
what a commodity can cost as an import
commodity
For correctly comparing (i) the
commodities are exactly comparable in
physical terms; and (ii) the commodities
are compared at the same location.
Case of Wheat
Exchange Rate
Unit
Value
%
3
LE/US$
119
$/Ton
15
%
134
Import Duties
$/Ton
0
Other Fees
$/Ton
0
Total Duties, Tax and Fees
$/Ton
12
%
146
$/Ton
496
$/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
World Price, U.S Gulf
Freight, U.S. Gulf to
Alexandria
World Price, Alexandria
World Price, Alexandria
World Price Equivalent at
Alexandria
Transport, Alexandria to
Market

12. 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
Pakistan Cotton, 1998
Egypt Cotton, 1998
Values Basis
Revenues
Costs of Production
Tradable
Profits
Values Basis
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 =
Non-tradable
232.91
99.66
122.66
10.60
Social Values
333.81
84.78
113.07
135.97
-100.90
14.88
9.59
-125.36
Divergence
Coefficients
NPC =
0.70
EPC =
Kyrgstan Cotton, 1999
0.54
DRC =
0.45
Tajikistan Cotton, 2001
Costs of Production
Tradable
Profits
Private Values
0.59
Revenues
Costs of Production
Tradable
Non-tradable
Private Values
Values Basis
Revenues
Profits
Values Basis
Revenues
Costs of Production
Tradable
Non-tradable
Profits
Non-tradable
Private Values
346.06
108.91
107.67
129.48
Private Values
731.40
201.23
300.88
229.28
Social Values
355.90
119.16
112.83
123.91
Social Values
790.52
246.06
303.32
241.15
Divergence
-9.84
-10.25
-5.16
5.58
Divergence
-59.12
-44.82
-2.43
-11.87
Coefficients
NPC =
0.92
Coefficients
NPC =
0.61
NPI =
0.82
EPC =
97.00
EPC =
0.56
DRC =
0.59
DRC =
0.55

13. Water versus Land Productivity
Factor - Driven
Economy
Investment Driven
Economy
Innovation Driven
Economy
Adopted from ICARDA
Low Cost Inputs:
Labour, Natural
Resources
Iran, Egypt,
Morocco
Efficiency Through
Heavy Domestic and
Foreign Investment
China, India, Turkey
Unique Value
USA, Japan, Korea
“NENA Region has good Comparative
Advantage in producing high value crops
but needs to translate this to competitive
advantage” PAM Analysis
Water Productivity (Kg/m3*10)
16.00
14.00
Max WP
Max
Yield
12.00
10.00
8.00
6.00
4.00
2.00
0.00
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
Land Productivity (Tons/ha)

14. Case Studies
Highlighting
Incentive Structure: Egypt &Iran
Water Productivity: Egypt, Syria, Iran, Palestine
Impact Analysis: Egypt, Oman , Kazakhstan
From CA to CA:

15. Incentive Structure
Iran: 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) = .81
Effective Protection coefficient ( neutral) = .98
Domestic Resource Cost ( as < 1) carries CA= .65

16. Egypt: Competiveness
Ranking by
Profitability LE/feddan
Cotton
Ranking by Cost/Benefits
Ration
1786
Cotton
2.20
Long Berseem
1605
Wheat
1.85
Sugarcane
1482
Maize
1.48
Rice
1227
Long Berseem
1.48
Wheat
924
Boad Beans
1.46
Short Berseem
712
Short Berseem
1.11
Boad Beans
583
Rice
0.99
Maize
543
Sorghum
0.99
Sorghum
311
Sugarcane
0.95

17. Comparison of water productivity for
different commodities- Livestock
products carries the lowest
6
5
4
3
2
1
0
Beef
Lentils
Wheat
Olives
Tomato
Water productivities are much
higher in vegetable compared
to fruits and very low in
livestock products.

18. Syria
Drip Irrigation shows higher water productivity than Sprinkler,
and Small farmers are obtaining much higher productivity
Water Productivity, farm size and technology: Net Margin m3
40
35
30
traditional
sprinklers
LF-well 100
LF-well 200
drip
25
20
15
10
5
0
LF-river
MF- river
MF- well 100
SF- river
SF- well 50

19. NENA region’s water productivities are higher than global average
and water productivity is much higher in horticulture than cereals
Horticulture crops in Palestine ($/m3)
Gaza
Jordan Valley
Oman
Yemen
0.00
0.50
1.00
1.50
2.00

20. 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.

21. Iran Water Productivity - how we value revenues (the
nominator in the equation), at the gross or at the gross
margins or at the net profits ($/M3)
Gross Revenue
Wheat
Barley
Maize
Chickpeas
Sunflower
Cotton
Sugar beet
Onion
Potato
Spring soyben
Paddy LG/HQ
Paddy LG/HY
Paddy short grain
0.007
0.006
0.006
0.007
0.006
0.010
0.009
0.012
0.012
0.006
0.006
0.007
0.007
Gross Margin
Net Profit
0.004
0.003
0.004
0.004
0.004
0.006
0.005
0.005
0.006
0.004
0.003
0.005
0.004
0.002
0.001
0.002
0.002
0.002
0.003
0.003
0.003
0.004
0.001
0.001
0.002
0.003
Or water productivity varies depending how we budget water use (the
denominator in the equation), the applied water or consumed water
Water applied (WPirrig)
Water Productivity Kg/m3
Evapotranspiration (WPET)
Water Productivity Kg/m3
8.9
0.5
7.5
0.325
0.175
1.25
Wheat
Maize
Rice
Sorgum
1.75
0.8
Maize
Rice
Sorgum
Potato

22. Output
Total
0
5
14
21
26
30
33
35
36
36
35
Water
AP=O/W
MP=dO/dw
E=MP/AP
Average Product Marginal Product Elasticty
0
0
5
5
1.00
7
9
1.29
7
7
1.00
6.5
5
0.77
6
4
0.67
5.5
3
0.55
5
2
0.40
4.5
1
0.22
4
0
0.00
3.5
-1
-0.29
Output
Total
Rvenvues Total Cost
Net
Rvenues
Water Production Fuction
Stages
Irrational
Irrational
Irrational
Irrational
Rational
Rational
Rational
Rational
Rational
Rational
Irrational
Marginal
Product
40
Value of Output
Water
Input
0
1
2
3
4
5
6
7
8
9
10
30
20
10
0
0
2
4
6
8
10
-10
Water Input
Total
Mar Val Prod
Average Product
Change in
Change In Cost Output
W
O
O*Po
C=W*Pw
NR=TR-TC
MP=dO/dw
MVP= MP*Po
dC=(E8-E7)….. dO=(C8-C7)…
0
0
0
0
0
0
0
0
1
5
10
5
5
5
10
2
14
28
10
18
9
3
21
42
15
27
4
26
52
20
5
30
60
6
33
7
Marginal Product
MC
MR
dC/dO
dTR/dO
0
0.00
0
5
5
1.00
2
18
5
9
0.56
2
7
14
5
7
0.71
2
32
5
10
5
5
1.00
2
25
35
4
8
5
4
1.25
2
66
30
36
3
6
5
3
1.67
2
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

23. Policy Impact Analysis

24. FAO/RNE
POLICY ANALYSIS
CASES/ BREIFS
Egypt
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
Palestine: Water
Values and
investment payback
period
Jericho
Egypt- Sugarcane
Policy 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
Jenin, Tulkarem,
Qalgilya
Impact of Policy
Profitabilty (Le/Fed)
1482
2129
Domestic Resource Cost
1.07
0.81
0
Ahmad-Kieth (2002)
Sugarcane: Better Irrigation Practices >>> Water Saving >>>
Enhanced Profitability and now carries comparative advantage (DRC< 1)
2
4
6
Years
8
10

25. Case of Egypt: Rent decontrol a major land policy shift
1000
700
600
500
400
300
200
100
0
800
600
400
200
0
1
Rent
Base
R e nt
2
Rent/Le/Feddan
Profitabilty/Le/Fed
Impact of Rent Decontrol on Wheat
3
4
Private Profitability
R ice
Base
N e w R e nt
N e w R e nt N e w
P ro fita b ility 5 0 0
700
R e nt 9 0 0
2 6 9 .5 1
1 2 6 2 .2 2
1 0 3 1 .7 3
8 3 1 .7 3
6 3 1 .7 3
M a ize
2 2 3 .2 1
461
184
-1 6
-2 1 6
C o tto n
4 2 5 .2 2
1656
1581
1381
1181
W he at
3 0 5 .4 5
626
431
231
31
S u g a rca n e
6 3 2 .3 0
1473
1606
1406
1206

26. Impact of Energy Cost on Efficiency of Resource Use:
of Al-Batinah region of Oman
Case
Orange
Mango
Lem on
Very high sensitive
crops for changes in
electricity price
Banana
Potato
Onion
Date (A)
Water Melon
Date (M)
Peper
Peper (PGH)
Rhodes Grass
Energy, water and food security nexus
Is becoming critical in energy deficit countries
and the environmental cost of cheap energy is
Evident in many countries
Squash
Cucum ber
Cucum ber (PGH)
Capsicum
Quite low
sensitive crops
for changes in
electricity price
Date (H)
Pum pkin
Chicko
Eggplant
Cabbage
Shift from low income, high water use

27. Kazakhstan: Rice policy cost to the nation
(tax payers) was very high and leading to
environmental disaster (Aral Sea)
Water
11%
500
450
400
350
300
250
200
150
100
50
0
4,50
Seed
18%
Chemicals
Land rent
3%
2%
4,00
3,50
3,00
2,50
2,00
1,50
Ton per Ha
Thousands
Rice: Area, Production and Yield
Fertiliers
5%
Hired labor
7%
1,00
0,50
0,00
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Years
Production (M Mt)
Area Harv (M Ha)
Yield (Tons/Ha)
Rice: Cost Structure
Traded 66 and Non Traded 34%
Machinery
54%
Average Private Profitability
Policy Indicators
Rice Small
Rice Medium
Rice Large
Crops
Yield (c/ha)
32.36
27.52
33.57
Potatoes
55763,9
Grapes
47270,5
0.80
1.29
Apples
18659,9
Cotton
18463,6
Sunflower
16230,9
Sugar beet
9821,9
Private
Returns
Water KZT/cm
to
Private Profits (KTZ/ha)
1.16
6415
8953
12080
Rice
DRC
-4.38
2.71
3.36
SoyaBean
Wheat
KZT/ha
9149,82
4972,5
4069,35