Presented by Lucia Battaglia Presented at 2015 ECAMA Research Symposium Malawi Institute of Management (MIM), Lilongwe, 4-5 June 2015

1. Cost-benefit analysis of policy reform
options: an application to the Farm Input
Subsidy and maize value chain in Malawi
Lucia Battaglia and Valentina Pernechele
Monitoring and Analysing Food and Agricultural Policies
Lilongwe, Malawi
4-5 June 2015

2. Outline
• Farm Input Subsidy Programme
• Methodology
• Data
• Results
• Conclusions

3. 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

4. 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;
1. 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;
2. Revise fertilizer procurement in order to limit the number of suppliers,
thereby reducing the transaction costs of the programme and the logistical
burden;
3. 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.

5. 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 prices
iv. 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

6. Maize value chain in Malawi

7. Data
Representative 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

8. 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

9. Policies
Scenario 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 MWK
Scenario 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.

10. Policies impact on the profitability of the
maize producers sector
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Base scenario Scenario 1 - increase
in the farmers'
contribu on
Scenario 2 - FISP
retarge ng
Scenario 3 -
retarge ng+increase
in contribu on
Private Cost Ra o Private Value Added Ra o

11. Policies impact on the degree of
competitiveness of the maize producers sector
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Base scenario Scenario 1 - increase
in the farmers'
contribu on
Scenario 2 - FISP
retarge ng
Scenario 3 -
retarge ng+increase
in contribu on
Domes c Resource Cost Ra o Social Value Added Ra o

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

13. 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