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© FAO January 2008
Commodity Chain Analysis
A Tool for Quantitative Analysis of Socio-Economic
Policy Impacts
Module 1: Policy Framework
Session 6: Commodity Chain Analysis
F A O P o l i c y L e a r n i n g P r o g r a m m e
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© FAO January 2008
By
of the
FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS
Lorenzo Giovanni Bellù, Agricultural Policy Support Officer Agricultural Policy Support Service, Policy Assistance and Resource Mobilization Division, FAO, Rome, Italy
and
Nathalie Guilbert, ConsultantAgricultural Policy Support Service, Policy Assistance and Resource Mobilization Division, FAO, Rome, Italy
Commodity Chain AnalysisA Tool for Quantitative Analysis of Socio-Economic
Policy Impacts
About EASYPol
The EASYPol home page is available at: www.fao.org/easypol
This presentation belongs to a set of modules which are part of the EASYPol Training Path Policy Learning Programme – Module 1: Policy Framework, Session 6: Commodity Chain Analysis (CCA): A tool for quantitative analysis of socio-economic policy impacts
EASYPol has been developed and is maintained by the Agricultural Policy Support Service, Policy Assistance and Resource Mobilization Division, FAO.
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© FAO January 2008
FAO Policy Learning ProgrammeModule 1: Policy Framework
Session 6: Commodity Chain Analysis
Objectives
At the end of this session the
participants will be able to:
Name the constituting elements of a commodity chain
Explain why it is important to analyse whole commodity chains (CCA) for policy formulation purposes
Mention some examples of CCA for policy formulation
Recognize situations in which policy objectives may not be achieved due to “leakages” in the commodity chain.
Session based on the case of
the formal firewood chain
in Burkina Faso, Ouagadougou area
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© FAO January 2008
FAO Policy Learning ProgrammeModule 1: Policy Framework
Session 6: Commodity Chain Analysis
The concept of a commodity chain
Commodity Chain Analysis is a technique applied to assess how public policies, investments and institutions affect existing or planned chains for agricultural commodities.
CCA consists of quantitative analysis of inputs and outputs, prices, value added and margins of the different agents under different policy scenarios.
The term “Commodity chain” denotes the group of agents related activities and markets, who contribute directly to the production, the transformation and distribution to final markets of a single product.
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© FAO January 2008
FAO Policy Learning ProgrammeModule 1: Policy Framework
Session 6: Commodity Chain Analysis
The global situation of the firewood chain in Burkina Faso
National firewood annual production: 4,151,642 tons (400kg per capita)
Around 60 000 people are involved in the chain
Estimated firewood consumption in Ouagadougou: 1,100,000 tons/year
Source of energy consumed at national level
89%
11%
firewood
other energies
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FAO Policy Learning ProgrammeModule 1: Policy Framework
Session 6: Commodity Chain Analysis
A pilot study at smaller scale for policy making
Poverty incidence is higher in these regions (around 50%) than the average of the country (around 46%).
Around 800 woodcutters involved; most of them are also farmers.
17 296 ha of managed forests production of 1.37 tons of firewood/ha total production around 24,000 tons.
A Pilot study at a reduced scale; regions analyzed are Center-West & Center-South.
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© FAO January 2008
FAO Policy Learning ProgrammeModule 1: Policy Framework
Session 6: Commodity Chain Analysis
A pilot study at smaller scale for policy making
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© FAO January 2008
FAO Policy Learning ProgrammeModule 1: Policy Framework
Session 6: Commodity Chain Analysis
The production situation
Formal chain: regulated wood production in publicly managed sites.
Producers are organized in socio-professional structures called (Forest Administration Groups (“Groupements de Gestion Forestière”) .
Groups are concessionaires of the forests.
Producers carry out activities to preserve forest resources like: reforestation, fights against bush fires, land protection against cattle...
Informal chain: uncontrolled wood extraction.
More numerous.
Economic agents are not grouped.
No care/worry about forest preservation.
Tax evasion.
Unfair and illegal concurrence vs. activities under public regulation.
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FAO Policy Learning ProgrammeModule 1: Policy Framework
Session 6: Commodity Chain Analysis
The firewood chain chart
Firewood woodcutters organized in Forest Administration Groups
(GGF) & Unions of GGF
Collectors –Wholesalers –processors of firewood
organized in Associations
Self -consumption
Main flows of firewood
Other flows of firewood
Self consumption flows
Final Consumers of firewood
Retailers of firewood organized in Associations
Firewood woodcutters
Informal
Collectors –Wholesalers –processors of
firewood Informal
Retailers of firewood Informal
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© FAO January 2008
FAO Policy Learning ProgrammeModule 1: Policy Framework
Session 6: Commodity Chain Analysis
Actors of the chain
Three main types of actors:
Firewood producers (sale price of one ton : US$ 17.6)
Wholesalers (sale price of one ton : US$58.4)
Retailers (sale price of one ton : US$ 68)
Value added:
Firewood producers: US$ 12.8 VA per ton
Wholesaler : US$ 24 VA per ton
Retailer : US$ 1.9 VA per ton
Value Added Distribution per group of economic agents
36%
59%
5%
producers
wholesalers
retailers
Net benefits for each group of economic agents
39%
53%
8%
producers
wholesalers
retailers
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FAO Policy Learning ProgrammeModule 1: Policy Framework
Session 6: Commodity Chain Analysis
Income and margins of fallers
The average net benefit per farmer/faller earned during the campaign (3 months) is around US$ 260, which represents an important part (more than one fourth) of the total annual income of its household (US$907).
The national average household poverty line of around US$ 1060.
Sell price of one ton of firewood (in US$) for organized chain
Allocation of the revenue per ton (US$)
Fund for Village
investment
Fund for Land
Development
Forest Tax (concession
fee)
Margin to Faller
17.6 1.6 4.8 2.4 8.8
Thanks to firewood production activities, farmers are
able to keep out of extreme poverty and vulnerability.
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Session 6: Commodity Chain Analysis
Policy issues Facts Opportunities/solutions
Market increase for producers
High current and future demand of firewood
Gas used by only 2% of the population
Gas subsidy very expensive for the budget
Gas used by urban and richer part of population
Deforestation & environmental issues
Substitution of firewood, less deforestation
Gas subsidy implemented
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Session 6: Commodity Chain Analysis
Lack of forestry management
No forestry control (agro-pastoral appropriation of the land)
Unfair competition vs fallers in managed areas
Loss of income for the State
Non respect of rotation delays and environment Rationalize downstream activities
Facilitate grouping of fallers
Enforce forestry regulations
Vulnerable Rural population
Severe Poverty and food insecurity of small-holders and landless people
Create employment within the chain
Unfair distribution of income among fallers and traders
Rationalize downstream activities
Reallocate subsidy resources to invest in forests management
Policy issues Facts Opportunities/solutions
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Session 6: Commodity Chain Analysis
The objectives of the policy measures are:
To increase income generated and distributed in rural areas
To fight against deforestation and other environmental issues
Policy objectives
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FAO Policy Learning ProgrammeModule 1: Policy Framework
Session 6: Commodity Chain Analysis
Proposal: a «package» of two policies measures:
1. Demand side policy: Stop the butane gas subsidy to sustain demand.
Remark: The objective of the gas subsidy was to preserve forests. The assumption is that this objective can be achieved by investing resources of the gas subsidy in forest management.
2. Supply side policy : investing in forest management to increase the productivity of forests (1.364.25 tons/ha) through improved reforestation, technical and organizational capacities.
National annual gas consumption 155,042,000 kg A
Subsidy price US$/kg 0.68 B
Subsidy cost to the budget US$ 105,118,476 A * B
Policy measures Identified
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FAO Policy Learning ProgrammeModule 1: Policy Framework
Session 6: Commodity Chain Analysis
Expected socio-economic impacts of the demand-side policy
Stop subsidy Price of gas
Price firewood Ouaga Po
Revenue traders
Demand firewood Ouaga
WHY? Because firewood is a substitute of gas
Quantities actually sold ?
Depends on supply:1) Supply rigid Po, Q2) Supply elastic: Po, Q (likely)
WHY? Because Po x Q as P and Q
Margins traders Mt
?Revenue fallers Rf
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Session 6: Commodity Chain Analysis
Quantity (Q) Price (P) PxQ000 Tons $/Ton 000$
trader revenue 23.6 68 1604.8Costs 23.6 17.6 415.36
Without Policy margin 1189.44
faller revenue 23.6 17.6 415.36Cost 23.6 4.4 103.84Margin 311.52
Quantity (Q) Price (P) PxQ
trader revenue 73.4 68 4991.2Cost 73.4 17.6 1291.84
With policy margin 3699.36(stop subsidy)
faller revenue 73.4 17.6 1291.84Cost 73.4 4.4 322.96Margin 968.88
Quantity (Q) Price (P) PxQ Var %
trader D revenue 49.8 0 3386.4 211.0%With policy - D Cost 49.8 0 876.48 211.0%Without policy Dmargin 2509.92 211.0%
faller D revenue 49.8 0 876.48 211.0%D Cost 49.8 0 219.12 211.0%D Margin 657.36 211.0%
Expected socio-economic impacts of the demand-side policy
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FAO Policy Learning ProgrammeModule 1: Policy Framework
Session 6: Commodity Chain Analysis
Margin fallers Mf ?Depend on production costs Cf. Without supply policy: Cf , Mf
Envir. Externalities Ee ? Without supply policy: Ee
Negotiating power of faller:
Zero Low High
Inelastic SupplyMT RF
MT RF
MT RF
Elastic SupplyMTRF
MT RF
MT RF
Mt =Margins traders Rf = Revenue fallers
Expected socio-economic impacts of the demand-side policy
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Session 6: Commodity Chain Analysis
Depends on demand:1) No shift: Pf , Qf2) Shift due to demand policy: Pf ,
Qf
Investment Marginal cost prod instead of
Supply firewood Fallers
WHY? Because firewood availability per ha
?
Envir. Externalities Ee
? Depends on demand:1) No shift: Ee 2) Shift due to demand policy: Ee
instead of
Expected socio-economic impacts of the supply-side policy
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Session 6: Commodity Chain Analysis
Summary of combined expected policy impacts
5. Likely changes in the negotiating power of woodcutters versus traders
1. More forests managed less deforestation and more wood available
2. Higher level of firewood demand larger market employment created more revenues available for woodcutters better conditions for farmers
3. More people benefit from public financial resources
4. Technical and organizational capacities of the chain’s actors improved
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Session 6: Commodity Chain Analysis
9. Sustainable firewood supply to meet demand of present and future generations.
Summary of combined expected policies impacts [cont’d]
6. Increased Income to State through the forest tax, and to villages through the investment village tax;
7. Employment created to manage forests
8. Less informal circuits and better sensitization on environmental issues;
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Session 6: Commodity Chain Analysis
Combined economic impact of policies: Value added generation
Value Added per group of economic agents without and with policy (000US$)
0
500
1000
1500
2000
producers wholesalers retailers
without policy
with policy
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Session 6: Commodity Chain Analysis
Scenarios Total production of
firewood (tons)
Production per woodcutter
per year/campaign
(tons)
Number of woodcutters
involved
Revenue per faller (US$)
per campaign
Without policy (1.36 tons/ha)
23 652 29.25 809 257
With policy (4.25 tons/ha)
73 510 29.25 2 513 257
Difference 49 857 - 1 706 -
Larger firewood supply Employment creation
US$ 439 124 of net revenues created at firewood producers level
1706 households will benefit from the policy
In addition more jobs will be created to manage and control the forests
VA of the whole regional chain increased by +/- US$ 2 million
Combined economic impact of policies: Socio economic impacts
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Session 6: Commodity Chain Analysis
CCA software: A facility for computations
Tables extracted from the FAO CCA software
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Session 6: Commodity Chain Analysis
Competitiveness of the sector with and without policy: Economic pricing
Economic prices needed for competitiveness assessment
Economic price of firewood based on price of imported gas
We know the following equivalences:
The gas subsidy represents 117% of the price paid by consumers:
1 Ton of firewood 0.35 Ton Equivalent Petroleum (TEP)
0.296 Tons of gas
1 Ton of gas 1.18 TEP 3.37 Tons firewood
US$/Ton
Subsidised Gas price 580
Subsidy 678
Cost of gas for the country 1258
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International Competitiveness of the Sector: Economic pricing
The gas generates greenhouse effects (environmental externalities):
US$/Ton
Cost of gas for the country 1258
Environmental externalities (estimated) 8
Total cost of gas 1266
Total cost of gas 1266 US$/Ton
Firewood equivalent of one ton of gas 3.37 tons firewood
price of one ton of firewood as Gas Equivalent (Us$1266/3.77)
375.7 US$/ton
Gas equivalent Economic price of 1 Ton of firewood
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Session 6: Commodity Chain Analysis
Firewood energy is more difficult to use:
Price of one ton of firewood as Gas Equivalent 375.7 US$/ton
Adjustment factor (estimated) 0.4
Adjusted firewood price (375.7 US$ ton x0.9) 150.3 US$/Ton
Without policy With policy
Adjusted firewood price 150.3 US$/Ton 150.3 US$/Ton
Environmental externality per ton of firewood (estimated)
15 US$/Ton 0 US$/Ton
Firewood price applied 135.3 US$/ton 150.3 US$/Ton
Firewood use may generate deforestation:
International competitiveness of the sector: Economic pricing
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FAO Policy Learning ProgrammeModule 1: Policy Framework
Session 6: Commodity Chain Analysis
Source: Tables extracted from the FAO CCA software
Scale factor 1000
International competitiveness of the sector: Policy Analysis Matrix
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FAO Policy Learning ProgrammeModule 1: Policy Framework
Session 6: Commodity Chain Analysis
Combined impacts of policy measures on poverty: Selected indicators
Additional revenue to the poorest
Additional revenue to the closest to the poverty line
Additional revenue (random selection)
Without policy: incidence 49.52%
With policy: incidence 49.52% 49.15% 49.52%
Without policy P. Gap 34.5% of the poverty Line
With policy P. Gap 34.2% 35.0% 34.4%
For this pilot exercise, poverty impacts are calculated at regional level*.
With policy additional revenue of US$ 260/year for 1706 households.
* based on total expenditures (% of population)
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Session 6: Commodity Chain Analysis
Time matters: policy implementation requires time to invest in reforestation, educate and train people in forest management.
Time matters: policy implementation requires time to invest in reforestation, educate and train people in forest management.
Combined impacts of policy measures on poverty
Remarks:Remarks:
The importance of poverty reduction impacts of policies depends on how policy measures are targeted on different social groups.
The importance of poverty reduction impacts of policies depends on how policy measures are targeted on different social groups.
Different poverty indicators could lead to rank policy options differently, e.g. poverty incidence versus poverty gap.
Different poverty indicators could lead to rank policy options differently, e.g. poverty incidence versus poverty gap.
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Session 6: Commodity Chain Analysis
Conclusions
This analysis has been carried out following the commodity chain approach combined with the use of household-level data.
The FAO CCA software enabled the authors to analyze value added, margins and competitiveness of the chain without and with policy.
Household data + STATA software allowed the authors to calculate income/expenditure distribution without and with policy and related socio-economic indicators.
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FAO Policy Learning ProgrammeModule 1: Policy Framework
Session 6: Commodity Chain Analysis
Links to Module 1 : Sessions 1-8
FAO Policy learning programme
Module 1: Policy Framework
Session 1: Global socio-economic, nutritional and environmental facts. Future trends in world food and agriculture
Session 2: Conceptual framework to analyse global policy processes
Session 3: Role of FAO
Session 4: Right to food
Session 5: Policy making in the national context
Session 6: Commodity Chain Analysis (CCA): A tool for quantitative analysis of socio-economic policy impacts
Session 7: Policy impact analysis, using Partial Equilibrium Analysis (PEA) Multi Market Models (MMM)
Session 8: The Southland case study
FAO Policy learning programmeCapacity Building Programme on Policies and Strategies for Agricultural and Rural Development
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© FAO January 2008
FAO Policy Learning ProgrammeModule 1: Policy Framework
Session 6: Commodity Chain Analysis
T h a n k y
o u !