Financial and Economic Profitability of Selected Agricultural Crops in Bangladesh

1. Financial and Economic Profitability of Selected Agricultural Crops in Bangladesh Institution: Department of Management and Finance Sher-e-Bangla Agricultural University (SAU) Principal Investigator: Dr Mohammad MizanulHaqueKazal Department of Development & Poverty Studies SAU

2. Research Team

3. Research Team

4. Background of the Study • Crop sector is the source of staple food for 150 million people • major source of livelihood for 16 million farm households. • The crop and horticulture sector jointly contributed US$11,564 million to the economy, accounting for 11.4% of the GDP • Financial profitability differs from economic (social) profitability because of distortions in the factor and product markets

5. Introduction • Trade and price policy • stability in food prices • input subsidy and output support • food security of the poor • strategic element for poverty alleviation

6. Objectives The objectives of this research project are: • To examine the financial and economic profitability of some selected crops including an assessment of the comparative advantage through PAM analysis. • To assess the impact of fertilizer subsidies on financial profitability and production including determination of the factors leading to differences in financial and economic profitability across selected crops and across different regions for the same crops. • To explain changing patterns of agricultural land use in terms of area cultivated for different crops in the different regions based on financial profitability for different crops since 1990.

7. Research Design The study was designed to conduct into three phases Phase-Ideals with farm level survey, financial and economic cost and return analysis and assessment of comparative advantages of crops; Phase-IIdeals with assessing the impact of fertilizer subsidies on profitability using BRRI experimental data for rice only as well as farm-survey data for selected crops; Phase-III measure the changing patterns of agricultural land use and identifies its socio-economic determinants using through the secondary time-series data.

8. Figure: Survey District

9. Table: Distribution of sample according to farm type

10. Table : Study area based on land elevation and technology

11. Analytical Techniques Phase 1: Financial and economic profitability of the various crops AND an assessment of comparative advantage for import substitution and/or export 1. Financial and economic costs and returns from crops 2. Assessment of comparative advantage of crops Policy Analysis matrix (PAM) framework applied to measure economic efficiency and competitiveness under different production systems

12. Financial profitability of major crops Cost and return analysis is the most common method of determining and comparing the profitability of different farm enterprises. In estimating the level of profitability in crop production the following formula was used: ∏ = P1Q1 + P2Q2 - ∑PiXi– TFC Where, ∏ = Profit per hectare for producing the crop; P1 = Per unit price of the output; Q1 = Quantity of output obtained (per hectare); P2 = Per unit price of by-product; Q2 = Quantity of by –product obtained (per hectare); Pi = Per unit price of the ith input used for producing the crop; Xi = Quantity of the ith input used for producing the crop; and TFC = Total fixed cost.

13. Phase2: Assess the Impact of fertilizer subsidies on financial profitability and production This analyses are done by using two different approaches such as (1) by using the experimental data from BRRI, and (2) by using farm-survey data

14. Phase 3: Socio-Economic and Environmental Determinants of Crop Diversity in Regions of Bangladesh (1990-2008) The study uses a model of crop choice in a theoretical framework of the farm household model applying a micro-econometric approach. • In this phase, • First, it has been estimated the rate of change of individual crop area over time. • Next, it has been identified the determinants of land use of each crop over time. The study was computed growth rate of area cultivated for individual crop using semi-log trend function as follows:

15. Results & Discussions

16. Estimation of Financial profit

17. Table : Cost and return analysis of high land HYV Boro according to farm size in north-western region (Dinajpur, Rajshahi) Figures in parentheses indicate number of laborers

19. Table : Financial profitability of high land HYV Boro according to variety in north-western region (Dinajpur, Rajshahi)

21. Table : Financial profitability of HYV Aman according to technology and variety * Significant at 10% level (p<0.10)

28. Table : Effect of financial profitability due to changes in output price, yield and price of fertilizer for selected crops in Bangladesh Figures in parentheses indicate changed in percentage

29. Table : Effect of financial profitability due to changes in output price, yield and price of fertilizer for selected crops in Bangladesh Figures in parentheses indicate changed in percentage

30. Figures in parentheses indicate changed in percentage

31. Figures in parentheses indicate changed in percentage

32. Effect of financial profitability due to changes in output price, yield and price of fertilizer • The sensitivity analysis of financial returns was found that the net financial returns were highly sensitive to changes in output price and yield. But the net returns were found weakly sensitive to the changes in fertilizer prices and especially changes in urea price for all crops irrespective of land elevation and technology. • It was revealed that the 25 percent change in fertilizer price or 50 percent changes in urea price puts scantly effect on changed net returns from all crops except rainfed aman and supplementary irrigated aman in north-western region.

33. Economic Profitability & Policy Analysis Matrix (PAM)

34. Table : Policy Analysis Matrix for high land HYV Boro in north-western region (Dinajpur, Rajshahi)

35. Table : Results of the divergences Note: - and + indicates the negative and positive divergences, respectively.

36. Note: - and + indicates the negative and positive divergences, respectively.

37. Result of the Policy Analysis Matrix • Table shows different policy transfer or divergences such as output, tradable input, domestic factor and net policy transfer. • Revenue transfer is positive for some (Boro rice in southern Kushtia region) and mustard in central region) and marginally negative for other crops such as Aman, Boro and aromatic rice in all regions, wheat in all regions, maize and lentil. The positive values indicate that government policies affect positively to the producer incentives and vice-versa.

38. Result of the Policy Analysis Matrix • The input transfer is also negative for all the crops analysed in different regions under both the import and export parity prices. The negative values illustrate that the domestic producers buy the imported inputs at the price which is less than the world price. It means that the government has implemented input subsidy policy to the crop sector to offset higher cost of production. • The domestic factor transfer is positive for all the crops in all regions under both the import and export parity prices. The positive value shows that the opportunity costs of non-tradable inputs are lower than their market prices. • The negative values of net profit illustrate that these crop producers could earn higher profit or minimum loss under free trade condition and vice-versa. This means that under free trade, producers could make more profit in contrast to the existing policy environment.

39. Table : Results of the nominal protection co-efficient on output (NPCO), Nominal protection co-efficient of input (NPCI), effective protection co-efficient (EPC) and private cost ratio (PCR)

40. Protection analysis by the ratio coefficient • Important indicators for calculating the protection rate by different ratio such as NPC (Nominal Protection Coefficient on output and input (NPCO and NPCI) , EPC ( Effective Protection Coefficient), PCR (Private Cost Ratio) and DRC (Domestic Resource Cost) are used for measuring the effects of incentives and comparative advantage in this study. • Any effect of trade policy on the crop sector largely affects the incentive on agricultural sector. • The NPCO values were found to be less than one (<1) but they were very close to one for all the selected crops. The values close to one imply that producers are nearly protected through the existing policy interventions.

41. Protection analysis by the ratio coefficient • The NPCI values of less than one (for all crops) suggest that the government policies are reducing input costs for crop production in Bangladesh. • The NPCI values were found to be less than one (<1) for all the crops irrespective import or export parity suggesting that the government policies are reducing input costs and reducing their average market prices below the world prices. NPCI values of less than one clearly indicate that the government efforts to support the sectors. • NPCs values of less than one both in the input and output markets clearly indicate the government efforts to support the rice sector, maize and lentil by providing that crop at a cheaper price.

42. Protection analysis by the ratio coefficient • The EPC values under import parity were found to be less than one (EPC<1) for HYV Boro rice in all regions except southern (Kusthia) and central (Kishoreganj) regions, for Aman rice in all regions, for aromatic rice, for wheat in all regions, and for maize and lentil. • The values of EPC were found to be greater than one for all other regions for HYV Boro and for mustard in central region implying that government policies provides positive incentives to producers of these crops. • The values of EPC were very close to one indicating that producers were encouraged by the existing policy regimes. • The PCR values were found to be less than one (but close to one in many cases) for all the crops in different regions irrespective import or export parity indicating that the commodity system is competitive at producer level.

43. The above findings based on the indicators of NPCO, NPCI, EPC and PCR conclude that the existing government policy environment tends to protect the interest of the producers in agricultural sector at production level. Overall, the crop-wise analysis reveals that based on import parity, most of the selected crops irrespective of region and technology deserve import protection; while based on export parity, aromatic rice and HYV jute deserve export protection. Therefore, the government including other stakeholders should continue and strengthen the ongoing interventions to give positive incentives to the agricultural primary level producers for the crops as sorted out in the study.

44. Table : DRC for different crops in different regions under import and export parity

45. Table : DRC for different crops in different regions under import and export parity • If DRC < 1, the economy saves foreign exchange by producing the selected crops domestically either for export or import substitution. This is because the opportunity cost of domestic resources and non-traded inputs used in producing the selected crops is less than the foreign exchange earned or saved. • In contrast, if DRC > I, domestic costs are in excess of foreign costs or savings indicating that the selected crops should not be produced domestically and should be imported instead.

46. Comparative advantage analysis by the DRC • The values of the DRCs estimation revealed that Bangladesh has a comparative advantage for import substitutions for all the selected crops (though it varies when considered different regions), as all DRC values of selected crops are less than one (DRC<1). • The above findings based on the values of DRC conclude that overall, the crop-wise analysis reveals that based on import parity, most of the selected crops irrespective of region and technology deserve import substitution policy; while based on export parity, aromatic rice and HYV jute deserve export promotion policy.

47. Effect of changes in output prices and yield on economic returns and domestic resource cost • The results show that economic returns are highly sensitive to the changes in the international reference prices. • When the output price increased by 20%, all the values of economic returns and DRCs show that the country has comparative advantage for import substitution except for the rainfed supplemented irrigated wheat and jute of south central in the country. • The results of economic return and domestic resource cost are, however consistent. Although at the base case it was found the comparative disadvantages for wheat, mustard and jute but now when the output price changes the crops have comparative advantage. • A decrease in the output price by 20% would make the domestic production inefficient for import substitution for almost all the crops except rainfed Aman, aromatic Aman, maize and lentil

48. Effects of changes in yield on the economic return and DRC • The results show that an increase of yield by 10% results in increases of the economic returns but no changes found in case of the status of the comparative advantages, though the values of DRCs varies. • When the yield increases by 10%, the magnitudes of the values in DRC decrease and when the yield decrease by same percent the values in DRCs increase and the value of the DRCs. But either case no changes found in the efficiency status.

49. Results of experimental data from BRRI

50. Table : Simulation results of economic optimum levels of N fertilizer and effect on rice yield in response to price change of urea