Support for marketing of agricultural quality products is profitable

Transcription

1 Support for marketing of agricultural quality products is profitable Paper presented at the Symposium The perspectives of Agriculture in Central Europe in Brno, Feb. 22, 2005 by Karl Michael Ortner 1 Abstract The evaluation of rural development programs in the EU should provide information on the implementation and impacts of EAGGF co-financed programs in accordance with Council Regulation (EC) Nr. 1257/1999, help to re-orient existing programs in terms of their goals and budget allocation in order to improve the administration, implementation and the achievements of their targets. The paper presents some results of the evaluation of measures to improve marketing of agricultural quality products in Austria. They are offered in the rural areas of all federal states and received 2.4 Mio of public assistance in the years 2000 to 2002; 179 projects were approved during that period. Income and employment effects of the measures undertaken were estimated on the basis of monitoring data and a questionnaire. The results show that on average the benefits of the projects exceed their public costs at least twofold. They generate increased profits, employment and future taxes even though these are not their major targets. Keywords: Rural development programs, evaluation, marketing, agricultural products, support, cost-benefit analysis. 1 Introduction Article 43 of Regulation (EC) No 1257/99 calls for an evaluation of the expected economic, environmental and social impacts of measures undertaken within rural development programs. The evaluation has to follow the principles laid down in Articles 40 to 43 of Regulation (EC) No 1260/1999. The current paper reports on the mid-term evaluation of the measure marketing of agricultural quality products in Austria. This measure is one of the so-called article 33 measures of Regulation (EC) No 1257/1999 which focus on the adaptation and development of rural areas. They are innovative in the sense that they are based on the bottom-up approach. Applicants propose to undertake a project whose realization will enhance the wellbeing of a group of persons, f. i. residents of a community, tourists, farmers etc. or is going to improve the local environment in certain respects. The government, including the European Community, support these projects on the ground that they most accurately address the needs of the local population with which the projects originate. Article 33 measures differ from other types of support provided under the second pillar of the CAP. They are open to participants from outside agriculture and offer subsidies to nonagricultural activities. Since they are more or less new, it was unclear to what extent they would 1 Federal Institute of Agricultural Economics, Marxergasse 2, 1030 Vienna, Austria, karl.ortner@awi.bmlfuw.gv.at,

2 be taken up by interested parties. Thus is not surprising that the budget allocated to them in Austria is quite small in relation to other types of assistance which have a long tradition and are well established and recognised within the agricultural domain, such as environmental payments and payments to less favoured areas (see table 1). Table 1: Second pillar expenditures in Austria , in Mio Support scheme Total support EAGFL contribution total investments setting up farms training environment less favoured areas processing forestry adaptation and dev. of rural areas of which marketing agr. quality products 25 village renewal 16 diversification 136 water resources 11 infrastructure, roads 99 land protection 25 Some 5 % of the overall budget was earmarked for the adaptation and development of rural areas which can be split into two broad categories. The first calls on the rural and agricultural population to improve the quality of their supply and branch out into non-traditional activities, the second to improve the area in which people live. Although the budget for marketing of agricultural quality products - the object of the current evaluation - amounts to less than 10 % of the money allocated to article 33 measures, projects which support diversification face similar conditions and eligibility criteria and may thus have similar effects on the overall targets of article 33 measures. It is thus not implausible to assume that the results of the current evaluation are valid for a substantial share of support for adaptation and development measures. 2 Marketing agricultural quality products In order to get a subsidy for marketing agricultural quality products certain conditions have to be met: - the members of the project team can be farmers, project managers and public institutions, but 51 % of the members must be farmers - they have to produce a project plan which establishes the financial and economic feasibility of the proposed investments - the project must refer to an existing farm product of special quality - the subsidy is based on the costs of certain facilities and activities which must meet the specifications given in the programming document. The level of assistance depends on the quality of the project, the needs, and the availability of public funds (budget); it cannot exceed 40 % of eligible costs. The following activities are eligible to receive support for the improvement of marketing and sales possibilities of agricultural quality products and services at the individual farm level: - investments into structures (facilities and buildings) for presentation, marketing and sale 2

3 - acquisition of technical knowledge and consultation services - project concepts - product and brand development - marketing of regional quality brand products (excluding advertising) - presentation of products - market analyses and quality control 3 Take-up of the program In the first three years of the program, 179 projects were accepted; they encompass 306 activities which received different rates of support, with an average rate of 31 % (weighted by eligible costs of the projects, see table 2). The overall amount of assistance to these projects was 2.4 mio, i. e. less than 10 % of the money budgeted for seven years. Support per activity was in a range between 42 and % of the costs were incurred for investment type activities. The average cost of a project was , with a median of Some data on the type of persons involved in the projects were acquired at the application stage. According to these data there were some direct beneficiaries (members in the projects), of whom 87 % were farmers and 87 % participated actively. The distribution of members across projects was extremely uneven, ranging from zero (42 projects) to The project operators expected to secure some existing jobs and to create 108 new ones, more or less evenly divided between male and female. Table 2: Take-up of projects on marketing agricultural quality products in type activities eligible costs share of costs assistance in % of costs investments other total Evaluation criteria The European Commission, DG AGRI, published guidelines to specify the background of the evaluation and the desired results. They specify a list of questions which have to be answered, and a list of criteria and possible indicators which should help to answer them more clearly. According to the intervention logic reproduced in Figure 1, evaluation of a programme should focus on results and impacts of assistance, where results refer to specific objectives and impacts to overall objectives. These objectives, again, follow from the needs which have been identified in a region or a sector, with a view to socio-economic and/or environmental problems. The identification of needs and gaps is a major task in the ex-ante evaluation; the goals and measures which are implemented to achieve them are determined by administrative and political bodies. 3

4 Figure 3.2 Relations between objectives and impacts in the programming cycle Needs Overall objectives Impacts Specific objectives Results Operational Objectives Outputs Inputs Figure 1: Relations between objectives and impacts Source: EC DG AGRI VI/8865/99- Rev. The aim of the evaluation is to determine or estimate the inputs that have been used and the results that have been achieved through the measures undertaken. For article 33 measures, the guidelines call in particular for the estimation of their impacts on 1) population 2) employment 3) income 4) market situation (production, quality, competitiveness) 5) environment 6) living conditions in rural areas, differentiated by type of region, age, gender, employment and environmental indicators. Some of these variables are hardly relevant for "marketing of quality agricultural products" which aim to achieve some specific operational objectives but are not particularly tailored to increase employment or improve the environment. Still they may achieve something in these respects although it may be hard to determine. The current evaluation thus concentrates on estimating indicators relating to variables 2), 3) and 4) above. Toward this end, monitoring data was available. It reports on the type of project, costs of activities undertaken within the project, subsidies received, number of persons who are members of the project, number of farmers involved, beneficiaries, secured and newly created jobs, participants in the project or network. For some of the data collected in this way see chapter 3 above. 5 Data collected through a questionnaire In order to carry out the evaluation, we had to acquire additional information from project operators through a questionnaire which was tested, adjusted and sent to them by mail. Income was the most sought-after information but also the one most difficult to get because respondents are unwilling to reveal anything that might lead tax authorities to become suspicious 2. In order to avoid this problem, we tried to gather information which would let us calculate changes in income on average for all projects, with appropriate assumptions if 2 Most farmers in Austria pay a lump-sum tax which is based on the value of land which they farm. 4

5 necessary. Overall, the questionnaire included 17 questions, some subdivided, with up to six possible answers (ranges) to choose from, concerning the number of members for which the operator was able to answer to what extent the project would have been carried out in case it hadn't got any assistance the expected length of use of the investment, and the time required to recover it changes in production (for 19 activities listed) the share of revenue to which the project matters changes in the quality of products marketing (change in buyers, presentation, sales channels) prices labour input expenses for inputs personal experiences. After prompting, 90 questionnaires (on 50 % of the projects) were returned; 75 of them could be linked to data acquired at the application and payment stages. Monitoring and questionnaire data together was thus available for (at least) 41 % of the projects, 34 % of their eligible costs, 55 % of their members 3, 86 % of secured jobs, and 38 % of expected created jobs. Project operators on average answered for 52 % of members; for the remaining 48 % we assumed that their changes are only half as much. Unfortunately, none of the respondents was willing or able to answer the following question: We assume that the project doesn't involve the entire production of the members but only some products and/or services. What is the share of products the project is concerned with? We assumed the share of products and services covered by the projects to be 15 % of the value of agricultural production. Secondly, we exclude the effects of that part of the projects which would have been implemented even in the absence of support, i.e. 33 % of the projects. Accordingly, a percentage of 10 % of revenue was used for extrapolation. 6 Benefits and costs The detailed answers to the questionnaire, the methodology of extrapolation and the impacts on a broader set of indicators can be found in the mid-term evaluation report (Ortner and Simon 2004). Here we concentrate on the amount of employment created and income generated through assistance to these projects. Government assistance is financed through taxes which - upon collection - reduce the disposable income of some persons who are loosing the opportunity to spend it. This opportunity moves to the government which must be able to justify the transfer of money into its fold with expenditures on activities which not only recover the original investment but yield sufficient interest; i.e. government expenditures are supposed to produce benefits which exceed costs, usually by a wide margin. F. e. the returns to government expenditures on agricultural extension services in Austria have been found to exceed costs sevenfold (Ortner 1985). What are the benefits of subsidising projects for marketing agricultural quality products? These projects essentially are investments which yield profits in the future. The annual profit generated through these projects over 10 years is estimated to be 0.69 mio (table 3). This is the difference between increased revenue (2.8 mio through higher prices and increased production of some products) and increased costs for purchases of inputs, labour and depreciation. Depreciation was calculated as 10 % of the privately financed eligible costs of the projects. Labour costs were calculated on the assumption that a person is indifferent between labour and leisure if labour is remunerated with 80 /day. 3 Since the definition of members was unclear, we applied a maximum number of members per project of

6 Table 3: Annual impact of the projects, in mio changes in revenues outlays profit public costs benefit/cost input costs labour costs depreciation* assistance 0.24 administration and taxation 0.08 total * 10 % of eligible costs excluding assistance Accordingly, in the course of ten years and disregarding time preferences, the projects are expected to yield 6.9 mio profit for members. This is the effect of 2.4 mio government assistance. Thus, on average, 1 of assistance to these projects creates a profit of 2.9. However, the cost of 1 spent by the government is more than 1 since taxes have to be collected at a cost and there are deadweight losses associated with taxation. In addition, administrative costs (associated with the selection of suitable projects and the disbursement of assistance) are not negligible. Therefore we assumed additional costs to be 1/3 of assistance 4. The ratio between private benefits (profits) and public costs is The projects are going to provide 12.5 mio return to labour. This corresponds to 71 (between 65 and 77) additional annual labour equivalents (at 220 days per year). 42 of them are contributed by female persons, 16 by members and only 1 is spent on agricultural production. The benefit/cost ratio depends on the valuation of labour vs. leisure. If we disregard leisure, we could concentrate on income, defined here as the sum of returns to labour and profit which amounts to 1.94 mio. If the major objective of the program were to maximise income, income per unit of public costs would be the appropriate efficiency ratio. In the current application, this ratio is 6.1; i.e. 1 of public costs creates 6.1 of income. This ratio is interesting in itself because it relates to the taxation of income: If the tax rate applicable to this income exceeds some 16 % 6, the program is paying for itself; it produces more tax revenue than the amount the government previously spent to finance assistance, taking into account the deadweight costs of taxation and administrative costs. 7 Summary and conclusions In order to estimate the impact of measures adopted under the Austrian rural development program in the area of marketing agricultural quality products and services over the years , a questionnaire was developed and returned by 50 % of the project operators. Its results confirmed that as a consequence of 179 projects undertaken, 71 annual labour equivalents were created and that, if the wage rate for this labour is 80 per day, the benefit/cost ratio of public costs of these projects is 2.2. At an income tax rate of 16 %, these projects recover their public costs within 10 years. The focus on income alone is, however, insufficient to determine the desirability of projects. First, the generation of income is not their major objective; second, income depends on the costs of labour relative to leisure, and third, even in the absence of income and employment effects, the projects are beneficial to both consumers and project members. They enhance the quality of the products and services rendered, and they improve the quality of life for participants in the projects In the literature, deadweight losses have been put at % of expenditures. Similar ratios have been found for other government outlays elsewhere, f. i. expenditures for agricultural research and extension. For a critical assessment of related research see Alston and Pardey (2001). Taking account of time preferences and the average time of use of the projects (13.7 years), the internal rate of return to public costs is 21 %. The average rate of return to public costs for seed research in Germany was 28 and 16 % in the eighties and nineties (von Witzke 2004). 1.33/8.2=1/6.1 (if the full social cost of government expenditures of 1 is 1.33). 6

7 Unfortunately the seemingly precise indicators of efficiency of the program presented above are hardly reliable because the projects are very heterogeneous and the data obtained from the questionnaire refer to expectations and crude estimations rather than actual outcomes. It would thus be quite interesting and useful to carry the current analysis over to more projects and to apply it to programs at a stage when data or estimates on actual outcomes are more readily available. Benefit/cost ratios calculated on the basis of similar methodology and assumptions would be a useful tool to compare the (average and marginal) efficiency of support to different programs with respect to income and employment effects. 8 Literature ALSTON, J. M. AND P. G. PARDEY: Attribution and other problems in assessing the returns to agricultural R&D. In: Agricultural economics 25 (2001) 2-3, EUROPEAN COMMISSION: Evaluating socio-economic programmes. Selection and use of indicators for monitoring and evaluation. MEANS collection. Brussels EUROPEAN COMMISSION, DIRECTORATE-GENERAL FOR AGRICULTURE: Common evaluation questions with criteria and indicators: evaluation of rural development programmes supported from the European Agricultural Guidance and Guarantee Fund. Document VI/12004/00 final. Brussels EUROPEAN COMMISSION, DIRECTORATE-GENERAL XVI FOR REGIONAL POLICY AND COHESION: Guide to cost-benefit analysis of major projects in the context of EC Regional Policy. Brussels FALL, MADIOR AND THIERRY MAGNAC: How valuable is on-farm work to farmers? American Journal of Agricultural Economics 86 (2004) 1, OECD: Territorial indicators of employment: Focusing on rural development. Paris Towards sustainable development: Indicators to measure progress. Proceedings of the OECD Rome conference. Paris ORTNER, KARL M.: Die Rentabilität der landwirtschaftlichen Beratung für die österreichische Volkswirtschaft, 1963 bis In: Der Förderungsdienst Sonderheft 6s/1985, ORTNER, KARL M. U. LEONHARD SIMON: Zwischenevaluierung von Maßnahmen zur Vermarktung landwirtschaftlicher Qualitätsprodukte. Bundesanstalt für Agrarwirtschaft, Wien 2004 (to be published). VON WITZKE, HARALD: Züchtungsforschung lohnt sich. In: dlz-agrarmagazin. Pflanzenzüchtung in Deutschland. Sonderbeilage zum World Seed Congress 2004, S