• TABLE OF CONTENTS
HIDE
 Front Cover
 Title Page
 Acknowledgement
 Table of Contents
 List of Tables
 List of Figures
 Abstract
 Introduction
 Procedure and methods
 Potato production in Ecuador
 Analysis of storage and supply...
 Summary, conclusion and recomm...
 Glossary
 Appendix
 Reference
 Biographical sketch






Title: The economic feasibility of stabilizing the price and supply of potatoes in Ecuador
CITATION PAGE IMAGE ZOOMABLE PAGE TEXT
Full Citation
STANDARD VIEW MARC VIEW
Permanent Link: http://ufdc.ufl.edu/UF00053945/00001
 Material Information
Title: The economic feasibility of stabilizing the price and supply of potatoes in Ecuador
Physical Description: xiii, 171 leaves : ill. ; 28 cm.
Language: English
Creator: Wiegand, Kenneth Bruce, 1942-
Publication Date: 1975
 Subjects
Subject: Potatoes -- Prices -- Ecuador   ( lcsh )
Food and Resource Economics thesis M.S
Dissertations, Academic -- Food and Resource Economics -- UF
Genre: bibliography   ( marcgt )
non-fiction   ( marcgt )
 Notes
Thesis: Thesis (M.S. in Agr.)--University of Florida.
Bibliography: Bibliography: leaves 165-170.
Statement of Responsibility: by Kenneth Bruce Wiegand.
General Note: Typescript.
General Note: Vita.
Funding: Electronic resources created as part of a prototype UF Institutional Repository and Faculty Papers project by the University of Florida.
 Record Information
Bibliographic ID: UF00053945
Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved, Board of Trustees of the University of Florida
Resource Identifier: aleph - 000355577
oclc - 02280806
notis - ABZ3818

Table of Contents
    Front Cover
        Front Cover
    Title Page
        Page i
    Acknowledgement
        Page ii
        Page iii
    Table of Contents
        Page iv
        Page v
    List of Tables
        Page vi
        Page vii
        Page viii
        Page ix
        Page x
    List of Figures
        Page xi
    Abstract
        Page xii
        Page xiii
    Introduction
        Page 1
        The development process
            Page 1
        The setting
            Page 2
            Page 3
        The problem
            Page 4
            Page 5
            Page 6
            Page 7
            Page 8
            Page 9
            Page 10
            Page 11
        The hypothesis
            Page 12
        The objectives
            Page 12
        Organization of the thesis
            Page 13
    Procedure and methods
        Page 14
        Theoretical considerations
            Page 14
            Price variability
                Page 14
                Benefits of less variable prices
                    Page 14
                Regional price variation
                    Page 15
                    Page 16
                Variable supply and inelasticity of demand
                    Page 17
                Supply stabilization
                    Page 18
            Storage
                Page 18
                Concept of storage
                    Page 18
            Production adjustments
                Page 19
        Empirical considerations
            Page 20
            Measuring potato price variability
                Page 20
                Page 21
        Storage
            Page 22
            Length of storage period
                Page 23
            Storage costs
                Page 23
            Actual price storage analysis
                Page 24
            Regional storage and transport
                Page 24
            Maximum allowable investment in storage
                Page 25
                Page 26
        Production adjustment
            Page 27
            Potato growers survey
                Page 27
            Sample size
                Page 28
            Production data
                Page 29
            Marketing and cost of production data
                Page 30
                Page 31
    Potato production in Ecuador
        Page 32
        Agricultural production in Ecuador
            Page 32
        Potato production
            Page 33
            Page 34
            Page 35
            Page 36
        Preferred month for planting
            Page 37
            Page 38
            Page 39
            Page 40
        Movement of production to market
            Page 41
            Page 42
            Page 43
            Page 44
            Page 45
            Page 46
            Page 47
    Analysis of storage and supply management potentials
        Page 48
        Price variation
            Page 48
            Among highland crops - risk
                Page 48
            Within and between market cities
                Page 49
                Page 50
        Forms of storage and costs
            Page 51
            Page 52
            Page 53
        National storage potential
            Page 54
            Page 55
            Page 56
            Page 57
            Page 58
            Page 59
        Provincial and regional storage
            Page 60
            Page 61
            Page 62
            Provincial potential
                Page 63
                Page 64
                Page 65
            Regional potentials
                Page 66
                Page 67
                Page 68
                Page 69
                Page 70
                Page 71
        National reallocation : storage and transport
            Page 72
            Page 73
            Page 74
            Page 75
        Summary of storage potential
            Page 76
        Production management potential
            Page 77
            Preferred month for planting
                Page 78
                Page 79
            Number of months required for crop maturation
                Page 80
            Premature harvest: Frequency and reasons
                Page 80
                Page 81
            Postmature harvest : frequency and reasons
                Page 82
            Role of credit
                Page 83
            Estimated required adjustments in hectarage
                Page 84
                Page 85
                Page 86
        Comparison of supply stabilization techniques
            Page 87
            Page 88
            Page 89
    Summary, conclusion and recommendations
        Page 90
        The costs and benefits of a storage program
            Page 91
            Page 92
        The costs and benefits of production management
            Page 93
            Page 94
        The least cost combination of alternatives
            Page 95
        Recommendations
            Page 96
            Page 97
            Page 98
    Glossary
        Page 99
    Appendix
        Page 100
        Page 101
        Page 102
        Page 103
        Page 104
        Page 105
        Page 106
        Page 107
        Page 108
        Page 109
        Page 110
        Page 111
        Page 112
        Page 113
        Page 114
        Page 115
        Page 116
        Page 117
        Page 118
        Page 119
        Page 120
        Page 121
        Page 122
        Page 123
        Page 124
        Page 125
        Page 126
        Page 127
        Page 128
        Page 129
        Page 130
        Page 131
        Page 132
        Page 133
        Page 134
        Page 135
        Page 136
        Page 137
        Page 138
        Page 139
        Page 140
        Page 141
        Page 142
        Page 143
        Page 144
        Page 145
        Page 146
        Page 147
        Page 148
        Page 149
        Page 150
        Page 151
        Page 152
        Page 153
        Page 154
        Page 155
        Page 156
        Page 157
        Page 158
        Page 159
        Page 160
        Page 161
        Page 162
        Page 163
        Page 164
    Reference
        Page 165
        Page 166
        Page 167
        Page 168
        Page 169
        Page 170
    Biographical sketch
        Page 171
        Page 172
Full Text
f/(1 44-


THE ECONOMIC FEASIBILITY OF STABILIZING THE PRICE
AND SUPPLY OF POTATOES IN ECUADOR





By



KENNETH BRUCE WIEGAND


A THESIS PRESENTED TO THE GRADUATE COUNCIL OF
THE UNIVERSITY OF FLORIDA
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE
DEGREE OF MASTER OF SCIENCE IN AGRICULTURE


UNIVERSITY OF FLORIDA

1975

















THE ECONOMIC FEASIBILITY OF STABILIZING THE PRICE
AND SUPPLY OF POTATOES IN ECUADOR





By



KENNETH BRUCE WIEGAND


A THESIS PRESENTED TO THE GRADUATE COUNCIL OF
THE UNIVERSITY OF FLORIDA
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE
DEGREE OF MASTER OF SCIENCE IN AGRICULTURE


UNIVERSITY OF FLORIDA


1975














ACKNOWLEDGMENTS


I am deeply appreciative of the time, patience and concern which

Dr. Chris 0. Andrew has so generously invested in my training and the

preparation of this thesis. It has truly been a learning process,

primarily due to his unwaivering personal and professional attitude

towards graduate education. Firmly, but with great tact and convincing

insight, he guided my first uncertain steps in the preparation of

the project proposal, and later dedicated long hours to review and

discussion of each stage and chapter in the development of the final

product.

I am also indebted to Dr. Kamal Dow and Dr. Kary Mathis for their

many suggestions and revealing questions. The potentially difficult

task of researching a project in Ecuador was substantially simplified

by Dr. Dow's presence as Chief of Mission for the University of Florida

program in Quito. Also, the frequent correspondence and timely back-

up support of Dr. Mathis, in addition to his patient review of several

manuscripts, all helped to make the experience in Ecuador and Gainesville

an enjoyable and productive venture.

Many individuals in Ecuador and Gainesville have helped to shape the

thesis and make its content more germaine and easily understood. For

their assistance, advice, and moral comfort, I am happy to acknowledge

here the contributions of Sheriar Irani, Luis Maldonado, Carolyn

Almeter, Michael Schwartz, Jim and Diane Frito, Luis Cruz, the personnel









of INIAP, Guido Toral in Cuenca, Dr. Francisco Citelly, Bharat

Jhunjhunwala, Dr. Hector Becerra, and Michael Twoomey at the International

Potato Center in Lima.

I am grateful for the financial support received from the Department

of Food and Resource Economics and from the National Institute of

Agricultural and Livestock Research in Quito. The data collection stage

of the research project was greatly assisted by the support of Lic.

Humberto Mejia A. and family of Quito, who gave generously of. their

hearth and home, thus providing our family with all of the necessary

creative comforts for an extended overseas venture.

I would like to express my special gratitude for the hard work,

dedication, and invariably sunny disposition of the typists who have been

burdened with the task of converting these handwritten words to a neat

and legible presentation. Beth Zimpfer, Wilma Galanos, Dora Benavides,

and Alicia Ruales were extremely helpful at different stages of the

project, and Sandy Wiedegreen was given the final task of putting it all

together in its present state.

I would also like to acknowledge the inspiration and constant

faith inspired by my parents, who by their daily example, determined my

attitude towards life and the goals therein worthy of achievement.

Finally, I would like to express my gratitude to my wife, Teresa,

for her numerous suggestions, privileged insight, and unfailing patience

throughout this period, and to my son, Kevin, who made it all worthwhile.













TABLE OF CONTENTS


Page

ACKNOWLEDGMENTS ii

LIST OF TABLES vi

LIST OF FIGURES xi

ABSTRACT xii


CHAPTER

I. INTRODUCTION 1

The Development Process 1
The Setting 2
The Problem 4
The Hypothesis 12
The Objectives 12
Organization of the Thesis 13

II. PROCEDURE AND METHODS 14

Theoretical Considerations 14
Price Variability 14
Benefits of less variable prices 14
Regional price variation 15
Variable supply and the inelasticity
of demand 17
Supply stabilization 18
Storage 18
Concept of storage 18
Maximum allowable investment in storage 19
Production Adjustments 19
Empirical Considerations 20
Measuring Potato Price Variability 20
Storage 22
Length of Storage Period 23
Storage Costs 23
Actual Price Storage Analysis 24
Regional Storage and Transport 24
Maximum Allowable Investment in Storage 25










Page


Production Adjustment 27
Potato Growers Survey 27
Sample Size 28
Production Data 29
Marketing and Cost of Production Data 30

III. POTATO PRODUCTION IN ECUADOR 32

Agricultural Production in Ecuador 32
Potato Production 33
Preferred Month for Planting 37
Movement of Production to Market 41

IV. ANALYSIS OF STORAGE AND SUPPLY MANAGEMENT
POTENTIALS 48

Price Variation 48
Among Highland Crops--Risk 48
Within and Between Market Cities 49
Forms of Storage and Costs 51
National Storage Potential 54
Provincial and Regional Storage 60
Provincial Potentials 63
Regional Potentials 66
National Reallocation: Storage and Transport 72
Summary of Storage Potential 76
Production Management Potential 77
Preferred Month for Planting 78
Number of Months Required for Crop Maturation 80
Premature Harvest: Frequency and Reasons 80
Postmature Harvest: Frequency and Reasons 82
Role of Credit 83
Estimated Required Adjustments in Hectarage 84
Comparison of Supply Stabilization Techniques 87

V. SUMMARY, CONCLUSIONS AND RECOMMENDATIONS 90

The Costs and Benefits of a Storage Program 91
The Costs and Benefits of Production Management 93
The Least Cost Combination of Alternatives 95
Recommendations 96

GLOSSARY 99

APPENDIX 100

REFERENCES 165

BIOGRAPHICAL SKETCH 171














LIST OF TABLES


Table Page

1 Average cyclical wholesale price variation
for potatoes in Ecuador and selected countries 6

2 Apparent cost of potatoes as a percent of food
expenditure in selected countries 8

3 Apparent losses in potato production during low
price cycles, Ecuador, 1965-71 10

4 Potato marketing losses in the Pichincha
Province, Ecuador, 1973, per hundred weight of
potatoes 11

5 Preferred month for planting potatoes in the
Northern, Central, and Southern Highlands of
Ecuador by percentage of farmers interviewed, 1974 38

6 Average yearly potato production, area harvested,
and yield by region, Ecuador, for periods 1962-67
and 1968-73 39

7 Annual variability of value per hectare, yield,
and wholesale price of four alternative highland
crops, Ecuador, 1962-72 50

8 Correlation (r) matrix for monthly wholesale price
of potatoes, selected cities, Ecuador, 1962-72 52

9 Average monthly wholesale price differential
between subsequent months for potatoes in Ecuador,
1954-72, in constant 1970 sucres per quintal 55

10 Average price differential in sucres per quintal
between low- and high-price periods for potatoes,
Ecuador, 1962-71, and profit margin after storage 62

11 Estimated maximum allowable investment in potato
storage by province in the Central Region,
Ecuador, 1962-72, in sucres per quintal 64

12 Estimated regional costs and benefits for
potato storage, Ecuador, 1972, in constant 1970
sucres 71








Table


13 Estimated margin for potatoes purchased and
stored in Tulcan and later transported to
selected major cities for sale to wholesalers,
Ecuador, 1962-72 74

14 Preferred months for planting potatoes by
region and size of planting, Ecuador, 1972 and 1974 79

15 Estimated average monthly surplus and deficit
potato production by region, Ecuador, 1974 85

16 Modifications required to stabilize potato
production in Central Region, Ecuador, 1972 86

A-i Production of potatoes by highland province and
region, Ecuador, 1962-1973, in thousands of
metric tons 102

A-2 Yield of potatoes by highland province and region,
Ecuador, 1962-1973, in quintales per hectare 103

A-3 Area in potatoes by highland province and region,
Ecuador, 1962-1973, in thousands of hectares 104

A-4 Monthly regional wholesale potato prices,
Ecuador, 1962-1969, 1971-1972, in sucres per
quintal 105

A-5 Monthly regional wholesale corn prices, Ecuador,
1962-1969, 1971-1972, in sucres per quintal 108

A-6 Monthly regional wholesale wheat prices,
Ecuador, 1962-1969, in sucres per quintal 111

A-7 Monthly regional wholesale barley prices,
Ecuador, 1962-1969, in sucres per quintal 113

A-8 Constant monthly wholesale potato prices,
Ecuador, 1954-1972, in sucres per quintal 115

A-9 Average monthly wholesale price of potatoes
in selected cities, Ecuador, for period
1962-72, and in Pasto, Colombia, for 1955-64 116

A-10 Percent price differential between local and
national monthly wholesale potato prices in
selected cities, Ecuador, 1962-72 117

A-11 Average monthly potato arrivals to regional
markets, Ecuador, 1962-73 118


Page










A-12 Reaction of potato producers to price
fluctuations, by farm size, 1972 119

A-13 Annual variability of yield by province for
selected highland crops, Ecuador, 1961-72 120

A-14 Costs of production per hectare of potatoes
(mechanized), Ecuador, 1972 121

A-15 Average cost of production per hectare of
potatoes for medium size farm, Ecuador, 1972,
in the Central Highlands 123

A-16 Result demonstration cost of production per
hectare of potatoes, Hacienda El Carmen,
Pichincha Province, Ecuador, 1962 125

A-17 Index of prices to the consumer, potatoes,
Ecuador, 1974, in sucres per quintal 127

A-18 Prices and margins for potatoes from
Chimborazo Province, sold in Quito, Ecuador,
1962, in sucres per quintal 128

A-19 Consumer prices in Quito, 1951-74 (base: 1965
= 100 and 1970 = 100) 129

A-20 Percent monthly price variation for selected
crops and cities, Ecuador, 1962-72 130

A-21 Estimated storage costs for forced night air
potato silo in the Ecuadorian Highlands, 1972 131

A-22 Truck transportation costs between major cities,
Ecuador, 1974 132

A-23 Government credit for potato and general
agricultural production in Ecuador, 1951-70 133

A-24 Moving average of preferred month for planting
potatoes in the Northern, Central, and Southern
Highlands of Ecuador, by percentage of farmers
interviewed, 1974 134

A-25 Monthly quantity of potatoes that could have been
stored and consumed to stabilize supply in
Northern Highlands, Ecuador, 1972 135


viii


Table


Page










A-26 Monthly quantity of potatoes that could have been
stored and consumed to stabilize supply in Central
Highlands, Ecuador, 1972 136

A-27 Monthly quantity of potatoes that could have been
stored and consumed to stabilize supply in
Southern Highlands, Ecuador, 1972 137

A-28 Estimated cost for storing potatoes in the
Northern Highlands, Ecuador, 1972 138

A-29 Estimated cost for storing potatoes in the
Central Highlands, Ecuador, 1972 139

A-30 Estimated cost for storing potatoes in the
Southern Highlands, Ecuador, 1972 140

A-31 Estimated additional revenue from stored
potatoes, Northern Highlands, Ecuador, 1972 141

A-32 Estimated additional revenue from stored
potatoes, Central Highlands, Ecuador, 1972 142

A-33 Estimated additional revenue from stored
potatoes, Southern Highlands, Ecuador, 1972 143

A-34 National monthly quantity of potatoes that could
have been stored and consumed to stabilize supply,
Ecuador, 1972 144

A-35 Estimated cost for storing potatoes nationally
Ecuador, 1972 145

A-36 Modifications required to stabilize potato
production in the Northern and Southern Regions,
Ecuador, 1972 146

A-37 Reasons for selection of best month for planting
potatoes, by region, Ecuador, 1974 147

A-38 Reasons in Southern Region for selection of best
month for potato planting, by size of planting,
Ecuador, 1974 148

A-39 Reasons in Northern Region for selection of best
month for potato planting, by size of planting,
Ecuador, 1974 149


Table


Page










A-40 Months required for potatoes to mature, in the
Southern and Northern Sierra Regions, by
farm size, Ecuador, 1974 150

A-41 Frequency of premature harvest by potato farm
size and region, Ecuador, 1974 151

A-42 Number of'weeks premature harvest by total farm
size, Southern Region, Ecuador, 1974 152

A-43 Number of weeks premature harvest by total farm
size, Northern Region, Ecuador, 1974 153

A-44 Reason for premature potato harvest by number
of weeks harvested prematurely as a percentage
of farmers polled, Southern Region, Ecuador, 1974 154

A-45 Reason for premature potato harvest by number of
weeks harvested prematurely as a percentage of
farmers polled, Northern Region, Ecuador, 1974 155

A-46 Reason for premature harvest by potato farm
size and region, Ecuador, 1974 156

A-47 Frequency of post mature potato harvest by
region and size of farm, Ecuador, 1974 157

A-48 Number of weeks postmature potato harvest by
region and size of farm, Southern Region,
Ecuador, 1974 158

A-49 Number of weeks postmature potato harvest by region
and size of farm, Northern Region, Ecuador, 1974 159

A-50 Reason for postmature potato harvest by number of
weeks harvested postmaturely as a percentage of
farmers polled, Southern Region, Ecuador, 1974 160

A-51 Reason for postmature potato harvest by number of
weeks harvested postmaturely as a percentage of
farmers polled, Northern Region, Ecuador, 1974 161

A-52 Distribution of credit among potato growers by
region and total farm size, Ecuador, 1974 162

A-53 Sample questionnaire for potato farmers,
Ecuador, 1974 163


Page


Table













LIST OF FIGURES


Figure Page

1 Theoretical comparison of loss and gain of
consumer's surplus caused by fluctuating prices 16

2 Map of Ecuador and the study area 36

3 Rainy period in the Highlands Region, Ecuador 42

4 National average monthly wholesale price and
estimated monthly market arrival for potatoes by
region in highland Ecuador, 1954-72 43

5 Market flow of potatoes in Ecuador, 1973 47

6 Potential short range storage based upon
significant monthly wholesale price variance
of potatoes in Ecuador for period 1954-72 57

7 Estimated average profit margins for stored
potatoes, Ecuador, 1954-72 58

8 Wholesale potato prices showing potential
storage periods, Ecuador, 1962-72 61

9 Estimated percent of annual potato production
required to stabilize monthly supply, Northern
Highlands, Ecuador, 1972 68

10 Estimated percent of annual potato production
required to stabilize monthly supply, Central
Highlands, Ecuador, 1972 69

11 Estimated percent of annual potato production
required to stabilize monthly supply, Southern
Highlands, Ecuador, 1972 70

A-1 Average constant wholesale potato prices showing
potential storage periods, Ecuador, 1954-72 101









Abstract of Thesis Presented to the Graduate Council
of the University of Florida in Partial Fulfillment of the Requirements
for the Degree of Master of Science in Agriculture


THE ECONOMIC FEASIBILITY OF STABILIZING THE PRICE
AND SUPPLY OF POTATOES IN ECUADOR

by

Kenneth Bruce Wiegand

June, 1975

Chairman: Chris O. Andrew
Major Department: Food and Resource Economics

The objective was to measure the economic feasibility of stabilizing

the price and/or supply of potatoes in Ecuador. It was estimated that

the risk associated with potato production could be reduced to almost one-

half its current level through a stabilization program, and that the

waste associated with distributing potatoes could be reduced by 16,000

tons annually if an adequately stable supply system were established.

A significant degree of price variance was measured between the low prices

of May, June, and July and the rising postharvest prices in the later

months of September, October, and November. Storage costs associated

with a low-cost, forced-night, air-storage facility designed in Colombia

were used to analyze potential storage profits, based upon a maximum

storage period of four months.

Costs and benefits of a storage program at the national level using

average deflated time series data revealed no significant storage

potential. The limitations of requiring a stable monthly supply of

potatoes and a four month maximum allowable storage period combined to

produce an unprofitable storage scheme.









The potential for supply management through changes in planting and

harvest dates (production smoothing) was explored by interviews with

potato producers. Their attitudes towards year-long production and

incentives for.premature and postmature harvest were determined. The

actual costs associated with production smoothing were indeterminable at

the national level although a rough measure of their size was indicated

by the potentially foregone benefits of not stabilizing production and

potato prices. The potential for production smoothing at the,regional

level relative to storage was calculated for a typical year in the Central

Region. Production costs for planting "out of season" could be allowed

to exceed the normal production costs by 2.4 times before they would

equal the estimated regional storage costs. This apparent cost advan-

tage of production smoothing is tempered, however, by the intangible

consumer benefits of a storage program where, Eor example buffer

stocks could be used to alleviate temporary shortages, thus reducing

the net costs associated with storage.



Chairman


xiii














CHAPTER I


INTRODUCTION


The Development Process


In the agricultural development process much emphasis has been given

to policies and programs designed to accelerate growth in production and

productivity [27, 71]. Yet, little attention has been paid to the role

of agricultural product markets, the primary mechanism for coordinating

production and consumption activities in the development process [6, 67].

The "green revolution" is a good example of this strategy. The high

yielding varieties together with a new package of inputs have resulted

in dramatic increases in production and productivity but only minimal

changes in human welfare [52]. Consumers who wish to improve their diets

are often unable to exert an effective demand due to limited purchasing

power, high prices, and inadequate access to the products. While many

countries have succeeded in achieving target levels of growth in agri-

cultural production, they have failed in the real objective of develop-

ment, i.e., improving economic well-being for all the people [57, 26].

A pilot research program designed to examine the role of food

marketing improvements during Puerto Rico's early developmental period

led Harrison and other Michigan State University researchers to the

conceptualization of a broad framework for examining development

planning and market strategy [68]. Of primary concern was the ultimate














CHAPTER I


INTRODUCTION


The Development Process


In the agricultural development process much emphasis has been given

to policies and programs designed to accelerate growth in production and

productivity [27, 71]. Yet, little attention has been paid to the role

of agricultural product markets, the primary mechanism for coordinating

production and consumption activities in the development process [6, 67].

The "green revolution" is a good example of this strategy. The high

yielding varieties together with a new package of inputs have resulted

in dramatic increases in production and productivity but only minimal

changes in human welfare [52]. Consumers who wish to improve their diets

are often unable to exert an effective demand due to limited purchasing

power, high prices, and inadequate access to the products. While many

countries have succeeded in achieving target levels of growth in agri-

cultural production, they have failed in the real objective of develop-

ment, i.e., improving economic well-being for all the people [57, 26].

A pilot research program designed to examine the role of food

marketing improvements during Puerto Rico's early developmental period

led Harrison and other Michigan State University researchers to the

conceptualization of a broad framework for examining development

planning and market strategy [68]. Of primary concern was the ultimate








effect of reducing food staple prices. It was hypothesized that since

food expenditures usually make up more than half of total family living

expenditures in urban areas of less developed countries, a reduction in

food prices can have a significant effect on real family income. In

such a situation, a 10 percent reduction in food prices could increase

total purchasing power (real income) by 5 percent or more. The result

would be an increase in "effective demand" for both food and nonfood

products. This increased demand for food would then be reflected back

through rural assembly markets to farmers, who would be stimulated to

expand output [57].


The Setting


The agricultural production and marketing situation in Ecuador

differs little from the conditions described by McPherson and Johnston

in their characterization of agriculture in the tropics [48]. The

economic and institutional conditions have been listed often in the

literature and they usually include the following:

a) Rapid rates of population growth,

b) Rapid migration to the cities,

c) High rates of unemployment and underemployment,

d) Duality of economic organization characterized by
commercial and traditional agriculture, modern heavily
capitalized versus traditional shops and cottage industry,
modern commercial and service firms (supermarkets, data
processing, etc.) versus traditional intermediaries and
service people,

e) High degree of inequality in distribution of wealth,
income and economic opportunity,

f) Prevalence of market imperfections and monopolistic
tendencies,








g) Extensive overlap among political and economic elites,

h) Antiquated tax laws, evasion of taxes, rigid fiscal
and monetary policies,

i) Factor and product price distortions [26].

The potato production-distribution system in Ecuador is characterized

by a large number of independent producers, a lack of government price

intervention,1 and innumerable buyers and sellers [8]. Except for

export crops, most agricultural produce is distributed by a multitude of

small assemblers and wholesalers. Rural assemblers who buy fr6m farmers

seldom have the resources to do more than ship the produce to a nearby

population center, where it is resold to other assemblers. These

assemblers transport the produce to the city for resale in the wholesale

market. There is a serious shortage of storage and handling facilities

for all domestically produced foodstuffs [42]. Spoilage and transit

losses, chiefly the result of poor warehousing, have been estimated at

as much as 20 to 25 percent for such staples as potatoes, barley, corn

and beans [16, 23, 24, 38]. The results of these deficiencies are

apparent at several levels:

1. Prices are subject to broad disparities from region to
region, and given the limited storage capacity, they
reflect a sharp seasonal cycle from glut to scarcity.

2. The numerous resales and the frequent transshipments
between farmers and consumers work to the disadvantage of
both.

3. For such a dietary staple as potatoes, the average total
markup between producer's price and consumer cost in the
Quito market has been reported to be as high as 100
percent [44].




1During 1973-74, the military government set price controls on food-
stuffs, but compliance with the decrees varied widely.








Prices paid to farmers are greatly affected by price changes at

the consumer level. A drop in price at the point of final demand is

usually passed on to the farmer in the form of a lower price. Peasant

farmers, by reason of transport costs and unfamiliarity with urban

markets, usually must sell their excess production to the village store-

keeper, trucker, or itinerant buyer. Small scale merchants are at a

similar disadvantage with respect to the large urban wholesalers, who

are frequently their primary source of working capital and who have at

least a limited capacity to stockpile nonperishables [23].


The Problem


The major problem for potato producers and consumers in Ecuador is

the wide seasonal and cyclical variation in prices [65, 66]. Lack of

credit, traditional production practices and price uncertainty through-

out the potato production-distribution system have probably limited

expansion and intensified supply fluctuations. Because of the seasonal

and cyclical nature of production, prices reflect the sharp movement

from glut to scarcity. The prices to farmers are subject to severe

instability because: (1) the supply fluctuations, along with an inelastic

demand,create price fluctuations at the consumer level which are passed

on to the farmers, and (2) prices are subject to wide variations from

region to region. During the 1961 1967 period, an average change of

0.53 percent in consumption of potatoes was associated with a 1 percent

change in price; and after 1968, the average change in consumption dropped

to 0.45 percent [8].





5


While not as severe as the cyclical, 3 year price variation, the

monthly price variation experienced by producer and consumer is a source

of concern for both. The per quintal (100 Ibs) price of potatoes has,

on several occasions, doubled within a 30 day period. In less than 90

days between February and April of 1962, the price in Tulcan dropped

from S./75 to S./26 per quintal [29].2 Such a large variation in price

between months can be explained partially by the three-year cycle,

which would show severe price differentials in either the period just

before or just after the peak price. However, even in the year cited

(1962), there was a significant monthly price variation in four of the

major market cities.

The cyclical price variation for potatoes in Ecuador has, for

many years, been qualified as extreme and excessive by both consumers

and producers [8, 14]. During the w.ell-defined, three-year cycle of

high-to-low prices described by Arevalo, the wholesale price for a

100-pound sack of potatoes has ranged from a high of S./120 to a low of

S./25 [8, 29]. According to surveys made among producers in the Central

Region, it has been estimated that potato production increases by 40

percent during these high-to-low price periods. In general terms, the

cyclical price variation of potatoes is not significantly different from

other Latin or North American countries, as shown in Table 1.

The relative effect of large price variations does, however, affect

the Ecuadorian consumer to a greater degree than his neighbors, and more




2Unless specified otherwise, all monetary notations indicate
Ecuadorian sucres (S./). The official rate of exchange in October 1974
was US $1.00 = S./24.90, thus one sucre was roughly the equivalent of
four U.S. cents.












Table 1. Average cyclical wholesale price variation for potatoes in Ecuador and selected countries



Average Average No. of years Percent that high
Country Unit low price high price in cycle price exceeds low price



Ecuador Sucres/qq. 43.68 63.61 3 43

Colombia Pesos/ton 882.00 1205.00 2.5 37

Peru Soles/qq. 85.00 113.00 1 33

U.S.A. Dollars/cwt. 2.48 3.51 3 42


Source: Calculated from [7,

aBased upon price cycles and


8, 9, 35, 37, 74, 76, 77].

data collected between 1965 and 1972.








so than U.S. consumers because of the relatively greater importance of

potatoes in the Ecuadorian diet.

By reducing the prices to a measurement of the change in food

costs for an average-sized family, a more meaningful comparison to other

countries may be accomplished. Based upon recent estimates, an average-

sized family of 5 persons in Quito will consume 1.5 Ibs of potatoes per

day [34]. At the median income level, this represents 3.1 percent of

their food costs when potato prices reach their cyclical three-year

low and 8.1 percent of their food costs when potato prices are high, thus

representing an increase of 161 percent compared to Colombia, where the

increase is only 96 percent over a similar period.3 The potato price

instability problem is obviously more acute at lower income levels where
4
a much higher percentage of the family income is devoted to food. The

differences between Ecuador and several other countries are presented in

Table 2.

The price variability problem is no less serious at the producer's

level. Potato production is considered to be a high-cost, high-output

operation. This is primarily due to the large number of ,phytopathological

controls required to insure a salable crop, the cost of adequate seed,

and the required fertilizer application. Until 1973, government-supported

bank credit was largely unavailable to the majority of producers [47].

Most commercial producers were forced to secure credit through agricultural




3This analysis, made for comparative purposes, assumes that consumers
would purchase the same amount of potatoes during a high-price period as
during a low-price period.
4The poorest one half of households surveyed in Call, Colombia, by
Michigan State University researchers typically spent 60 to 80 percent of
their income on food compared to an overall allocation of 40 to 50 percent
[58].












Apparent cost of potatoes as a percent of food expenditure in selected countries


Cost of potatoes per person per day Increase in expenditure
Country Estimate as percentage of total food as percentage of low
expenditure price
At low price At high price
---------------------------------percent-------------------------------

Ecuador A 3.10 8.10 '161

Colombia A 2.40 4.70 96

B .71 1.14 60

Peru A .69 1.06 53

B 3.30 4.40 33

U.S.A. A 1.00 1.09 9


Source: [8, 9, 35, 53, 74, 76, 77].


aMethods of reporting data vary; therefore,
were used where available.


alternative estimates (A and B) of per capital consumption,


bApparent costs to consumer are based upon prices observed during the following years: Ecuador--1968, 1969;
Colombia--1968, 1969; Peru--1964, 1968; U.S.A.--1964-1967.


Table 2.








supply houses or to finance the entire operation from their own sources

of capital. Those few producers fortunate enough to harvest potatoes

during a high-price period became quite wealthy; however, many large

investments have been lost by those unlucky enough to harvest during the

"trough" years of the potato price cycle [14]. The magnitude of the

losses can be appreciated by examining production costs for the years

when prices were at their low point (Table 3).

Additional problems may be linked directly to the inadequacy of

the distribution system. Losses during transit and in market channels,

chiefly the result of poor handling and warehousing, have been reported

as high as 20 percent with spoilage accounting for 9 percent of these

losses (Table 4). According to some estimates, however, potato losses

between farms and consumers due to spoilage could be reduced 50 percent

through the utilization of adequate storage facilities [77]. In 1972,

such a reduction in losses would have provided an additional 16,027

metric tons of potatoes (5 percent of the national marketed production),

representing 28 million sucres, based upon the average price of S./81 per

quintal for that year. Also, the limited export potential for potatoes

has remained unexploited, primarily due to insufficient marketing and

storage facilities [42].

The violent fluctuations in potato prices from year to year cause

great uncertainty for the producer and consumer and lead to an inefficient




The proportion marketed is 70 percent of total production, accounting
for 331,343 metric tons in 1972. Spoilage at 9 percent accounts for 29,821
tons. If reduced to 4 percent, it would account for only 13,254 tons,
a reduction of 16,027 tons, or 348,417 quintals. At S./81 per quintal,
this represents S./28,221,780.








Table 3. Apparent losses in potato production during low
Ecuador, 1965-71


price cycles,


Item 1965 1968 1971

----------S./metric ton-----------


Price/Metric Ton 616 778 228

Cost/Metric Tona

Cost Estimate I 775 752 832

Cost Estimate II 672 653 722

Loss (-) or Gain (+) Metric Ton

Cost Estimate I -159 + 26 -604

Cost Estimate II 56 +125 -494


Source: [8, 21, 29, 30, 61, 62].

aBased upon two separate cost/ha. estimates. A partially mechanized
cost is represented by I (Schwartz) and a sample of medium-sized farms
in the Central Zone is represented by II (Arevalo).












Table 4. Potato marketing losses in the Pichincha Province, Ecuador, 1973, per hundred weight of potatoes


Total loss
Spoilage Weight loss (a)

--------------lbs.------------------


Price Value of total loss
(b) (a x b)

--------sucres per lb.-------


Loss as percent
of retail value

----percent----


Wholesaler

Jobber

Broker

Retailer


Total


Source: [44].


Type of
middleman


0.8

1.5

2.3

4.7


9.3


1.7

3.1

2.7

3.4


10.9


2.5

4.6

5.0

8.1


20.2


1.20

1.35

1.38

1.53


3.00

6.20

6.90

12.30


28.40


2.0

4.1

4.5

8.0


18.6








allocation of resources. The inelastic nature of the price-quantity

relationship for potatoes results in extremely unstable revenue

expectations, thus causing alternating deficit and surplus situations

in the marketplace.


S The Hypothesis


The high degree of price variability for potatoes affects not only

the welfare of the consumer, but also contributes to the great amount of

instability found in the production sector. It is hypothesized that the

cobweb cycle could be broken (or at least reduced in amplitude),

benefiting both producer and consumer, by stabilizing the price and

supply of potatoes through:

1. Storage from surplus to deficit periods;

2. Production adjustments allowing for year-round cultivation
of potatoes; and/or

3. Import and export of potatoes to balance national deficits
and surpluses.


The Objectives


The economic feasibility of the alternatives can be determined by

examining the costs and benefits associated with each one separately

and in combination. However, the scope of this study will allow an

investigation of only the first two alternatives--storage and production

adjustments. The main objectives were to:

1. Determine the economic feasibility of potato storage in
Ecuador with price supply stabilization as a primary
consideration, by estimating the potential storage profit
margins for the three major producing areas.








allocation of resources. The inelastic nature of the price-quantity

relationship for potatoes results in extremely unstable revenue

expectations, thus causing alternating deficit and surplus situations

in the marketplace.


S The Hypothesis


The high degree of price variability for potatoes affects not only

the welfare of the consumer, but also contributes to the great amount of

instability found in the production sector. It is hypothesized that the

cobweb cycle could be broken (or at least reduced in amplitude),

benefiting both producer and consumer, by stabilizing the price and

supply of potatoes through:

1. Storage from surplus to deficit periods;

2. Production adjustments allowing for year-round cultivation
of potatoes; and/or

3. Import and export of potatoes to balance national deficits
and surpluses.


The Objectives


The economic feasibility of the alternatives can be determined by

examining the costs and benefits associated with each one separately

and in combination. However, the scope of this study will allow an

investigation of only the first two alternatives--storage and production

adjustments. The main objectives were to:

1. Determine the economic feasibility of potato storage in
Ecuador with price supply stabilization as a primary
consideration, by estimating the potential storage profit
margins for the three major producing areas.









2. Determine the economic feasibility of production adjust-
ments as a potato price stabilizer in conjunction with or
in place of potato storage by measuring producer attitudes
and estimating the costs associated with smoothing pro-
duction. Production adjustments would include reducing
production seasonality through the introduction of new
varieties, changes in cultural practices (such as planting
and harvesting dates) and credit.


Organization of the Thesis


Subsequent chapters describe the theoretical and empirical con-

sideration for the analysis of storage feasibility, and the benefits which

may be derived by price stabilization. A short description of potato

production and distribution in Ecuador is followed by the actual analysis

of price variation, storage potential, and production management. In

the final chapter, the results of the analysis are summarized and several


recommendations are made.













CHAPTER II


PROCEDURE AND METHODS


Theoretical Considerations


Prior to analyzing the feasibility of stabilizing the price and

supply of potatoes in Ecuador, the theories related to price variability,

storage, and production smoothing were reviewed and the assumptions which

underlie the treatment of the data were investigated. To avoid unintended

bias in the data processing, interpretation, or analysis, an explanation

of the data sources, treatment, and reliability is made below in con-

junction with a description of the mathematical and statistical methods

which are appropriate to the problem description and data characteristics.


Price Variability

Benefits of less variable prices. Shepherd discussed at some

length the benefits consumers may derive from price stabilization [63].

Consumers receive more satisfaction from the fairly even consumption of

a particular food than from a scarcity at one time and a glut at another.

This would appear to be especially valid in the case of a dietary staple

like potatoes. The extra worth of the stable supply may be greater or

less than the extra money the consumer has to pay for it; however, the

consumer would benefit to some extent, since the extra money paid would

provide some benefit and might even be of lesser value in general to the

consumer than the benefit received.













CHAPTER II


PROCEDURE AND METHODS


Theoretical Considerations


Prior to analyzing the feasibility of stabilizing the price and

supply of potatoes in Ecuador, the theories related to price variability,

storage, and production smoothing were reviewed and the assumptions which

underlie the treatment of the data were investigated. To avoid unintended

bias in the data processing, interpretation, or analysis, an explanation

of the data sources, treatment, and reliability is made below in con-

junction with a description of the mathematical and statistical methods

which are appropriate to the problem description and data characteristics.


Price Variability

Benefits of less variable prices. Shepherd discussed at some

length the benefits consumers may derive from price stabilization [63].

Consumers receive more satisfaction from the fairly even consumption of

a particular food than from a scarcity at one time and a glut at another.

This would appear to be especially valid in the case of a dietary staple

like potatoes. The extra worth of the stable supply may be greater or

less than the extra money the consumer has to pay for it; however, the

consumer would benefit to some extent, since the extra money paid would

provide some benefit and might even be of lesser value in general to the

consumer than the benefit received.













CHAPTER II


PROCEDURE AND METHODS


Theoretical Considerations


Prior to analyzing the feasibility of stabilizing the price and

supply of potatoes in Ecuador, the theories related to price variability,

storage, and production smoothing were reviewed and the assumptions which

underlie the treatment of the data were investigated. To avoid unintended

bias in the data processing, interpretation, or analysis, an explanation

of the data sources, treatment, and reliability is made below in con-

junction with a description of the mathematical and statistical methods

which are appropriate to the problem description and data characteristics.


Price Variability

Benefits of less variable prices. Shepherd discussed at some

length the benefits consumers may derive from price stabilization [63].

Consumers receive more satisfaction from the fairly even consumption of

a particular food than from a scarcity at one time and a glut at another.

This would appear to be especially valid in the case of a dietary staple

like potatoes. The extra worth of the stable supply may be greater or

less than the extra money the consumer has to pay for it; however, the

consumer would benefit to some extent, since the extra money paid would

provide some benefit and might even be of lesser value in general to the

consumer than the benefit received.













CHAPTER II


PROCEDURE AND METHODS


Theoretical Considerations


Prior to analyzing the feasibility of stabilizing the price and

supply of potatoes in Ecuador, the theories related to price variability,

storage, and production smoothing were reviewed and the assumptions which

underlie the treatment of the data were investigated. To avoid unintended

bias in the data processing, interpretation, or analysis, an explanation

of the data sources, treatment, and reliability is made below in con-

junction with a description of the mathematical and statistical methods

which are appropriate to the problem description and data characteristics.


Price Variability

Benefits of less variable prices. Shepherd discussed at some

length the benefits consumers may derive from price stabilization [63].

Consumers receive more satisfaction from the fairly even consumption of

a particular food than from a scarcity at one time and a glut at another.

This would appear to be especially valid in the case of a dietary staple

like potatoes. The extra worth of the stable supply may be greater or

less than the extra money the consumer has to pay for it; however, the

consumer would benefit to some extent, since the extra money paid would

provide some benefit and might even be of lesser value in general to the

consumer than the benefit received.








Waugh has shown, however, that with any negative sloping demand

curve, the loss in consumer's surplus from averaging two prices is always

greater than the gain [63]. This can be illustrated by drawing a hypo-

thetical demand curve and labeling the areas above and below the average

price, Po (Fig 1). The gain (G) for consumers when prices are below

average is always greater than the loss (L) when prices are above average,

due to the negative slope of the demand curve. Thus, according to Waugh,

consumers are harmed by price stabilization, not only as a group but

also as individuals.

Howell and Lovasy have pointed out, however, that Waugh's theorem

is true only if prices are stabilized at or above the arithmetic mean of

the variable prices [63]. Shepherd concurs, stating that in the case of

a straight line demand curve, stabilizing the supplies at their arithmetic

means will stabilize prices at their arithmetic means. However, if the

demand curve is curved, stabilizing supplies at their arithmetic means

will stabilize prices below their arithmetic means, thus benefiting

consumers.

Johnson made an additional point, showing that stabilization of

supplies at the arithmetic mean of the fluctuating supplies always

benefits society as a whole (if carrying costs are neglected) [63]. In

cases where consumer's surplus is reduced, there would be a substantial

gain in producer's surplus, in which case the producers could afford to

compensate consumers for their losses while maintaining a net profit.

Regional price variation. Although the scope of this study does

not include examination of potato import and export feasibilities, the

degree of interregional market integration within the country may be





























Price


p


Figure 1.


'1

L

P0

G

P2
-- D
D
0
Quantity Purchaseda



Theoretical comparison of loss and gain of consumer's surplus
caused by fluctuating prices.

Source: [63]

aGain (G) is greater than loss (L) at any price below the
average price (P).








measured by determining how closely the prices are correlated between

domestic markets. Market integration is defined as the degree of inter-

relationship between prices for the same commodity in separate markets.

A measure of the extent to which the markets are integrated is indicated

by the degree of correlation between prices measured on a regular basis

in the separate markets. Where markets are integrated, the prices for a

particular commodity, potatoes in this case, would not vary by more than

the costs associated with transportation, risk of short-run changes in

price, distance from sources, transportation bottlenecks, or differences

in grade. Where the lack of correlation between regional market prices

cannot be explained sufficiently well by the factors listed above, one

may assume that price variation could be reduced through some kind of

supply management program [43].

Variable supply and the inelasticity of demand. A primary cause of

price fluctuations for potatoes is the highly variable quantity of

potatoes supplied to the market. This supply instability in combination

with the inelastic nature of the demand for potatoes illustrates the

classical "cobweb" price-output pattern.

The nature of price fluctuations in a cobweb analysis depends upon

relative elasticities of supply and demand [64]. Where the elasticity of

supply is.significantly greater than the elasticity of demand, supply

interactions will diverge from equilibrium and fluctuations will increase.

Just the opposite is the case for potatoes, at least theoretically,

indicating their price output pattern should converge towards equilibrium,

i.e., adjustments in production should eventually bring about an equi-

librium price. For a number of reasons, however, behavior in the real








world, does not conform to this simple case of cobweb theory. Farmers

do not always react the same way to past prices; they play the odds,

hedging their potential future losses by planting several different

crops whenever possible. Weather makes total yield response extremely

variable no matter how the producers react to prices. Technological

change may also affect yields, crop quality can affect prices, and

demand shifts may disrupt the classical cobweb pattern. The pattern of

sharply fluctuating prices and income, however, results primarily from

changes in available supplies and the relatively inelastic demand for

potatoes.

Supply stabilization. Any attempt to alter this price instability

must necessarily involve changing the supply or demand, either by

stabilizing supplies and making supply more inelastic or by providing for

a more elastic demand. Because major changes in demand elasticities are

unlikely, stabilizing potato prices in the short run must involve some

kind of supply management program. Presumably, such a program would

adjust supplies available to market demand at prices that are acceptable

to both consumers and producers. A supply management program would

reduce price variability in the cobweb price-output pattern by making

supply more inelastic.


Storage

Concept of storage. Determination of the economic feasibility of

potato storage rests primarily upon the costs associated with the desired

length of storage time. Samuelson describes the underlying theory of

storage showing that whenever the expected price of a commodity exceeds

the harvest price plus storage costs, storage will occur [60]. He made








world, does not conform to this simple case of cobweb theory. Farmers

do not always react the same way to past prices; they play the odds,

hedging their potential future losses by planting several different

crops whenever possible. Weather makes total yield response extremely

variable no matter how the producers react to prices. Technological

change may also affect yields, crop quality can affect prices, and

demand shifts may disrupt the classical cobweb pattern. The pattern of

sharply fluctuating prices and income, however, results primarily from

changes in available supplies and the relatively inelastic demand for

potatoes.

Supply stabilization. Any attempt to alter this price instability

must necessarily involve changing the supply or demand, either by

stabilizing supplies and making supply more inelastic or by providing for

a more elastic demand. Because major changes in demand elasticities are

unlikely, stabilizing potato prices in the short run must involve some

kind of supply management program. Presumably, such a program would

adjust supplies available to market demand at prices that are acceptable

to both consumers and producers. A supply management program would

reduce price variability in the cobweb price-output pattern by making

supply more inelastic.


Storage

Concept of storage. Determination of the economic feasibility of

potato storage rests primarily upon the costs associated with the desired

length of storage time. Samuelson describes the underlying theory of

storage showing that whenever the expected price of a commodity exceeds

the harvest price plus storage costs, storage will occur [60]. He made








world, does not conform to this simple case of cobweb theory. Farmers

do not always react the same way to past prices; they play the odds,

hedging their potential future losses by planting several different

crops whenever possible. Weather makes total yield response extremely

variable no matter how the producers react to prices. Technological

change may also affect yields, crop quality can affect prices, and

demand shifts may disrupt the classical cobweb pattern. The pattern of

sharply fluctuating prices and income, however, results primarily from

changes in available supplies and the relatively inelastic demand for

potatoes.

Supply stabilization. Any attempt to alter this price instability

must necessarily involve changing the supply or demand, either by

stabilizing supplies and making supply more inelastic or by providing for

a more elastic demand. Because major changes in demand elasticities are

unlikely, stabilizing potato prices in the short run must involve some

kind of supply management program. Presumably, such a program would

adjust supplies available to market demand at prices that are acceptable

to both consumers and producers. A supply management program would

reduce price variability in the cobweb price-output pattern by making

supply more inelastic.


Storage

Concept of storage. Determination of the economic feasibility of

potato storage rests primarily upon the costs associated with the desired

length of storage time. Samuelson describes the underlying theory of

storage showing that whenever the expected price of a commodity exceeds

the harvest price plus storage costs, storage will occur [60]. He made









this observation by assuming that:

1. Monthly demand remains constant;

2. Variable storage costs per month remain constant;

3. There.is only one instantaneous harvest per year; and

4. Total monthly sales must equal the fixed quantity harvested.

However, potatoes are a perishable commodity for which storage costs

increase through time due to spoilage and weight loss, and there are

several harvests throughout the year [23, 15, 69]. Samuelson"allowed

for such a case in his description and illustrated seasonal patterns

with an extended harvest.

Maximum allowable investment in storage. A similar but more consise

analysis can be made by estimating how much could be invested in storage.

Such a procedure would, in effect, measure the producer's average surplus

by subtracting production-distribution costs from the wholesale market

price over a long period.


Production Adjustments

Supply stabilization can also be accomplished by extending the pro-

duction season, thus making potatoes available in quantities sufficient

to meet the consumer demand throughout the year. The feasibility of

extending the potato production season in Ecuador may be analyzed by

means of the following procedures:

1. Determine the amount of time by which the production cycle
in each of the three regions may be altered through changes
in the planting and harvesting periods.

2. Determine those factors that have the most influence on
producer response to changes in cultural practices.

3. Identify additional factors (credit, farm size, risk,
market structure) which affect farmers' production decisions.








To determine the optimum combination of potato storage and supply

management programs, the equilibrium quantity of potatoes required to

meet the consumption (effective demand) requirements of the nation

throughout the year.must be estimated. Stabilizing prices by storage

requires that supplies be stabilized at the arithmetic mean of the

varying supplies (allowing for spoilage). This implies that the point

where prices are stabilized will be determined by the curvature of the

demand curve [63]. Then, by estimating the demand and supply-functions

for each period throughout the year, deficits and surpluses relative to

the mean can be determined vis-a-vis the quantity required and the

quantity demanded to maintain equilibrium (the stable supply).

The relative costs associated with either storage or production

smoothing may be examined by comparing the marginal cost associated with

each. A potential limitation to such an analysis is the difficulty with

which costs are assigned to the items in each alternative.


Empirical Considerations


Measuring Potato Price Variability

Price variation within and between market cities by month was

measured by means of standard regression analysis. The degree of

variation was also calculated for alternative highland crops using Kling's

procedure6 to determine the amount of risk associated with growing and




6Measured by subtracting annual prices, yields, and value per acre
from preceding year's prices, yields, and value per acre; then computing
the standard deviation of these changes and expressing it as a percentage
of the average price, yield, or value per acre for the period.








To determine the optimum combination of potato storage and supply

management programs, the equilibrium quantity of potatoes required to

meet the consumption (effective demand) requirements of the nation

throughout the year.must be estimated. Stabilizing prices by storage

requires that supplies be stabilized at the arithmetic mean of the

varying supplies (allowing for spoilage). This implies that the point

where prices are stabilized will be determined by the curvature of the

demand curve [63]. Then, by estimating the demand and supply-functions

for each period throughout the year, deficits and surpluses relative to

the mean can be determined vis-a-vis the quantity required and the

quantity demanded to maintain equilibrium (the stable supply).

The relative costs associated with either storage or production

smoothing may be examined by comparing the marginal cost associated with

each. A potential limitation to such an analysis is the difficulty with

which costs are assigned to the items in each alternative.


Empirical Considerations


Measuring Potato Price Variability

Price variation within and between market cities by month was

measured by means of standard regression analysis. The degree of

variation was also calculated for alternative highland crops using Kling's

procedure6 to determine the amount of risk associated with growing and




6Measured by subtracting annual prices, yields, and value per acre
from preceding year's prices, yields, and value per acre; then computing
the standard deviation of these changes and expressing it as a percentage
of the average price, yield, or value per acre for the period.









selling each crop [41]. Occasionally the results were compared with

those from other countries to lend perspective to Ecuador's situation.

The primary source for nationwide, monthly price data in Ecuador

is the series prepared by the Institute of Economic Research at Central

(National) University .in Quito. In 1952, the Institute began to tabulate

monthly wholesale prices for 116 separate articles in the market plazas

of seven major cities [45].

A new wholesale-retail price index was established in 1911 by the

National Planning Board (JNPCE) and the National Institute of Statistics.

In recent years, these agencies have jointly published a price series

and index based on data gathered in Quito, Guayaquil and Cuenca.7 The

1951-72 consumer price index for Quito has been used in this study, with
8
the food and beverage index converted to 1970 = 100 base.

Zuvekas has indicated that, although the quality of wholesale price

data for Ecuador is generally considered to be rather poor, the data

probably give a fairly good picture of long term price trends [80].

Since no other historic price series exists for the entire country, it

is utilized routinely by the United Nations, World Bank, Inter-American

Development Bank (BID), and the U.S. Agency for International Develop-

ment. In the National Agricultural and Livestock Research Institute's




All of the price data utilized for this study were compiled from
the previously mentioned sources in Ecuador and insertions were estimated
for missing data. The 1960-69 series was copied directly from the final
tally sheets at the Economic Research Institute at Central University and
the post-1970 data were taken from the annual publications of the National
Planning Board (JNPCE) and the National Marketing Service (SIMAE).
8The consumer price index was changed from a 1965 to a 1970 base
year to correspond with Arevalo's analysis of potato production and
distribution in the Central Region. These conversions are shown in
Appendix Table A-19.








Economic Bulletin No. 9, Dow lists the Central University price data,

although he supplemented the series with a list of producer level

prices for agricultural goods (for 1972 only) [21].

Unfortunately, there is no guarantee that the prices shown in the

Central University series reflect prices for the same product. Varietal

preferences of potatoes by region have been observed [30, 44], and it

should be recognized that until 1969, the price series shows a

distinction by potato size only. The prices for toda grosa and redroja

sized potatoes were compiled by university statisticians, but the

varietal designations were ignored until 1972, when the popular "Chola"

variety was distinguished as the object of SIMAE price sampling technique.

However, the series is the longest and most complete collection of price

data available by region and is routinely used by most institutions.


Storage


The feasibility of utilizing storage to attain stable supplies is

dependent primarily upon the associated costs and length of storage.

Either or both of these two factors could be determined by constructing

an "ideal" storage facility and then establishing the physiological and

economic parameters by purchasing potatoes and storing them for various

time periods. Such an undertaking was deemed to be expensive and time-

consuming for the present study so alternative methods were chosen.




These refer to Grade A and Grade B potatoes, respectively.









Length of Storage Period

In order to determine the period during which storage might

logically occur, the potato price series for the primary market cities

were analyzed. The prices were averaged by month over an 18 year period

(after being deflated.to constant 1970 sucres) and over the cities to

obtain a national set of average monthly potato prices. The degree of

variance between months was then tested using the Tukey-Duncan

procedure [49].


Storage Costs

The costs associated with the storage process selected will

determine, in part, whether or not storage is a viable alternative to

immediate sale. Thus, the technical requirements for potato storage by

region and according to level within the production-distribution system.

must be determined. Abundant literature exists describing the tempera-

ture and humidity requirements for optimal potato storage in the United

States and Europe and designs for storage units which will facilitate

optimal environmental conditions. Space and light conditions also play

an important role in stored potato quality and are well represented in

the literature [12, 28, 56, 69, 70, 72]. Unfortunately, only a few

studies exist for potato storage in Ecuador, and these are limited to

examining the feasibility of utilizing chemical germination inhibitors

[17, 20, 31].

Storage costs associated with each alternative system must be

estimated, based upon location, size, and degree of mechanization of

the system. These costs can be calculated based upon the following

considerations [58]:









Length of Storage Period

In order to determine the period during which storage might

logically occur, the potato price series for the primary market cities

were analyzed. The prices were averaged by month over an 18 year period

(after being deflated.to constant 1970 sucres) and over the cities to

obtain a national set of average monthly potato prices. The degree of

variance between months was then tested using the Tukey-Duncan

procedure [49].


Storage Costs

The costs associated with the storage process selected will

determine, in part, whether or not storage is a viable alternative to

immediate sale. Thus, the technical requirements for potato storage by

region and according to level within the production-distribution system.

must be determined. Abundant literature exists describing the tempera-

ture and humidity requirements for optimal potato storage in the United

States and Europe and designs for storage units which will facilitate

optimal environmental conditions. Space and light conditions also play

an important role in stored potato quality and are well represented in

the literature [12, 28, 56, 69, 70, 72]. Unfortunately, only a few

studies exist for potato storage in Ecuador, and these are limited to

examining the feasibility of utilizing chemical germination inhibitors

[17, 20, 31].

Storage costs associated with each alternative system must be

estimated, based upon location, size, and degree of mechanization of

the system. These costs can be calculated based upon the following

considerations [58]:








1. Cost of constructing and equipping the storage facility and
rate of depreciation;

2. Cost of maintaining and operating the storage facility;

3. Cost of grading, handling, and application of chemicals
to potatoes;

4. Value of potatoes rejected in sorting;

5. Value of potatoes lost due to shrinkage and damage;

6. Interest rate for holding potatoes based upon price at
harvest

Costs for specific storage requirements may vary substantially

between small, medium, and large farms and assembler or retail levels.

Opportunity costs attached to labor, shrinkage amount of crop withheld

for immediate or near-future consumption, and the availability and cost

of credit may also vary.


Actual Price Storage Analysis

Along with estimates of storage costs, it was possible to review

the historical potato price series on a national and regional level,

determining those periods where storage might occur, given the physio--
/
logical constraints. In this way, a series of actual margins for each

year was generated, which was subsequently deflated and averaged to

obtain an estimate of the potential margin between the eventual sale

price and the original price plus storage charges.


Regional Storage and Transport

Another alternative to estimating storage feasibility on a national

scale was the calculation of regional storage followed by subsequent

transport to higher priced markets. The optimal levels of storage,

transport, and price can be estimated to measure the net social benefit








1. Cost of constructing and equipping the storage facility and
rate of depreciation;

2. Cost of maintaining and operating the storage facility;

3. Cost of grading, handling, and application of chemicals
to potatoes;

4. Value of potatoes rejected in sorting;

5. Value of potatoes lost due to shrinkage and damage;

6. Interest rate for holding potatoes based upon price at
harvest

Costs for specific storage requirements may vary substantially

between small, medium, and large farms and assembler or retail levels.

Opportunity costs attached to labor, shrinkage amount of crop withheld

for immediate or near-future consumption, and the availability and cost

of credit may also vary.


Actual Price Storage Analysis

Along with estimates of storage costs, it was possible to review

the historical potato price series on a national and regional level,

determining those periods where storage might occur, given the physio--
/
logical constraints. In this way, a series of actual margins for each

year was generated, which was subsequently deflated and averaged to

obtain an estimate of the potential margin between the eventual sale

price and the original price plus storage charges.


Regional Storage and Transport

Another alternative to estimating storage feasibility on a national

scale was the calculation of regional storage followed by subsequent

transport to higher priced markets. The optimal levels of storage,

transport, and price can be estimated to measure the net social benefit








of a government-supported price stabilization program. Several linear

programming models have been designed to analyze such a problem, in

particular, those based on Samuelson's treatment of intertemporal

price equilibrium, with its concept of net social pay off [18, 60].

The data base for Ecuador, however, is not sufficiently reliable to

generate either the supply or demand functions required for the above

treatment. Thus, an analysis of the margins was made by adding the

cost of transport to the storage costs. The city where the lowest

series of prices occurs was selected as the storage center to show the

maximum margin attainable by such a procedure.


Maximum Allowable Investment in Storage

The amount that could be invested in storage was calculated for the

Central Region by determining the average price for potatoes by year and

province and subtracting the estimated costs of production and distri-

bution. Independent estimates of the cost of production.were utilized in

order to lend as much breadth of interpretation as possible to the

calculation and the most appropriate estimates were chosen to represent

the potato industry. Assuming that consumption equals production,

i.e., all of the potatoes produced are consumed in one form or another,

then expenditures for potatoes in general are equal to the sum of

production at given prices:

(1) Expenditures = QP

Where Q = Quantity of potatoes harvested in quintales
per month in a given year;

P = Wholesaler retailer price per quintal per
month in a given year.









By allowing Cpd to equal production and distribution costs and Cs

to equal storage charges, the price equation can be expressed in terms

of these costs:

(2) P = Cpd + Cs

However, to analyze the historical data available, the equations

must be converted to a measure of the actual price-quantity relationships.

The national average annual price for potatoes is written as:

(3) Pj = EEQij Pij
EQi

where Q = Quantity of potatoes harvested in quintales;

P = Wholesaler retailer price per quintal of
potatoes;

i = 1st, 2nd, ., 12th month of year;

j = 1954, 1955 .year.

Based upon Shepherd and Johnson's [63] concept of consumer surplus

at or below the mean of fluctuating supplies, it was assumed that

whenever P < P, the consumer will benefit. It would then follow that:

if

(4) Cpd + Cs < P

then

(5) Cs < P Cpd

and (6) Cs + B = P Cpd

Storage costs and consumer benefits can be redefined as a new

identity, S, equal to Cs + B, where B represents a variable quantity

which may accrue to the benefit of the consumer, i.e.:

(7) S = Cs + B








Or, instead, an upper bound may be established on the amount that

could be invested in storage. Any difference between actual storage and

the maximum allowable amount would represent a benefit (B) to the

consumer, and it is assumed that storage would occur whenever B > 0.

S may be estimated using the following procedure:

(8) S = E(Pjk Cjk) E(Pj Cj)

where S = Maximum allowable storage charge per quintal
per month nationally;

Pj = EZQij Pij
ZQi

Cj = Production distribution costs;

i = 1st, 2nd, 12th month;

j = 1962, 1963 Jth year

An elementary FORTRAN program was written to calculate the maximum

allowable investment in storage.


Production Adjustment


Potato Growers Survey

To determine potato growers attitudes towards planting month

preference, ease of postmature harvest and other production practices,

a survey was designed for use in the Northern and Southern Regions. The

questionnaire was divided into two sections, the first dealing with the

factual data such as farm size, type of-seed, and planting space, and

the second part dealing with the grower's attitudes towards the best

month for planting, reasons for premature harvest, and other nonbiologi-

cal controls.








Or, instead, an upper bound may be established on the amount that

could be invested in storage. Any difference between actual storage and

the maximum allowable amount would represent a benefit (B) to the

consumer, and it is assumed that storage would occur whenever B > 0.

S may be estimated using the following procedure:

(8) S = E(Pjk Cjk) E(Pj Cj)

where S = Maximum allowable storage charge per quintal
per month nationally;

Pj = EZQij Pij
ZQi

Cj = Production distribution costs;

i = 1st, 2nd, 12th month;

j = 1962, 1963 Jth year

An elementary FORTRAN program was written to calculate the maximum

allowable investment in storage.


Production Adjustment


Potato Growers Survey

To determine potato growers attitudes towards planting month

preference, ease of postmature harvest and other production practices,

a survey was designed for use in the Northern and Southern Regions. The

questionnaire was divided into two sections, the first dealing with the

factual data such as farm size, type of-seed, and planting space, and

the second part dealing with the grower's attitudes towards the best

month for planting, reasons for premature harvest, and other nonbiologi-

cal controls.









The primary purpose of the survey was to measure the influence of

the farmer's attitude concerning preferred months for planting and

harvesting, as related to the size of farm and region within Ecuador.

It also indicated the reasons for different production practices, which

will allow future analysts to concentrate their study upon those specific

attitudes or practices considered alterable and conducive to."production

smoothing."


Sample Size

The size of the sample was determined by the need to make the

survey as comparable to Arevalo's Central Region survey as possible.

The grower's response to preferred month for planting is used in con-

junction with the same response in Arevalo's questionnaire; thus, a

target number of at least 80 growers was interviewed in the Southern

Region, where approximately the same quantity of potatoes are produced

as in the Central Region. A similar breakdown of the sample, i.e.,

small- (34 percent), medium- (38 percent), and large- (28 percent) sized

farms was considered optimal; thus, more than 80 growers were surveyed.

In the Northern Region, a similar number of growers were interviewed in

order to approach the farm size classification percentages, since most

farms are medium-sized in the North. Time and budgetary constraints

ruled out using a larger statistically determined sample, requiring

surveys in the South and in the North based upon the degree of price

variation.








Production Data

Following the 1954 agricultural census, attempts were made by the

Central Bank to gather and/or estimate production and hectarage for

several basic cropsand to publish the results. Thus, a highly

estimative series of production statistics were published for 1955

through 1958. By 1962, a regular reporting series had been established

by the Ministry of Agriculture (MAG).

The MAG receives estimates of hectarage and production from the

province level extension offices throughout the country, in addition to

estimates from technicians employed in various semiautonomous agencies,

such as the Canar-Azuay Development Board (CREA), the National Planning

Board (JNPCE), the coffee and banana commissions, and the National

Agricultural and Livestock Research Institute (INIAP). A series of

adjusted production and hectarage estimates are calculated for each

province.10 The MAG series is the longest continuous available series

for production and hectarage at the provincial level. Neither

varieties nor grades are distinguished for potatoes in the series or

its appendices and footnotes.

The accuracy of the production and hectarage data may be questioned,

especially when reportedly different sources show wide variation as, for

example, in the case of the amount of wheat produced (harvested) in 1968.

The large amount of variability in yield for highland crops reinforces a

lack of confidence in the accuracy of the data, since it is doubtful




1Similar to the U.S.D.A. process of adjusting U.S. national
production estimates of individual state production and acreage to the
total nationwide estimates.








that natural factors alone would account for such large consecutive

annual differences in yield.

A 1971 study of price and income elasticities of major agricultural

commodities by Utah State University economists was abandoned,11 after

publishing an interim.report, due to their lack of confidence in the'

secondary price and production data [78]. Nevertheless, estimates of

yields for the major crops probably indicate correctly the direction

of changes in production and hectarage throughout the 1960's and can

be utilized as "direction indicators" in the absence of more reliable

statistics. Comparison of the national estimates with those made by

extranational agencies (USDA, BID, FAO) would be of little purpose,

since their sources of production information are even more limited
and biased than the national accounts.12 Although efforts have been

made by Zuvekas to explain discrepancies in the banana production

estimates, no similar work has been published for the nonexport crops,

such as potatoes and its highland alternatives [80].


Marketing and Cost of Production Data

Production cost data have been selected from various publications

to illustrate the wide variety of estimates available to the analyst.

Shepherd emphatically points out the fallacy in utilizing or accepting

only one set of production cost estimates, stating that:




1Morris Whittaker, Personal correspondence with author, April 18,
1974.
12C. Milton Anderson, Agricultural Attache, U.S. Embassy, Quito,
Ecuador, Personal Interview, 1974.









Anyone who tried to estimate "the" cost of production
of a farm product soon finds that there is no such
thing. Each farmer has this own cost of production,
and these costs differ from farmer to farmer [63].

Production cost estimates for potato production during the early

1970's do tend to group around S./10,000 per hectare. However, current

productions costs are much higher due to the doubling of fertilizer

prices in late 1973.

Perhaps the most accurate estimates of marketing costs, margins,

and movement of potatoes, at least in the Central Region, are those

found in Maldonado's 1974 marketing study (Appendix Table A-17). Several

tables from the study have been included in the Appendix, together with

comparable data from two previous studies--the 1963-64 ITALCONSULT mar-

keting analysis (Appendix Table A-18) and a more recent FAO report [25].













CHAPTER III


POTATO PRODUCTION IN ECUADOR


Agricultural Production in Ecuador


During the last decade, the annual rate of growth of agricultural

production in Ecuador lagged behind that of the national economy [13,

80]. Yet, as a result of rapid population growth at 3.1 percent

annually between 1963 and 1971, and gains in real per capital income

from $174 in 1960 to $190 in 1970, the demand for farm products has

increased steadily [5, 11].

The lagging state of Ecuador's agricultural sector is commonly

ascribed to a highly adverse pattern of land and labor use, technical

backwardness, and lack of investment in agriculture [23]. Methods of

cultivation in the Sierra in many instances have not greatly advanced

beyond those in use at the time of the Spanish conquest in the 16th

Century. The small Indian farmer cultivates all of his land, which

has become relatively unproductive through centuries of use, whereas

the estate owner leaves a considerable part of his land unused [23].

In neither instance have modern methods been adopted to any marked

degree. This is not to say that agricultural production is necessarily

inefficient, but that it has been unable to keep abreast with the

requirements of an expanding population and economy [42].













CHAPTER III


POTATO PRODUCTION IN ECUADOR


Agricultural Production in Ecuador


During the last decade, the annual rate of growth of agricultural

production in Ecuador lagged behind that of the national economy [13,

80]. Yet, as a result of rapid population growth at 3.1 percent

annually between 1963 and 1971, and gains in real per capital income

from $174 in 1960 to $190 in 1970, the demand for farm products has

increased steadily [5, 11].

The lagging state of Ecuador's agricultural sector is commonly

ascribed to a highly adverse pattern of land and labor use, technical

backwardness, and lack of investment in agriculture [23]. Methods of

cultivation in the Sierra in many instances have not greatly advanced

beyond those in use at the time of the Spanish conquest in the 16th

Century. The small Indian farmer cultivates all of his land, which

has become relatively unproductive through centuries of use, whereas

the estate owner leaves a considerable part of his land unused [23].

In neither instance have modern methods been adopted to any marked

degree. This is not to say that agricultural production is necessarily

inefficient, but that it has been unable to keep abreast with the

requirements of an expanding population and economy [42].








The agricultural sector contributes substantially to export

earnings, domestic food requirements, and employment. Until the early

70's and before petroleum was discovered, agriculture accounted for

90 percent of Ecuador's export earnings, principally from bananas, cocoa,

coffee, and sugar [42]. Domestic agricultural output currently supplies

about 85 percent of the country's food needs and many of the agri-

cultural products required for industry. Crop and livestock production,

forestry and fishing provide a livelihood for over 50 percent ,of the

economically active population. Additional indirect contributions are

made to employment by the food and beverage processing industries

which account for 55 percent of the value of manufactured products [54].

Food consumption in Ecuador is below minimum nutritional standards

and is well under the average for Latin America. Present food con-

sumption levels indicate a large potential demand for all food products,

especially the more nutritious foods such as meat and dairy products;

filling the large potential demand will depend upon supply and income

factors in the years ahead. General estimates of income elasticities

made by the FAO indicate ranges from 0.1 for tubers and 0.4 for sugar,

to 0.8 for meat and dairy products, and 0.9 for fats and oils [42].


Potato Production

Among the domestically produced and consumed farm products grown

in Ecuador, potatoes are one of the most important. Since there is no

significant export or import movement, nor alternative uses for the

potato crop, potatoes are used to satisfy domestic consumer demands. In

the highlands, estimated annual per capital consumption of tubers, of








which potatoes are the predominant item, is 660 grams, making tubers

a dietary staple for a majority of the people living in the highlands

[42, 34]. Of the field crops grown for domestic consumption in 1973,

potato production ranked first in volume and second in value. Of the

819,000 hectares of farm land planted to major domestic food crops in

1973, 6 percent or 43,573 hectares (107,550 acres)'was utilized for

producing 538,769 metric tons of potatoes [75].

Although there are a few very large farms devoted entirely to

potato production, potatoes are grown, for the most part, in

conjunction with other crops on farms of all sizes, from large

estates to subsistence plots. The smaller subsistence farms of five

hectares or less are the only size group which dedicate a major

portion (up to 37 percent) of their land to potatoes. These smaller

producers can be characterized as self-sufficient, marketing only those

quantities of potatoes clearly in excess of their family needs. Thus,

it has been assumed that their planting schedules are relatively

unaffected by price variations [8].

Medium-sized farm owners with more than five hectares cultivate a

variety of crops rather than allocating a large portion of their

holdings to potato production where uncertainty due to low disease

resistance, and large seasonal price variation is prevalent. Additionally,

the per hectare production costs for potatoes are high, thus inhibiting

extensive medium-size farm plantings. The largest haciendas are

usually located at an altitude over 3,000 meters where the low cost of

raising livestock offers an advantageous alternative to potato cropping,

especially in view of the risks associated with potato production.








According to Arevalo, it is on the large and medium-size farms where

production decisions determine the total quantity of potatoes which

are marketed in any given period. When favorable prices occur, the

medium-size farm owner can shift additional land into potato production

more easily than the large hacendado, who must convert pastures to

plantings. However, just the opposite is true when unfavorable prices

occur, as the large farmer may easily convert to additional pasturage,

but the medium-size farm owner is constrained by the market price

situation for alternative crops.

The principal potato production area extends the length of Ecuador,

at 3,000 meters above sea level in a long "canyon" between twin ranges

of high Andean peaks (the shaded area in Fig. 2). The major regions are

distinguished as the northern, central, and southern inter-Andean

basins. The physiological requirements for high yields limit potato

production to this inter-Andean area where daytime temperatures

fluctuate between 150 and 180 centigrade, and where precipitation of

135 mm. to 289 mm. will guarantee proper potato top and tuber formation.

Since precipitation is such an important factor in the growth and yield

of the potato plant, the preferred planting time varies by region

according to the rainfall schedule [2, 3, 4, 8, 55].

The vegetative cycle for potatoes requires about three months,

followed by an equal period for proper tuber formation. Thus, most

potatoes are harvested as near to the seventh month of their life cycle

as possible. Among the larger producers who have access to improved

seed varieties, fungicides, insecticides and irrigation, the production

season is reportedly almost year-round [30]. Smaller producers, however,
















Esmeraldas







0 QUITO


-Pichincha

Manabi


Cotopaxi-



Tungur
Los Rios

0-


2
Guayas 4
U -


Canar













4
Loj a


S( Undem

PERU


Scale 100 km.

Figure 2. Map of Ecuador and the study area.

Source: Based upon [51].








still cling to their traditional planting periods, and each major

producing region displays slight differences in the preferred month for

planting (Table 5).

The regions are further distinguished by their soil types, culti-

vation systems, and product markets. According to Arevalo, the northern

zone has demonstrated an expanding production due to increased yields

and has been more adversely affected by price variations than the other

regions. This condition reportedly has caused an increasing 'shift to

cereal crops and beef cattle, while the opposite situation in the

Southern Region has led to an extension of the hectarage allocated to

potato production. However, little support for these observations can

be found in the regional production reports (Table 6) [8].


Preferred Months for Planting


The Northern Region apparently shares a bimodal production

pattern with Colombia's Narino province. The major producing province

of Ecuador's Northern Region, Carchi, forms the southern limit to a

natural geographic and ecologic region, the Narino Plateau. As would

be expected, the production-price patterns for potatoes in Tulcan,

Ecuador, and Pasto, Colombia are quite similar.

However, the two northern provinces of Carchi and Imbabura account

for only 17 percent of Ecuador's potato production. The greatest

amount of cropland and resources allocated to potatoes is concentrated

in the Central and Southern Andean Regions. Production is divided evenly

between the two regions, with each region accounting for approximately

40 percent of the national production. In the Central Region production









Table 5. Preferred month for planting potatoes in the Northern, Central,
and Southern Highlands of Ecuador by percentage of farmers
interviewed, 1974


Month North Central South

.----------------(percent)----------------

January 5 7 2

February 6 5 2

March 4 8 5

April 5 10 10

May 20 15 18

June 6 9 10

July 4 5 7

August 5 8 5

September 1 6 5

October 15 8 16

November 17 10 13

December 12 9 7


Total 100 100 100


Source: [8, 79].













Table 6. Average yearly potato production, area harvested, and yield by region, Ecuador, for periods
1962-67 and 1968-73.


Region


North


Central


South




North


Central


South


Source: [50, 62].


Production


1962-1967 1968-1973

Metric tons

44,170 93,930


144,818 218,076


158,430 229,945


Percent of total

12.8 17.7


42.2 40.2


45.0 42.1


Area


1962-1967 1968-1973

Hectares

4190 5485


12658 14603


23028 25282


Percent of total

10.5 12.5


32.7 32.2


56.8 55.3


Yield


1962-1967 1968-1973

Quintals/Ha

229 372


249 325


150 198


Percent increase

62.4


30.5


24.2


----








is concentrated in Pichincha, Tungurahua, and Cotopaxi provinces while

in the Southern Region it is concentrated in the provinces of Chimborazo

and Canar.

In contrast to the strictly bimodal production pattern in the

Northern Region, the crop year appears to be more extended in the Central

Region, allowing for almost year-round production. The season is

limited only by the relatively dry period during July and August,

according to Arevalo's survey of producers in the three central provinces.

The Southern Region's seasonal price pattern suggests a planting season

quite similar to the Northern Region. This can be partially explained

by the relatively low level of technology which characterizes potato

production in the Southern provinces, thus producing a more traditional

approach to the planting season.

Reasons for selecting a particular month as best for planting

potatoes varied substantially from one region to another, although the

traditional concern for weather and disease avoidance easily outweighs

other reasons as the farmer's primary concern.13 The dual concern for

weather and disease avoidance is not accidental, since a particularly

virulent potato fungus attacks the plant only when certain weather
14
conditions prevail. Late Blight, called lancha in Ecuador, is almost

always present in the fields, and the fungus will flourish when there

is a cold spell (or night) accompanied by rain or heavy dew, followed by

a rise in temperature (the following day), with continued humid, moist

conditions [69]. Such weather patterns are more prevalent at



13See Appendix Tables A-37, A-38 and A-39.
14Phytophthora infestans (Mont) De Bary.








certain periods of the year according to region, and it is apparently

the primary concern for many farmers, especially the medium and large

sized commercial growers who cannot afford more than a few applications

of fungicides. Additional precautions in selecting a suitable month

for planting must also be taken to avoid frosts, hail, and drought.

Figure 3 shows the average precipitation pattern for the Sierra Region

throughout the year. The most noticeable difference by regions is

observed in the Southern area of the Sierra (from Ambato, southwards)

where a definite dry period appears from October through December.


Movement of Production to Market


Varying supplies of potatoes are delivered to the large urban

centers in an approximately continuous, year-round pattern, although

a one-month delay or short fall in any given month's regional production

could combine with a naturally low supply period nationwide to produce

significant national shortages for a short period [30]. Or a regional

crop slightly early or late might coincide with another regional

harvest, causing a glut in the market place. Figure 4 illustrates

the estimated arrival of regional harvests in urban centers based upon

the regional schedules for planting potatoes, as indicated in Table 6.

This pattern of regional potato production corresponds reasonably well

with average monthly prices for an 18-year period. Averaging prices

over such a long period, however, is somewhat misleading in that it

reduces the severe monthly price differentials caused by coincidental

shortages or surpluses.










Latitude

10


N


Equator 00


S


Month
M A M J J A S O N D


City



Tulcan

Ibarra



Quito





Ambato





Alausi




Cuenca


Loja


J F M A M J J A S O N D

Rainy period


Figure 3. Rainy period in the Highlands Region, Ecuador.


Source: [25]















S./qqa Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec MT/mo.b


I
/
I
I
86 \ Southern / National Average 20,000
\ Production Wholesale Price /
/


83\
8 3' _" I
\\ / \ 15,/000

80 / Production
80/ \- -./

S. 10,000
I
77 *' ,


/ /' 5,000
74 c
/ Northern Production
>y'--ll 1


Figure 4.


National average monthly wholesale price and estimated monthly market arrival For potatoes by
region in highland Ecuador, 1962-72.


Source: Calculated from [29, 50, 62, 79].

aSucres per quintal, from Appendix, Table A-8.
bMetric tons per month, from Appendix, Table A-11.








The process utilized to get a potato crop from the field to the

consumer is determined by the size of the crop. Small scale farmers

customarily sell their produce in local marketplaces on a regularly

designated market day, either directly to the consumer or to the owners

of small warehouses. Oftentimes, a special wholesale area or market-

place has been established where larger quantities of potatoes may

be purchased from the farmers by the warehouse owners (or their agents).

The warehouses and storage bins can usually be found on streets

immediately adjacent to the main plazas [14].

Larger scale farmers usually sell their crop unharvested to field

buyers or warehouse owners from the nearby cities. Usually, the buyer

will pay only 10 to 20 percent of the agreed upon price at the time of

harvest, and will pay the balance during the following 60 days. ihen

purchasing in the field, the buyer will usually bring his own harvesting

crew, although large producers in Cotopaxi, Chimborazo, and Canar

Provinces have maintained the custom of harvesting their own fields

(probably due to the great surplus of available cheap labor in the area).

Large warehouse owners (or their agents) provide their own transport, V/

hauling the crop immediately to the nearest large city, or to the

largest metropolitan centers where they can obtain more favorable

prices [14,44]. Occasionally, large scale producers will contract for

part of their crop to be harvested and transferred by an area trucker

who employs a harvesting crew. The owner will then sell additional

sections. tablass) of the field to individual wholesalers (or field

buyers), each with their own small crew of 5 to 8 potato diggers.









Once the potatoes reach the urban centers, they may be sold

directly to the public (in the market places), but most often they are

purchased by a second group of wholesalers or brokers, who in turn sell

the potatoes to retailers (or to the public). Quite often, the potatoes

are received on consignment, and the consignee may try to expand his

sales opportunities by offering commissions to street salesmen.

Retailers who sell their potatoes in 100 pound sacks can expect to

handle from 10 to 100 sacks per week, while those who sell by the pound

(smaller neighborhood shop owners) can only expect to handle from 1 to

20 sacks per week [1, 14, 32],

Due primarily to the high production.costs (especially when heavier

than usual applications of fungicide are required) and the relatively

small amount of available bank credit, producers often sell their crops

prior to harvest to acquire additional working capital. And in the

provinces of Chimborazo and Canar, a form of sharecropping is still

prevalent in some zones, where the large landowner furnishes the land

and potato seed, while a businessman will furnish the tractor, fertilizer,

and laborers. Under such a contract (called aparceria), the crop is

subsequently divided evenly between the two [14].

In a 1974 study of potato marketing in Pichincha Province,

Maldonado concluded that the potato production-distribution system in

that area is characterized by complete freedom of entry and exit. He

found no evidence of widespread speculation (due perhaps to the highly

perishable nature of the product and the complete absence of adequate

potato storage facilities), nor any relation between potato price

fluctuations and the cost of transporting potatoes [44].






46


The movement of potatoes from the areas of major production to

those of major consumption is apparently restricted only by the condition

of the roads and the price expectations of the seller. Figure 5 indi-

cates the direction of market flows and provides an estimate of the

volume of potatoes moving from the production areas to major cities

[39, 40, 46, 59].





47




N
COLOMBIA

Esmeraldas
STulcan


SIbarra -..
PACIFIC \ C ( \




Sto. Domingo O 4-- Q Uto



Portoviejo uevedo
Ilanta < / v Latacunga



Ambato
/ 'I

/Babahoo iobamba

Guayaquil
Principal zones of production

Sfuenca Major transactions
4/> Medium transactions



VI
OCEAN / -- Minor transactions
"1/ achala


SLoja t Cities of 500, 000 to 1,00, 000 pop.

O Cities of 20, 000 to 100, 000 pop.
%

I

I. /
PERU U / t


Figure 5. Market flow of potatoes in Ecuador, 1973.

Source: [14]













CHAPTER IV


ANALYSIS OF STORAGE AND SUPPLY MANAGEMENT POTENTIALS


Price Variation


The degree of cyclical and seasonal potato price variation in

Ecuador described in Chapter I and the cyclical movement of prices for

potatoes in several countries (Table 1) shows little difference on an

international level and points to the probability of a common economic

characteristic for potatoes, i.e., inelasticity of demand.

The impact of potato price variation in Ecuador may be examined

from many different perspectives. Price variation may stimulate pro-

ducers to grow alternative crops, alter their production practices or

may be a reason per se for investment in storage. In this analysis,

price variation was examined primarily as an incentive for the government

to develop price stabilizing schemes. After examining the intensity of

potato price variation, potato storage potentials were analyzed on

national and regional levels, with a final consideration given to

possibilities for reallocation of supply on a national basis with trans-

port and storage.


Among Highland Crops--Risk

Based on producer responses, 70 percent felt that they had experienced

considerable losses in the last few years and 80 percent felt that price













CHAPTER IV


ANALYSIS OF STORAGE AND SUPPLY MANAGEMENT POTENTIALS


Price Variation


The degree of cyclical and seasonal potato price variation in

Ecuador described in Chapter I and the cyclical movement of prices for

potatoes in several countries (Table 1) shows little difference on an

international level and points to the probability of a common economic

characteristic for potatoes, i.e., inelasticity of demand.

The impact of potato price variation in Ecuador may be examined

from many different perspectives. Price variation may stimulate pro-

ducers to grow alternative crops, alter their production practices or

may be a reason per se for investment in storage. In this analysis,

price variation was examined primarily as an incentive for the government

to develop price stabilizing schemes. After examining the intensity of

potato price variation, potato storage potentials were analyzed on

national and regional levels, with a final consideration given to

possibilities for reallocation of supply on a national basis with trans-

port and storage.


Among Highland Crops--Risk

Based on producer responses, 70 percent felt that they had experienced

considerable losses in the last few years and 80 percent felt that price













CHAPTER IV


ANALYSIS OF STORAGE AND SUPPLY MANAGEMENT POTENTIALS


Price Variation


The degree of cyclical and seasonal potato price variation in

Ecuador described in Chapter I and the cyclical movement of prices for

potatoes in several countries (Table 1) shows little difference on an

international level and points to the probability of a common economic

characteristic for potatoes, i.e., inelasticity of demand.

The impact of potato price variation in Ecuador may be examined

from many different perspectives. Price variation may stimulate pro-

ducers to grow alternative crops, alter their production practices or

may be a reason per se for investment in storage. In this analysis,

price variation was examined primarily as an incentive for the government

to develop price stabilizing schemes. After examining the intensity of

potato price variation, potato storage potentials were analyzed on

national and regional levels, with a final consideration given to

possibilities for reallocation of supply on a national basis with trans-

port and storage.


Among Highland Crops--Risk

Based on producer responses, 70 percent felt that they had experienced

considerable losses in the last few years and 80 percent felt that price








fluctuation was the major causal factor (see Appendix Table A-12).

Furthermore, the degree of variance in yield, price, and value among

highland crops indicates that there is a greater amount of risk

associated with growing potatoes than with other Sierra crops. By

measuring the standard deviation of changes in price, yield, and value

per hectare from one year to another, an indication of the relative risk

involved in growing each crop can be established [41].. Table 7 shows the

annual variability.in value per hectare, yield, and price for,,several

alternative Sierra crops. Although barley and potatoes are affected

almost equally by those factors influencing yield, their respective

values per hectare are substantially dissimilar. This is apparently

caused by the much greater degree of price variability in the case of

potatoes, whereas the price for barley remains relatively stable. This

may be due to the highly perishable nature of potatoes in the post-

harvest marketing stage.


Within and Between Market Cities

Potato price variation within the five major market reporting cities

was the stimulus for the present study. Monthly price variation and the

cyclical price pattern have been characterized as excessive and aggra-

vating by consumers, producers, and national economic planners. The

degree of correlation between the monthly potato prices for several

market cities was calculated. The matrices of correlation coefficients

are based on the 1962-72 .series of wholesale prices. A measure of the

significance of price variation between months on a national level is

included below in the discussion of storage.












Table 7. Annual variability of value per hectare, yield, and wholesale price of four alternative
highland crops, Ecuador, 1962-72


Annual Variabilitya

Crop Value per hectare Yield Price

---------------------------(percent)--------------------------

Potatoesb 62.5 42.5 44.5

Corn 41.3 41.1 19.3

Wheat 33.0 28.7 9.8

Barley 43.1 35.6 18.1


Source: Calculations based upon data from [29, 41, 50, 62] and Appendix Tables A-i, A-2, A-4, A-5, A-6
A-7, A-13 and A-20.

aMeasured by subtracting annual prices, yields, and values per hectare of 1962-72 from preceding year's
prices, yields, and value per hectare; then computing the standard deviation of these changes and
expressing it as a percentage of the average price, yield, or value per hectare for 1962-72.

bCompare with the estimate of risk associated with U.S. potato production during the 1918-40 period;
Value per acre--46%, Yield--9%, Price--53%. [41]








Potato price variation between market cities was examined by

generating the coefficients of correlation between the cities for each

year in the 1962-72 series, and for the entire series broken into two

subgroups (Table 8). The 1962-69 prices were analyzed to examine

variation between cities prior to the completion of a new major highway

linking the Northern and Central regions and prior to instituting a new

price reporting system. Subgrouping the routine increased the degree

of correlation for recent years, although prices in Cuenca remain com-

paratively less correlated to those in other cities. It would be

difficult to define with accuracy the reasons for increased correlation

in prices between the major cities for the two periods without additional

investigation; however, some.major reasons could be:

1. Improved communication between cities, both terrestrial
and verbal;

2. Gradual dispersion of the Santa Catalina potato variety
with subsequent standardization of the growing season
between regions; and

3. Gradual implementation of the year-long planting
seasons due to the Santa Catalina variety and
abandonment of traditional seasons and varieties.

Ramifications of the variation in price between major market cities are

discussed below in reference to storage with interregional transport.


Forms of Storage and Costs


Potato storage research in Ecuador has concentrated upon methods

utilizing chemical germination inhibitors [20]. Major emphasis was

placed upon the determination of potential length of storage using

different inhibitors and the costs associated with each. Although

alternative storage methods have been reported in conversations with









Table 8. Correlation (r) matrix for
potatoes, selected cities,


monthly wholesale price of
Ecuador, 1962-72.


Period 1962-1969 (n=600)
Market Tulcan Quito Guayaquil Ambato Cuenca



Tulcan 1.00 0.75 0.75 0.38 0.50

Quito 1.00 0.93 0.37 0.75

Guayaquil 1.00 0.43 0.70

Ambato 1.00 0.12

Cuenca 1.00


Period 1971-1972 (n=120)
Market Tulcan Quito Guayaquil Ambato Cuenca



Tulcan 1.00 0.98 0.97 0.97 0.89

Quito 1.00 0.99 0.99 0.86

Guayaquil 1.00 0.99 0.85

Ambato 1.00 0.88

Cuenca 1.00









potato specialists, only one of these has been observed by the author,

and none have been described in the literature. According to some

technicians, there is widespread use of open pit storage in fields where

the potatoes are harvested. This may occasionally be in a small

depression only, where the potatoes are covered by a mulch composed of

dry brush and dead potato plants. Potatoes stored in such a pit, however,

are not for sale since they will be used for seed as soon as growing

conditions permit. Thus, pit storage seems to be primarily a method to

avoid backhauling seed potatoes to the planting site.

Farmers in the Cayambe region north of Quito reportedly store

potatoes in caves excavated under carefully selected hillocks, where

surface water can be directed to the ground surface over the caves and

allowed to filter down into the cave roof and walls, thus cooling and

moisturizing the storage chamber. Although no such storage chambers were

observed by the author, reliable sources testify to their existence, but

the amount of potatoes stored in such caves was indeterminable.15

A third storage method reported to be popular among Carchi farmers

is to store potatoes in a loft over the house or kitchen (i.e., soberado)

for seed and household consumption, although the potatoes may also have

a limited impact on commercial supplies.

Francisco Citelly, agricultural engineer at the University of Narino

in Pasto, Colombia, recently designed and tested a low-cost, forced night

air storage facility for potatoes in the Colombian highlands [19].




15Portilla Rocha, Fabian, Director. National Institute of
Agricultural and Livestock Research (INIAP), Quito, Ecuador, personal
conversation, 1974.









Where the required number of nights with temperatures below 80 C are

present and where relative humidity remains near 80 percent, potatoes

may be stored in the silos up to four months with only minimal weight

loss (1.5 percent of product value at time of sale from storage) and

with no appreciable deterioration in appearance. The costs associated

with a four-month storage period, where holding charges total S./9.71

per quintal, are described in the Appendix. Utilizing the rounded

figure of S./10.00 per quintal, the four-month cost can be broken into

a monthly storage charge, to estimate the monthly amounts as follows:

1st month storage + in/out costs
40 percent of S./10 S./4.00

Each additional month
20 percent of S./10 x 3 mo S./6.00

Total for four-month period S./10.00

There seem to be no basic differences in climate at the recommended

altitude for storage in Ecuador. Wherever these conditions and the

building specifications are met, potato storage could be instituted for

periods up to four months in duration at an approximate cost of S./4.00

per quintal for the first month and S./2.00 per quintal for successive

months. For analytical purposes, these data are used as bench marks.


National Storage Potential

Analysis of historical price behavior allows some inferences about

the future price situation for potatoes and the feasibility of storage

at the national level. The monthly wholesale price average for potatoes

in constant 1970 sucres for a period of 18 years was analyzed (Table 9).

By comparing any base month in the left hand column with any subsequent

month indicated in the top row of Table 9, one may determine the average












Table 9. Average monthly wholesale price differential between subsequent months for potatoes in Ecuador,
1954-72, in constant 1970 sucres per quintal


Base month


January

February

March

April

May

June


Jan

Jan


Feb

2.17

Feb


Mar

4.72b

2.22

Mar


Apr

2.67

-0.28

-2.06

Apr


May

-2.56

-5.061

-7.28a

-5.221

May


Subsequent months

Jun Jul

-0.22 -0.28

-2.66 -2.77

a -4.78b -5.00b

b -2.72 -2.94

2.50 2.50

Jun -0.22


July Jul ..ii 0./z a. o.UZ 3. 5

August Aug 3.61 5.11b 3.17 0.44

September Sep 1.50 -0.44 -3.17

October Oct -1.94 -4.67b

November Nov -2.72

December Dec


aSignificantly different from base month mean price at .05 level (i.e. 5.36+).

bSignificantly different from base month mean price at .10 level (i.e. 4.22+).


Sep

6.45a

3.95

1.72

3.78

9.00a

6.50a
,a


Aug

2.83

0.33

-1.89

0.72

5.39a

2.89


Oct

7.95a

5.45a

3.22

5.28b

10.50a

8.00a
Sa


Nov

6.00a

3.50

1.28

3.33

8.56

6.06a
Sa


Dec

3.27

-0.77

-1.17

0.61

5.83a

3.33








constant price differential between the two months. For example, the

average constant price differential between January and March is shown

as S./4.72 per quintal. The price differentials which demonstrate a

measurable degree of variance at two separate levels of significance

have been outlined in Table 9.

From this analysis of monthly price differentials for potatoes,

additional confidence is generated to support the observation that a

significant difference exists between the low prices in May, June, and

July and the rising postharvest prices in the later month of September,

October, and November. If storage is feasible at all on a regional

basis, this analysis then suggests that the positive and significant

values in Table 9 depict periods when the storage potential is greatest.

Negative and significant values further document price variability but

depict the downward movement in prices when storage would only aggrevate

the problem.

However, potential national short-range storage based on the

indicated price differentials is not encouraging (Fig. 6). In spite of

the "statistically significant" variance in average national monthly

potato prices, their range from S./75.00 in May to S./85.00 in October

does not appear to offer sufficient margin to stimulate investment in

storage, which is estimated to cost at least S./10.00 at 1972 prices per

four-month period.

Aggregate potential profit margins for potato storage at the

national level, again based on 1954-72 data, further suggest a pattern

for when storage is needed and potentially feasible (Fig. 7). The

difference between the wholesale price and the purchase price with














S./qq Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec


85


National monthly wholesale price of potatoes

80





75
SI I | I p I I




-------- - ---------------- ----

tL.--------------------------------------- ----- -

Solid line indicates potential uninterrupted ,__
short range storage. a

Broken line indicates potential storage for
long range storage conditions only.






Figure 6. Potential short range storage based upon significant monthly wholesale price variance of
potatoes in Ecuador for period 1954-72.

aShort range storage limited to maximum four month period, in forced, night-air sheds.






58





S./qq


July through October /




2 II

January through March '













I June through September
1 / 1


\/ ii








Note: The profit margins were calculated as the average constant
-2
iI






















sucres (s./) per quintal.
Noe hepoi mris eeclcltd steavrg cntn

ucre (s./ perAuguntal









storage costs included produces a series of positive and negative margins

dependent upon the length of storage. The greatest storage profit

potential apparently lies between the months of July and October, although

potatoes stored through October to November remain a profitable venture.

For determining storage feasibilities, however, it is important to

question the validity of measuring national price variation from

deflated price averages based on time series data. Although the averages

indicate long-run conditions, and help to reduce the effect of short run

fluctuations, they obscure the actual price situation faced by producers

and consumers on a week to week basis. Nor do the national average prices

accurately reflect local, provincial and regional conditions, where

temporary differences in supply and alternate demand schedules based upon

local varietal preferences may be incorporated into the price structure.

The effect of these differences and others, such as regional differences

in yields, supply of labor and transportation at harvest, and factor

input costs are implicitly examined in subsequent sections of the

analysis. However, to complete an examination of potato storage

potential on a national level, and thus determine the degree of incentive

for application of the analysis to a less aggregate local level, the

non-deflated price series for potatoes was analyzed.

By determining historical periods based on real prices when storage

would have been economically feasible, a storage pattern was identified

which more accurately depicts the impact of time differentials on

storage needs at the national level. Using only those periods in which

storage could have profitably occurred, the national storage potential

was calculated for each year of a representative 10 year span which








included three complete price cycles (Fig. 8). Using Citelly's low cost

storage estimate of S./10.00 per quintal as a bench mark, each period of

storage was allowed to "creep" forward as long as the subsequent prices

exceeded the storage costs.

Although the analysis is based upon perfect previous knowledge of

price movements, the results even under these ideal conditions are not

supportive of the popular belief that potato storage is a business

venture that would guarantee consistently high profits. With perfect

previous knowledge of price movements, the data indicated a difference

of only S./20.00 between the average low and high prices, for an average

storage period of approximately three months (Table 10). When the

estimated costs for storage during each time period are subtracted from

the average price differential, very little remains as an incentive, much

less as a margin or hedge, against unforseen changes in price.

Thus, even though month to month price variability appears to be

significant on a national basis, the margins for profitable storage appear

to be insufficient for a national storage program. This does not pre-

clude the possibility that regional storage could be feasible due to the

unique characteristics of regional demand and supply which may negate

potential benefits of interregional transport and national storage of

potatoes.


Provincial and Regional Storage


Although calculation of potential storage profits on a national basis

indicated only limited prospects for successful commercial involvement in

such a venture, the positive margins did show that perhaps greater

potential exists at either regional or local levels.








S./QQ
100




90




80




70




60





50




40




30


1962 1963 1964 1965 1966 1967 1968 1969
8. Wholesale potato prices showing potential storage periods, Ecuador, 1962-72.
data for 1970 are not available.


Figure
aPrice


1971'


1972
















Table 10. Average price'differential in sucres per quintal between
1962-71, and profit margin after storage


low- and high-price periods for potatoes, Ecuador,


Low pricea High priceb Price Period of Constant price Storage cost
Year Range Average Range Average Differencec storage difference for length Profit margin
(1970 = 100) of storage


-----------------sucres per quintal------------------ months -------------sucres per quintal---------------

1962 37-44 40 51-60 56 16 3 25.20 6.71 18.49
1963 51-58 55 66-69 68 13 3 18.95 6.71 12.24
1963 69-69 69 80-80 80 11 4 16.03 8.38 7.65
1964 55-63 59 66-73 70 11 3 15.30 6.71 8.59
1965 39-39 39 49-50 49 10 4 13.48 8.38 5.10
1965 44-65 50 65-80 72 22 3 29.65 6.71 22.94

1966 60-60 60 74-79 76 16 3 19.88 6.71 13.17
1968 46-51 49 58-64 61 12 4 13.62 8.38 5.24
1968 46-64 54 58-87 73 19 3 21.57 6.71 14.86
1969 74-81 77 85-100 94 17 3 17.56 6.71 10.85
1971 29-40 35 46-53 49 14 3 13.15 6.71 6.44
1971 41-85 56 61-108 90 34 3 31.92 6.71 25.21


aAverage low price for potential "into storage" period.

bAverage high price for potential "out storage" period.

CSimple difference, between high and low limited to four month maximum spread.
dFigured from first month "in storage" to middle month of "out storage," with minimum S./10 difference.


eFirst month of storage = 40% x S./8.38; each additional month
constant (1970) sucres.


add 20 percent of S./8.38, which is cost of storage in









Provincial Potentials

The maximum allowable investment in storage was calculated for

provinces in the Central Region as an indicator of storage profitability

at the regional rather than national level (Table 11). This approach

involved inclusion of.production costs to specify a production-storage

feasibility. The only region with sufficiently accurate production cost

data for this analysis was the Central Region. Separate estimates of

production costs were used in order to include a wide range of levels of

technology and farm size.16 Alternative I represents a technified,

highly-mechanized system, with heavy chemical inputs [61]. Alternative

II is based upon actual field surveys made by Arevalo in 1971 in the

Central Region for medium size farms [8]. Alternative III is based upon

a 1962 experimental plot set up in Pichincha province by Torres, and it

offers a basis for comparison with the other models [73].

To determine the average storage potential by province, the market

price for potatoes in each province was calculated over the 1962-72 period

by averaging the available market city data. The prices for Pichincha

and Cotopaxi provinces were calculated by averaging the price series for

Quito and Ambato. The Tungurahua prices were established from the Ambato

price series. Thus, a series of wholesale prices was generated for a 10

year period (1970 was omitted due to lack of data) for each province.

To determine the amount of potatoes marketed each month, Arevalo's

survey of potato farmers indicating their preferred month for planting,

was utilized [8]. Seven months were allowed for the planting-to-market




16A detailed description of each cost estimate may be found in the
Appendix, Tables A-'14, A-15, and A-16.









Table 11.


Estimated maximum allowable investment in potato storage
by province in the Central Region, Ecuador, 1962-72, in
sucres per quintal


Cost of production Pichincha Cotopaxi Tungurahua
alternative



I Schwartz 4.27 10.88 4.58


II Arevalo 9.34 15.07 .9.56


III Torres 5.42 11.83 5.71









period, and the estimated amount of potatoes marketed in each month was

calculated by multiplying the percentage of preference for a given month

by each year's estimate of potatoes harvested. Thus, a series showing

the estimated amount of potatoes marketed every month in each province

was generated for the 1962-69, 1971-72 periods.

The market price series was multiplied by the monthly production

(converted to quintales) to determine a total monthly expenditure, which

was then converted to a measure of estimated annual expenditure for

potatoes by province to calculate the average annual prices.

The alternative costs of production per hectare were deflated to

produce a 10 year series and were then converted to cost per quintal by

dividing through with each year's yield, by province. Thus, a real-cost-

of-production series was established for each alternative and for each

province in the Central Region over the 10 year period. Maldonado's

estimated cost of distribution within the region (from the farm to

wholesale level) was deflated and added to each year's estimate of

production costs [44]. Subsequently, the combined production and

distribution costs for each year, province, and alternative cost of

production were subtracted from the average annual price. The constant

amounts calculated for each province and year were averaged, and the

regional potential for storage was thus determined for each alternative

cost of production.7




17The procedure outlined above to estimate the maximum amount
which could be invested in storage is described mathematically in
Chapter II.









The estimates of the maximum amount which could be invested in

storage by each province are shown in constant 1970 sucres. The range

of allowable investment in storage from S./4.27 to S./10.88 per quintal,

utilizing Schwartz'.cost of production estimates, tends to corroborate

the analysis at a national level. After subtracting storage costs, very

little profit would remain as an incentive for private commercial interest

in potato storage, at least in the Central Region. Accurate production

and distribution cost estimates for the Northern and Southern'regions

were not available at the time this study was made, however, their

introduction into the model might produce greater storage investment

incentives, especially in the Southern Region where production costs are

assumed to be lower due to surplus labor conditions.


Regional Potentials

Although regional storage profit margins appear too low to stimulate

private investment in storage, the costs and benefits associated with a

program which would stabilize the supply were calculated. The volume of

potatoes and length of storage in each region required to stabilize the

monthly supply were estimated using the survey in which producers indi-

cated their preferred month for planting. Assuming a constant monthly
18
requirement of 8.33 percent of annual production,8 a storage schedule

for each region was drawn, showing the percentage of potatoes which




18The monthly requirements are not actually constant, due to
the increased seed requirements during the heavy planting months;
however, increasingly the seed is being supplied from specially
inspected farms which produce only certified improved seeds.








must be stored each month in order to maintain a constant supply.19

To achieve a stable supply at the least cost, the use of Citelly's

forced night air storage system was required, thus limiting the storage

period to a maximum of four months. Figures 9, 10, and 11 show the

percentage of annual production and length of storage required to

stabilize the supply for each region. In constant 1970 sucres, such a

program would have cost an estimated S./5.00 to S./9.00 per quintal in

1972, depending upon the region, with a total storage requirement of

70,797 metric tons (Table 12). However, at no time would monthly

storage requirements have exceeded 16,790 metric tons (during a maximum

4 month storage period) in any region, which was only 3.6 percent of

the national annual production. The monthly quantities of potatoes

moved into and out of storage in each region and the estimated storage

costs for each quantity are shown in the Appendix, Tables A-25 through

A-30.

When the benefits were calculated for a "typical year" by

subtracting the total revenue of the stored potatoes at the harvest price

from the revenue produced by holding them for later sale (in order to

stabilize the potato supply to consumers), the benefits were small, and

in the Central Region, a negative value appeared (Table 12). These

values would have been higher if the requirements for a completely stable

monthly supply and the maximum four month storage period had been relaxed.

Given these requirements, in a typical year, the expected profit from




19Mannarelli's study indicates that an average of 70 percent of
the annual potato production was marketed in 1973[46].























































Figure 9. Estimated percent of annual potato production required to
stabilize monthly supply, Northern Highlands, Ecuador, 1972.
a
These estimates of monthly production are based upon moving three month
average of preferred month for planting (Appendix Table A-24) with six
months added for the production season from planting to harvest.

bThis estimate assumes constant demand throughout the year for potatoes
for consumption in all forms, i.e. food, seed, silage, industry.























































Figure 10. Estimated percent of annual potato production required to
stabilize monthly supply, Central Highlands, Ecuador, 1972.
aThese estimates of monthly production are based upon moving three month
averages of the preferred month for planting (Appendix Table A-24) with
six months added for the production season from planting to harvest.
bThis estimate assumes constant demand throughout the year for potatoes for
consumption in all forms, i.e. food, seed, silage, industry.























































Figure 11. Estimated percent of annual potato production required to
stabilize monthly supply, Southern Highlands, Ecuador, 1972.
aThese estimates of monthly production are based upon moving three month
averages of the preferred month for planting (Appendix Table A-24) with
six months added for the production season from planting to harvest.
bThis estimate assumes constant demand throughout the year for potatoes
for consumption in all forms, i.e. food, seed, silage, industry.











Table 12.


Estimated regional costs and benefits for potato storage, Ecuador,
in constant 1970 sucres


1972


Region Quantitya Total Unit Cost Total Unit Net
stored cost benefit benefit benefit

MT S./ S./MT S./QQ S./MT S./QQ S./QQ

Northern 14,954 2,734,640 183 8.41 56,820 3.79 .17 -8.24

Central 26,173 3,251,290 124 5.71 -927,080 -35.42 -1.63 -7.34

Southern 29,670 5,898,090 199 9.14 2,853,920 96.19 4.43 -4.71


Total 70,797 11,884,020 168 7.72 1,983,660 28.02 1.29 -6.11


aCalculated from monthly totals, Appendix Tables A-28 through A-33.

bCalculated from constant average wholesale prices (Appendix, Table A-9) using Tulcan prices for
the Northern Region, Quito and Ambato prices for the Central Region, and Cuenca prices for the
Southern Region.









holding the potatoes for later sale will not offset the costs associated

with such a program. Although profits might be generated in some years,

they would be discounted in subsequent years of losses.

Also, the probable size of the subsidies which would be required

of a government-financed plan to stabilize supply through the use of

a low-cost, forced night-air storage program can be inferred from Table

12. For example, such a program in the Southern Region, where benefits

are highest, would cost at least S./9.14 per quintal, less S./4.43 per

quintal in benefits, leaving S./4.71 per quintal as a loss to be

covered by a subsidy.


National Reallocation: Storage and Transport


The effects of allocating potato supplies equally among months on a

national rather than regional basis was determined using the same

approach as that used for the separate regions. Quantities were totaled

across regions for each month to determine the periods of shortage and

surplus, and a storage scheme was designed to standardize the supply for

consumers (Appendix, Tables A-34, A-35). A total of 51,760 metric tons

was required for storage, at a cost of S./10,369,510 or S./9.21 per

quintal.

Although the total cost calculated at a national level is lower than

the total of the regional costs at S./11,884,020, several important

differences between national and regional storage must be emphasized.

This national approach ignores the transport costs necessary for a plan

which would stabilize the potato supply on a national basis, and does

not allow for the limiting effect of specific regional varietal




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