• TABLE OF CONTENTS
HIDE
 Front Cover
 Title Page
 Preface
 Acknowledgement
 Table of Contents
 List of Tables
 List of Figures
 Reading this report
 List of acronyms
 Part I. Executive summary
 Part II. Main report
 Part III. Appendices
 Reference
 Back Cover














Group Title: CIMMYT economics program working paper ; no. 01/85
Title: Comparative advantage and policy incentives for wheat production in Ecuador
CITATION THUMBNAILS PAGE IMAGE ZOOMABLE
Full Citation
STANDARD VIEW MARC VIEW
Permanent Link: http://ufdc.ufl.edu/UF00080094/00001
 Material Information
Title: Comparative advantage and policy incentives for wheat production in Ecuador
Series Title: CIMMYT economics program working paper
Physical Description: xviii, 99 p. : ill., map ; 28 cm.
Language: English
Creator: Byerlee, Derek
International Maize and Wheat Improvement Center
Publisher: International Maize and Wheat Improvement Center
Place of Publication: México D.F. México
Publication Date: 1985
 Subjects
Subject: Wheat -- Economic aspects -- Ecuador   ( lcsh )
Wheat trade -- Ecuador   ( lcsh )
Agriculture -- Economic aspects -- Ecuador   ( lcsh )
Genre: bibliography   ( marcgt )
non-fiction   ( marcgt )
Spatial Coverage: Ecuador
 Notes
Bibliography: Includes bibliographical references (p. 98-99).
Statement of Responsibility: Derek Byerlee.
Funding: CIMMYT economics program working paper ;
 Record Information
Bibliographic ID: UF00080094
Volume ID: VID00001
Source Institution: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: oclc - 13080015

Table of Contents
    Front Cover
        Front Cover
    Title Page
        Title Page
    Preface
        Page i
        Page ii
        Page iii
    Acknowledgement
        Page iv
    Table of Contents
        Page v
        Page vi
    List of Tables
        Page vii
        Page viii
        Page ix
    List of Figures
        Page x
    Reading this report
        Page xi
    List of acronyms
        Page xii
    Part I. Executive summary
        Page xiii
        Page xiv
        Page xv
        Page xvi
        Page xvii
        Page xviii
    Part II. Main report
        Page 1
        Introduction
            Page 1
            Page 2
        A framework for measuring comparative advantage and policy incentives
            Page 3
            Page 4
            Page 5
            Page 6
            Page 7
            Page 8
            Page 9
            Page 10
            Page 11
        The macro-level policy enviroment in Ecudaor: 1970-83
            Page 12
            Page 13
            Page 14
            Page 15
            Page 16
            Page 17
        The agricultural policy enviroment for wheat in Ecuador
            Page 18
            Page 19
            Page 20
            Page 21
            Page 22
            Page 23
            Page 24
            Page 25
            Page 26
            Page 27
            Page 28
            Page 29
            Page 30
            Page 31
            Page 32
            Page 33
        Wheat in the farming system - the Cayambe area
            Page 34
            Page 35
            Page 36
            Page 37
            Page 38
            Page 39
            Page 40
            Page 41
            Page 42
            Page 43
            Page 44
            Page 45
            Page 46
            Page 47
            Page 48
            Page 49
            Page 50
            Page 51
        Profitability to the nation of wheat production and competing crop-livestock activities
            Page 52
            Page 53
            Page 54
            Page 55
            Page 56
            Page 57
            Page 58
            Page 59
            Page 60
            Page 61
        Conclusions
            Page 62
            Page 63
            Page 64
            Page 65
    Part III. Appendices
        Page 66
        Appendix A. Changes in consumption patterns and consumer pricing policy
            Page 67
            Page 68
            Page 69
        Appendix B.The wheat marketing and milling system
            Page 70
            Page 71
            Page 72
        Appendix C.The world market for dairy products and the relationship between world prices and Ecuadorian prices
            Page 73
            Page 74
            Page 75
            Page 76
            Page 77
            Page 78
        Appendix D. Calculation of mechanization costs
            Page 79
            Page 80
            Page 81
            Page 82
        Appendix E. Budgets for crop-livestock activities to calculate farmer and national profitability
            Page 83
            Page 84
            Page 85
            Page 86
            Page 87
            Page 88
            Page 89
        Appendix F. Institutes and departments providing data and information for the study
            Page 90
        Appendix G. Data on wheat production and utilization
            Page 91
            Page 92
            Page 93
            Page 94
            Page 95
            Page 96
            Page 97
    Reference
        Page 98
        Page 99
    Back Cover
        Back Cover
Full Text
















Comparative Advantage and Policy Incentives
for Wheat Production in Ecuador

Derek Byerlee

CIMMYT's Economics Program
Working Paper No. 01/85









PREFACE


This paper by Derek Byerlee is the first in a series that staff of
CIMMYT Economics Program and research organizations in selected
developing countries will prepare on assessing the comparative advantage
of particular regions in specific crops. The approach features domestic
resource cost analysis. We believe that the approach offers great
promise for those responsible for the allocation of research resources.
We plan to undertake additional studies like that reported on by
Byerlee, expecting that each study will be useful in itself. Beyond
that, the series will provide the experience necessary for the
preparation of a manual that can be used by colleagues to guide similar
work by national programs.


And what can such studies contribute to those responsible for
guiding the allocation of research resources? They provide a convenient
format for assessing the advantages that a given region has in the
production of a particular crop. Beyond that, the format offers an easy
framework for assessing how that advantage might change with changes in
selected policy variables or with the introduction of new technologies.
This information can be combined with that from other sources, e.g. that
frame biological scientists describing what is likely through research or
that from policy makers reflecting society's views of its priorities,
to assist in deciding the relative emphasis to be given to crops or to
regions.


A major advantage of the analytical format is that it permits the
assessment of private profit-taking prices and costs as seen by
farmers--as well as profit to the nation--abstracting from the effects
of taxes, subsidies,- and exchange rate anomalies. With this
information, research managers can speculate on the permanence of
differences between private and national gains and have a stronger sense
of the direction in which research resources should be oriented. This








permits more precise insights into one of the problems that
characterizes research management, that of the lag between the
commitment of resources and the delivery of the product of research.


Three qualities differentiate this effort from that of others who
have applied domestic resource cost analysis to the question of
comparative advantage. The first is that biology is brought to center
stage in the analysis. The second is that the analysis is aimed at
research resource managers rather than at those responsible for policy.
The third is that the resulting manual will be designed so as to offer
easy guidelines for those wishing to apply the analytical framework.


We believe that managers concerned with cost-effective research
will welcome such a tool as an aid to decision making. They will want
to have the capacity to develop such analyses with their own resources
and, therefore, will want the manual that is seen as a major product of
this effort.


Over the next two years we expect to complete six to eight such
studies, covering a wide range of the circumstances typically
encountered by research decision makers. Each will be presented as a
working paper.


This paper is in response to the question of continuing support for
wheat research in the face of steady declines in the area devoted to
wheat. The analysis permits distinguishing the effects of factors
influencing farmer profitability, including the effects of government
policies, and gives evidence of the study region's comparative advantage
in wheat production. The realization that wheat's competitive position
has been eroded by policies of uncertain duration offers support for
continuing research in wheat.


The bulk of the research for this paper was conducted in 1983.
Sane of the conditions in Ecuador have changed since then, but it is my


(ii)








belief that the main conclusions still hold. The paper could not have
been prepared without the active cooperation of many people in Ecuador,
especially in INIAP, in the private and farming sectors, and in CIMMYT's
Ecuador-based regional staff.


As with all CIMMYT working papers, we welcome comments, criticisms,
or counsel so that the paper might be improved.








Donald Winkelmann,
Economics Program


February, 1985


(iii)






















ACKNOWLEDGMENTS



This paper has been prepared as a joint project between INIAP, Ecuador
and CIMMYT, Mexico. Important contributions have been made by INIAP
Staff, especially Carlos Casco, Arturo Figueroa of the PIP, Cayambe,
Patricio Espinosa and members of the Economics Section, and Jaime Tola,
Head of the Wheat Program. Invaluable orientation and encouragement was
received from Jesse Dubin and Patrick Wall of the CIMMYT Andean Regional
Wheat Program. Jos6 Carri6n and Oswaldo Chicaiza assisted in the
assembly of data. Hilda Uribe and Claudia De Alba ably typed several
drafts of the manuscript. Jim Longmire and Scott Pearson provided
valuable comments on an earlier draft. The typing was done by Hilda
Uribe and Claudia De Alba and their excellent efforts are acknowledged.
The graphs were drawn by Jos6 Manuel Fouilloux V. Finally, many thanks
to the farmers, members of the private sector and officials of MAG who
took time to provide information.


(iv)









TABLE OF CONTENTS


PREFACE

ACKNOWLEDGEMENTS

READING THIS REPORT

LIST OF ACRONYMS

Part I EXECUTIVE SUMMARY

Part II MAIN REPORT

1.0 Introduction

2.0 A Framework for Measuring Camparative
Advantage and Policy Incentives

2.1 An Example of Calculating Policy
Effects and Comparative Advantage

2.2 Definition of Terms

2.3 Comparative Advantage in a Dynamic
World

2.4 Data Sources and Analysis

3.0 The Macro-Level Policy Environment in
Ecuador: 1970-83

3.1 The Petroleum Boan, 1970-81

3.2 The Macro-Economic Situation in 1983

4.0 The Agricultural Policy Environment for
Wheat in Ecuador

4.1 Price Policy for Wheat and Competing
Crop-Livestock Activities, 1970-80

4.2 Price Policy for Wheat and Competing
Enterprises, 1980-83

4.3 Price Policy for Agricultural Inputs

4.4 Policies Affecting Capital, Labor and
Water Costs


Page Number

(i)

(iv)

(xi)

(xii)

(xiii)



1


3


4

6


9

11


12

12

16


18


18


28

29


31









Page Number

5.0 Wheat in the Farming System The Cayanbe
Area 34

5.1 Wheat Production Technology 36

5.2 Relative Profitability of Crop and
Livestock Alternatives 44

5.3 Changes in Cropping Patterns in
Relation to Relative Profitability 48

6.0 Profitability to the Nation of Wheat
Production and Carpeting Crop-Livestock
Activities 52

6.1 Assumptions Used to Compute Opportunity
Prices 52

6.2 Results of the National Profitability
Analysis 55

7.0 Conclusions 62

Part III APPENDICES

A Changes in Consumption Patterns and Consumer
Pricing Policy 67

B The Wheat Marketing and Milling System 70

C The World Market for Dairy Products and the
Relationship Between World Prices and
Ecuadorian Prices 73

D Calculation of Mechanization Costs 79

E Budgets for Crop-Livestock Activities to
Calculate Farm Level and Social Profitability 83

F Institutes and Departments Providing Data and
Information for the Study 90

G Data on Wheat Production and Utilization 91

REFERENCES 98


(vi)









LIST OF TABLES


Table


Table



Table


Table


Table



Table


Table


Table


Table


Table



Table


Table


Table



Table


Table


1.


2.



3.


4.


5.



6.


7.


8.


9.


10.



11.


12.


13.



14.


15.


(vii)


Measures of Comparative Advantage and Policy
Incentives

Same Possible Conflicts Between National and
Farmer Profitability at Different Levels of
Technology

Changes in Real Prices Paid to Producers,
1970-80, 1980-83

Import Tariffs for Wheat and Canpeting Crop-
Livestock Cacmodities, Ecuador

Estimated Costs in 1983 of Imported Wheat in
Ecuador Based on Expected Long Run CIF Price
of US$210/ton.

Estimated Costs in 1983 of Imported Urea Based
on Expected Long Run CIF Price of US$190/ton.

Practices Used in Wheat Production; Small and
Medium Size Farmers, 1977

Practices Used in the Production of Wheat in
Pichincha by Farm Size, 1982

Distribution of Area of Wheat by Farm Size
Strata, Pichincha, 1982

Comparison of Costs of Mechanical and Animal/
Manual Practices in Wheat Production, Cayambe,
1983

Labor Intensity of Different Techniques for
Wheat Production

Partial Budget for Recamended Fertilizer
Application (80-80-0 kg of NPK/ha)

Farmer Profitability of Wheat and Competing
Enterprises Under Different Assumptions,
Cayambe, 1983

Estimated Returns to Land in Wheat, Potatoes
and Dairy in 1971 and 1983

Opportunity Prices Used for National Profitability
Analysis Compared to Actual Farm Prices


Page Number


8



10


20


23



30


33


38


40


41



41


43


43



47


50


56









Page Number


Table



Table


Table



Table




Table



Table


Table

Table


Table


Table


Table


Table

Table


(viii)


16. Estimated Profitability to Farmers and to the
Nation of Wheat and Competing Enterprises at
Recommended Technology Levels, Cayambe, 1983

17. Summary of Main Policy Effects by Enterprise,
Cayambe, 1983

18. Comparison of the National Profitability of
Wheat and Dairy Under Alternative Assumptions
Regarding Productivity, Cayambe, 1983

19. Comparison of National Profitability of Wheat
and Dairy at Improved Technology Levels Under
Alternative Assumptions About World Prices
for Wheat and Milk

20. Summary of the Ratio of Foreign Exchange, Labor
and Capital Costs to the Value of Output at
Improved Level of Technology

Al. Summary of Consumption Patterns for Main Food
Staples and for Milk

A2. Wholesale Prices in the Quito Market, June, 1983

Cl. Self-sufficiency of Ecuador and Neighboring
Countries in Milk Products, 1979-81

C2. Retail Prices of Milk and Milk Products in
Selected Latin American Countries, 1981

C3. Stocks, World Trade and Prices for Milk and Milk
Products

C4. Nominal Protection Coefficients for Milk, Butter,
and Wheat, 1970-83

Dl. Parameters Used to Calculate Machinery Costs

D2. Cost of Tractor and Combine Harvester Operation
Under Different Assumptions Regarding Foreign
Exchange Rates, Interest Charges and Fuel, 1983

El. Input-Output Relations for Crop Activities at
Farmer Levels of Technology

E2. Input-Output Relations for Crop Activities -
Recommended Technology

E3. Input-Output Relationships for Dairying


Table


Table


Table












Table E4.


Table Gl.


Table G2.


(ix)


Calculation of National and Farmer Profitability
at Recommended Technology Levels

Area, Yield, Production, and Utilization of Wheat
in Ecuador, 1964-81

Supply and Utilization of Wheat in Ecuador,
1964-81

Wheat Area by Province, Ecuador. 1976-82

Wheat Yields by Province in Ecuador, 1976-82

Total Number of Wheat Farmers, Wheat Area, and
Average Farm Size in Ecuador, 1970-82

Use of BioChemical and Mechanical Technologies
in Wheat Production in Ecuador, 1970-82

Price Series for Wheat and Wheat Products in
Ecuador, 1970-83

Prices of Inputs Used in Wheat Production in
Ecuador, 1971-83


Table

Table

Table


Table G6.


Table G7.


Table G8.









LIST OF FIGURES


Page Number


Figure


Figure

Figure


Figure


Figure



Figure

Figure


Figure


Figure


Figure


Figure 11.


Figure


Figure


Area, Production and Consumption of Wheat,
Ecuador, 1970-82

Official and Corrected Exchange Rates, 1971-80

Real Costs of Inland Grain Transportation,
1970-83

Producer Prices for Wheat, Milk and Potatoes,
1970-80

Comparison of Average Wheat Price Received by
Farmers with World Price Equivalent Calculated
at Different Exchange Rates

Indices of Real Consumer Prices of Milk Products

Comparison of Producer Prices for Milk with
World Equivalent Price, 1970-83

Carparison of Retail Price of Butter with World
Price Equivalent, 1970-83

Real Prices for Wheat Seed and Fertilizer,
1975-83

Value of Loans (in 1970 Sucres) Authorized by
the Banco Nacional de Famento for Wheat in all
Ecuador and for Livestock in Cayambe

Map of Ecuador Showing Wheat Importing Point,
Consuming Point and Producing Point for the
Study

Technological Change in the Dairy Industry,
Cayambe and Machachi Valleys, 1950-80

Real Retail Prices for Basic Food Staples in
Urban Areas, 1970-82









READING THIS REPORT


This report is written in three different parts. The readers should
select those parts most relevant to their level of interest.





Part I Executive summary of the main methods and results for those
interested in an overview.





Part II Main body of the report in six sections.





Part III Appendices of data and detailed explanations of some aspects
of the analysis for those who may want to review the
assumption and methods in detail.


(xi)









LIST OF ACRONYMS



BNF Banco Nacional de Fomento (National Development Bank)


DI~M Dry Whole Milk


ENAC Ermpresa Nacional de Almacenamiento y Comercializaci6n
(National Agricultural Products Marketing and Storage Campany)


ENPROVIT Empresa Nacional de Productos Vitales
(National Basic Products Ccrpany)


FERTISA Fertilizantes Ecuatorianos, S. A.
(Ecuadorian Fertilizer Company)


INEC Instituto Nacional de Estadistica y Censo
(National Institute of Statistics)


INERHI Instituto Ecuatoriano de Recursos Hidrgulicos
(Ecuadorian Institute of Water Resources)


INIAP


MAG



NPC


PIP


Institute Nacional de Investigaciones Agropecuarias
(National Agricultural Research Institute)


Ministerio de Agricultura y Ganaderia ;
(Ministry of Agriculture and Livestock)


Nominal Protection Coefficient


Program de Investigaci6n en Producci6n
(Production Research Program)


WEIGHTS AND MEASURES


1 quintal (qq) = 100 lbs. = 45.4 kg.
1 liter (It) = 0.26 gallons (US).
1 ton drymilk = 8.33 ton liquid milk.


(xii)









Comparative Advantage and Policy Incentives
for Wheat Production in Ecuador


EXECUTIVE SUM9MRY


Objectives and Methodology


During the last decade wheat production in Ecuador has decreased
sharply at the same time that consumption has been increasing rapidly.
As a result wheat imports have grown at 12 percent annually from 1970 to
1982 and Ecuador now imports over 90 percent of the wheat consumed.
Wheat is now the most important staple food in Ecuador.


These trends raise three questions; a) why has wheat production in
Ecuador fallen and imports increased so rapidly, b) is it an efficient
use of its resources for Ecuador to produce wheat locally, and c) if it
is efficient to produce wheat, what combination of policy incentives and
technological change are needed to promote domestic wheat production.
The broad objectives of this study were to analyze these questions with
particular attention to the effects of government policies on wheat pro-
duction and the implications for INIAP's (the National Agricultural Re-
search Institute) program of wheat research.


The framework of comparative advantage and policy incentives was
used as the basis of the analysis. Comparative advantage was measured by
calculating the profitability to the nation, measured by the contribu-
tion of wheat and competing enterprises to national income. Locally
produced wheat was valued at the equivalent price of imported wheat
while imported inputs were also valued at their import cost with
appropriate adjustments for internal transport and marketing margins.
Labor and capital were valued at their returns in alternative uses
within Ecuador. By conducting similar calculations for competing crop
and livestock enterprises, the returns to the nation of land used in
wheat were compared with alternative uses of that land.


Economic returns calculated by this method often differ substan-


(xiii)









tially from farmers returns because of the effects of policy inter-
ventions. Government policies which set the price, of wheat or subsidize
inputs lead to differences between the import equivalent price and the
price the farmer receives or pays. Similarly interest rates paid by
farmers may be quite different from the opportunity cost of capital. In
fact the difference between farmers' profitability and national profit-
ability is a measure of the total effect of policy that is, whether
policy is providing incentives or disincentives for wheat production.


The Policy Environment for Wheat Production


The major feature of the Ecuadorian policy environment during the
1970s was the increase in oil export revenues. The petroleum boom and
the related management of the exchange rate had a number of effects on
agriculture. The exchange rate was kept fixed even though inflation was
higher in Ecuador than in its main trading partners so that imported
items such as wheat became cheaper in real terms. Incomes grew rapidly,
particularly those of the urban middle class, leading to a strong demand
for food products and especially livestock products that compete with
wheat for land use. Employment also grew rapidly, leading to rapid
rural-urban migration and increased real wage rates in urban areas.
Together with very low fuel prices, this provided a strong incentive for
farmers to mechanize.


Producer prices of wheat in the last decade have declined sharply
in real terms and relative to prices of ccampeting crop and livestock
c commodities. The decline in the price of wheat arises largely from a
policy of linking producer prices to the import price of wheat at the
official exchange rate which became significantly overvalued in the
period 1977 to 1981. In the case of milk production, the most important
alternative use of land, prices were fairly steady in real terms for
much of the decade and appear to have risen in recent years. Milk prices
were significantly above import prices for dry milk at the official
exchange rate and prices of butter and cheese in Ecuador were over
double prices prevailing in nearby countries such as Panama with more
open trade policies. The producer price for barley also rose relative to


(xiv)









wheat, again due to import protection. Prices of potatoes and soft maize
which are not widely traded on world markets were determined by domestic
supply and demand. Increased labor costs and lack of technological
change for these labor intensive crops resulted in relatively rapid
increases in the prices of these commodities. Overall in the period
1970-83 the price of wheat declined 30 percent relative to barley and
about 50 percent relative to milk.


In 1983, the official producer price of wheat was only about 50
percent of the import price equivalent, converted at an exchange rate of
Sucres 80/$US1.00, to reflect the true value of foreign exchange to the
nation. Milk prices were also slightly below import prices and economic
recession, reduced demand and declining real prices for cheese and
butter had eliminated nost of the protection on milk products. Barley
producer prices were below the import price equivalent but less so than
in the case of wheat. The greater price disincentives for wheat arose
from a policy of importing wheat at the official exchange rate while
imports of other products were either prohibited (e.g. butter and
cheese) or allowed only at close to the free exchange rate.


Agricultural inputs were also imported at the official exchange
rate and prices of imported inputs such as fertilizer tended t decline
relative to inflation over the period 1970-83 because of overvaluation
of the exchange rate. In addition, wheat producers benefited from low
fuel costs and more recently a subsidy on Ministry of Agriculture mecha-
nization services which have led to a decline in machinery rental rates
(adjusted for inflation) of as much as 50 percent from 1974 to 1983.


Farmers with access to bank loans also received credit at negative
real rates of interest during recent years. In 1983, the differential
between interest rates on agricultural loans and the inflation rate was
30 percent or more. However, wheat producers benefited little from cheap
credit. Livestock production, which is a relatively capital-intensive
industry, experienced rapid increases in credit at the same time that
the wheat area sown with credit was reduced to only about 7 percent of
the total.


(xv)








Farmer Profitability and National Profitability


The profitability of wheat and competing crop and livestock activi-
ties were compared at two levels of technology, 1) farmer technology,
and 2) an improved level of technology which represents expected pro-
ductivity levels with the application of available research results.
Because of time limitations this comparison was restricted to two dif-
ferent systems in the Cayambe-Tabacundo-Otavalo area: a) valley bottoms
where irrigation allows intensive dairy farming with articifial pastures
or two crops per year to be produced, and b) hillsides without irriga-
tion where only extensive relatively low productivity dairying with
natural pastures is practiced and usually only one crop per year can be
grown.


Farmers' returns to land in wheat production are slightly less than
for other cereals and less than half of the returns in dairying and
potatoes. Moreover, because of the pricing policies discussed above,
real returns in wheat production have fallen sharply over time while
returns in dairying and potatoes have increased significantly. Not
surprisingly, there has been a substantial shift in land use toward both
intensive and extensive dairy. High capital and labor requirements and
price risks of potato production have limited expansion of that crop.


Price policy has also been a factor in the stagnant yields in wheat
production in recent years. While farmers have accepted improved wheat
varieties (and probably prevented a decline in yields due to diseases),
most farmers use no fertilizer or apply doses well below recommendations
based on on-farm experimental data. However, economic returns to fertil-
izer use in wheat are modest given current prices, and well below re-
turns in crops such as potatoes where fertilizer is widely used. Further-
more, even at improved levels of technology wheat is less profitable to
farmers than either extensive or intensive dairying at current farmer
levels of technology.


When national profitability of each crop-livestock activity was
calculated (by expressing product and input prices at import price


(xvi)









equivalent, allowing for over-valuation of the official exchange rate
and removing subsidies on transport, mechanization services, and credit)
wheat provided the highest returns to land after potatoes, and extensive
dairying the lowest. The results are somewhat sensitive to assumptions
about productivity levels; wheat yields of 1.6 t/ha with moderate doses
of fertilizer are needed to compete with extensive dairy on the hill-
sides. In the valley bottoms, wheat competes with intensive dairyiig
when compared at either farmer or improved levels of technology. In
each case, wheat also provides higher returns than barley since barley
requires similar levels of inputs but the import price of barley is
usually below that of wheat. Moreover if policy distortions are removed,
the incentives for use of reccamended technology, especially fertilizer,
are significantly increased. In fact, the increase in economic returns
per hectare due to use of improved technology is highest in the case of
wheat.


The differences between farmers returns, which are low for wheat
and returns to the country fran wheat production, which are relatively
high are due to the effects of policy. Overall, net policy effects
taking into account effects on product and input prices and capital
costs are significantly negative for wheat, zero for barley and positive
for dairy and potatoes.


These conclusions have at least three important limitations. First,
there is little available data on the dairy industry, particularly ex-
tensive dairying. A survey of land use patterns and productivity is
needed to establish the relevant input-output parameters and extent of
different livestock systems. Second, the analysis was confined to one
region. Extension across other important wheat producing regions is
needed to confirm the generality of the conclusions. Finally, other
objectives, such as income distribution and consumer protection from
fluctuations in world prices would also want to be considered in any
decision to promote domestic wheat production at the expense of other
products.


(xvii)








Implications


If there is a desire to promote wheat production in the interests
of more efficient resource use, a number of possible policy measures are
possible. One low cost alternative is to set the producer price of wheat
at the import equivalent price, converted at the free exchange rate with
appropriate means to enforce this price to millers. (Imported wheat
could still be imported at the official exchange rate to maintain low
consumer prices.) This would imply a current price of about S.18,300/t
or S.830/qq. in 1983. It will also be important to maintain prices of
wheat relative to prices of competing products in line with their re-
lative cost of importation. This implies a price of wheat roughly 15
percent above milk and barley prices. Since domestic wheat purchases
currently make up about 5 percent of wheat milled,i payment of a price of
S.18,300/ton would have only a negligible impact on consumer prices.
While the desire to maintain low wheat prices to consumers given the
present economic crisis is understandable, in the long run food security
is promoted by allowing wheat prices to consumers to rise to levels that
reflect the true cost of imported wheat.


Finally, the results provide justification for continuing a strong
wheat research program. Although technological i change alone is not
sufficient to overcome the low farmer returns from wheat under current
policies, agricultural research is a long term process and decisions on
research resource allocation must take a long term perspective on the
policy environment.


(xviii)








COMPARATIVE ADVANTAGE AND POLICY INCENTIVES
FOR WHEAT PRODUCTION IN ECUADOR


1.0 Introduction


A recent analysis of wheat imports and consumption in the devel-
oping world (CIMMYT, 1983) identified several special characteristics of
the wheat economy of the Andean Region including the following: a) wheat
consumption has increased steadily in the 1970s to reach about 35
kg/capita; b) wheat production has decreased at a rate of 6 percent per
annum during the same period: and, c) the region now imports over 90
percent of the wheat consumed.


Wheat production and consumption in Ecuador, shown in Figure 1,
follow the same trends exhibited for the Andean Region as a whole. In
fact, wheat consumption and imports in Ecuador has increased more
rapidly than in neighboring countries. Wheat consumption increased from
26 kg/capita in 1970 to over 40 kg/capita in 1982. This has been made
possible by a 12 percent growth in wheat imports over this period. The
proportion imported has increased from 46 percent of consumption in 1970
to over 92 percent in 1982. These trends raise three questions: a) why
has wheat production in Ecuador fallen and imports increased so
rapidly?, b) is it an efficient use of its resources for Ecuador to
produce wheat?, and c) if it is efficient to produce wheat in Ecuador,
what type of policy incentives and technological change are needed to
promote domestic wheat production?


The broad objective of this study is to analyze these questions as
a basis for assessing INIAP's allocation of research resources to wheat
(INIAP is the national agricultural research organization). With contin-
uation of current trends, domestic wheat production is scarcely suffi-
cient to justify a strong national wheat research program. However, if
wheat production can be shown to be an efficient use of national re-
sources and also profitable to farmers, a case can be trade for continu-
ing a strong national research program.








COMPARATIVE ADVANTAGE AND POLICY INCENTIVES
FOR WHEAT PRODUCTION IN ECUADOR


1.0 Introduction


A recent analysis of wheat imports and consumption in the devel-
oping world (CIMMYT, 1983) identified several special characteristics of
the wheat economy of the Andean Region including the following: a) wheat
consumption has increased steadily in the 1970s to reach about 35
kg/capita; b) wheat production has decreased at a rate of 6 percent per
annum during the same period: and, c) the region now imports over 90
percent of the wheat consumed.


Wheat production and consumption in Ecuador, shown in Figure 1,
follow the same trends exhibited for the Andean Region as a whole. In
fact, wheat consumption and imports in Ecuador has increased more
rapidly than in neighboring countries. Wheat consumption increased from
26 kg/capita in 1970 to over 40 kg/capita in 1982. This has been made
possible by a 12 percent growth in wheat imports over this period. The
proportion imported has increased from 46 percent of consumption in 1970
to over 92 percent in 1982. These trends raise three questions: a) why
has wheat production in Ecuador fallen and imports increased so
rapidly?, b) is it an efficient use of its resources for Ecuador to
produce wheat?, and c) if it is efficient to produce wheat in Ecuador,
what type of policy incentives and technological change are needed to
promote domestic wheat production?


The broad objective of this study is to analyze these questions as
a basis for assessing INIAP's allocation of research resources to wheat
(INIAP is the national agricultural research organization). With contin-
uation of current trends, domestic wheat production is scarcely suffi-
cient to justify a strong national wheat research program. However, if
wheat production can be shown to be an efficient use of national re-
sources and also profitable to farmers, a case can be trade for continu-
ing a strong national research program.







Figure 1. Area, Production and Consumption of Wheat, Ecuador, 1970-82.


S 220
o

S200
4,-
= 180

A 160
C
S140
10
120
So


80 81


Year


Source: F.A.O.







The specific objectives of the study are:


i) Analyze the price policies which have influenced the decrease in
wheat production.
ii) Estimate the profitability to farmers of wheat production and com-
peting crop and livestock activities.
iii) Using product and input prices that reflect their cost of importa-
tion, calculate the profitability to the nation (i.e. change in
national income) of resources used in wheat production compared to
the returns in competing crop and livestock activities.
iv) Estimate the effect of improved wheat production technology on the
profitability of wheat production to farmers and to the nation and
determine what combination of price policy and improved technology
would be necessary to efficiently produce wheat in Ecuador.


Approximately one month of the author's time was available for
gathering information for this study. To limit its size, it was
concentrated on wheat production in the Cayambe area of Pichincha
Province and part of Imbabura Province an area that was formerly a
major wheat producing area of Ecuador. Conclusions drawn from this study
are meant to provide a basis for further analysis, both in other areas
of the Sierra as well as for a more in-depth study of livestock, the
main competing enterprise. It is hoped that the tentative findings of
this study will stimulate further analysis of the important questions of
price policy, import protection and ccnparative advantage for different
commodities in Ecuador.


2.0 A Framework for Measuring Comparative Advantage
and Policy Incentives


The framework used in this study is conceptually simply, although
its empirical application is sometimes more complex. The basic approach
is to measure and to take into account the effects of various government
policies on the prices received by farmers for their outputs and the
prices paid for their inputs.


Government policy influences prices at a number of different levels.








Macro-economic policy with respect to the exchange rate and interest
rates influences prices in all sectors of the economy. Exchange rate
policy is particularly important in determining the prices of imported
inputs and of agricultural products, such as cereals, which are widely
traded in international markets. There are also usually policies that
are specific to the agricultural sector such as a subsidy on fertilizer.
Finally, there are policies which are specific to a crop or region. A
guaranteed price for wheat is specific to that crop or a government
tractor hire scheme may be specific to a region.


Governments usually have particular objectives for the imple-
mentation of each of these policies. However, the total effect of policy
interventions is often not clear. In many cases, the total effect of
various policies discriminates against, or favors, particular crops or
groups of farmers in ways that are not readily apparent. These policy
effects may be large enough that the profitability of a particular crop
or technology to farmers bears little relationship to the profitability
to the country. For example, guaranteed prices are often set on the
basis of cost of production without reference to the cost of importing
that product In many cases, allocation of agricultural research
resources on the basis of current area or production of the crop may
lead to under-investment in activities in which that country is an
efficient producer but whose production is reduced by policy
disincentives (and vice versa).


2.1 An Example of Calculating Policy Effects and Comparative Advantage


The following simplified example shows how the effects of policy
interventions can be calculated and the profitability to the nation
estimated. Assume that:
a) The farmers' price of wheat is $150/ton which is below the world
price.

I
In fact, cost of production is also determined by product prices
since increased prices are generally capitalized into land values (i.e.,
increased prices lead to increased cost of production).








b) The major purchased input in wheat production is fertilizer
which costs $50/ha given a fertilizer subsidy equivalent to $25/ha.
c) The farmers' labor and capital used in wheat production are
valued at $75/ha at market prices and the rental value of land is
$75/ha. Clearly if the current wheat yield is 1.3 tons/ha, wheat is an
unprofitable crop to farmers since net returns are -$5/ha (1.3 x 150 -
50 75 75).


However, from the national viewpoint the resources used in wheat
production may be profitably employed. The value of the wheat produced
from the point of view of the country is the saving in foreign exchange
frcm substituting for wheat imports (given that the country is a wheat
importer). Assume that wheat is imported at $180/ton and that it costs
$20/ton to transport to the capital city. If domestic wheat costs
$10/ton to transport to the capital city then the value to the nation of
wheat in the producing area is $190/ton (180 + 20 10). This we call
the "world price equivalent". At the same time, fertilizer receives a
subsidy of $25/ha which is a real cost to the country. Hence the
profitability to the nation which measures the contribution of wheat
production to national income is (190 x 1.3 (50+25) 75 75) = 22
which indicates that wheat is marginally profitable. Despite the subsidy
on fertilizer, the net effect of policy is to tax farmers by $27/ton (-5
-22) by maintaining a producer price for wheat below the import price.


Policy may also indirectly affect the profitability of wheat
through effects on competing enterprises. Assume that wheat land
competes with pasture for livestock production. If livestock products
are protected by a 30 percent duty on imports, the market value of land
will also be increased. Let us assume that the farmer receives returns
of $300/ha for livestock less costs of $75 for inputs and $150 for labor
and capital. The residual return on land to the farmers is $75/ha (300 -
75 150). However, the value to the country of the livestock output
(meat or milk) is less than $300/ha since it costs less to import it
-part of the $300 value of livestock produce is due to the import
duty. Assume that the value of the livestock output at the world price
equivalent (i.e., adjusted for tariffs and transport costs) is $240/ha.








Therefore, the opportunity cost of land in livestock is only $15/ha (240
- 75 150). The returns to the nation from wheat production using this
value of land are $82/ton, (190 x 1.3 (50+25) 75 15) and wheat
production is quite profitable. The total effect of policy on wheat
producers is then -$87/ha (-5 82). The national profitability of
livestock, on the other hand, is negative (240 75 150 97)1/
This means that farmers earn slightly more fromi livestock production
than from wheat production. However, frcm the point of view of the
country, wheat contributes substantially more to national income. In
this example, policy incentives favor the livestock sector and discrimi-
nate against the wheat sector.


Of course, the opposite situation is also equally possible. If
domestic wheat production is protected by an import duty on imported
wheat then producer prices for wheat would be above the world price
equivalent. At the same time if wheat competes with cotton that is
subject to an export tax, then additional policy incentives are
indirectly provided to wheat production through disincentives on cotton.


2.2 Definition of Terms


A number of measures have been developed for measuring policy
incentives and comparative advantage and are summarized in Table 1
(Pearson, 1982). All inputs and outputs are divided into tradables and
nontradeables. Tradeables are those products and inputs that are
imported or exported, or have the potential to be traded, such as wheat
or fertilizer. Nontradeables are all factors which are not readily
imported or exported in world markets. They are divided into: a) those
factors, labor and capital, which are mobile and can be used in other
regions or sectors and b) the factor, land, which is immobile.




/The opportunity cost of land in livestock is its residual return in
wheat production (190 x 1.3 75 75 = 97).








As shown in the above example, the profitability of production of a
given cn-nodity can be calculated at two levels. Farmer profitability
is computed using the actual market prices paid and received by farmers
for all inputs and outputs. This is represented by E in Table 1.
National profitability, on the other hand is the measure of the
contribution of a given enterprise to national income. It is calculated
by estimating the value to the nation of outputs produced and costs to
the nation of inputs used. That is, all inputs and outputs are valued
at opportunity prices. In the case of tradeable. canodities this
opportunity price is the world price equivalent that is, the import
(or export) price adjusted for exchange rate distortions and internal
transport and distribution costs. Nontradeables are valued at their
opportunity cost to the nation that is their value in alternative
uses. This was illustrated in the earlier example by valuing land for
wheat production at its return to the nation in livestock production.


Farmer profitability and national profitability differ because of
government policy interventions. Individual policy effects are
represented by the difference between a particular product, input or
resource valued at market prices and at opportunity prices A
tariff on imports of a product is measured in K, a subsidy on fertilizer
in L and a subsidy on credit in M (Table 1). Indirect policy effects,
that have an impact on prices for competing crops and hence influence
the opportunity cost of land, are measured in N. Total policy effects
are measured by O; a positive value for O indicates that the total
effect of all policies is to provide incentives additional to those
provided by the world prices for the production of that camnodity.
Likewise a negative value indicates policy disincentives.




Policies are implemented with various objectives. In the jargon of
economics some policies may be implemented in order to offset market
failures which result in inefficient resource allocation. In this study
we ignore the incidence of market failures as a motive for policy inter-
ventions. In the particular industries under study, with the possible
exception of wheat milling, competitive forces appear to operate.








Table 1. Measures of Comparative Advantage and Policy Incentives.

Tradeables Nontradeables
a/ Capital
Products Inputs and Labor Land Profits

Market Prices A B C D E = A-B-C-D
World Price
Equivalent F G
Opportunity Cost
of Resources H I
Opportunity Price F G H I J = F-G-H-I

Policy Effect K=A-F L=G-B M=H-C N=I-D O = E-J
= K+L+M+N

Measures of Policy Incentives
Nominal Protection Coefficient (NPC) =
F
Effective Protection Coefficient(EPC)= A B
F-G
Effective Subsidy Coefficient = O/F


Measures of Ccmparative Advantage
National Profitability = J
H+I
Domestic Resource Cost Ratio = +
F-G
National Returns to Land = F G H


a/ Most inputs consist of a tradeable component and a nontradeable
component. For example, a tractor produced locally includes imports used
in its manufacture plus same nontradeables such as labor and capital.
These inputs should be divided into their tradeable and nontradeable
components. Even fully imported inputs include some nontradeable costs
incurred in their local transport and distribution (see Pearson 1982 for
more details).

Source: Adapted from Pearson (1982).


National profitability, J, is the measure of the contribution of
that enterprise to national income. When national profitability is
positive the country is estimated to have a comparative advantage in the
production of that cacmmdity. Sometimes, a ratio, the domestic resource
cost ratio, is used to compare profitability among different products
(Table 1). A domestic resource cost ratio greater than one indicates
that the cost of the domestic resources used in production of a given








camodity are more than the foreign exchange saved and hence it is not
an efficient use of resources to produce that crop. An alternative mea-
sure used in this study which focuses on alternative uses of land in
one area is to measure the national returns to land (F G H in Table
1). This is conceptually simple since it enables a comparison of the
contribution to national incomes of alternative uses of a given type of
land.


2.3 Comparative Advantage in a Dynamic World


While policy incentives frequently change from year to year with
changes in government policy, measures of comparative advantage are
primarily determined by a) the production technique employed, b) world
prices for inputs and outputs and c) general economic developments,
particularly with regard to infrastructural investment and economic
growth. Production techniques may change with the introduction of
improved technologies which lower the cost of production and increase
profitability to the farmer and to the nation. Hence, wheat production
may not be an efficient use of resources given current farmer technology
but may be quite efficient with the introduction or development of im-
proved technology. This of course has potentially important implications
for investment in agricultural research. In this study, the comparative
advantage of wheat in Ecuador is evaluated at two levels of technology.
The first is farmers' current technology for wheat and competing
crop-livestock activities. The second is an improved technology that
can be recommended on the basis of on-farm research or has already been
adopted successfully by same farmers. In this case, in order to
facilitate comparison, an improved level of technology is also used for
all competing enterprises.


Given that our priiary objective is to provide information relevant
to allocation of agricultural research resources, we are particularly
interested in the relationship between technological change, comparative
advantage and policy incentives. In Table 2 a country is shown to be
efficient in wheat production at both levels of technology, (as measured
by national productivity) but at farmer levels of technology it is








unprofitable for farmers to grow wheat because of policy disincentives.
In case 1, however, introduction of improved technology enables wheat to
become profitable to farmers despite the existence of price policy
disincentives. This is clearly a strong argument for investment in
research and extension to enable the country to exploit its ccmparative
advantage in wheat production. In the second case, even a change in
technology does not make wheat profitable to farmers because policy
disincentives have a stronger effect. In this case the main value of
the analysis is to quantify the cost to the country of pursuing its
current policies. Further, investment in wheat research must be
justified on the basis that price policy with respect to wheat will
change in the future.


Table 2. Some Possible Conflicts Between National and Farmer Profitabil-
ity at Different Levels of Technology.

National Farmer
Profitability Profitability

Case 1

1. Current Farmer Technology Positive Negative
2. Potential or Improved Technology Positive Positive

Case 2

1. Current Farmer Technology Positive Negative
2. Potential or Improved Technology Positive Negative



Another major factor determining comparative advantage is the world
price for wheat and carpeting commodities. Since we are interested in
resource use over the long run, we need to estimate expected long run
world prices. In some cases these prices themselves are subject to con-
siderable distortions due to subsidies by exporting countries that lead
to an export price considerably less than the price in the exporting
country (e.g. wheat in the EEC, dairy products in most exporting coun-
tries). However, our interest is not whether export prices are subsi-
dized but whether these subsidies will continue in the future. If they
are expected to do so, then an importing country can take advantage of
these subsidized prices in setting its own priorities,








It should be kept in mind that measures of comparative advantage
are only a measure of the efficiency of resources used in production
relative to the costs of imports. Governments have other objectives in
resource allocation besides efficiency, especially food security and
income distribution objectives. For instance, in the above example,
governments may favor livestock production because of greater perceived
price uncertainty in world markets for livestock products relative to
grain or because small farmers emphasize livestock production.
Nonetheless, the efficiency of resource use is always an important
objective and is an important measure to enable decision makers to
quantify the cost of pursuing other objectives.


2.4 Data Sources and Analysis


From the above example it is clear that several different types of
data are needed to conduct the analysis of comparative advantage and
policy incentives. These include:


a) Technical coefficients for production of wheat and competing
crop-livestock enterprises, given current and potential production
technologies.
b) Market prices for outputs and for inputs and'resources used in
production.
c) Import prices sometimess export prices) for inputs and outputs
and costs of internal transportation and marketing to the final point of
consumption.


In this study, data on technical coefficients and market prices
were obtained from farm-level surveys and on-farm experiments. Survey
data were often available but were not usually sufficiently complete for
this type of analysis. Estimates of technical coefficients were improved
through informal interviews with farmers, technical scientists and ex-
tension officers.


Data on import prices and internal costs of marketing were obtained
largely from secondary sources. These were supplemented by interviews








with government agencies and firms who were importing in order to pro-
vide a detailed cost breakdown into foreign exchange and local
distribution and transport costs. Efforts were concentrated on obtaining
information for the major outputs and inputs (e.g., fertilizer). Policy
distortions on minor inputs will not usually affect the final result and
were usually ignored. Appendix F provides a list of the public and
private agencies who were visited in the course of obtaining data for
this study.


All calculations for the analysis in this paper were done using the
VISICALC program on the Apple II + micro-ccmputer of INIAP. This program
is particularly valuable since all formulas used for constructing the
budgets are stored in memory. Hence new estimates of technical para-
meters, up-dating of price data and sensitivity analysis can be easily
performed.


3.0 The Macro-Level Policy Environment in Ecuador: 1970-83


3.1 The Petroleum Boom, 1970-81


Macro-level fiscal, monetary and exchange rate policy has had a
major influence on Ecuadorian agricultural performance in the 1970s. The
major determinant of the Ecuadorian economic situation since 1972 has
been the petroleum boom. The main characteristics of economic growth
during this period are as follows:
a) Petroleum export revenues increased from a negligible amount in
1970 to 60 percent of export revenues in 1981. Export revenues increased
by 14 percent annually in real terms.
b) Economic growth, led by petroleum exports, was the highest in
Latin America, averaging 8.6 percent per year from 1972 to 1980. How-
ever, there were major differences between sectors in economic perfor-
mance. Construction grew at 8.4 percent and manufacturing at 11.5 per-
cent annually, while agriculture grew at 2.7 percent annually (less than
population growth).
c) With slow growth of the agricultural sector, food imports in-
creased rapidly from US$20m in 1972, to US$149m in 1980. Wheat accounted
for much of this increase.








d) Government spending increased rapidly and with a continuous
fiscal deficit since 1975, inflation has been considerably higher in
Ecuador than in its main trading partners.


The impact of these various factors on the agricultural sector was
felt in a number of ways during this period. These include the effects
on a) the exchange rate, b) food demand patterns, c) wage rates, and d)
transport costs.


Overvaluation of the Exchange Rate. Ecuador maintained a fixed
exchange rate during the 1970s, even though the rate of inflation in
Ecuador was 20-25 percent higher than the inflation rate in its main
trading partners. The fixed exchange rate was made possible by rapid
increases in oil prices. Rather than increasing foreign exchange
reserves, additional export revenues were spent on imports and in the
later years of the 1970s, the value of the Sucre was only sustained by
heavy foreign borrowing. The fixed exchange rate in the face of higher
inflation meant that imported (or exported) goods became cheaper
relative to domestically produced goods that are not traded.


Rapid growth in the industrial sector was sustained by substantial
tariff protection. This protection averaged 25 percent but was consider-
ably higher for consumer goods where rates of protection were often well
over 50 percent. This means that prices of imported goods were effec-
tively higher on average because of these protective policies toward the
industrial sector. The incomes of farmers who received less protection
(and negative in the case of wheat) have effectively been reduced since
they must pay higher prices (an average of at least 25 percent higher)
for consumer goods, and yet receive prices for their output at or below
world prices.


The combination of these exchange rate effects is shown in Figure
2. In 1971, before the petroleum boom, the main exchange rate distortion
was due to tariff protection on industrial goods. During the 1960s
inflation in Ecuador had been relatively low and the Sucre had been
devalued by 28 percent in 1970. By 1980, the sucre was overvalued by








Official and Corrected Exchange Rates, 1971-80.


Rate Corrected
for Differential
Iinflotion and Average
Import Toriff a
Rote Corrected
00--'" 0 d--- for Differential
,- Inflation


_Official
Exchange Rate














1971 2 73 74 75 76 77 78 79 80
Year



Equivalent exchange rate estimated by correcting for average net import
duties, export taxes, export credits, etc.
Differential inflation between Ecuador and main trading partners weighted
by export shares.


Source: Based on World Bank estimates of export weighted effective exchange
rate and equivalent inflation-rates.


35


30-


25


20


15-


10


5







a/


Figure 2.








about 22 percent due to tariff protection. At the same time, if Ecuador
had allowed the sucre to change in value at the same rate as the
inflation differential between Ecuador and its main trading partners,
the sucre would have fallen 22 percent between 1972 and 1980 to reach a
value of 37 Sucres/US$1.001.


Demand Effects. Recent analysis suggests that the urban middle
class population was the largest beneficiary of economic growth in the
197bs (see for example Ortiz Crespo, 1983). The population growth rate
in this group was also relatively high. This led to a rapid increase in
demand for food, particularly livestock products, whose demand increases
rapidly with income growth. Given the reasonable assumptions that the
urban population and real incomes have each grown at close to 5 percent
annually, and that a 1 percent increase in income leads to a 0.8 percent
increase in demand for livestock products, demand for meat, eggs and
dairy products increased at 9 percent annually2. Demand for bread and
rice increased less rapidly perhaps 7.5 percent annually, assuming
that an income increase of 1 percent leads to a demand shift of 0.5
percent. Demand for traditional foods (maize and potatoes) were largely
determined by population growth. These changes in demand patterns
placed particular pressure on prices and imports for dairy products and,
to a lesser extent, on wheat products.





1/ This would represent the upper limit of the overvaluation since there
may be some double counting by including the effects of tariff protec-
tion and inflation. Normally, higher domestic inflation without exchange
rate devaluation is accompanied by increased tariff protection and im-
port controls in order to maintain the balance of payments which is sub-
ject to pressure from cheaper imports. However, in the case of Ecuador,
the improved terms of trade due to increased oil prices allowed the
balance of payments to be kept in equilibrium until the late 1970s. With
the benefit of hindsight, it seems that the Sucre should have been
devalued and foreign reserves allowed to build up. This exchange rate
effect of increased export earnings from the energy (or mineral) sector
has been termed by economists the "Dutch Disease", Wijnberger (1984).
2/ These are projected effects of income growth. Actual demand effects
were modified by price effects since relative prices of food cTommdities
changed considerably (see Section 4).








Increased Real Wage Rates. The rapid growth rate of the non-agricultural
sectors, particularly construction, as well as increases in real wages
stimulated rapid rural-urban migration (and increased off-farm employ-
ment in areas near large cities). As a result, real wages paid by
farmers in the Sierra Norte increased by one third from 1972 to 1980.
Increased wage rates raised costs to farmers who were unable to raise
product prices because of import competition (e.g. wheat) or could not
substitute for labor through mechanization (e.g. farmers on steep
slopes).


Subsidized Transport Costs. While prices of petroleum products in world
markets increased significantly in real terms in the decade of the
1970s, they fell in Ecuador The effective subsidy on diesel reached 90
percent in 1980, and was then reduced to about 70 percent in 19831/
As a result, long distance transport costs also fell significantly in
real terms (Figure 3). This tended to reduce the inland prices of
imported and bulky commodities, including wheat.


3.2 The Macro-Econanic Situation in 1983


The recent economic crisis in Ecuador due to declining oil prices
and a large foreign debt has led to a reversal of some of the effects of
the petroleum boom in the 1970s. The devaluation of the exchange rate
has removed the effect of differential inflation between Ecuador and its
trading partners although tariff protection and import controls remain
high. A two-tiered exchange rate is in effect, with imports classified
as "essential" imported at the official rate and other imports entering
at a free rate or a second official rate (Lista II) close to the free
rate. Given that approximately 50 percent of imports enter at each rate,
the average exchange rate is about S.65/US$1.00. Adjusting for average
import tariffs of at least 20 percent, leads to a corrected exchange
rate of approximately S.80/US$1.00 which is close to the free market
exchange rate. This is also close to the rate suggested by a



1/ This is an approximate calculation based on diesel prices in Ecuador
and the USA.









Figure 3. Real Costs of Inland Grain Transportation, 1970-83.


Year


Source: PRONACER and the national petroleum company.


12000-


cOh





4-o


0


-1200



1000:
a-
4-

C
(n
-800 <
CO
00




a-
-600



-400



CL
-200
4-
6)r








knowledgeable Ecuadorian economist and is the rate used in this study.
This rate will be referred to in the remainder of the paper as the
1/
corrected exchange rate.


The negative growth of the economy has also affected the growth in
demand and employment. In particular, we expect that with real income
declining, the demand for livestock products is growing at less than the
population growth rate. At the same time, it appears that real wages in
both urban and rural areas have fallen.


4.0 The Agricultural Policy Environment for Wheat in Ecuador


The market environment in which farmers make decisions on wheat
production is influenced by a) the price policy for wheat, b) the price
policy for competing crop-livestock activities, c) the price policy for
specific agricultural inputs, and d) policies which affect the cost of
capital and labor resources used in wheat production. All of these are,
of course, directly or indirectly influenced by macro-economic policies,
such as the exchange rate policy already discussed in Section 3.0. In
this section, the agricultural policy environment is analyzed for each
of the above components. In general, the discussion is divided into pol-
icies in effect during the years of the petroleum boom, 1970-81, when
wheat production fell sharply, and policies that were in effect in 1983,
after the economic crisis had taken effect.


4.1 Price Policy for Wheat and Competing Crop-Livestock Activities,
1970-1980


Relative prices of wheat and competing crop-livestock products
changed sharply in the period 1970-80. Figure 4 and Table 3 show that
the real price of wheat to producers declined by 22 percent (and


1/
Given a corrected exchange rate of S.38/US$1.00 in 1980 and
differential inflation between Ecuador and its main trading partners
over the period 1980-83 the expected exchange rate would be about
S.75/US$1.00.








Figure 4. Producer Prices for Wheat, Milk and Potatoes, 1970-80.


10000


9000


8000


7000


6000
i


5000


:4000-


3000


2000-


1000-


Wheat


Source: nAG, Departamento de Estadistica.


1970 7 72 73 74 75 76 77 79 80
Year








Table 3. Changes in Real Prices Paid to Producers, 1970-80, 1980-83.

Ratio of Price of
Percent Changes in Campeting Product to
Real Prices Wheat Price
1970-80 1980-83a/ 1970 1983


Wheat -21 5b/ 1.00 1.00
Barley 8 1 .82 1.10
Maize 8 -17 .89 1.10
Potatoes 25 -19 .58 .70
Milk -8 23b/ .82 1.27





a/ Based on prices in June, 1983 of Wheat, S.500/qq; Barley, S.550/qq;
Maize, S.550/qq; Potatoes, S.350/qq; and Milk S.14/lt.
b/ 1983 prices are prices actually received by producers. These prices
were above guaranteed prices in the case of both milk and wheat.

Sources: 1970-80 prices from Ministry of Agriculture (1980) and
Ministry of Agriculture "Precios de Productos Agropecuarios a Nivel de
Productor", various issues. 1983 prices based on field interviews.



over 30 percent between 1970 and 1979), milk prices remained relatively
steady, while real prices of potatoes and soft maize increased. The real
price decline in the case of wheat is linked to a policy of importing
wheat free of duties after about 1969 and at a significantly overvalued
exchange rate with subsidized internal transportation. Figure 5 shows
that the producer price of wheat was closely linked to the import price
of wheat at the official exchange rate. It was somewhat lower in sane
years (such as 1974) but higher in 1977. However, when the real price of
imported wheat is calculated by adjusting for a) an overvalued exchange
rate (see Section 3.0), and b) a subsidized internal transport costsI/
the official producer price was below the world price equivalent in all



Transport subsidies were removed by using the US price of diesel
fuel valued at the corrected exchange rate and assuming a fuel
consumption of 0.05 It/ton-km for 500 km.







Comparison of Average Wheat Price Received by Farmers with World
Price Equivalent-/ Calculated at Different Exchange Rates.


Figure 5.


34000

32000-

30000-

28000.

26000-

24000-

22000-

20000

18000

16000

14000

12000

10000-

8000

6000

4000

2000-


Exchange Rote)


1970 71 72 73 74 75 7'6 T7 78 9 80 8'
Year


82 83


a_/ Import price plus internal cost of transport, loading, etc.

Source: Producer prices MAG, Departamento de Estadistica. Prices after 1980
are tentative estimates.
World price equivalents PRONACER. Official import prices in 1977 were
not consistent with world prices. The CIF price for' Rotterdam was
substituted as an approximation. Transport costs have been added from
Guayaquil to the Sierra.


World Price Equivalent
(Corrected Exchange Rate and un Subsidized
( Transport)


I I


I


- ef








years. On average, wheat producers received 33 percent below the real
import price equivalent of wheat. The official price for wheat was on
average 13 percent above the import price converted at the official
exchange rate. However, the producer received on average 10-15 percent
below the official price and close to the world price equivalent at the
official exchange rate. Overall, exchange rate overvaluation explained
about 70 percent and subsidized transport about 30 percent of the
difference between world prices (at the farm level) and producer prices.


The producer price for wheat was discounted from the official price
in part because of higher moisture and impuritees of local wheat as well
as some monopsony buying power by local millers. Millers found it
easier and cheaper to use imported wheat whose quality was strictly
controlled. Moreover the government subsidized the price of imported
wheat to millers during most of the 1970s. Beginning in 1973 millers
were compensated for any increase in import prices above a reference
price. This reference price remained fixed at $137/t until 1982
resulting in a substantial consumer subsidies in most years (see
Appendix E for details).


Because of these subsidies the price of wheat flour to bakers was
kept constant from 1973 to 1982. This led to declining real prices for
bread relative to competing staples such as potatoes and soft maize.
Subsidized bread prices were a major factor stimulating the demand for
bread and promoting rapid increases in wheat imports in the 1970s
(discussed further in Appendix A).


In 1983, the reference for wheat was raised sharply to $195/ton,
slightly above the import price and the consumer subsidy was effectively
removed.


Barley is an alternative crop to wheat. It is used for human food,
animal feed and malting. Hence, the price of barley was determined by
demand for each of these uses as well as imports and import prices of
barley and close substitutes such as maize for animal feed. Although








barley is generally cheaper than wheat in world markets, domestic barley
prices were above wheat prices in the late 1970s because of tariffs on
imported barley (Table 4).


Prices for potatoes and soft maize generally increased in real
terms in the 1970s (Table 3 above). Prices of both of these products
were essentially determined by domestic supply and demand and hence
exhibit considerable year to year fluctuations (see Figure 4 above for
potato prices). Soft maize is largely a subsistence crop and is not
easily substituted by imported hard maize. Potatoes imports were
possible but their high transport costs and a tariff prevented this.
Both potatoes and soft maize have undergone little increase in
productivity in the 1970s. This together with their relatively labor
intensive production methods and increased real wage rates have tended
to raise their real price at the same time that total production
stagnated (or even declined in the case of soft maize).



Table 4. Import Tariffs for Wheat and Competing Crop-Livestock Commodi-
ties, Ecuador.


1979 1983
(percent) (percent)
(ad-valorem) (ad-valorem)


Wheat 0 0
Dry Milk 85 Prohibited
Butter and Cheese 95 Prohibited
Barley 85 50
Potatoes 80 Prohibited
Maize 80 Prohibited





Price policy for milk is the most complex. The government has set
guaranteed producer prices for milk which have become very politicized.








Nonetheless, farmers have usually been able to receive a price 10-20
percent higher than the guaranteed price. Dry milk has also been im-
ported in limited quantities by the government agency, EMPROVIT, and
mixed with fresh milk or sold cheaply as reconstituted milk. In total,
these imports amounted to about 25 percent of milk processed
industrially (i.e. pasteurized). At the same time, about half of all
milk is processed into cheese, butter, and other products. There were no
price controls on this sector and in fact a large share of cheese is
processed in very small-scale labor intensive industries without
government regulation.


In 1979, both butter and cheese prices were protected by a 90 per-
cent import tariff (Table 4 above). The result of these various policy
measures is that butter and cheese prices have risen significantly in
real terms, while milk prices to the consumer have fallen slightly due
to imports of dry milk (Figure 6). Higher prices for butter and cheese
were also made possible by a strong consumer demand due to rising urban
incomes. Milk processors have probably also subsidized their fluid milk
processing by profits from cheese, butter and other dairy products.


The dairy sector in Ecuador has to a large extent been protected
from imports. Figures 7 and 8 show world price equivalents for milk and
butter (see Appendix C for assumptions used in these calculations). At
the official exchange rate both milk and butter have been increasingly
protected from imports in the 1970s. In the case of milk this protection
was not, however, large enough to compensate for an overvalued exchange
rate, whereas butter received significant protection even using a more
realistic exchange rate. Overall, at the corrected exchange rate the
estimated average Nominal Protection Coefficient, which expresses local
prices as a percent of world price equivalents, was .67 for wheat, 1.32
for butter and .86 for milk in the period 1977-80. Moreover, it is
likely that producers received a somewhat higher price for milk than
indicated by the statistics, due to diversion to cheese making or to
sale as raw milk.


The world market for dairy products has been distorted by








Figure 6. Indices of Real Consumer Prices of Milk Products.


250]





200-


150-




I00-


50-


Source: INEC


Butter









Cheese


Milk


1970 71 72 73 74 75 76 77 78 79 80 81 82 83
Year








Comparison of Producer Prices for Milk with World Equivalent
Price, 1970-83.


Figure 7.




18000


16 000-



14000-


1 70 71 72 73 74 75 76 77 78 79 80 81 82 83
Yeor
Source: Producer price MAG, Departamento de Estadistica. Prices in 1979,
1981 and 1983 were estimated from other sources. World price equivalent-
1976-83 data based on CIF price of dry milk, EMPROVIT estimates, and
1970-75 data are average CIF prices for Latin America estimated from
data on volume and value of dry milk imports, FAO Trade Yearbook, various
issues. Marketing margins and conversion to liquid milk equivalents are
detailed in Appendix C.


World Price Equivalent
(Corrected Exchange Rate)


12000



10000


9000



6000


4000



2000-








Comparison of Retail Price of Butter with World Price Equivalent,
1970-83.


World Price Equivalent
(Official Exchange Rate)


1970 71 72 73 74 76 77 78 79 80 81 82 83
Year


Source: Retail price INEC.
World price equivalent based on New Zealand export price and
estimated transport and marketing margins (see Appendix C for details).


Figure 8.







300i


250



200



150-



100-



50-








subsidized exports by the EEC and more recently by the USA. In these
exporting countries the export price of dairy products, especially dry
milk, is as low as half of the prevailing wholesale price in that
country. These subsidized export prices seem, however, to be a permanent
characteristic of the world market for the foreseeable future.
Neighboring countries in Latin America have depended more on imported
dairy products and have as a result, maintained significantly lower
consumer prices for cheese and butter than in Ecuador which has not
imported these products.


In sum, the following price policy effects seem to have prevailed
for the dairy industry in the 1970s:
a) Rapid growth of incomes, especially in the urban middle class,
promoted a strong demand for milk and milk products.
b) Imports of dairy products were either limited in quantity, as in
the case of dry milk, or subject to high tariffs.
c) The guaranteed producer price of milk was kept relatively
constant in real terms. Producers obtained somewhat higher prices
because they were able to sell to small-scale cheese manufacturers or
for distribution as raw milk.
d) The ratio of butter and cheese prices to milk prices was high in
Ecuador and butter and cheese have received substantial protection from
imports.
e) Sales of imported dry milk allowed milk prices to consumers to
remain constant (in real terms).


4.2 Price Policy for Wheat and Ccmpeting Enterprises, 1980-1983


With the economic crisis and high inflation there were changes in
relative prices from 1980 to 1983. Wheat prices received by producers
have fallen further in real terms since 1980. Wheat has been imported at
the official exchange rate. Even though wheat producers have received
above the guaranteed price (largely due to demand for livestock feed and
from Colombia), the producer price in June, 1983 was nearly 40 percent
below the import price equivalent of close to S.17,600/ton (S.800/qq)
based on the corrected exchange rate and unsubsidized transport costs








(calculations are given in Table 5).


Barley, on the other hand, was given lower priority in foreign ex-
change allocations and hence is imported at close to the free exchange
rate. There continues to be a strong incentive to raise domestic barley
prices above wheat prices and this seems to have occurred in 1983.


Imports of dairy products were prohibited in 1983 except for small
amounts of dry milk imported by the government. Real prices of nilk
remained stable from 1980 to 1983. However, the negative growth of the
economy has severely weakened the demand for milk products and there was
evidence that real prices of butter and cheese had declined sigrifi-
cantly. With these changes and an increase in prices of dairy products
in the world market, the protection to the dairy industry has been elim-
inated (based on the corrected exchange rate). Given prices of dry milk
and butter in world markets, it would seem that the level of protection
is negative for milk and insignificant in the case of cheese and b tter
(see Appendix C). However price disincentives were substantially higher
for wheat (NPC = .75) than milk (NPC = .87), even though world wheat
prices were depressed in 1983.


Overall during the period 1970-83 the price of wheat relative to
barley decreased by same 30 percent. Wheat prices relative to official
milk prices. decreased by 36 percent. The actual difference in the case
of milk was probably even larger. Farm surveys in 1971 and 1983 suggest
that real milk prices received by farmers increased 27 percent while
wheat prices declined 28 percent.


4.3 Price Policy for Agricultural Inputs


Most agricultural inputs have been imported free of duty or at very
low duties of 3 to LO percent. Some inputs such as compound fertilizers
are also made up in Ecuador but using imported raw materials. Since 1982
most agricultural inputs have been imported at the official exchange
rate. Hence exchange rate overvaluation has and continues to make agri-
cultural inputs cheaper. Real fertilizer prices, for example, declined








Table 5. Estimated Costs in 1983 of Imported Wheat in Ecuador based on
Expected Long Run FOB Price of US$170/ton.

Costs of
Importation
with Corrected
Exchange Rate
Actual Costs and Transport
of Importation Unsubsidized
Foreign Currency Costs
(US$/ton)
Cost and Freighta/ 195195
Interest (15 percent for 120 days) 9.75 9.75
Central Bank Monetary Stabilization
Fund (15 percent for 120 days) 9.75 b/
Other Bank Charges (2.6 percent) 5.07 5.07
Insurance (.375 percent) .71 .71
Losses (0.5 percent) .98 .98

CIF Price 221.26 211.51

Sucre Costs (S./ton)

CIF Price in Local Currency 10,500c/ 16,921c/
Port and Unloading Costs 272 272d/
Transport to the Sierra 608 1,168
Loading and Unloading 5 5

Total Cost/ton 11,385 18,366
Total Cost/qq 518 835
Producer Price Equivalent
for Local Wheat 466 750




a/ FOB Price of $170 plus $25/ton freight. This is the current reference
price fixed by the government. In 1983 it was above actual FOB prices
but close to the long run trend in the world price.
b/ Assumed to be zero at corrected exchange rate.
c/ Official exchange rate of S.47.5/$US1.00 and corrected exchange rate
of S.80/$US1.00.
d/ Unsubsidized fuel price of S.20.8/lt assuming 0.05 It/ton-km for 500
km. Nonfuel costs are divided equally between tradeable costs which are
adjusted to the corrected exchange rate, and nontradeable costs.
e/ Assumes 10 percent discount for quality, humidity and impurities.


Source: Actual costs of importation obtained from PRONACER and inter-
views with millers.








significantly from 1975 to 1983 (see Figure 9). However this policy is
changing and agricultural machinery was imported at close to the free
exchange rate in 1983.


Estimated components of fertilizer costs are shown in Table 6.
Relatively high costs of bagging and profits lead to a relatively high
margin between CIF and retail prices. However, the importation at the
official exchange rate and subsidized internal transport costs led to a
significant subsidy of one third of real fertilizer costs.


Costs of mechanization have been subsidized through a) subsidized
diesel prices and b) subsidies by the Ministry of Agriculture for ma-
chinery hire services. Private tractor hire services in areas without
competition from MAG were charging double the price of the MAG in 1983.
Prices of private tractor hire services are close to our estimated
actual cost of tractor operation (see Appendix D). It seems that the MAG
is charging for operating costs but not covering capital and
depreciation costs.


4.4 Policies Affecting Capital, Labor and Water Costs


The petroleum boom has resulted in rapid increases in credit at low
cost interest rates for all sectors of the economy. Much of this credit
has been available through the Banco Nacional de Fcmento (BNF) where
interest rates have been consistently below the inflation rate. By 1983,
these differences had become very large. The BNF charged 13 percent
interest plus same administrative costs for short term agricultural
loans while inflation exceeded 50 percent.


Cheap interest rate policies had differential effects on crop-live-
stock activities. Most dairy farmers have received credit from the BNF
or private banks to improve livestock, pastures or adopt other produc-
tivity increasing innovations. One survey found that all large dairy
farmers used bank credit and that credit covered an average of two
thirds of investment costs (Barskey and Cosse, 1981). Credit to live-
stock enterprises issued by the BNF in Cayambe quadrupled from 1970 to







Figure 9. Real Prices for Wheat Seed and Fertilizer, 1975-83.


20000

180001 1

I-I
16000-

b 14000-

1 12000- ....
C%,






6000
1 0000" 1 \\ Seed
S\0
8000- \Urea

g 6000-

4000

2000-


1975 76 77 78 79 80 81 82 83
Year

a/ Prices quoted for Urea in Guayaquil.

Sources: FERTISA-BNF-Departamento de Fertilizaci6n del MAG.







Table 6. Estimated Costs in 1983 of Imported Urea based on Expected
Long Run CIF Price of US$190/ton.


Costs of
Importation
with Corrected
Exchange Rate
Actual Costs and Transport
of Importation Unsubsidized

(US$/ton)
Foreign Currency Costs
CIF Price Urea 190 190
Port Charges 4.32 4.32
Commission (4 percent) 8.20 8.20
Central Bank Monetary Stabilization
Fund (5 percent) 10.25 a/


Total 212.77 202.52


Sucre Costs (S./ton)
Total Cost at Guayaquil Port 10,000 16,202
Costs of Bagging 1,200 1,200
Transport to the Sierra 600 1,168
Storage 58 58
Insurance 78 78
Administration 124 124
Profits (10 percent) 1,206 2,000


Total Costs 13,266 20,830


Costs per bag (50 kg) 663 1,040






a/ Assumed to be zero for corrected exchange rate.

Source: Interviews with MAG and private input supplier.








1977 in real terms, (see Figure 10). At the same time, credit for wheat
production has steadily declined since 1974. By 1980 only 7 percent of
the wheat area was sown with funds from credit institutions compared to
77 percent for rice. Credit was also disproportionately channelled to
large farmers.


The reasons for lack of credit for wheat production were not in-
vestigated in depth. Farmers complained about delays and paper work re-
quired for credit. Reduced use of credit for wheat production may also
reflect the low costs and profitability attached to wheat (see next
section) since farmers seem willing to use bank credit for livestock
activities.


Labor costs are influenced by minimum wage legislation especially
in the case of large farmers. Minimum wages have been set somewhat
higher than the corresponding market wage rate. Nonetheless the
difference does not seem to be large and we have not taken account of
this policy effect in this study.


Water resources for irrigation are important for intensive dairy
farming. We did not attempt to look at costs of providing irrigation
services from surface water from mountain springs. But since this is a
low cost source and farmers paid for the water, it is unlikely that a
large subsidy was included in the price of the water. However, some
farmers were receiving water from a new program of INIEHRI to dig deep
tube wells. We were informed that these services were subsidized but
since the area covered in Cayambe is not large (less tha 2000 ha) we did
not attempt to quantify the extent of the subsidy.


5.0 Wheat in the Farming System The Cayambe Area


Measures of comparative advantage and policy incentives are spe-
cific to a particular region. Technical coefficients, transportation
costs and competing crop-livestock activities are all likely to depend
on the particular recommendation domain that is, a group of farmers in
similar circumstances for whom the same technology can be recamended









Figure 10.








20-

18-


Value of Loans (in 1970 Sucres) Authorized by the Banco
Nacional de Fomento for Wheat in all Ecuador and for
Livestock in Cayambe.


I
I %
I %
I
I %
I \

I !


Livestock -
Coyombe Branch Only


1970 71 72 73 74 75 76 77 78 79 80
Year




Sources: Wheat Banco Nacional de Fomento.
Livestock Barskey and Cosse, 1981.








(see Harrington and Tripp 1984). This is particularly true in Ecuador,
where there is considerable variability in the agro-climatic and
socio-econamic conditions under which wheat is grown. In this study, the
analysis is conducted for the Cayambe area of the INIAP Programa de In-
vestigaci6n en Producci6n (PIP). This area which comprises the Cantons
of Tabacundo and Cayambe in the Province of Pichincha and the southern
part of the Canton of Otavalo in Imbabura, has traditionally been one of
the most important wheat producing areas of Ecuador (Figure 11).


On-farm research of the PIP in the Cayambe area, since its
establishment in 1977, has focused on wheat and provides basic data for
estimating the profitability of wheat under alternative technological
assumptions. There were an estimated 6000 ha of wheat in this area and
10,000 ha of barley in 1977 and same 60,000 dairy cows in 1983
(estimates of the local staff of the Ministry of Agriculture). Maize and
potatoes are the other principle crops.


The study area is diverse with respect to both physical character-
istics, especially slope and altitude and to a lesser extent rainfall
and soils, and socio-econcmic characteristics of farmers such as farm
size, tenure and distance and ease of access to markets. To simplify the
analysis we emphasized two basic types of farming systems or recomnenda-
tion domains land in the valleys where farmers have access to irriga-
tion which allows intensive dairying with improved pastures farming or
production of two crops per year; and land on the sides of the valley
without irrigation where extensive dairying with natural pastures is
practised and usually only one crop per year can be grown. In addition
there are substantial differences in wheat technologies used by small
and large farmers so two levels of farmer technology are often employed
in the analysis.


5.1 Wheat Production Technology


The PIP in Cayambe conducted a diagnostic survey of small and
medium size farmers in 1977 as a basis for on-farm experimentation in
the area. Results are shown in Table 7. The Ministry of Agriculture also







Figure 11.


Map of Ecuador Showing Wheat Importing Point, Consuming Point
and Producing Point for the Study.


- Ecuadorian Sierra
W (over 1000 m)
Study area








Table 7. Practices Used in Wheat Production, Small and Medium Size
Farmers, 1977.



Farm Characteristics

Total area (ha) 2.5
Area in wheat (ha) 1.1
Percent of farmers who work off-farm 89

Mechanical Technology

Percent of farmers who used:
Tractor for land preparation 62
Drill 0
Combine 21
Stationary thresher 68

Biochemical Technology

Percent of farmers who used variety released:
In the previous 5 years 27
In the previous 10 years 64
In the previous 15 years 99

Percent of farmers who used:
Certified seed 20
Fertilizer 31
Herbicide (2-4,D) 65

Average amount of fertilizer applied (of farmers who
used fertilizer):
Nitrogen (kg/ha) 29
Phosphorous (kg/ha) 41
Potassium (kg/ha) 16

Utilization of Wheat

Average yield (t/ha) 0.7
Percent of farmers who sold wheat 35
Percent of farmers (who sold)
selling wheat to mills 15



1/ The survey used a sample of farmers with less than 30ha as well as
the cooperatives of the Agrarian Reform.
2/ The varieties used and year released were: RPrmero, 1973; Cayambe,
1973; Amazonas, 1969; Atacazo, 1969; Crespo, 1963; Napo, 1963; 150,
traditional.

Source: Espinoza, 1982.








conducts annual surveys of wheat production practices stratified by farm
size /. Data for 1982 for the province of Pichincha (which includes
most of the study area) are given in Table 8. Results of the two surveys
are reasonably consistent despite the five year gap between the two.


There is a clear division in wheat production between small and
large farmers. Small farmers (approximately 5 ha or less) make up three
quarters of wheat producers but with less than 1 hectare of wheat per
farmer account for only one quarter of the wheat produced. A small
number of large farmers (including cooperatives) with over 50ha,
produced over half of the wheat (Table 9).


Small farmers use most of their land for crop production, and about
a quarter to a third of this land is usually sown to wheat. Tractor pre-
paration of land is canmon, especially given the availability of govern-
ment tractor hire services. Animal traction is also widely used, al-
though the cost of animal power is higher than for tractors (Table 10).
Harvesting is done by hand but usually threshed with a stationary
thresher. Hand harvesting and mechanical threshing is considerably more
expensive than use of a combine (Table 10). Difficulties in obtaining
machinery when needed and the location of wheat on steep slopes or
inaccessible areas, have slowed the use of mechanical practices on small
farms, despite the cost advantage.


Small farmers in Cayambe have widely adopted improved varieties
released by INIAP (Table 7), although they rarely use certified seed.
Farmers often praised the better rust resistance of new varieties tested
in the PIP as a distinct advantage. The PIP survey and our own inter-
views indicate that herbicide (2,4-D) is also widely used but fertilizer
is only used by a small proportion of farmers. Fertilizer doses are also
well below current recommendations (80-80-0 kg/ha of NPK) and are also
low in nitrogen and high in potassium, since most farmers use "potato"


1/ Unfortunately the strata used to divide farmers in this survey are
not clearly defined. We have simply used the average farm size calcu-
lated as total area divided by number of farmers, to characterize the
strata.








Table 8. Practices used in the Production of Wheat in Pichincha
Province by Farm Size, 1982.



Farm Size Strata
I II III Average


Land Use

Average farm size (ha) 2.7 6.6 556 21.7
Area in wheat (ha) 0.8 1.5 47 2.5
Percent of land in crop 97 95 58 64
Percent of crop land in wheat 32 23 15 18


Mechanical Technology

Percent of farmers who use:
-Tractor for land preparation 29 34 97 32
-Drill 0 1 32 1
-Carbine 18 32 85 23
-Stationary thresher 43 51 13 43


Biochemical Technology

Percent of farmers who use:
-Certified seed 0 2 43 27
-Fertilizer 27 41 73 31
-Insecticide 5 23 19 9
-Herbicide 24 40 63 29
Amount of seed (kg/ha) 129 133 130 130
Average doses of fertilizer (for farmers
who use fertilizer):
-Nitrogen (kg/ha) 13 18 22 20
-Phosphorous (kg/ha) 33 40 34 35
-Potassium (kg/ha) 11 13 8 9


Production

Average yield (kg/ha) 761 939 1384 1157
Percent sold 67 84 94 88



Source: Divisi6n de Informftica y Estadistica, MAG.








Table 9. Distribution of Area of Wheat
1982.


Strata


I

II

III


Average
Farm Size
(ha)

2.7

6.6

556


by Farm Size Strata, Pichincha,


Percent
of
Farmers


75

19

5


Percent
of Wheat
Production


26

11

62


217


Source: Divisi6n de Informntica y Estadistica, MAG.


Table 10.


Comparison of Costs of Mechanical and
in Wheat Production, Cayambe, 1983.


Tillage Animal
Tractor


Unit


day
hour


Animal/Manual Practices


Unit/ha Cost/Unit Costs/ha
(Sucres)


4
2.5


Crop Hand cut day 7
Thresher quintal 20
Combine quintal 20





Source: Informal interviews with farmers.


200


135


1000







fertilizer (10-30-10).


Large farmers (over 50ha) are generally mechanized except for
planting which is still largely done by broadcasting. Most large farmers
also planted a recently released variety/ (often with certified seed)
and used herbicide and fertilizer. However, fertilizer doses were low
although the nutrient balance was closer to the recommendations than for
small farmers because of greater use of 18-46-0 and Urea.


Wheat yields in Pichincha in 1981-1982 averaged 1.25 t/ha (28
qq/ha). Yields were over 50 percent higher for large farmers than for
small farmers. Most wheat was sold although small farmer sales were de-
pendent on having a good crop that allows sales above consumption needs.


The wide variation both in mechanical and bio-chemical technologies
leads to several different alternatives in wheat production. Table 11
shows different possibilities for using labor saving techniques. For
this study we only considered the first two alternatives. Fertilizer is
the major factor leading to differences in yields between farmers. Data
from on-farm experiments suggest that application of 80-80-0 of NPK
increases yields by at least 1.0 ton/ha. This implies a return on
capital invested in fertilizer of over 100 percent using wheat prices of
June, 1983 but only 65 percent at the guaranteed minimum price of
S.8800/t (S.400/qq) (Table 12). In general the rate of return on
fertilizer investment for wheat has been around 80 percent in recent
years. These rates of return, however, are considerably below the rates
of return to applying fertilizer on potatoes which are estimated at
2/
about 600 percent Not surprisingly small farmers with a shortage of
capital and little access to credit usually apply fertilizer to potatoes
but not to wheat. In addition there is a significant risk in fertilizer
application in wheat.



1/
Thirty five percent of the seed used by larger farmers in Pichincha
in 1982 was of the varieties Chimborazo and Antisana which were released
in 1978.
2/ Based on INIAP experimental data, it seems that an average fertilizer
response in potatoes is about 800kg/ha (18qq) per 50kg bag of fertilizer
(usually 10-30-10) applied.









Table 11. Labor Intensity of Different Techniques for Wheat Production.


Preparation Weeding


Harvesting


Threshing Mandays/ha


Herbicide
Herbicide
Herbicide
Hand


Cambine
Hand
Hand
Hand


Combine
Mechanical
Mechanical
Animal


Table 12. Partial Budget for Recommended Fertilizer Application
(80-80-0 kg of NPK/ha).
Sucre/ha


Fertilizer
3.5 bags 18-46-0 at S.876/50 kg bac
2.0 bags Urea at S.660/50 kg bag.
Labor
2 mandays for application at S.135,
Total costs that vary
Increased yield
Field price of wheata
Increased revenues
Net benefits
Marginal rate of return on capital
Marginal rate of return using
official wheat price /
official wheat price


3063
1320


'day


270
4653
1.Ot/ha
S.9900/t
S.9900/ha
S.5247/ha
113 percent


65 percent


a/ Excludes cost of harvesting at S.50/qq.
/S.400/qq (S.8800/t) less cost of harvesting.


Source: Calculated from results of 34 on-farm experiments in the Cayambe
area, 1977-82. Experimental yields were adjusted downward by 10 percent
to reflect farmer yields.


I
II
III
IV


Tractor
Tractor
Animal
Animal


I.








5.2 Relative Profitability of Crop and Livestock Alternatives


The major competitive enterprises for wheat production are barley
and milk production. Barley is produced on small and large farms on the
slopes and high areas. Much of this land, except for the highest parts
above 3,500m above sea level, is suitable for wheat production.


Budgets for dairying were constructed for two different systems. In
the first system, which characterizes much of the lower area of the
Cayanbe Valley, intensive dairying with artificial pastures and multiple
cropping are possible because of availability of irrigation. To cacpare
returns in this system with cropping activities we have expressed re-
turns in dairying per six-month cycle that is, half of the annual re-
turns. In the second system which characterizes much of the sloping
areas, artificial pastures are not possible because of lack of irriga-
tion. Here we have assumed an extensive dairy system, with about half
the milk yield per hectare. In this system only one crop per year is
usually possible and hence returns in dairying are expressed on an
annual basis.


Potatoes and maize are less important competitors to wheat produc-
tion. Potatoes are a small-scale labor and capital intensive crop pro-
duced for both hoem consumption and sales. However, the area under
potatoes is small in relation to the total area available for wheat
production. Soft maize is the main subsistence crop of small farmers.
Only a small part is marketed and the potential for substitution by
wheat is small.


All five crop-livestock activities are produced as part of a crop
rotation. On small farms a potato-wheat-maize-wheat-barley-legume rota-
tion is cam-on. On large farms in the valley, wheat has often been
planted as part of a program to renovate pastures. However in each case
and especially for large farmers the crop rotation pattern is flexible
depending on relatively profitability and risks of each alternative.


Budgets were constructed for each major crop-livestock enterprise








using farm level prices prevailing in June, 1983. Detailed budgets are
found in Appendix E. Technical coefficients and prices used in the
budgets have been obtained frcm many different sources. These include:
a) informal interviews with farmers in the area, b) interviews with
INIAP scientists and Ministry of Agriculture officials, c) estimates of
costs of production for annual crops published by the Ministry of
Agriculture and the Banco Nacional de Famento, and d) surveys undertaken
by INIAP and other research groups. We were able to obtain reasonably
consistent data for annual crops but we have less confidence in the data
for the dairy sector. A number of surveys (e.g. Nelson Flores, 1974; and
Barskey and Cosse, 1981) provide reasonable estimates of average tech-
nical coefficients for intensive dairying. However, none of these pro-
vide a stratification by agro-climatic zone (i.e. rainfall or access to
irrigation), to estimate coefficients for the extensive dairy system.
Hence,- technical coefficients for this system should be regarded as an
example of sane extensive dairy operations but are not necessarily
representative.


Farmers' returns were calculated under alternative assumptions re-
garding technology. In general two levels of technology were used the
average technology of farmers and a recommended technology. In the case
of wheat, two levels of farmer technology were included: a) small farmer
technology with no fertilizer used and hand harvesting and threshing
with a stationary thresher; b) technology for larger farmers which in-
cludes same fertilizer use and combine harvesting.


Reconmended technologies were chosen to represent an improved tech-
nology that could be applied given current knowledge from agricultural
research and that is in use by some farmers. In the case of wheat,
technical coefficients were based on five years' results of on-farm
experiments. The major difference to the current farmer technology is
the use of 80-80r0 kg/ha of NPK to give an average yield of 2.5 t/ha.


Data for improved technologies in maize, potatoes, barley and dairy
were based on experiences in PIPs in nearby areas, informed estimates of
INIAP scientists and experiences of some farmers with higher yields than







the average. Because of lack of data and time, no effort was made to
estimate returns for extensive dairying at improved productivity levels.
Coefficients for each level of technology are listed in Appendix E.


Returns per hectare for wheat and dairy are also calculated for
two assumptions regarding costs of capital. In the first case, farmers
use their own funds and a 10 percent real cost of capital is assumed. In
the second case, farmers receive credit from the banking system where
rates of interest have )een less than the rate of inflation in recent
years. Calculations of returns in this case assume a zero real rate of
interest. In practice m)st wheat, barley and maize is produced using
farmers' own capital resources, while nearly all dairy farmers received
credit from banks, mainly the Banco Nacional de Fomento, at subsidized
interest rates (Barskey and Cosse, 1981). Hence, unless stated
otherwise, returns in the dairy sector are calculated at zero real
interest rates. Also, because the dairy industry provides returns on a
daily basis, no account is taken of costs of working capital as in
cropping activities.


Finally, the substantial difference between the cost of tractor
hire fran the Ministry and the costs to tractor owners also leads to
same differences in farmer returns. Most large farmers own their trac-
tors and returns to both wheat and dairy were calculated under this
assumption. (Appendix D gives further details on calculation of mecha-
nization costs).


The, returns per hectare, summarized in Table 13, indicate that
potatoes and dairy are the most profitable enterprises under all
assumptions. For both levels of technology, potatoes provide over five
times the return on land in wheat production. For both levels of
technology, dairy is in second place. Intensive dairy operations
provided over double the returns to wheat even when measured over a
six-month cycle. Wheat yields of 3.5 t/ha at the same costs would be
needed to compete with intensive dairy. Even for a dairy farmer who uses
his own capital, returr s from dairying are higher than for wheat.
Significantly, returns ir the extensive dairy operation expressed on an









Table 13. Farmer Profitability of Wheat and Caopeting Enterprises
Under Different Assumptions, Cayanbe, 1983.


Returns to Land
(S./ha)


Farmer Technology
Wheat No fertilizer, hand harvesting
Moderate fertilizer (15-45-15
of NPK/ha) and combine harvesting
Barley Moderate fertilizer and combine harvesting
Maize
Potatoes
Dairy Intensive system
Extensive system
Recornended Technology
Wheat
Barley
Maize
Potatoes
Dairy Intensive system
Intensive system with unsubsidized
capital and machinery costs
Wheat At unsubsidized machinery costs
aReturns for a six-month cycle.


2,890

6,080
5,990
6,660
36.160 a/
14,920
15,540

13,360
13,890
14,930
64,200 a/
26,545


18,220
11,820


annual basis are also higher than for even wheat produced with the re-
commended technology.


Returns to wheat are generally comparable with other cereal crops,
although slightly lower than barley. Use of improved technology is a
critical determinant of profitability of these crops. In the case of
wheat, returns for small farmers who use no fertilizer are only half of
those for farmers who apply a moderate fertilizer dose and only a fifth
of returns using the recommended technology. Higher costs of harvesting
by hand also explain part of the reason for low returns to the small
farmer.


In addition to economic returns, a number of other factors
determine the farmers' choice of enterprise. Dairying is a low risk
enterprise. Farmers receive a guaranteed price and in recent years the
strong demand for milk has enabled the producer to receive a margin
above the guaranteed price (S.14/1t in 1983 versus a guaranteed price of
S.12/lt). Furthermore, irrigation and supplemental feeding allow year-








round stable production. Dairying also requires less labor than same
crops, especially potatoes and maize, and much of this labor is heeded
in small amounts each day for milking. Women usually perform this task.
The major constraint on dairying is the capital investment needed to
establish and maintain pastures and develop a dairy herd. The
availability of credit for dairying at low interest rates has enabled
this constraint to be relaxed for those farmers with access to this
credit.

The production of potatoes is, on the other hand, limited by: a)
high capital and labor requirements, and b) high market risk. Prices
have tended to show a cyclical behaviour due to a relatively inelastic
demand.

5.3 Changes in Cropping Patterns in Relation to Relative Profitability

The relatively profitability of different crop and livestock activ-
ities has changed markedly over time. A rough approximation is given in
Table 13. In 1971, potatoes and wheat gave similar returns while returns
in dairying were slightly higher. Returns in dairying and potatoes have
increased by 50-100 percent in real terms, while returns in wheat are
less than half of returns in 1971. These changes in relative profit-
ability reflect two major factors. First, real prices of potatoes and
milk have tended to increase while real prices of inputs, especially
imported inputs, have declined. At the same time, real prices of wheat
have dropped sharply. Second, technological change has been rapid in the
dairy sector and to a lesser extent in potatoes while yields of wheat
have changed little.

Figure 12 shows rapid adoption of improved techniques in dairy
farming in Machachi and Cayambe in the 1960s and especially in the
decade of the 1970s. Potato yields increased in the 1960s and early
1970s with increased use of fertilizer and plant protection but seemed
to have levelled off in recent years. In Carchi province, potato yields
reportedly increased from 3.6 qq per quintal of seed in 1961 to 10 qq in
1974 (Barskey and Lovell (1982)). Labor inputs also increased but labor
productivity was much higher in 1974. The increase in real prices of
potatoes in the 1970s would suggest that productivity has increased
little in this period.










Figure 12. Technological Change in the Dairy Industry, Cayambe and
Machachi Valleys, 1950-80.


lizotion


Artificial /
Postures
/
/


f Pure Breds




U*
*
*e
o
*e


*
*
*
.*Artificial Insemination
*
*
*
Oe
*e


...* .......***** a


1950


1960


1970


1980


Yeor







Source: Calculated from Barskey and Cosse.


100

90-

80-

70-

60-

50-

40-

30-

20-

10-








Table 14. Estimated Returns to Land in Wheat, Potatoes and Dairy in 1971
and 1983.
Southern Pichincha Northern Pichincha Real Change
Province, 1971 Province, 1983 1971-83
(S./ha) (S./ha)
Dairya/ 3284 28520 46%
Potatoes 2885 38440 124%
Wheat 2821 6600 -61%
aReturns expressed on an annual basis.
b/
Deflated by consumer price index.

Source: 1971 data are from Nelson Flores (1974) using the average for
farmers with over 20 ha. 1983 data are for a similar group of farmers.
Conditions in Southern Pichincha are similar to those in Northern
Pichincha.

These changes in relative profitability have been associated with
important changes in cropping patterns. Small farmers have probably not
made large changes in their wheat area but these are some factors which
have probably led to some decline in the area of wheat on small farms
are. These include:
a) Increases in specialty cash crops such as potatoes and onions.
b) A decreased interest in wheat as a subsistence food due to the
availability of subsidized wheat flour in nearby towns. In 1980 wheat
flour was sold to consumers for about the same as the producer price for
wheat.
c) Some reduction in cropped area on steep slopes with outmigration
to urban areas and inability to mechanize.

Almost certainly wheat production has dropped sharply on larger
farms. Much of this change is due to substitution by pastures. Unfortu-
nately statistics on the area in pastures and milk production are
neither reliable nor consistent. Some estimates suggest that the area in
pasture has increased substantially, doubling fran 1968 to 1982.
Statistics on milk production suggest a 5 percent growth rate for
1969-1978 (Barskey and Lovell (1982)), while official MAG Statistics
indicate a growth rate of only 2.7 percent. Our observations would
suggest that the area devoted to pastures and milk production has
increased substantially with changes in relative prices. This
substitution has occurred in a number of ways.








a) Wheat was formerly sown to renovate pastures after 2 to 4 years.
This practice is diminishing as better pasture management increases the
period in pasture. Pasture renovation is also now often carried out by
sawing potatoes and forage crops.
b) Area that was formerly cereal land or natural pasture has been
brought into intensive pastures through an expanded irrigation system.
c) Steeper land on large farms that was formerly used for cereals
is now used for grazing of young animals or dry cows as a complement to
the irrigated land which is used for milk cows.
d) Land with no irrigation has been converted to natural pastures
for extensive dairy operations with low milk yields per hectare.


The process of converting land to pasture use is still going on;
even in same of the higher areas (above 3200m) cereal land is being
converted to pastures.


Some wheat has also been replaced by barley because of better mar-
ket prospects (see Section 3). Some land in the Cangahua area is ideally
suited for wheat but is now sown to barley. Official statistics note a
drastic decline in barley area in the 1970s. However, almost certainly
the official estimate of 5,000 ha of barley in Pichincha Province in
1982 is a substantial underestimate.


Finally, in land reform areas where land has been subdivided some
land that was formerly sown to wheat is now sown to subsistence crops
such as maize. There is also a substantial area of natural pastures in
these cooperatives which is being developed into artificial pastures.


In sum, the use of land in the Cayambe area has shifted with the
declining profitability of wheat relative to dairy (and to same extent,
barley). Increased prices for milk, rapid technological change, and
access to cheap credit have significantly increased the returns in
dairying. Much of these returns have been capitalized into higher land
prices, which has of course raised the cost of production for all
enterprises. The average returns in dairying at improved levels of
technology would pay about an 8 to 15 percent return on capital invested








in land in 19831/.


6.0 Profitability to the Nation of Wheat Production and Competing
Crop-Livestock Activities


The final step in analyzing the wheat situation in Ecuador was to
calculate the social or national profitability of wheat and competing
enterprises, using prices that correct for policy distortions. That is,
prices of items such as wheat, fertilizer and machinery, which are
imported or exported were based on import prices converted at the
corrected exchange rate. Labor and capital were valued at their oppor-
tunity costs in alternative uses and then returns to land calculated.
Section 6.1 presents the assumptions used in the calculations and Sec-
tion 6.2 summarizes results.


6.1 Assumptions Used to Compute Opportunity Prices


Wheat. The import price for wheat was based on a long run expected price
in world markets of $US170/ton FOB (USA, No.2 Hard Red Winter) or
$US21/ton landed in Guayaquil2/. This is above actual import prices
in 1983 when world prices were below the long run trend.


Internal transportation costs were divided into three components:
a) fuel, b) depreciation and repairs, and c) other. Unsubsidized fuel
costs were estimated by assuming an export equivalent price of diesel of
US$0.26/It and fuel consumption from Guayaquil to the Sierra of 0.05
It/ton-km. Remaining transport costs were divided equally between
depreciation and spare parts which are tradeable items, and capital and
labor costs which are non-tradeable. The tradeable component was then
revalued at the corrected exchange rate.




1/ Prices for good dairy land were around S.350,000/ha with a return of
S.28,500/ha for average productivity and S.53,500/ha for high productiv-
ity.
2/ Estimated from the long term trend line, Log (price) = 3.611 + .0485
T for the period, 1953-83, for the U.S. f.o.b. price.








Transportation costs for domestic wheat were not included since
imported wheat must be transported to mills in the producing area. The
mill at Cayambe which purchased up to 7,000 tons of local wheat in the
1960s, was expected to purchase less than 1,000 tons in 1983. Hence, any
increase in local wheat production could substitute for imported wheat
at this mill.


Other marketing, handling, and distribution costs were assumed to
be similar for local and imported wheat. The cost of storage, loading,
and unloading of imported wheat is probably more than offset by
additional costs of handling local wheat in bags and additional cleaning
and drying costs for local wheat. Price differences due to higher
quality of imported wheat were not considered.


Based on these assumptions, the world price equivalent (i.e. the
import price equivalent at the mill less marketing and transport costs
to transfer local wheat fran the producer to the mill) would be about
S.17,600/t (S.800/qq).


Barley, Maize and Potatoes. Barley is also an imported commodity. Long
run prices for malting quality barley in world markets are 10-20 percent
lower than wheat, although in 1983 high prices for coarse grains reduced
this differential. An import price of US$180 was used for barley and
transport costs calculated as in the case of wheat.


Potatoes and soft maize were considered as nontraded ccmnodities,
although sane potatoes and soft maize do cross the Colcrbian border.
Average domestic prices for potatoes of S.7,700/t (S.350/qq) are roughly
equivalent to potato prices in the USA or Europe when converted at the
corrected exchange rate (i.e. about US$100/ton).


Soft maize is a basic subsistence crop with no close import sub-
stitute. Only a small part enters the market. Hence, this crop was not
considered in the analysis of national profitability.


Milk. Estimating the import price of milk presented special problems for









the reasons already discussed. Based on the analysis of Appendix C, it
seems that declining real prices of dairy products with decreased demand
have eliminated much of the protection that was received by the dairy
industry in the 1970s. The milk price in 1983 was slightly below the
import price for dry milk, converted at the corrected exchange rate. For
calculating national profitability an import price equivalent of S.16/lt
for liquid milk was used.


Fertilizer. Fertilizer prices were calculated in a similar manner to
import prices for wheat. For example, for urea, import prices were based
on an FOB price USA of US$150/t plus US$50 freight and handling charges.
This was converted at the corrected exchange rate and unsubsidized
transport costs and a marketing margin of S.3,550/ton included. The
producer price for urea based on this method was estimated at S.1020 per
50 kg bag.


Machinery. Machinery costs include a) depreciation and repairs, b) capi-
tal costs, c) fuel costs, and d) costs of operator labor. The major ad-
justments in these costs to compute national profitability were a)
taking account of the overvalued official exchange rate, and b) removing
the diesel subsidy and the MAG subsidy on tractor services. Details are
provided in Appendix D. These adjustments raise machinery costs quite
substantially. The estimated true cost of tractor operations is about
S.900/hour compared to S.220/hour charged by the Ministry of Agricul-
ture. It should be noted that farm machinery is now imported at close to
the free market exchange rate so that except for the Ministry subsidy,
actual costs of machinery operation approximate true costs. Private
machinery hire services that do not cnopete with the Ministry are
expected to raise their prices accordingly.


Other Inputs. Most other inputs such as herbicides, fungicides for pota-
toes and vetinary medicines for livestock are imported. The real cost of
these inputs was estimated by simply assuming that 70 percent of the
cost to farmers was foreign exchange costs and allocating the remainder
to local marketing and distribution costs. Because of their high value
to volume ratio, no adjustments for subsidized transport costs were








made. Foreign exchange costs of the inputs were adjusted to take account
of the overvalued official exchange rate.


Supplemental feeding of livestock is canon. Same of this, such as
wheat bran and mineral supplements, is imported at the official exchange
rate, while others such as hard maize, are purchased at local market
prices. Arbitrarily we assumed that 50 percent of the costs of supple-
mental feeding were foreign exchange costs.


Seed. Most seed used by farmers for all crops is seed saved from the
previous season. This was simply valued at the same prices as the pro-
duct. Seed for pasture establishment and maintenance is however largely
imported. This cost was adjusted for exchange rate overvaluation in the
same way as for other inputs.


Capital and Labor. All capital expenses were based on a real rate of
interest of 10 percent. Most estimates indicate that the opportunity
cost of capital in developing nations is at least this amount. Labor
costs were valued at the actual wage rate paid to workers.


Table 15 summarizes farmer prices and estimated opportunity prices,
free of policy distortions. In most cases, the farmer receives and pays
prices less than the opportunity price due to exchange rate overvalua-
tion (i.e. imports at the official exchange rate). Larger differences
occur due to subsidies on diesel fuel, bank credit and government
tractor hire services.


6.2 Results of the National Profitability Analysis


National profitability of each enterprise was calculated for a
"base run" using technical coefficients that reflect the recommended or
"best bet" technology (except for extensive dairy where a farmer
technology was used). Sensitivity analysis was then conducted to
calculate national profitability at farmer levels of technology and also
with variations in world prices.









Table 15. Opportunity Prices Used for National Profitability Analysis
Campared to Actual Farm Prices,


Farm Price
June, 1983


Opportunity
Price


Farm Price
as Percent
Opportunity
Price


Products

Wheat (S./qq)
Barley (S./qq)
Milk (S./lt)
Potatoes (S./qq)


Inputs

Seed
Diesel (S./lt)
Urea (S./50 kg)
18-46-0 (S./50 kg)
10-30-10 (S./50 kg)
2-4,D (S./lt)
Tractor Use (S./hour)
Real interest on
bank credit (percent)
Labor (S./day)
Animal power (S./day)


Investments

Tractor (75 H.P.) (S.)
Caobine Harvester (S.)
Value of dairy herd
(S./adult animal equiv.)


a/ Based on government tractor hire services.


830
720
16
350


60
76
87
100


830
20.8
1020
1130
1060
445
800


500
550
14
350


500
3.4
660
875
750
250a/
220a

negative
135
270


1,100,000
3,668,000

40,000


10
135
270


1,690,740
5,000,000

40,000


100
100


100









Table 16. Estimated Profitability to Farmers and to the Nation of Wheat
and Competing Enterprises at Recommended Technology Levels,
Cayambe, 1983.
National
Farmer Returns Returns Total Policy
to Land to land Effect b/
(Sucres/ha)

Wheat 13,360 23,330 -9,960
Barley 13,880 14,620 -740
Potatoes 64,200 45,300 18,900
Intensive Dairya/ 26,550 18,850 7,700
Extensive Dairy 15,540 12,830 2,710

a/ Expressed per 6 month cycle.
b/ Excludes indirect effects operating through policies affecting
returns to land in carpeting activities. See Table 2.1 for definitions
of policy effects.



Results for the base run are shown in Table 16. Note that national
profitability for intensive dairy is calculated for a six month cycle in
order to compare with a crop cycle. Potatoes are the most profitable
enterprise. However, for this technology level, wheat is in second place
followed by intensive dairy. Barley and extensive dairy are the least
profitable alternatives. That is, when products and inputs are valued at
their import prices and subsidies removed from capital and mechanization
costs, one hectare of wheat contributes more to national income than one
hectare of pasture for intensive dairy over a six month period, and sub-
stantially more than one hectare of barley or extensive dairy.


The results also clearly show the difference between the ranking of
wheat and dairy based on private and national profitability. To the
farmers, wheat is the least profitable enterprise and intensive dairying
gives the second highest profits (after potatoes). In the case of wheat,
policies, especially wheat prices lower than world prices, tax the
farmer about 23 percent (net) of the value of his production. On the
other hand, policies such as subsidized credit and diesel as well as the
importation of inputs at the official exchange rate combine to provide a
total net subsidy on intensive dairy of 19 percent of the value of pro-
duction. These various subsidy effects are summarized in Table 17.









Table 17. Sumnary of Main Policy Effects by Enterprise, Cayambe,
a/
1983a

Subsidy on Import of
Price of Output Diesel and Other Inputs
in Relation to Mechanization at Official Subsidy
World Price Services Exchange Rate on Credit

(Sucres/ha)
Wheat -17,300 4,590 1 990 0

Barley 7,890 4,590 1,680 0

Potatoes 0 4,740 13,000 0

Intensive Dairya/ 4,690 3,160 1,920 7,300

Extensive Dairy 2,490 0 701 4,500


a/ Calculations of policy effects are defined in Table 1.
b/ Calculated for a six month cycle.



The national profitability analysis also clearly shows the expected
superiority of wheat in relation to barley. Their costs are similar but
higher yields of wheat and higher prices for wheat in world markets pro-
vide greater benefits from wheat production. In areas which are suited
to wheat production, wheat will provide a return almost 50 percent
higher than barley. However, price policy, especially the importation of
barley at a close to the free market exchange rate, provides incentives
to farmers to grow barley. Again, there is a conflict between what is
profitable to farmers and what is profitable to the country.


Wheat is definitively less profitable than potatoes to both farmers
and the country. However, the limited and risky market for potatoes pro-
vides little likelihood that potato area will expand significantly.
Potatoes also provide high profits to farmers so there is no conflict
between profitability to farmers and to the nation.


The most interesting case concerns the competition between wheat








and dairy, especially given the fact that expansion of dairy production
has been largely responsible for the decline in wheat area. Sensitivity
analysis was conducted on alternative price and technological assulp-
tions to determine to what extent the conclusions on the higher national
profitability of wheat are sensitive to these assumptions.


Table 18 gives results for national profitability of wheat and
dairy at farmer levels of technology. Wheat gives somewhat higher
returns than intensive dairy on a six-month cycle. However, returns in
extensive dairy on an annual basis are slightly higher than for a wheat
crop. Some improvements in wheat productivity are needed to compete with
extensive dairying national profitability in the two enterprises are
equal at a wheat yield of only 1.6t/ha compared to farmers' yields of
i.5t/ha. On the other hand, at the recommended level of technology for
wheat (2.5t/ha), milk productivity in extensive dairying needs to exceed
2000 It/ha (with no change in costs) to compete with wheat. Hence the
results of national profitability analysis are quite sensitive to
assumptions about current technology and the potential for improvement
in productivity in wheat and dairy.



Table 18. Comparison of the National Profitability of Wheat and Dairying
Under Alternative Assumptions Regarding Productivity, Cayambe,
1983.

National Profitability

Current Farmer Productivities (Sucres/ha)

Wheat (Yield 1.5 t/ha) 10,550
Intensive Dairy (Milk Yield 3000 It/ha)a/ 8,450
Extensive Dairy (Milk Yield 1300 It/ha) 12,830

Productivities with Improved Technology

Wheat (Yield 2.5 t/ha) /23,330
Intensive Dairy (Milk Yield 4900 It/ha)a 18,850



a/ Calculated for six-month cycle.
b/ Based on results of on-farm experiments on wheat and productivity
levels of the best farmers in the case of dairy.








Table 18 also shows that wheat gives the largest increase in
returns to land from use of improved technology. This implies that if
promoting the use of improved technology requires the same investment of
research and extension services per hectare for wheat and dairy, then
allocation of these resources to wheat will provide substantially higher
payoffs to the nation, providing farmers have the market incentives to
grow wheat.


Table 19 shows the effect of changes in world prices on national
profitability. Using the maximum expected import price of dry milk (see
Appendix C), intensive dairying becomes slightly more profitable than
wheat but there is still a large advantage of wheat over extensive
dairying. If wheat prices are expected to remain at their current low
levels and if an adjustment of 10 percent is made to allow for quality
differences between local and imported wheat, the relative ranking
is rather similar (Table 19). The competition between wheat and
intensive dairy is sensitive to assumptions about world prices but wheat
at improved levels of technology maintains its comparative advantage
over extensive dairy.



Table 19. Comparison of National Profitability of Wheat and Dairy at Im-
proved Technology Levels Under Alternative Assumptions about
World Prices for Wheat and Milk.

National Profitability

1. Base Run Expected Import Prices (Sucres/ha)
Wheat ($US210/ton) 23,330
Intensive Dairy ($US1500/t)a 18,850
Extensive Dairy ($US1500/t) 12,830

2.Milk at Maximum Expected Import Price
Intensive Dairy ($US1800/t)a/ 25,200
Extensive Dairy ($US1800/t) 16,200

3.Wheat Price Based on Minimum Expected
Import Price ($US175/t) b/ 18,500


a/ Calculated for six-month cycle.
b/ Import price in 1983 less 10 percent discount to allow for higher
moisture and impurities of local wheat.








Finally, Ixbcause it. is difficult to estimate the opportunity price
for foreign exchange, sensitivity analysis was conducted at different
exchange rates. However, the ranking among enterprises was unchanged for
exchange rates between S.65/$US1.00 and S.95/$US1.00. Table 20 shows the
relative foreign exchange, labor and capital costs of each enterprise.
For every three units of foreign exchange saved by growing wheat in
Ecuador instead of importing it, about one unit must be used for im-
porting inputs and machinery. Ratios are similar for other enterprises,
except extensive dairying which uses little foreign exchange. Potatoes
are by far the most labor intensive crop while dairying requires three
times more capital than crop production. National profitability
estimates of these enterprises will be quite sensitive to wage rates and
interest rates, respectively.





Table 20. Summary of the Ratio of Foreign Exchange, Labor and Capital a/
Costs to the Value of Output at Improved Level of Technology.


Foreign Exchange
Costs per Labor Costs Capital Costs
Unit Value of per Unit Value per Unit Value
Output of Output of Output c/
(xl03) (xl03)


Wheat .31 36 57
Barley .37 46 72
Potatoes .35 157 41
Intensive Dairy .24 54 193
Extensive Dairyb/ .10 62 270






a/ All prices expressed in opportunity prices.
b/ Farmer level of technology.
c/ Excludes capital invested in land.








7.0 Conclusions


Wheat production in Ecuador has declined because of reduced area
combined with stagnant yields. The reduction in wheat area reflects de-
clining profitability in real terms and in relation to competing crop-
livestock enterprises, particularly dairying and to a lesser extent
barley. The failure to achieve widespread use of yield increasing tech-
nologies in wheat, especially fertilizer, also reflects relatively low
returns to investment in improved technologies at prevailing input and
output prices.


Government policies have played an important role in the declining
profitability of wheat production. These include:!
a) An overvalued exchange rate (along with subsidized transport
costs) which kept prices of imported wheat low and also led to declining
real prices for wheat to producers.
b) Importation of wheat free of duty at the same time that milk,
potatoes and barley were subject to tariffs or import controls.
c) Substantial increases in bank credit at negative real interest
rates which particularly favored capital intensive industries such as
dairying and enabled rapid increases in productivity.


At the same time, policy interventions also favored reduced costs
of wheat production. The overvalued exchange rate reduced the price of
imported inputs and machinery. Subsidised diesel prices and more re-
cently MAG subsidization of mechanization services sharply reduced costs
of tractor use below the real cost. However, wheat and competing enter-
prises benefited in approximately equal terms from these policies.


By 1982/83, wheat provided farmers less than a third of the returns
to dairying, including extensive dairying carried out with low produc-
tivity on natural pastures. Even if farmers employed the best available
technology, wheat production would be less profitable than extensive
dairying at current levels of productivity. Furthermore returns associa-
ted with use of improved wheat technology are not high enough to induce
widespread adoption by small farmers with capital scarcity and inability








to withstand risks. Under these circumstances it is not surprising that
there has been a substantial switch from wheat production to livestock
and in some cases barley. This change has occurred in both the valleys
where wheat is no longer sown to renovate pastures, and increasingly on
the slopes and higher areas.


A major objective of this study has been to determine if wheat
production would be an efficient use of resources from the national
viewpoint. The profitability to the nation of each crop-livestock
activity was computed by expressing product and input prices at their
world price equivalent and removing subsidies on prices of fuel, tractor
services and credit. The results clearly show that except for potatoes,
wheat provides the highest national returns to land and extensive
dairying the lowest. This result holds for both current levels of
technology (except for small farmers) and for improved levels of
technology. Moreover if farmers faced world price equivalents for both
wheat and fertilizer the incentives for use of recamnended fertilizer
doses would be significantly increased.


Scme uncertainty surrounds future trends in world prices for milk
products, given the large subsidies now paid by exporting countries.
Sensitivity analysis assuming an expected maximum world price for milk
products suggests that intensive dairy would provide somewhat higher
national profits but that wheat would still compete with lower
productivity extensive dairying.


These conclusions have at least three important limitations. First,
there is little available data on the dairy industry, particularly ex-
tensive dairying. A survey of land use patterns and productivity is
needed to establish the relevant input-output parameters and extent of
different livestock systems. Second, the analysis was confined to one
region. Extension across other important wheat regions is needed to
confirm the generality of the conclusions. Nonetheless, Cayambe is a
high potential region and it is expected that livestock activities would
have lower productivity in other regions. Finally, the results focus on
efficiency of resource use. Other objectives, such as income distribu-








tion and consumer protection from fluctuations in world prices will also
want to be considered in any decision to promote domestic wheat produc-
tion at the expense of other products.


The results of this study do not suggest that all the policy
interventions listed should be eliminated in order to promote wheat
production. Many of the policies, such as subsidized transport costs or
maintenance of a low official exchange rate are implemented with broader
objectives in mind and have implications for all sectors of the economy.
However, if there is a desire to promote wheat production in the
interests of more efficient resource use, a number of possible policy
measures are possible. One low cost alternative is to set the producer
price of wheat at the import equivalent price, converted at the free
market exchange rate. (Imported wheat could still be imported at the
official exchange rate to maintain low consumer prices.) This would
imply a current price of about S.18,300/t or S.830/qql/. It will also
be important to maintain prices of wheat relative to prices of competing
products in line with relative import equivalent prices. This implies a
price of wheat roughly 15 percent above milk and barley prices.


Since domestic wheat purchases currently make up about 5 percent of
wheat milled, payment of a price of S.18,300/ton would have only a
negligible impact on consumer prices. The difference between this
producer price and the price of imported wheat at the official exchange
rate could be financed by a small tax on imported wheat. While the
desire to maintain wheat prices low to consumers given the present
economic crisis is understandable, in the long run food security is
promoted by allowing wheat prices to consumers to rise to levels that
reflect the cost of imported wheat at the corrected exchange rate. If
domestic wheat production expands, the tax on imported wheat (at the
official exchange rate) can be increased to support domestic producer



Actual producer prices would be about 10 percent lower to allow for
quality differences. Some mechanism is also needed to enforce minimum
producer prices at the mills given the buying power of local millers.
ENAC which is heavily involved in rice purchases could play this role.
See Appendix B for a discussion of same of these issues.









prices and at the sane time gradually bring the price of imported wheat
to a price based on the free exchange rate.


A second option for promoting wheat would be to reallocate credit
that is now heavily focused on livestock and rice production toward
wheat production. The results of on-farm research suggest that
significant productivity increases in wheat are possible through use of
recommended fertilizer levels which could be promoted by greater credit
availability for fertilizer purchases. Recently the BNF has announced
increased credit allocations for wheat.


Finally, the current results provide justification for continuing a
strong wheat research program. Although technological change alone is
not sufficient to overcame the low farmer returns from wheat under cur-
rent policies, agricultural research is a long term process and
decisions on research resource allocation must take a long term
perspective on the policy environment. The current negative policy
environment for wheat is only a decade old and could change in the
future. More analysis of policy alternatives is needed to provide a
better information base for such decisions.


Finally, research decisions should take a broader perspective on
possible pay-offs to increased productivity. Increased productivity in
wheat will increase the competitiveness of wheat with other crops. At
the same time increased productivity in dairying might reduce milk
prices and indirectly allow expanded cereal production through removal
of land fran low productivity dairying.

















APPENDICES









A Changes in Consumption Patterns and Consumer Price Policy


B The Wheat Marketing and Milling System


C The World Market for Dairy Products and The Relationship Between
World Prices and Ecuadorian Prices


D Calculation of Mechanization Costs


E Budgets for Crop-Livestock Activities to Calculate Farm-Level and
Social Profitability


F Institute and Departments Providing Data and Information for the
Study


G Data on Wheat Production and Utilization








Appendix A. Changes in Consumption Patterns and Consumer Pricing Policy.


Consumption.of basic food staples has undergone rapid change in the
1970s, in part induced by pricing policy. Table Al summarizes these
changes as well as the importance of various food staples for different
groups. Consumption of rice and wheat has expanded extremely rapidly.
Both commodities, are consumed more in urban areas than in rural areas,
and wheat tends to be consumed more by higher income groups. Consumption
of rice and wheat has expanded in large part through declining
consumption of traditional staples such as barley, soft maize and
potatoes. Rapid urbanization has been one factor in this substitution
since urban consumers often prefer rice and bread (see Byerlee (1983)).
However, pricing policy has also been a major influence. Figure Al shows
that real retail prices for rice and bread have declined quite sharply
in the 1970s while prices for potatoes and soft maize have increased.
The decline in bread prices reflects two factors a) imports of wheat
free of duty and at an increasingly overvalued exchange rate and b) a
consumer subsidy on wheat flour that maintained wheat flour prices
constant from 1973 to 1982 but led to a decline of 70 percent in real
prices (see Figure Al). The decline in rice prices probably reflects
strong government programs to increase production including a large
allocation of BNF credits.


The removal of the subsidy on wheat flour in late 1982 led to a
sharp increase in flour prices of almost 200 percent. However the impor-
tation of wheat at the official exchange rate still resulted in low
prices of wheat flcar relative to other foods (see Table A2). In June
1983, wheat flour in the Quito market was still cheaper than all other
staples including hard maize. The removal of the subsidy on wheat flour
is estimated to have caused a 15-18 percent decline in consumption from
late 1982 to May 1983. However, rapid increase in prices of other
staples, including a shortage of rice, removed the initial price effect
and wheat imports and consumption were expected to increase in 1983 to
record levels.









Table Al. Sumnary of Consumption Patterns for Main Food Staples and for
Milk.


Rice
Wheat
Barley
Soft Maize
Hard Maize
Potato



Cassava
Milk


Per capital
Consumption,
1976/78
(kg/year)
25.5
37.5
8.1
7.6
23.4
57.3



35.2
63.2


Annual Growth
Rate Per
Capita
Consumption
1972/74
to 1976/78
(percent/year)
9.1
9.8
7.0
-17.2
1.3
6.9



5.1
0.8


Ratio of Con-
sumption of Ratio of
Higher Inccme Consumption
Groups to Lower in Urban
Income Groups in Areas to
Urban Areas a/ Rural Areas


1.08
1.63


- 1.41



-1.36


1.17
1.23


-.41



-.93


1.41


2.41


a/ The lower income group includes all households with incomes less
than S.83,000/year. They comprise 64.2 percent of the population and the
remaining 35.8 percent is classified as higher income.

Source: Calculated from data in Szretter, 1982.


Table A2. Wholesale Prices in the Quito Market, June, 1983.


Potatoes
Soft Maize
Hard maize
Barley
Wheat Flour
Barley Flour


Price
(S .qq)
1,300
1,100
800
700
740a/
1,200


a/ Quintal


converted from 50 kg to 44.5 kg.








Figure Al. Real Retail Prices for basic Food Staples in Urban Areas,
1970-82.


Bread


Potato


Wheatl
FlourJ


72 73 74 15


i6 77 8 9 80 8I 2 8'3
Year


Wholesale price to bakers.


Source: INEC


1970 71









Appendix B. The Wheat Marketing and Milling System


By 1983, well over 90 percent of the wheat milled in Ecuador was
imported. Almost all wheat has been imported as Hard Red Winter No.2
from the USA, although much of it is wheat of intermediate hardness
grown in California.


In 1983, all wheat imports were covered by Cormodity Corporation
Credits (CCC) of the U.S. government. These credits provide loans at
market interest rates over a three year period from private banks, but
with security of the loans guaranteed by the U.S. government. The avail-
ability of this credit is reported to have been an important factor in
maintaining and even increasing wheat imports in the face of the recent
scarcity of foreign exchange. CCC credits are a direct agreement between
the lending bank and the Ecuadorian Central Bank.


Wheat is imported up to a limit set by the MAG. (Each mill has its
own quota although wheat is often freely traded between mills.) The mil-
lers themselves do the wheat importing. This was formerly done by the
two large coastal mills on behalf of other mills. More recently the mil-
lers of the Sierra have formed their own importing company, Ecuatoriana
de Granos to import directly. Imports are on a C and F basis under a
tender system. Imports are usually received in vessels of 13,000-14,000
tons.


The government has established a reference price for imported
wheat. This reference price remained at about $135/t between 1973 and
1982 and was below the import price during most of the period. The
difference was made up by a government subsidy. In 1983, the reference
price C and F was $US195/t which was above the import price. The
difference goes to government revenues. Flour prices are also controlled
but these controls were not effective in 1983 when market prices rose
above the official price.


Local wheat is purchased following a schedule of official prices.
In 1983 this price was set at S.400/qq (S.8800/t) for wheat at 72








kg/hecto-litre, 15 percent moisture and 2 percent impurities. Discounts
(or premiums) of S.5.50/qq were made for each one kg per hecto-litre
change from the standard. In addition, prices were discounted for excess
moisture and impurities. One estimate is that on average, this discount
from the official price was about 10 percent.


In practice the difference between the official price and the price
actually paid to producers has varied substantially. When imported wheat
is widely available there is little incentive for millers to receive
local wheat for several reasons. First, imported wheat has been provided
at subsidized prices and although local wheat also received a direct
subsidy at the mill between 1979 and 1982, it is generally believed that
there was a strong incentive to use imported wheat. Second, even when
local wheat is discounted in price for moisture and impurities there are
additional costs of handling local wheat due to the variation in
quality, the receival of wheat in bags and also the extra costs of
cleaning and drying local wheat. Third, millers because of their small
numbers enjoyed same monopsony power in buying local wheat. Finally,
millers complained about the milling and baking quality of local wheat.
For these reasons local wheat prices seem to have fallen as much as 20
percent below official prices in some years. The government has at-
tempted to correct this problem by determining the quota for each mill
for imported wheat in terms of the quantity of local wheat purchased.
However, this seems to be enforced loosely, if at all. ENAC the govern-
ment food marketing agency has not intervened in the wheat market al-
though they play an active role in purchasing rice from farmers.


There are same 22 flour mills in Ecuador but their size varies
greatly. The two largest mills on the Coast account for half of the
total milling capacity. Four others in the Sierra make up 30 percent of
the capacity and the remaining 20 percent is shared between 16
relatively small mills. Total milling capacity is estimated at
16,000-18,000 t/day. At current rates of consumption only 60 percent of
capacity is utilized. Capacity expansion was very rapid during the
period of rapid increases in wheat imports in the 1970s. The decreased
growth of wheat imports has led to overcapacity in same mills and more







competition to purchase local wheat and in pricing of flour.


Milling margins are relatively low by developing country standards.
Based on a wheat purchase price of S.520/qq of 44.5 kg, a selling price
for flour of S.830/50 kg bag and an extraction rate of 75 percent the
mark-up on the purchase price of wheat is 9 percent higher than in the
US but lower than many countries such as Mexico.


Approximately 65 percent of flour is used in breadmaking, 20 per-
cent in noodles, 5 percent in biscuits, and another 5 percent in other
uses including home consumption. Noodles are a close substitute for rice
- hence relative prices of rice and flour are an important determinant
of noodle consumption.









Appendix C. The World Market for Dairy Products and the Relationship
Between World Prices and Ecuadorian Prices.


Over the last decade Ecuador has chosen a policy of near self-
sufficiency in dairy products. Table Cl shows the percentage dependence
on imports of dairy products for Ecuador in comparison with neighboring
countries of Latin America. Ecuador has been completely self-sufficient
in butter and cheese and has achieved over 90 percent self-sufficiency
in all milk consumed. In contrast, neighboring countries, with the
exception of Colombia, have imported sizable quantities of dry milk,
butter and cheese.



Table Cl. Self-sufficiency of Ecuador and Neighboring Countries in Milk
Products, 1979-81.


Percent Self-Sufficiency In
All Milka/ Butter Cheese


Ecuador
Peru
Colombia
Venezuela
Panama
Costa Rica
Mexico
Latin America


100
99
100
76
18
97
98
93


Per capital
Consumption
of Milk
(kg/year)
101
61
116
137
81
157
119
112


a/DoDmestic milk production as a percent of production plus imports.
Imports of dry milk, butter and cheese are converted at the ratio of 8:1
to milk equivalents and imports of evaporated and condensed milk at a
ratio of 2:1.
b/
Expressed in milk equivalents converted as in footnote a/.


Source: FAO Production Yearbook, 1981 and FAO Trade Yearbook, 1981.








Overall self-sufficiency rates in milk range from only about 60 percent
in Venezuela to 80-90 percent in Mexico and in Latin America as a whole,
compared to 93 percent in Ecuador.


Near self-sufficiency in dairy products in Ecuador has been
achieved at the expense of significant levels of protection to local
producers resulting in relatively high prices of milk products to
consumers. For example, prices of butter and cheese were well above
those in Peru and other Latin American countries in 1981 (Table C2).
However, consumer prices for milk were below prices in neighboring
countries. This resulted from the importation of dry milk and subsidized
sales of this milk to consumers. Milk processors have maintained low
margins through use of imported dry milk and by subsidizing milk
processing through profits from butter and cheese manufacturing.



Table C2. Retail Prices of Milk and Milk Products in Selected Latin
American Countries, 1981.


Milk Cheese Butter
($US/lt) ($US/kg) ($US/kg)
Ecuador .30 4.50a/ 9.32
Peru na 2.87 3.77
Colcabia .41 4.29 4.03
Venezuela .68 6.89 7.08
Mexico .43 na 5.12
Panama .49 3.20 3.67





aSoft cheese which usually sells for two-thirds of the price of hard
cheese.

na = not available.

Source: ILO Bulletin of Labor Statistics, 1982. Ecuadorian prices from
INEC. Prices converted to US Dollars at the official exchange rate from
IMF, International Financial Statistics Yearbook, 1982.








World markets for dairy products are complicated by large and
growing stocks in reporting countries, particularly in the USA and the
EEC (Table C3). This has led to export prices as much as 50 percent
below prevailing wholesale prices in the exporting countries. The
difference is made up by a large export subsidy, especially in Western
Europe which accounts for nearly 80 percent of world exports of dairy
products (expressed in milk equivalent). The US also exports sizeable
quantities of dairy products under food aid programs.



Table C3. Stocks, World Trade and Prices for Milk and Milk Products.


Estimated Approximate
Ending World Wholesale Export
Stocks Trade Prices Prices
1983 (1979-81) EEC,1982 EEC,1982
(million t) (million t) ($US/t) ($US/t)


Nonfat Dry Milk 1.9 2.5 2200 825
Butter 1.0 1.35 3400 2000
Cheese 1.5 1.4 2500 1750



Source: World Trade FAO Trade Yearbook, 1981: Wholesale Prices, FAD
Monthly Bulletin of Statistics, May, 1982; Stocks and Export Prices,
USDA Foreign Agricultural Circular-Dairy, various issues.



Because of these factors, it is not easy to determine a world price
for dairy products. However same estimates are possible. In the case of
dry milk, Ecuador has been a consistent but not a large importer. The
CIF price was determined from MAG records and a margin for internal
transport and distribution added. This margin was estimated by EMPROVIT
at S.14,000/t in 1983. Margins for previous years were determined by
assuming that the margin had changed by the same rate as inflation. Ex-
port prices for New Zealand butter are available from IMF International








Financial Statistics. A 15 percent margin was added to obtain Ecuadorian
CIF prices, resulting in slightly higher prices than the London CIF
price for New Zealand butter. The internal marketing margin was
estimated at about S.120/kg in 1983. This margin was used to estimate
margins in previous years as for dry milk.


The Nominal Protection Coefficient expressing the relationship be-
tween national prices and world prices was estimated using the official
exchange rate and also the corrected exchange rate as derived in Section
3.0. Results are shown in Table C4.


Nominal Protection Coefficients
1970-83.


Milk


.92
1.09
1.28
1.23


Nominal Protection
Coefficient
Butter WhE


.94
1.31
1.65
1.19


at


.98
.88
1.09
1.04


for Milk, Butter, and Wheat,


Adjusted Nominal Protection
Coefficienta/
Milk Butter Wheat


.79
1.06
1.32
.95


a/ Adjusted


for overvalued exchange rate.


Prices of milk and butter were generally below world prices in the
early 1970s but increased to well above world prices in the late 1970s.
In the case of milk the increase was not sufficient to compensate for
the overvalued exchange rate so that the adjusted NPC remained below
one. Butter on the other hand received substantial protection even
when an adjustment was made for exchange rate overvaluation. Wheat
prices on the other hand approximated world prices at the official
exchange rate during much of the period but received increasingly
negative protection at the corrected exchange rate.


Table C4.


1970-73
1974-76
1977-80
1983








A reliable series of world prices for cheese is not available.
However, for hard or cheddar cheese both Ecuadorian and world prices
closely followed butter prices. For soft cheese (queso de ternero) that
is camonly consumed in Ecuador, the situation is probably intermediate
between milk and butter that is, significant import protection was
received for domestic production but less than in the case of butter.
The large number of small-scale industrial establishments for cheese
manufacturing probably allowed greater competition in this sector.


It is also likely that the producer prices for milk underestimate
prices actually received. The strong demand for milk and high prices for
milk products has alluoed the milk producer to receive prices higher
than the guaranteed minimum price, especially in the period 1977-81.
Hence, actual NPCs for milk during this period are probably close to
one.


In 1983, milk prices at the corrected exchange rate were below
import price levels and even butter received little or no protection.
The slow-down in demand for milk products (and probable decline in
demand in the case of butter and cheese) has led to real price declines.
Nonetheless the level of discrimination was significantly less than in
the case of wheat.


In this study we are primarily interested in the longrun trend in
world prices for milk products. After a substantial jump in world prices
in the period 1979-81, prices have fallen somewhat. The build up of
stocks and the high subsidy on EEC exports is a subject of a good deal
of discussion in international trade forums. The EEC Commission has
developed a plan to reduce milk production but it is unlikely to lead to
a fall in stocks in the medium term. Continuing growth in productivity
in the dairy industry combined with stagnant demand has led to large
surpluses in both the EEC and the US.


The ceiling on world prices for dairy products is the internal
price in exporting countries (e.g. the EEC wholesale price). However,
this is unlikely to be achieved since a number of exporting countries,








especially Australia and New Zealand, have low levels of protection and
could expand production substantially even if the EEC were to cut back
exports. Hence, in this study an upper limit on import prices for dry
milk is assumed to be $1800/ton which is intermediate between the medium
term estimated price of $1500/ton and the EEC internal price of
$2200/ton.








Appendix D. Calculation of Mechanization Costs.


Use of tractors for land preparation is the most camnon source of
mechanical power in the Cayambe area. Larger farmers also use combine
harvesters for wheat and barley. Some other forms of mechanization are
also practiced, such as use of milking machines by same dairy farmers.
Only the costs of tractors and combine harvesters were considered in
detail in this study. These mechanization services are provided through
a) machinery ownership, b) rental from private machinery contractors or,
c) rental from the mechanization service of the Ministry of Agriculture.
The latter is the most comnon practice among small and medium size
farmers.


In order to separate out tradeable from nontradeable inputs and
correct for taxes and subsidies on machinery and fuel prices we divided
costs of mechanization services into the following components: a) de-
preciation b) capital costs c) fuel costs d) maintenance and repair
costs and e) operator's labor (Byerlee, 1983). These costs were cal-
culated per hour of machine use as follows:
a) Depreciation.
D = [(l-s)P ]/nh,
a
where D = depreciation cost per hour
s = salvage value of machine as a proportion of acquisition value
P = current purchase price of machine
n = number of years of life of the machine
h = number of hours worked per year.
b) Capital Cost
C = i [ (l+s)Pa/2]/h,
where C = capital cost of machine per hour
i = real cost of capital
Other variables are as defined above.
c) Fuel
F = .10 p A,
where F = Fuel cost/hour of machine use
p = horse-power of machine
A = price of fuel/it.




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