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Assessing the Financial Viability of Investing in Small-Scale Irrigation Technologies for Potato Production in Dedza and...

Permanent Link: http://ufdc.ufl.edu/UFE0042188/00001

Material Information

Title: Assessing the Financial Viability of Investing in Small-Scale Irrigation Technologies for Potato Production in Dedza and Ntcheu Districts of Central Malawi
Physical Description: 1 online resource (65 p.)
Language: english
Creator: Kamwana, Bonet
Publisher: University of Florida
Place of Publication: Gainesville, Fla.
Publication Date: 2010

Subjects

Subjects / Keywords: drip, financial, irrigation, motorized, potato, simulation, treadle, viability
Food and Resource Economics -- Dissertations, Academic -- UF
Genre: Food and Resource Economics thesis, M.S.
bibliography   ( marcgt )
theses   ( marcgt )
government publication (state, provincial, terriorial, dependent)   ( marcgt )
born-digital   ( sobekcm )
Electronic Thesis or Dissertation

Notes

Abstract: Over 50% of small scale farmers in Malawi leave on less than $1.00 a day and are food insecure. This stems from scarcity and seasonality of rainfall, lack of access to fertile arable land suitable for sustained rain-fed farming and lack of crop diversification. In response to this the Malawi Government developed a National Irrigation Policy and Development Strategy in June 2000. The Policy Document highlights financial viability of investing in small scale irrigation as one of the research needs. This study examines and analyzes the financial viability of investing in small-scale irrigation technologies for potato production in Central Malawi. The study identified seven irrigation scenarios: motorized pump-furrow, motorized pump-sprinkler, motorized pump-drip, treadle pump-furrow, treadle pump-basin, treadle pump-canal and drum drip kits. The financial viability of investing in the seven scenarios was assessed using net present values, benefit cost ratio and probability of generating positive net farm cash incomes. With the help of risk analysis software Simetarcopyright, a distribution of 500 iterations for the three key output variables for each irrigation technology was generated. The results show that the individual irrigation scenarios are financially viable. Each scenario gives a positive net present value and the benefit cost ratio for each scenario is greater than one. The scenarios also have a probability of at least 80% of generating positive net farm cash incomes. The motorized pump-furrow scenarios and treadle pump-furrow scenarios provided the highest mean net present value. The drip scenarios yielded the lowest mean net present value. The probability of generating positive net farm cash income increased with the passage of time. After three years of operations, the probability of generating positive net farm cash income rose to 100%.
General Note: In the series University of Florida Digital Collections.
General Note: Includes vita.
Bibliography: Includes bibliographical references.
Source of Description: Description based on online resource; title from PDF title page.
Source of Description: This bibliographic record is available under the Creative Commons CC0 public domain dedication. The University of Florida Libraries, as creator of this bibliographic record, has waived all rights to it worldwide under copyright law, including all related and neighboring rights, to the extent allowed by law.
Statement of Responsibility: by Bonet Kamwana.
Thesis: Thesis (M.S.)--University of Florida, 2010.
Local: Adviser: Weldon, Richard N.

Record Information

Source Institution: UFRGP
Rights Management: Applicable rights reserved.
Classification: lcc - LD1780 2010
System ID: UFE0042188:00001

Permanent Link: http://ufdc.ufl.edu/UFE0042188/00001

Material Information

Title: Assessing the Financial Viability of Investing in Small-Scale Irrigation Technologies for Potato Production in Dedza and Ntcheu Districts of Central Malawi
Physical Description: 1 online resource (65 p.)
Language: english
Creator: Kamwana, Bonet
Publisher: University of Florida
Place of Publication: Gainesville, Fla.
Publication Date: 2010

Subjects

Subjects / Keywords: drip, financial, irrigation, motorized, potato, simulation, treadle, viability
Food and Resource Economics -- Dissertations, Academic -- UF
Genre: Food and Resource Economics thesis, M.S.
bibliography   ( marcgt )
theses   ( marcgt )
government publication (state, provincial, terriorial, dependent)   ( marcgt )
born-digital   ( sobekcm )
Electronic Thesis or Dissertation

Notes

Abstract: Over 50% of small scale farmers in Malawi leave on less than $1.00 a day and are food insecure. This stems from scarcity and seasonality of rainfall, lack of access to fertile arable land suitable for sustained rain-fed farming and lack of crop diversification. In response to this the Malawi Government developed a National Irrigation Policy and Development Strategy in June 2000. The Policy Document highlights financial viability of investing in small scale irrigation as one of the research needs. This study examines and analyzes the financial viability of investing in small-scale irrigation technologies for potato production in Central Malawi. The study identified seven irrigation scenarios: motorized pump-furrow, motorized pump-sprinkler, motorized pump-drip, treadle pump-furrow, treadle pump-basin, treadle pump-canal and drum drip kits. The financial viability of investing in the seven scenarios was assessed using net present values, benefit cost ratio and probability of generating positive net farm cash incomes. With the help of risk analysis software Simetarcopyright, a distribution of 500 iterations for the three key output variables for each irrigation technology was generated. The results show that the individual irrigation scenarios are financially viable. Each scenario gives a positive net present value and the benefit cost ratio for each scenario is greater than one. The scenarios also have a probability of at least 80% of generating positive net farm cash incomes. The motorized pump-furrow scenarios and treadle pump-furrow scenarios provided the highest mean net present value. The drip scenarios yielded the lowest mean net present value. The probability of generating positive net farm cash income increased with the passage of time. After three years of operations, the probability of generating positive net farm cash income rose to 100%.
General Note: In the series University of Florida Digital Collections.
General Note: Includes vita.
Bibliography: Includes bibliographical references.
Source of Description: Description based on online resource; title from PDF title page.
Source of Description: This bibliographic record is available under the Creative Commons CC0 public domain dedication. The University of Florida Libraries, as creator of this bibliographic record, has waived all rights to it worldwide under copyright law, including all related and neighboring rights, to the extent allowed by law.
Statement of Responsibility: by Bonet Kamwana.
Thesis: Thesis (M.S.)--University of Florida, 2010.
Local: Adviser: Weldon, Richard N.

Record Information

Source Institution: UFRGP
Rights Management: Applicable rights reserved.
Classification: lcc - LD1780 2010
System ID: UFE0042188:00001


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ASSESSING THE FINANCIAL VIABILITY OF INVESTING IN SMALL-SCALE
IRRIGATION TECHNOLOGY FOR POTATO PRODUCTION IN DEDZA AND NTCHEU
DISTRICTS OF CENTRAL MALAWI


















By

BONET CHIKHAWO KAMWANA


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

UNIVERSITY OF FLORIDA

2010

































2010 Bonet Chikhawo Kamwana

































To my wife, Chrissie and my two sons, Chris and Peter for their love









ACKNOWLEDGMENTS

Many individuals have provided support and unruffled encouragement throughout

my graduate school. They have contributed significantly, briskly, and unwearyingly

towards the successful completion of my studies. I would like to express my

appreciation for their countless contributions.

I would like to thank Dr. Richard Weldon, the chair of my supervisory committee,

who made it possible for me to complete this project. Over the two years that I have

been studying, Dr. Weldon has been an excellent instructor, an inspired researcher, a

great academic counselor, a father and a friend. I would also like to thank Dr. John

VanSickle for being part of my committee and for his untiring support and effort.

I also extend my thanks to Dr. Richard Kilmer, Dr. Michael Gunderson and all the

instructors in the FRE Department for laying a solid foundation on which my success

was built. Thanks should also go to Dr. Walter Bowen and Dr. David Sammons for

making my stay in the USA the most memorable.

I would also like to thank my wife Chrissie and my two sons Chris and Peter for

enduring long periods of my absence. I also give special credit to personnel in the

Faculty of Development Studies at Bunda College of Agriculture for their support

especially Dr. Charles Masangano and Mr. Ronnie Mvula.

Finally I would like to thank the United States Agency for International

Development (USAID) for providing funding for my studies through the UILTCB

Program in Malawi.









TABLE OF CONTENTS

page

A C KNOW LEDG M ENTS .......... ..................... ....... .. ......................................... 4

LIST O F TA B LES .......... ..... ..... .................. ............................................. ...... .. 7

LIS T O F F IG U R E S .................................................................. 8

LIST OF ABBREVIATIONS ....... ............ .................... .......... 9

A BST RA C T ............... ... ..... ......................................................... ...... 10

CHAPTER

1 INTRODUCTION, PROBLEM STATEMENT AND OBJECTIVES .......................... 12

Introduction ............... ....................... ....................... 12
Potatoes and Food Security................................................ .................... 13
Irrigation and Food Security ......... .. ........................... 15
Problem Statement ........................ ............ ......... 15
H y p o th e s is .............. ................. .............................................................. 16
O bje active s ......... ...... ............ ................................. ........................... 16

2 LITERATURE REVIEW ....................... ........ ................. 17

Introduction .................... ............ ............... 17
Financial Viability ............... ......... .................. 17
Potato Production ......................... ........ .... ........ 20
Irrigation Technologies..................... .................... ............... 22
C chapter Sum m ary.............................. ............... 24

3 METHODOLOGY ............................ ....... ................. 25

Introduction .................... ............ ............... 25
Methods .................................. ................. 25
Net Present Value (NPV) Method......................................... .................... 26
Benefit Cost Ratio (BCR) Method................................................ 26
Probability Positive Net Cash Farm Income (NFCI) ..................... ........... 27
A nnuities......................................... ............... 27
Simulation Analysis................................ .......... ........ 28
Developing a Forecasting Model ............... .... ................... 28
P ro bab ility D istributio ns .................................. ........ ............... ............... 2 9
Correlation Conditions .............. ........ ....... ........ ..... ............... 29
Simulation Runs ...................... ........ ......... ................... 30
Analysis of Sim ulation O utput...................................... ..... 30
S um m a ry ......................................................................................................... 3 1









4 DATA COLLECTED............................................ ......... 35

In tro d u c tio n ................................................... ....................................... 3 5
H isto rica l P rice s .................35.............................................
H istorica l P otato Y ields .................................................. 36
Initial Investment Costs............................................................ 36
T rea d le P u m ps (T P ) .................................................................. 3 7
M otorized Pum ps (M P)...................... ........................ .................... 37
Drip Technology ............................................ .......... ......... 38
Annual Operating Costs of Irrigation Technologies................................ 38
Irish Potato Production C costs ........................................................................... 39
Non-irrigated and Irrigated Operations assumptions ................................... ....... 39

5 RESULTS AND DISCUSSION ....................................................... .......... 44

In tro d u c tio n ................................................... ....................................... 4 4
N on-Irrigated S scenario ........................................................................ ......... 44
Net Present Values (NPV) ...... ............................................... 44
Benefit Cost Ratios (BCR) ........................................................................... 45
Probability of Positive Net Cash Flows ...... ...................................... 45
Irrigation Scenarios without Pests Prevalence ..................................................... 45
M motorized Pum p (M P) Scenario ............................................... .... ........ 45
Treadle Pum p (TP) Scenarios ................................................................... 46
Drum Drip Kits Scenario .................................................... 47
Irrigation Scenarios with Pests Prevalence.............................. ............... 47
D discussion of Results.. ................................................. ............... 48
M motorized Pum ps (M P)................................................. ........................... 48
T read le P um ps (M P ) ..................................... ..... .............................. 4 9
D ru m D rip K its ................. .................................................................... .. 4 9
Probability of Generating Positive Cash Flows ................................... ........... 49
P ests P revalence .................................. ....................................... ............... 50

6 C O N C LU S IO N S ................. ................ ........ ................... ............................ 56

In tro d u c tio n ........................................... ...... ............................ ............... 5 6
Contributions of the Research ..................................... ............... ............... 56
S u m m a ry ..................... ....................... .. ......................................... .... ........ 5 7
Limitations of the Study Further Research Needs .............. .................. 58
Further R research N eeds........................................... ................ ............... 59

LIST O F R EFER ENC ES ............................................................... 61

BIO G RAPH ICAL SKETCH ........................................... ............... ............... 65







6









LIST OF TABLES

Table page

4-1 Sum m ary statistics for yields and prices.................................. ..................... 42

4-2 Initial investm ent costs ......................................... .............. .............. 42

4-3 Potato production costs per hectare ......... ............................ ............. 42

4-4 Labor, repairs and pests assumptions............... ....... ........ ............ 43

5-1 NPV simulation results for non-irrigated operations.................. ........... 50

5-2 BCR simulation results for non-irrigated operations .................................... 50

5-3 Extract of probability positive cash flows (Non-irrigated Scenario).................... 50

5-4 NPV simulation results for TP and drip (without pests).................................... 51

5-5 NPV sim ulation results for M P (w ith pests)....................................................... 51

5-6 NPV simulation results for TP and Drip (with pests)................................... 51

5-7 BCR simulation results for irrigated operations (without pests) ..................... 51

5-8 BCR simulation results for irrigated operations (with pests) .............................. 52

5-9 NPV simulation results for MP (without pests)............................................. 52

5-10 Extract of probability positive cash flows (MP Scenarios).............................. 52









LIST OF FIGURES

Figure page

2-1 Irrigation technology scenarios ........................................... .......................... 24

3-1 Risk analysis process ............... ........... ................ 31

3-2 Forecasting model.................................................................. ......... ........ ........ 32

3-3 Minimum NPV greater than zero. ................................................. 32

3-4 Minimum NPV less than zero. .............. ............... .. ............... 33

3-5 NPV between less than zero and greater than zero. ................ ............... 33

3-6 Non-overlapping PDFs. .................. ............. ............. ....... ............... 34

3-7 O overlapping PDFs. ........... .................. .......................................... 34

4-1 Historical prices tim e series ................................................. ................ 41

4-2 Historical yields time series. ..... ................................. .. ............... 41

5-1 PDF of NPVs for motorized pumps (without pest prevalence)......................... 53

5-2 PDF of NPVs for treadle pumps (without pest prevalence) ............................. 53

5-3 PDF of NPVs for drum drip kits (without pest prevalence).............................. 54

5-4 PDF of NPVs for motorized pumps (with pest prevalence).............................. 54

5-5 PDF of NPVs for treadle pumps (with pest prevalence) ............... ............... 55









LIST OF ABBREVIATIONS

BCR Benefit Cost Ratio

FAO Food and Agricultural Organization

GDP Gross Domestic Product

IRR Internal Rate of Return

KOV Key Output Variables

MoAFS Ministry of Agriculture and Food Security

MP Motorized Pumps

MK Malawi Kwacha

NFCI Net Farm Cash Income

NFI Net Farm Income

NPV Net Present Value

ODI Overseas Development Institute

PBP Pay Back Period

PDF Probability Density Function

TP Treadle Pumps

UNDP United Nations Development Programme









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

ASSESSING THE FINANCIAL VIABILITY OF INVESTING IN SMALL-SCALE
IRRIGATION TECHNOLOGY FOR POTATO PRODUCTION IN DEDZA AND NTCHEU
DISTRICTS OF CENTRAL MALAWI

By
Bonet Chikhawo Kamwana

August 2010

Chair: Richard Weldon
Major: Food and Resource Economics

Over 50% of small scale farmers in Malawi leave on less than $1.00 a day and are

food insecure. This stems from scarcity and seasonality of rainfall, lack of access to

fertile arable land suitable for sustained rain-fed farming and lack of crop diversification.

In response to this the Malawi Government developed a National Irrigation Policy and

Development Strategy in June 2000. The Policy Document highlights financial viability

of investing in small scale irrigation as one of the research needs.

This study examines and analyzes the financial viability of investing in small-scale

irrigation technologies for potato production in Central Malawi. The study identified

seven irrigation scenarios: motorized pump-furrow, motorized pump-sprinkler, motorized

pump-drip, treadle pump-furrow, treadle pump-basin, treadle pump-canal and drum drip

kits. The financial viability of investing in the seven scenarios was assessed using net

present values, benefit cost ratio and probability of generating positive net farm cash

incomes.

With the help of risk analysis software Simetar@, a distribution of 500 iterations for

the three key output variables for each irrigation technology was generated. The results









show that the individual irrigation scenarios are financially viable. Each scenario gives a

positive net present value and the benefit cost ratio for each scenario is greater than

one. The scenarios also have a probability of at least 80% of generating positive net

farm cash incomes.

The motorized pump-furrow scenarios and treadle pump-furrow scenarios

provided the highest mean net present value. The drip scenarios yielded the lowest

mean net present value. The probability of generating positive net farm cash income

increased with the passage of time. After three years of operations, the probability of

generating positive net farm cash income rose to 100%.









CHAPTER 1
INTRODUCTION, PROBLEM STATEMENT AND OBJECTIVES

Introduction

Malawi is one of the poorest countries in the world with per capital gross domestic

product (GDP) of $190, 30% of under-five children being malnourished and the infant

mortality rate of 229 per 1,000 live births and a life expectancy at birth of 42 years

(World Bank, 2001). Poverty levels have remained relatively high despite the Malawi

government instituting several poverty alleviation programmes over the decades. The

1998 Integrated Household Survey and the 2004 Integrated Household Survey show

that while poverty rate was estimated at 54.1 % in 1994, the figure went down to only

52.4% in 2004 (Malawi Government/World Bank, 2006).

The economy is heavily dependent on agriculture, which accounts for over 80% of

employment and foreign exchange earnings, and nearly 40% of GDP (UNDP, 2005).

The agricultural sector is divided into two subsectors: the estate subsector and

smallholder subsector. The estate subsector has a small number of large-scale farmers

covering about 17% of the cultivated land and is the major contributor to growth and

employment; with the major export crops being tobacco, sugar and tea (Overseas

Development Institute, 2005). The smallholder subsector covers the rest of the

cultivated land. It dominates food production providing livelihood to over 2.4 million

households (Academy for Educational Development, 2007).

The main crops grown by the smallholder farmers are maize, tobacco, cassava,

groundnuts, potatoes, cotton, sorghum and millet. Of these crops maize occupies 75%

of the cultivated land and is cultivated by over 95% of the farmers (Academy for

Educational Development, 2007). According to the Academy for Educational









Development, for most Malawians, maize is synonymous with food and a sense of food

security at the household level. However, maize production has been declining over the

recent years and demand for food has been increasing steadily. Malawi is not able to

meet its food requirements. Kundell (2008) identified the following as the major reasons

a) the failure of food production to keep pace with increases in the human population;

b) lack of water (droughts) and inability to use it for agricultural production;

c) declining soil fertility, combined with shrinking average farm holdings;

d) inappropriate and outdated agricultural technologies; and

e) the perception by many that maize is the only food even if other crops that are
more adapted to drought are available.

Thus Vulnerability to shocks such as climatic hazards-dry spells, seasonal

droughts, intense rainfall and flash floods (Malawi Governmnet, 2006) has led to a

decline in productivity. This is aggravated by mounting land pressure, declining soil

fertility, lack of diversification in the agricultural sector and reliance on rain-fed

agriculture (Overseas Development Institute, 2005).

Potatoes and Food Security

It has been argued that crop diversification, rather than increased maize

production, is the way off the poverty treadmill (Rubey, 2003). One of the crops that is

becoming important as a food security crop is the potato. Globally the potato is an

integral part of the food system (FAO, 2009). According to FAO, the potato is

a) the world's number one non-grain food commodity and its consumption is
expanding strongly in developing countries; where its ease of cultivation and high
energy content have made it a valuable cash crop for millions of farmers.

b) a highly recommended food security crop that can help low-income farmers and
vulnerable consumers ride out the turmoil in world food supply and demand
because, unlike major cereals, the potato is not a globally traded commodity, and









its prices are determined usually by local production costs, not by the vagaries of
international markets.

Roots and tubers are a major source of sustenance in Sub-Saharan Africa

(International Food Policy Research Institute (IFPR), 2001). A high demand and

production scenario shows that the total use of roots and tubers in developing countries

is likely to increase by 74% between 1993 and 2020; with more than half of the increase

attributable to faster growth in the use of potato (IFPR, 2001). Roots and tubers also

serve as sources of cash income for low-income farm households and raw material for

processed products for both rural and urban consumption.

In Malawi, roots and tubers play an important role in food security and providing

income to rural farm households. During the 2001 food crisis which recorded a 32%

reduction in national maize production, the Ministry of Agriculture and Irrigation believed

that the high production of roots and tubers (cassava, sweet potatoes, Irish potatoes) in

the same year offset the dip in maize production and provide adequate, if not surplus,

food for the country (UNDP, 2008). In addition a pilot phase of a tripartite partnership

among Universal Industries Limited (the largest confectionary manufacturer in Malawi),

International Potato Centre (a leading research institution) and Concern Universal

working with communities and the Government of Malawi to improve potato production

and to bring about improved incomes of smallholder farmers shows that improved

potato production brings about increased income for smallholder farmers (Concern

Universal, 2008). The crop is deemed important enough today to warrant a program of

research and extension by the national government in cooperation with international

organizations, notably the International Potato Center (Nsanjama, 1984).









Irrigation and Food Security

A study by GTZ (2006) noted that population pressure in many countries, including

Malawi, has exhausted the access to fertile arable land suitable for sustained rain-fed

cultivation. This has forced millions of subsistence farmers to toil land that has minor

potential to meet their household food requirements. According to GTZ, these physical

constraints are often compounded by harsh climatic conditions with scarce rainfall and a

more pronounced seasonality of the rains. As a result there is an increasing need for

developing small scale irrigation schemes for smallholder farmers. According to

NEPAD/FAO (2005), the development of irrigation is critical to offering real prospects for

boosting productivity, diversifying production and mitigating against the effects of

drought. Postel (1999) noted that irrigated plots in developing countries commonly yield

twice as much as rain-fed plots do. Postel argues that with irrigation, farmers can

choose to invest in high-yielding seeds, grow higher-value crops, have a normal harvest

even during periods of scarce rainfall, and harvest two or more crops from same piece

of land in a year.

Malawi is gifted with large water resources-lakes, rivers and the traditional dambos

(wetlands). Almost one fifth of the country is covered by water. However, despite the

huge water resources, agriculture is rain-fed. Irrigated land comprises only 0.6% of total

arable land in Malawi. The existing potential for irrigation is far from utilized, especially

in the area of low-cost water harvesting measures (Carr, 1997).

Problem Statement

More than 50% of smallholder farmers in Malawi are poor and food insecure. This

stems from increased pressure on land due to rapid population growth, weather shocks,

reliance on rain-fed agriculture and lack of crop diversification. All this is happening









while there is potential for diversifying from maize and developing small-scale irrigation

for smallholder farmers. NEPAD/FAO (2005) noted that irrigation resources are

underutilized and there has been no recent detailed study to identify and evaluate the

potential to utilize the groundwater resources for small-scale wet season supplementary

irrigation and dry season irrigation of high value crops. Furthermore there is limited

information among farmers, investors and policy makers on the viability of small-scale

irrigation systems for potato production in Malawi.

Hypothesis

Investment in small-scale irrigation (SSI) for potato production is a financially

viable investment option.

Objectives

The overall objective of this study is to assess the financial viability of investing in

small-scale irrigation technology for potato production in Dedza and Ntcheu Districts of

Central Malawi. The specific objective of the study is to develop a model which, under a

given set of assumptions, should be able to

a) determine initial investment and operating costs of different irrigation technologies,

b) determine the projected net cash flows per hectare for each irrigation technology,

c) determine net present value (NPV) and benefit cost ratio (BCR) for each irrigation
technology, and

d) determine the probability of generating positive cash flows from each irrigation
technology.

It is the aim of this study to become a tool for potato farmers for analyzing

investments in irrigation. The study should be of interest to farmers, government

departments and other stakeholders in the agricultural sector. The study should give

them a tool for decision making.









CHAPTER 2
LITERATURE REVIEW

Introduction

The purpose of this chapter is to provide a review of work already done on

determining financial viability of investments. The chapter also reviews some work on

potato production and irrigation technologies.

Financial Viability

In June 2000, the Malawi Government developed a National Irrigation Policy and

Development Strategy. Article 7.3.6 of the Policy Document highlights "Financial Issues

(e.g. financial viability from a farmers' perspective)" as one of the research needs in the

Irrigation Sub-sector. Financial viability is the extent to which project can be justified

financially. A financially viable project is the one that is a sound business proposition

capable of earning a rate of return that satisfies the investors and which generates

cash-flows sufficient enough to keep it going.

Financial viability of an irrigation system is important to farmers. Investing in an

irrigation technology involves committing huge sums of money. This has huge

implications on farmers' future profits and cash-flows. The benefits of such

commitments extend into the future and once the commitment is made the expenditure

is irreversible (Seo et al, 2006).

A large body of literature exists regarding techniques that are used to determine

financial viability of investment projects. These methods range from the traditional

payback period (PBP) to advanced methods such as net present value (NPV) and

internal rate of return (IRR). The traditional techniques rank projects based on

accounting profits and do not take into account the time value of money while the









advanced techniques, apart from taking into account the overall profitability and returns

of projects, also base the analysis on net cash-flows (Akalu, 2003), and take into

account the time value of money. These techniques are discussed further in Chapter 3.

There are a number of studies analyzing the viability of investing in different

irrigation technologies.

Mloza-Banda (2006) and Kadyampakeni (2004) used gross margin analysis to

analyze the viability of different irrigation technologies based on a bean crop. They

found that there were variations in viability across different technologies. Farmers who

used motorized pumps realized negative gross margins while those who used treadle

pumps, watering cans, gravity irrigation and residual moisture realized positive gross

margins.

Another study by Mangisoni (2006) used net farm income (NFI) to analyze the

impact of treadle pumps on poverty and food security in Malawi. Mangisoni found that

adopters of treadle pump irrigation technology had higher NFI than non-adopters. The

NFI of adopters of the technology was five times higher than that of non-adopters.

Mangisoni found that, in Blantyre district, the adopters got an average NFI of

MK122,855 while the non-adopters got NFI of MK15,987. Similar results were found for

Mchinji district.


Postel, S., et al (2001) focused on innovations that are designed to provide

smallholder farmers with appropriate, affordable and highly efficient technologies. Postel

et al. reported that farmers who adopted low-cost drip irrigation technology had reported

yield increases of between 50% and 100%. According to Postel et al., the adopters of

the technology also had a decrease in water use of between 40% and 80%. Postel et al.









also analyzed farmers who adopted treadle pumps. It was found that the adopters of the

treadle pump got extra income that enabled them to graduate to higher levels of

mechanization.

Malik and Luhach (2002) used NPV, IRR and BCR to determine the viability of drip

irrigation for fruit production. They found that investment in drip irrigation for fruit

production was sound and economically viable. Senkondo et al (2004) also used NPV,

IRR and BCR to analyze investments in rainwater harvesting for dry season irrigation

for maize, rice and onions. They found that investing in rainwater harvesting for maize,

rice and onions is financially viable. To determine how sensitive the investment was to

changes in variables, Senkondo et al increased input costs by 20% and reduced selling

prices by 20% and found that the NPV was positive, IRR was above cost of capital and

BCR was greater than 1 for maize and onions production only.

There are some similarities between this study and the studies discussed above.

The focus of all the studies is analyzing the viability of irrigation technologies. This study

draws some lessons from the studies discussed above. However, to accomplish its

purpose, this study has several marked differences in approach from the above studies.

a) The studies discussed above, except for Mloza-Banda (2006) and Kadyampakeni
(2004), analyze one irrigation technology only (for example drip only) or compare
two different irrigation technologies (such drip versus furrow). This study analyzes
and compares the viability of three different irrigation technologies (motorized
pump, treadle pump and drip) that lift water from the water source to the field and
five technologies (basin, canal, furrow, sprinkler and drip) that convey water from
the field to the plant. This is done to enable farmers to have a wider basis for
decision-making when it comes to investing in irrigation technologies.

b) There are some differences between the methods used in this study and the some
of the methods used in the studies above. The use of gross margins and NFI were
justifiable for the studies conducted by Mloza-Banda, Kadyampakeni and
Mangisoni respectively. Gross margin is the difference between revenues and cost
of sales. Gross margin analysis ignores some costs (such as marketing costs)
which affect a farm's cash earning capacity. NFI, on the other hand, is an









accounting profit which is based on accrual accounting. NFI includes both cash
and non-cash receipts and costs. This study uses net farm cash income (NFCI)
and capital budgeting techniques as measures of financial viability. NFCI is used
because the ability to generate cash goes a long way in determining the survival of
entities including farms and capital budgeting techniques are used because they
take into account the time value of money.

c) The other marked difference taken by this study is the use of simulation analysis.
While using measures such as NPV, IRR, BCR and PBR; this study recognizes
that these measures are deterministic. To account for the stochastic nature of the
variables involved, a simulation analysis is carried out so that the farmers have a
complete distribution of possible outcomes.

d) While this study focuses on potato production, none of the studies above does so.
Potatoes have been chosen because they are becoming a major part of the global
food system as discussed in the next section.

Potato Production

Potatoes were brought to East and Central Africa in the 19th century by

missionaries and European colonialists, but the crop did not become important to

Malawians until the 1960s, when production was estimated at 60,000 tonnes a year

(FAO, 2009). The crop is deemed important enough today to warrant a program of

research and extension by the national government in cooperation with international

organizations, notably the International Potato Center (CIP) (Nsanjama, 1984).

Now Malawi is sub-Saharan Africa's biggest potato producer. In 2007 Malawi

was the second highest producer of potatoes in Africa with a harvest of 2.2 million

tonnes. Although only a tiny proportion of Malawi's potatoes is exported, annual

consumption of the potato had more than tripled between the years of 1994 and 2009 to

88 kg per capital (FAO, 2009).

The potato is grown mainly in highland areas in the country's southern and

central regions. The most suitable areas are those at altitudes of between 1,000 and

2,000 m above sea level which receive more than 750 mm of annual rainfall (Gondwe,









1980). In the central region potato production is concentrated in the districts of Dedza

and Ntcheu near the eastern border with Mozambique (Gondwe, 1980). While in the

southern region, production is mainly around the districts of Blantyre and Mwanza

(Gondwe, 1980). Although potato production appears to be relatively unimportant in the

Northern region, suitable areas have been identified, particularly the Nyika Plateau and

the northern border with Tanzania (Malunga, 1982).

McDonagh (2002) studied "Crop-based farming livelihoods and policies in

Malawi." McDonagh found that potato farming is the most common new crop across all

income groups. In his paper, McDonagh states that "vegetable production (irish

potatoes, particularly) are a somewhat less risky option as they can be sold at local

markets." This view is supported by FAO (2009). According to FAO (2009) the potato is

a highly recommended food security crop that can help low-income farmers and

vulnerable consumers ride out the turmoil in world food supply and demand. FAO

argues that, unlike major cereals, the potato is not a globally traded commodity, and its

prices are determined usually by local production costs, not by the vagaries of

international markets.

Potatoes are also becoming a major part of the global system because they can

be used for a variety of purposes. According to FAO (2009)

a) potatoes are eaten fresh, frozen or dehydrated.

b) potato starch is used as an adhesive, binder, texture agent and filler. FAO states
that "Potato starch is a 100% biodegradable substitute for polystyrene and other
plastics and used, for example, in disposable plates, dishes and knives."

c) potatoes are used for feeding animals. Studies show that pigs fatten quickly on
6kg of boiled potatoes.









d) peels and other potato wastes can be fermented to produce ethanol. A study
shows that 440,000 tonnes of processing waste can produce between 4 to 5
million litres of ethanol.

FAO estimates that less than 50% of potatoes grown worldwide are consumed

fresh and the rest are processed into potato food products and food ingredients, fed to

cattle, pigs and chickens, processed into starch for industry, and re-used as seed tubers

for growing the next season's potato crop.

In Malawi, the potato is also becoming very important. FAO statistics indicate that,

in terms of the value of production, potatoes are among the top three crops produced in

Malawi. In 2005, potatoes ranked first with a value of $261,090,000 and were seconded

by maize at a value of $203,350,000 (FAO Statistics, 2009).

The above and other statistics may indicate that potato production is a financially

viable farming option that could help to improve incomes of smallholder farmers in

Malawi. For this reason this study carries out an analysis to determine if potato

production is financially viable from the perspective of the smallholder farmer.

Irrigation Technologies

The unpredictability of weather patterns (especially erratic rainfall) has made

agricultural production more risky. Weldon et al. (1984) state that "new crop varieties,

pesticides and irrigation are examples of technologies that have reduced risk and

increased income". In their paper, Weldon et al. stress that irrigation cannot eliminate

the risk altogether but can reduce the risk of low yields on soils with low available water

holding capacity. Thus this study focuses on investing in irrigation as one of the

measures for reducing risk, not eliminating it.

Several studies on irrigation have been conducted in Malawi. The most notable of

these are "Smallholder Flood Plain Development Program-Irrigation Technologies









Diagnostic Study" (Makoko, 2000), "The Impact of Treadle Pump on Small-Scale

Farmers in Malawi" (Itamura & Shinohara, 2004), "Comparative Analysis of Different

Irrigation Technologies and Water Management Techniques for Dry Season Cultivation

of Beans in Chingale Agricultural Development Program" (Kadyampakeni, 2004), and

"Experiences with Micro agricultural Water Management Technologies: Malawi" (Mloza-

Banda, 2006).

All the above studies show that there is potential for irrigation farming in Malawi

and Mloza-Banda identified irrigation technologies that need amplification. The five

technologies identified include:

a) treadle pump irrigation
b) river diversion irrigation (canalization)
c) residual moisture cultivation
d) small earth dams, and
e) river impounding/weirs.

Apart from the studies carried out in Malawi mentioned above, there are also

studies completed in other countries. The most notable is the FAO (1997) proceedings

of a subregional workshop in Harare on "Irrigation Technology Transfer in Support of

Food Security." A report by Perry (1997) from the proceedings discusses low-cost

irrigation technologies for food security in sub-Saharan Africa. Perry classifies the

technologies into "improved manual irrigational technologies" and "mechanized

technologies for small-scale irrigation." The improved manual irrigation technologies

include the traditional rope and bucket method, the motorized pump and the treadle

pump; while the mechanized technologies include high capacity-mechanized pumps

inserted in hand-dug wells. Perry indicates that the mechanized technologies assist in

water lifting, groundwater development and water distribution.









Considering that the target group is smallholder farmers, this study, focuses on

both manual and mechanized technologies. The particular focus is the treadle pump,

drip technology, motorized pump, basin, furrow, canal and sprinkler systems as shown

in the Figure 2-1.

Chapter Summary

Studies show that there are several types of irrigation technologies that

smallholder farmers can adopt. This study applies these technologies to potato

production as literature suggests that potatoes are becoming important to increasing

smallholder incomes. Chapter 3 lays out the methodology for determining the financial

viability of the technologies.


Figure 2-1. Irrigation technology scenarios.









CHAPTER 3
METHODOLOGY

Introduction

This study uses secondary data. Data is collected through field visits to selected

Malawi Government Irrigation Schemes, and to Concern Universal's Food Security and

Sustainable Livelihoods Project. The government schemes are chosen because they

are the oldest and largest irrigation schemes in Malawi. Concern Universal's Food

Security and Sustainable Livelihoods Project is chosen because Concern Universal's

two components of integrated sustainable livelihoods that are getting increasing

attention are crop diversification and the development of small-scale irrigation schemes.

Concern Universal is working with communities in Dedza and Ntcheu districts of Central

Malawi to improve potato production and bring about improved incomes for smallholder

farmers.

Other data is collected from Malawi's Ministry of Agriculture and Food Security,

FAO website, University of Florida and University of Malawi libraries. The data collected

includes:

a) initial investment costs for each irrigation technology
b) operating costs for each irrigation technology
c) historical potato yields, prices and costs of production, and
d) energy (diesel) costs

Methods

This study evaluates financial viability of investing in different irrigation

technologies using net present value (NPV), benefit-cost ratio (BCR) and probability of

generating positive net farm cash incomes (NFCI).









Net Present Value (NPV) Method

The NPV of an investment is the sum of discounted future cash-flows matched

with the initial investment. Under the NPV method, an investment is worth undertaking if

the discounted cash-flows over the project's life are equal or greater than the initial

outlay. Thus the decision rule is to accept projects with positive NPV and reject those

with negative NPV (Brigham & Ehrhardt, 2008).

Future net cash flows are discounted to present values based on the modification

of Barry et al. (1995) formula.


NPV = -I + NCFIi/(1+i)1 + NCF2/(1 +i)2+...+ NCFI/(1 +i)" (3-1)

Where: I is the initial cost of investing in an irrigation technology, NCFI1, NFCI2...

NFCIn are net farm cash incomes for each year, i is the interest or discount rate, and n

is the life span of the irrigation technology.

Net farm cash incomes (NFCI) for each year are computed by deducting total

operating cash payments from total cash receipts. Thus

NFCI = Q.p TOC (3-2)

Where: Q is yield per hectare, p is unit price, and TOC is total cash costs.

Benefit Cost Ratio (BCR) Method

The benefit cost ratio (BCR) method compares the sum of discounted benefits to

the sum of discounted costs. BCR of greater than 1 indicates that the project is

profitable. The decision rule is to accept project with BCR of greater than 1 and reject

those with BCR of less than 1. From Equation 3-2, BCR is given by:









BCR = Q.pd / TOCd (3-3)

Where 2Q.pd is the sum of discounted cash receipts and 2TOCd is the sum of

discounted cash costs.

In doing the analyses using the methods above, consideration is made explicitly

about the discount rate. Enters (1998) noted that there is a long debate about what the

discount rate should be. According to Enters, normally market rates are used when

analyzing agricultural projects and most investment calculations use rates between 5%

and 15%. In Malawi, the Reserve Bank sets the base lending rate for commercial banks

and currently the rate is set at 15%. Therefore, this study uses a rate of 15%.

Probability Positive Net Cash Farm Income (NFCI)

NPV and BCR may not be the only key output variables (KOVs) that may be of

concern to farmers. Other KOVs exit. One example of such KOVs is the probability that

the farmer will generate positive net farm cash incomes (NFCI). This study, therefore,

also determines the probability that farmers will generate positive NFCI under each of

the irrigation technology scenario.

Annuities

The different irrigation technologies have different life spans. As such, the NPV

calculations made are based on those different time horizons. If farmers are to decide

between technologies that have different life spans, a direct comparison of the NPV

generated by each technology would not be valid. A farmer who decides to invest in a

technology with a shorter life has the opportunity to invest in a new technology sooner

than if the farmer invested in a longer term technology. This has to be taken into

account when analyzing the different technologies so that a direct comparison can be









made between technologies with unequal lives. To overcome this problem, the NPV are

converted to annuities.

Annuities are constant cash flows from year to year. By converting the NPV for

each technology to an annuity, a comparison was made between the NPV of

technologies with different time spans. This enables the farmers to look at annual

streams of cash. The NPV are converted to annuities using Equation 3-4:

NPVi / (1- (1+i)-n) (3-4)

Where NPV is the net present value for a technology as determined using

Equation 3-1; i is the discount factor; and n is the life span of the technology.

Simulation Analysis

The values estimated using the above procedures are single values. However a

range of probable outcomes exist because of risk. This study uses simulation technique

to capture the riskiness of investing in the different technologies. Under this technique a

forecasting model is used to forecast Q, p and TOC in Equations 3-1, 3-2 and 3-3. The

study builds two scenarios (non-irrigated operation and irrigated operation) during the

simulation process using input values for the project's key uncertain variables. Software

Simetar@ (Simulation for Excel to Analyze Risk) is used to carry out the simulation

analysis.

Figure 3-1 shows modification of the risk analysis process developed by Savvides

(1994) which is used in this study to generate a risk profile of investing in irrigation

technology for potato production.

Developing a Forecasting Model

The first stage of the stochastic model involves the identification of critical

variables that have an impact on the success or failure of investing in the irrigation









technologies. It also involves developing mathematical relationships between the

variables. This study identifies several risk variables. The variables identified include

labor costs, energy (diesel) prices, pests and disease incidences, prices of inputs, levels

of production, inflation and type of irrigation technology. Figure 3-2 shows the model

used to define the mathematical formulae for processing input variables to arrive at the

key output variables (KOVs). This study uses NPV, BCR and Probability Positive Net

Cash Flow as KOVs.

Probability Distributions

The next step involves developing probability distributions for the risk variables as

was discussed by Savvides (1994), Poulinquen (1970), and Jones (1972). Several

probability distributions are identified for each risk variable. The probability distributions

used in this study include the empirical, GRKS and triangle.

The empirical distribution is used where the risk variable ccan take on continuous

values, or where there are limited observations for the risk variable such that it is difficult

to estimate the the parameters of the true probabability density function (PDF)

(Richardson 2006).

The GRKS distribution and triangle distribution are used where only three pieces

of information such as minimum, mode and maximum can be identified (Richardson,

2006). Richardson suggests that the three values (minimum, mode and maximum)

should be used to define a subjective distribution that can be used until something

better is developed.

Correlation Conditions

Two or more risk variables may be associated. Such associations may bias the

results of risk analysis. To avoid the bias, software Simetar@ is used to test correlations









among the variables. This is done to restrict the random selection of values for

correlated variables to the direction and limits of their expected dependency (Savvides,

1994). The correlations are determined using Equation 3-5 below.

ii.
P.. =
J C (3-5)

Where p.. is the correlation between risk variables i and j, ai is the standard

deviation existing between risk variables i and j, U, is the standard deviation of risk

variable i, and o, is the standarddeviation of risk variable j.

Simulation Runs

The values of the risk variables are drawn from the specified probability

distributions repeatedly by Simetar@ simulation engine. This study uses a sample of

500 iterations. The stochastic results of the model (i.e. net present value, benefit-cost

ratio and probability of positive cash flows) are computed and stored following each run.

Analysis of Simulation Output

The last part of analyzing the risk involves statistical analysis and interpretation of

the results from the simulation runs. Probability distribution functions (PDFs) graphs are

constructed from the 500 iterations to compare risk profiles of the investment for the

various perspectives. To arrive at a decision the following guide is used:

a) If the minimum point of the PDF of the NPV for an irrigation technology is greater
than zero, the technology is accepted (Figure 3-3). If the maximum point of PDF of
the NPV for an irrigation technology is less than zero, the technology is rejected
(Figure 3-4).

b) If the minimum of the PDF of the NPV ofor an irrigation technology is less than
zero and maximum point is greater than zero, the technology is neither accepted
nor rejected. Assuming other factors remain constant, the decision will depend on
risk preference of the farmer (Figure 3-5).









c) If the PDFs of theNPV for the different irrigation technologies do not intersect
when plot together, the technology whose CDF is on the far right is chosen
(Figure 3-6). If PDFs of the NPV for the different irrigation technologies intersect,
the choice will depend on the individual farmer's risk preference (Figure 3-7).

d) If the benefit cost ratio (BCR) of the irrigation technology is greater than zero,
accept the technology.

Summary

This chapter describes the outline of the research methodology. The study uses
secondary data. Capital budgeting techniques (NPV, BCR and probability positive cash
flows) are used to analyze and determine the viability of investing in irrigation
technology for potato production. Simulation analysis is carried out to take account for
risk.


Figure 3-1. Risk analysis process.


Stage 1
Forecasting Model (Preparation of a model capable of predicting reality)

Stage 2
Probability Distributions (Definition and allocation of probability weights to a
range of values)
Stage 3
Correlation Conditions (Setting relationships for correlated variables)

Stage 4
Simulation Runs (Generation of random scenarios based on a set of
assumptions)

Stage 5
Analysis of Simulation Output


































Figure 3-2. Forecasting model.


120,000 130,000 140,000 150,000 160,000 170,000


Figure 3-3. Minimum NPV greater than zero.


INPUTS
* Historical Yields
* Historical Prices
* Historical Costs


INTERMEDIATE OUTPUTS

* Production (Yields)
* Total Cash Costs = Production Costs +
Marketing Costs
* Revenues = Yields*Prices
* Net Cash Income = Revenues Total
Cash Costs


KEY OUTPUT VARIABLES
* Net Present Values (NPV)
* Benefit Cost Ratio (BCR)
* Probability Positive Net Cash Flows


EXOGENOUS VARIABLES

* Interest Rates
* Inflation
* Temperature & Rainfall
* Energy Costs (Diesel Prices)
* Labor Costs
* Pests and Disease Incidents























-3,008 -3,007 -3,006 -3,005 -3,004 -3,003 -3,002 -3,001 -3,000


Figure 3-4. Minimum NPV less than zero.


-300,000 -200,000 -100,000


0 100,000 200,000 300,000


Figure 3-5. NPV between less than zero and greater than zero.























80,000 100,000 120,000 140,000 160,000 180,000


Figure 3-6. Non-overlapping PDFs.


40,000 60,000 80,000 100,000 120,000 140,000


Figure 3-7. Overlapping PDFs.









CHAPTER 4
DATA COLLECTED

Introduction

This study uses secondary data. Data were collected from Bunda College of

Agriculture, Ministry of Agriculture and Food Security (MoAFS), Concern Universal's

Sustainable Livelihoods Project, British Petroleum (BP) Malawi, Sino-Link, Lilongwe

Mechanical Development and some online sources. The data collected include:

historical potato yields, historical potato prices, potato production costs, energy (diesel)

costs, inflation, initial investment costs for each irrigation technology and operating

costs for each irrigation technology.

Data on historical potato production costs were collected from Concern Universal's

Sustainable Livelihoods Project. Data on historical potato yields were collected from

MoAFS and Concern Universal's Sustainable Livelihoods Project. Historical data on

inflation was collected from the National Statistical Office website. Finally data on initial

investment costs and operating costs for each irrigation technology were obtained from

two irrigation equipment traders in Lilongwe: Sino-Link and Lilongwe Mechanical

Development.

Historical Prices

Most small scale potato farmers sell their potatoes at the farm gate. They sell the

potatoes in bags weighing between 200kg and 400 kg. At the time of this study each

bag was selling at MK15,000 which translates to an average of MK50.00/kg.

A fourteen year time series of prices was obtained from Bunda College of

Agriculture stores bin cards and from farmers of Namphantha village in Dedza district.

These prices were used to forecast future prices using trend analysis.









The prices showed an upward trend (Figure 4-1). From the trend line in Figure 4-1,

the equation for forecasting future prices was determined and is given as

Future Price = 2774.10 + 1.40x (4.1)

Where x is the year for which the price is to be forecast.

The mean price per kilogram for the observed data was MK17.52 with a minimum

of MK7.00 and maximum of MK28.57 (Table 4-1).

Historical Potato Yields

A fourteen year time series was also collected on potato yields. This was collected

from MoAFS and Concern Universal's Food Security and Sustainable Livelihoods

Project. The trend and its related equation for these data are shown in Figure 4-2. The

minimum observed yield per hectare was 6,300kg and the maximum was 14,500kg. The

mean yield was 10,258kg per hectare with a standard deviation of 2,617kg (Table 4-1).

Initial Investment Costs

The irrigation technologies were split into two main categories: those that lift water

from water source to the field; and those that convey water from the field to the actual

growing plant. These technologies were summarized in the Figure 2-1. Seven

scenarios, over which KOVs were computed and compared, were identified. The seven

scenarios included: (1) treadle pump (TP)-basin, (2) treadle pump (TP)-canal, (3)

treadle pump (TP)-furrow, (4) motorized pump (MP)-furrow, (5) motorized pump (MP)-

sprinkler, (6) motorized pump (MP)-drip, and (7) drum drip kits.

Data on initial investment cost was collected for the seven scenarios (Table 4-2).

MP-drip scenario showed the highest initial investment cost of MK333,900 while TP-

furrow showed the lowest initial investment cost of MK50,000.









Treadle Pumps (TP)

Treadle pumps (TP) were introduced in Malawi in 1994. By 2005 the number of

treadles pumps in Malawi was estimated at 64,000 (Mangisoni, 2006). Currently there

are two types of treadle pumps: the standard and the superlite. Commercial traders sell

the standard treadle pump at MK19,000 and the superlite at MK26,000. Although the

standard pump is cheaper than the superlite, most farmers prefer the superlite. The

superlite treadle pump is lighter and easier (requires less energy) to propel than the

standard one. Therefore, the analysis of treadle pumps in this study was based on the

superlite treadle pump.

Commercial traders sell the pumps without suction and delivery pipes. The pipes

are sold separately at MK375/meter. This study assumes that farmers require 50 meters

of pipes to deliver water to canals, basins and furrows. Thus the total cost for the pipes

is estimated at MK18,750.

This study also assumes that treadle pumps have a life period of 5 years

(Palanisami 1997). Accordingly all the KOVs for treadle pump technology were

calculated based on cash flows for 5 years.

Irrigation water from the treadle pump is delivered to the actual growing plant

through canals, basins or furrows. This leads to three treadle pump (TP) scenarios: TP-

canal, TP-basin and TP-furrow. The initial investment costs of the three scenarios were

determined to be MK75,000, MK60,000 and MK50,000 (Table 4-2) respectively.

Motorized Pumps (MP)

Motorized pumps (MP) come in different sizes depending on horsepower (HP).

This study assumes a 5-HP pump. The pump including suction and delivery pipes cost

MK202,500 at SinoLink Limited and Lilongwe Mechanical Development (LMD). Like the









treadle pump technology, motorized pumps are also combined with other technologies

to deliver water to the plant, which leads to three motorized pump (MP) scenarios: MP-

furrow, MP-sprinkler and MP-drip. MP-furrow costs MK206,750; MP-sprinkler costs

MK262,500; and MP-drip costs MK333,900 (Table 4-2).

Based on Palanisami (1997), the motorized pumps are assumed to have a life

span of 10 years.

Drip Technology

Drip irrigation applies water through small emitters to the soil surface at or near the

plant to be irrigated. At the time of this study, drip technology was relatively new in

Malawi and was in a trial phase. As a result, the costs used in this study were obtained

from comparable technologies from Zimbabwe. Palanisami determined that the drip

system costs about 1,150 USD per hectare. This translates to about MK168,900 at an

exchange rate of MK147.00 to 1.00 USD. If motorized pumps are used to convey

water to the drips, the total initial cost of both the pump and the drips is MK333,900

(Table 4-2).

Annual Operating Costs of Irrigation Technologies

This study identified labor, energy (diesel) and repairs as annual operating costs of

the irrigation technologies. The operating costs are high under the motorized pump

technology as compared to the other two technologies, treadle pump and drip

technologies. The reason for this is that unlike the other two technologies, the motorized

pump requires energy (diesel) to operate. Drip technologies exhibit the lowest annual

operating costs because drip irrigation requires less labor and cost less to maintain as

compared to motorized pumps and traditional furrow, basin or canal technologies.









Irish Potato Production Costs

Potato production costs were obtained from Concern Universal's Food Security

and Sustainable Livelihoods Project in Ntcheu and from Bunda College of Agriculture.

These costs are shown in Table 4-3 and represent costs that a representative potato

farmer would incur per hectare of potato production.

Land preparation costs include costs incurred on land clearing, ploughing,

harrowing and ridging. The cost of seed is included in planting costs. Harvesting and

marketing costs depend on yield. There is a harvesting and marketing cost of

MK5.64/kg which includes MK2.41/kg for actual harvesting, MK2.03/kg for packaging

and MK1.20/kg for transportation.

Non-irrigated and Irrigated Operations assumptions

Given that the purpose of this study was to determine the viability of irrigation, a

non-irrigated operation is used as a base and is compared to an irrigated operation.

However, no yield data was available for an irrigated operation. As such, some

modifications and assumptions were made.

a) The historical yield data is used to forecast future yields and an empirical
distribution with trend is used to model the risk of yield on a single representative
non-irrigated operation.

b) Deterministic forecast yields are used to represent an irrigated operation. The
assumption is that irrigation reduces yield variability to zero.

c) Risk from pests and diseases is introduced into the model to relax the yield
variability assumption. Since very limited information is available, we assume that
this risk follows a triangle distribution (Table 4-4). Three points (minimum, median
and maximum yield loss) are identified for both the non-irrigated and irrigated
operations. We also assume that there is higher pest prevalence during the rainy
season than the dry season. Hence higher pests and disease incidences for the
non-irrigated operation than the irrigated operation.

d) Other sources of risk for the irrigated operation are identified as risks emanating
from repairs and energy costs. We assume that repairs follow a GRKS distribution









(Table 4-4). We also assume that the cost of diesel is and follows an empirical
distribution. A fourteen year time series data for diesel prices were collected and
are used in an empirical distribution with trend to model the risks of energy prices.



















Future price = -2774.1 + 1.3955.:


1999 2004


-4- Unit Price (MK/kg)
Linear (Unit Price (MK!kg))





2009


Year

Figure 4-1. Historical prices time series.


16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000


1994


-1E+06+593.75x


1999


2004


---Yield (kg/ha)
- -Linear(Yield (kg/ha))


2009


Year


Figure 4-2. Historical yields time series.


519

1994









Table 4-1. Summary statistics for yields and prices
Yield (kg/ha) Unit Price (MK/kg)
Mean 10,258.21 17.52
Standard Deviation 2,616.70 6.18
95 % LCI 8,503.16 13.38
95 % UCI 12,013.27 21.67
CV 25.51 35.24
Min 6,300.00 7.00
Median 10,350.00 18.82
Max 14,500.00 28.57
Skewness (0.12) (0.21)
Kurtosis (1.11) (0.11)

Table 4-2. Initial investment costs
Initial Investment Useful Life
Cost (MK) (Years)
Treadle pump-canal 70,000 5
Treadle pump-basin 60,000 5
Treadle pump-furrow 50,000 5
Motorized pump-furrow 206,750 10
Motorized pump-sprinkler 262,500 10
Motorized pump-drip 333,900 10
Drum drip kits 295,000 8

Table 4-3. Potato production costs per hectare
MK
Land Preparation 21,000
Planting 125,250
Fertilizers 75,500
Pest & Disease Control 16,800
Weed Control 6,000
Total Cost 244,550









Table 4-4. Labor, repairs and pests assumptions.
Repairs assumptions (% of investment cost)
Minimum 3.0%
Median 7.0%
Maximum 10.0%


Loss of yields due to pests and diseases


Irrigated Non irrigated
3% 5%
5% 10%
7% 15%


MP-
furrow


Irrigation labor assumptions
Minimum
Median
Maximum


7,500.00
12,500.00
15,650.00


MP-sprinkler


4,500.00
8,500.00
11,250.00


MP-drip TP-canal TP-basin


3,000.00
4,500.00
7,500.00


15,000.00 15,000.00
20,000.00 23,200.00
37,500.00 32,500.00


TP-furrow Drum drip
kits

15,000.00 10,000.00
27,500.00 17,500.00
40,000.00 26,520.00


Minimum
Mode
Maximum









CHAPTER 5
RESULTS AND DISCUSSION

Introduction

Based on the methods described in Chapter 3 and the data collected in Chapter 4,

a simulation model was built and simulation analysis carried out to measure the

importance of irrigation. We present results of the simulation analysis in this chapter.

Yields, prices, energy costs, labor, repairs, pest and diseases were identified as the risk

variables that affect the key output variables (KOVs).

Non-Irrigated Scenario

Results for the non-irrigated scenario are linked to the three main KOVs: net

present values (NPV), benefit cost ratio (BCR) and probability of generating positive

cash flows. Each KOV for the non-irrigated scenario is discussed in the next sections.

Net Present Values (NPV)

Net present values (NPV) were converted to annuities so that valid comparisons

could be made between different time horizons. Three time horizons (5 years, 8 years

and 10 years) were identified depending on the irrigation technology to be considered. A

summary of simulation results for the non-irrigated scenario are shown in Table 5-1.

If the time horizon is 10 years, the mean NPV is MK173,407 with a standard

deviation of MK16,652 and a coefficient of variation of 9.6. Where the time horizon is 5

years, the mean NPV is MK104,872 with a standard deviation of MK17,058 and a

coefficient of variation of 16.27. The mean NPV for a time horizon of 8 years is

MK147,665 and its standard deviation and coefficient of variation are MK16,841and

11.4 respectively. PDF graphs for the NPVs for the non-irrigated scenarios can be seen

in Figures 5-1, 5-2 and 5-3.









Benefit Cost Ratios (BCR)

Summary statistics for benefit cost ratios (BCR) from the simulation of the three

time horizons are presented in Table 5-2. The mean BCR for a 10-year time horizon is

1.43 with a standard deviation of 0.046. The mean BCR for a 5-year horizon is 1.26 and

its standard deviation is 0.04 while the mean BCR for an 8-year span is 1.37 with a

standard deviation of 0.037. The simulation results show that the minimum BCR is

obtained under the 5-year life span while the maximum BCR is obtained under the 10-

year period.

Probability of Positive Net Cash Flows

While NPV and BCR are good indicators of financial viability, other farmers may

be interested in the ability to generate positive cash flows. Table 5-3 shows an extract of

the probability of farmers generating positive cash flows during the first 5 years of

operations. The simulation results show that the probability of generating positive cash

flows is 87.8% during the first year, 99.6% during the second year and 100% during the

third year and thereafter. These results are same for the three time horizons.

Irrigation Scenarios without Pests Prevalence

Like the non-irrigated scenario, results for the irrigated scenario without pests'

prevalence were determined. The three main KOVs, NPV, BCR and probability of

generating positive cash flows were computed.

Motorized Pump (MP) Scenario

Simulation results for the motorized pump (MP) scenario were split into MP-furrow,

MP-sprinkler and MP-drip depending on the technology that delivers water to the actual

plant (Figure 2-1). Simulation results of the three MP scenarios are given in Table 5-9.









The mean NPV for the three MP scenarios (MP-furrow, MP-sprinkler and MP-drip)

are MK135,177, MK115,479 and MK95,695 respectively. MP-furrow scenario gives the

highest maximum NPV of MK151,818 while the MP-drip gives the lowest maximum

NPV of MK118,235. The standard deviations and the related coefficients for the three

MP scenarios are MK4,808 and 3.56 for MP-furrow scenario, MK5,989 and 5.19 for MP-

sprinkler scenario and MK7,082 and 7.4 for MP-drip scenario.

Summary statistics for BCR the three MP scenarios are shown in Table 5-7. A

similar pattern as that of NPV is obtained for BCR. MP-furrow has the highest mean

BCR of 1.38 while MP-drip has the lowest mean BCR of 1.33. MP-furrow shows both

the smallest standard deviation and coefficient of variation as compared to MP-sprinkler

and MP-drip (Table 5-7).

An extract of the simulation results of the probability of generating positive cash

flows for the MP scenarios is shown in Table 5-10. While the simulation results show

that there is a 100% probability of generating positive cash flows under the MP-furrow

scenario during the first two years of operations, the probabilities of MP-sprinkler are

97.4% and 100% during the same period and those for MP-drip are 93.8% and 100%.

Treadle Pump (TP) Scenarios

Results were generated for the three treadle pump (TP) scenarios: TP-canal, TP-

basin and TP-furrow. These results are shown in Tables 5-4 and 5-7.

Firstly, the mean NPV of the TP-canal scenario is MK100,806 with a standard

deviation of MK6,459. The minimum NPV for TP-canal obtained during any single

iteration is MK78,221 while the maximum is MK111,462. PDF graphs for NPV for this

scenario can be seen in Figure 5-2. The mean BCR for this scenario is 1.276 with a

standard deviation of 0.02.









The mean NPV of the TP-basin scenario is MK103,511 and its standard deviation

is MK4,841. The NPV for the TP-basin scenario during any single iteration range

between MK878,247 and MK117,440. Figure 5-2 shows a PDF graph for NPV of the

TP scenarios. BCR simulation results for this scenario are shown in Table 5-7.

Finally the mean NPV of TP-furrow were also determined. The mean NPV is

MK146,179 with a standard deviation of MK6,901. The maximum NPV is MK165,213

while the minimum NPV is MK125,353. Like for the other TP scenarios PDF graphs for

this scenario can be seen in Figure 5-2.

Drum Drip Kits Scenario

The mean NPV of the drum drip kits scenario is MK77,579 with a standard

deviation of MK6,020 (Table 5-4). A PDF graph of NPV for this scenario is shown in

Figure 5-3. The minimum NPV for the drum drip kits scenario is MK61,126 while the

maximum is MK95, 857. Table 5-7 shows the BCR results. The mean BCR of the drum

drip kits scenario is 1.49 and its standard deviation is 0.26 with a coefficient of variation

of 1.78.

Irrigation Scenarios with Pests Prevalence

Pests and diseases were introduced into the model to relax the yield variability

assumptions made under the irrigation scenarios. The simulation results for the pest

prevalence were determined. These results are presented in Tables 5-5, 5-6 and 5-8.

After introducing pests, PDF graphs of the irrigated scenarios are shown in Figures 5-4

and 5-5.

The highest mean NPV of MK123,959 is obtained under the TP-furrow scenario

while the lowest mean NPV of MK36,343 is obtained under the drum drip kits. MP-drip









gives the highest standard deviation of MK8,896 where as TP-basin gives the lowest

standard deviation of MK6,194.

After introducing pests, the mean BCR for the scenarios range from 1.23 (TP-

basin) to 1.44 (drum drip kits).

Discussion of Results

Motorized Pumps (MP)

Both NPV and BCR suggest that investing in all the three motorized pump (MP)

scenarios (MP-furrow, MP-sprinkler and MP-drip) is financially viable. Thus a farmer can

invest in any one of them. However, when the three MP scenarios are considered

together, a question arises as to which one a farmer should invest in.

Results show that MP-furrow scenario provides the lowest risk as shown by its

standard deviation. Apart from providing the lowest risk, the results also show that MP-

furrow scenario has the highest maximum NPV of MK131,074 and the lowest minimum

NPV of MK91,016. This leads us to believe that, holding other factors constant; MP-

furrow scenario is superior to the other MP scenarios. This is true if we compare MP-

furrow and MP-drip scenarios only, it may not be the case when we compare MP-furrow

and MP-sprinkler scenarios. While the maximum NPV (MK118,235) of MP-drip scenario

is below the minimum NPV (MK122,804) of MP-furrow scenario, the maximum NPV for

MP-sprinkler of MK135,835 is above the minimum NPV of MP-furrow.

A further analysis was done to identify why TP-furrow was superior to the other

technologies. We found that farmers were more familiar with this method. We also

found that furrow irrigation is most appropriate to shallow rooted crops. Thus potato is

best suited to furrow irrigation as it cannot stand in very wet soils for a long period.









Treadle Pumps (MP)

Results for treadle pump (TP) scenarios suggest that investing in the individual

scenarios, TP-canal, TP-basin and TP-furrow, is financially viable. This is supported by

the positive NPV and BCR of greater than one (Table 5-4 and Table 5-7).

The results also suggest that, other things being equal, TP-furrow is more superior

to the other two TP scenarios. The minimum NPV of TP-furrow scenario obtained

during each iteration (MK125,353) is greater than the maximum NPV of both TP-canal

(MK111,462) and TP-basin (MK117,440). As a consequence, regardless of risk

preference of the farmers and holding other factors constant, TP-furrow is the most

preferred.

Drum Drip Kits

Table 5-4 shows that the NPV obtained under the drum drip kits is positive and

Table 5-7 shows that the BCR is greater than one. These results suggest that investing

in drum drip kits irrigation technology is financially viable.

Probability of Generating Positive Cash Flows

The results suggest farmers have a high probability of generating positive cash

flows both under the irrigated and non-irrigated scenarios. The lowest probability of

generating positive cash flows for the non-irrigated scenario is 88% with a standard

deviation of 33% (Table 5-3) while the lowest probability for the irrigated scenario is

94% with a standard deviation of 24% (Table 5-10). After the first two years of

operations the probability of generating positive cash flows increases to 100% for all the

scenarios. This may suggest farmers gain more experience with the passage of time

such that the chance of getting loses decreases.









Pests Prevalence

Introducing pest into the model, shown in Figures 5-4 and 5-5, does not affect our

results significantly. Still investing in any of the irrigation scenarios is financially viable.

There is only a slight shift in the results. Pests reduce the mean NPV of all the irrigation

scenarios while increasing the risk at the same time (Tables 5-5 and 5-6).


Table 5-1. NPV simulation results for non-irrigated operations
10 year life span 5 year life span 8 year life span
Mean (MK) 173,407 104,872 147,665
Std. Dev 16,652 17,058 16,841
CV 9.60 16.27 11.40
Min (MK) 117,260 47,311 96,050
Max (MK) 228,286 151,586 198,292

Table 5-2. BCR simulation results for non-irrigated operations
10 year life span 5 year life span 8 year life span
Mean 1.43 1.261 1.366
Std. Dev 0.046 0.040 0.037
CV 2.52 3.16 2.68
Min 1.33 1.12 1.26
Max 1.53 1.38 1.46

Table 5-3. Extract of probability positive cash flows (Non-irrigated Scenario)
2010 2011 2012 2013 2014
Mean 87.8% 99.6% 100% 100% 100%
Std. Dev 32.8% 6.3% 0% 0% 0%
CV 37.3 6.3 0 0 0
Min 0% 0% 100% 100% 100%
Max 100% 100% 100% 100% 100%









Table 5-4. NPV simulation
TP-canal


results for TP and drip (without pests)
TP-basin TP-furrow Drum drip kits


Mean (MK) 100,806 103,511 146,179 77,579
Std. Dev 6,459 4,841 6,901 6,020
CV 6.41 4.68 4.72 7.76
Min (MK) 78,221 87,247 125,353 61,126
Max (MK) 111,462 117,440 165,213 95,857

Table 5-5. NPV simulation results for MP (with pests)
MP-furrow MP-sprinkler MP-drip
Mean (MK) 109,397 89,699 69,914
Std. Dev 6,993 8,023 8,896
CV 6.39 8.94 12.72
Min (MK) 91,016 66,849 46,015
Max (MK) 131,074 117,353 99,374

Table 5-6. NPV simulation results for TP and Drip (with pests)
TP-canal TP-basin TP-furrow Drum drip kits
Mean (MK) 78,586 81,291 123,959 58,192
Std. Dev 7,804 6,194 7,879 7,066
CV 9.93 7.62 6.36 12.14
Min (MK) 49,270 63,348 99,073 36,343
Max (MK) 94,602 97,720 146,233 79,695


Table 5-7. BCR simulation results for irrigated operations (without pests)
MP- MP- MP-drip TP- TP- TP- Drum
furrow sprinkler canal basin furrow drip kits
Mean 1.379 1.354 1.339 1.276 1.275 1.401 1.489
Std. Dev 0.015 0.018 0.021 0.019 0.014 0.024 0.026
CV 1.076 1.326 1.539 1.487 1.094 1.708 1.779
Min 1.333 1.290 1.279 1.200 1.233 1.327 1.422
Max 1.429 1.407 1.401 1.314 1.316 1.473 1.585









Table 5-8. BCR simulation results for irrigated operations (with pests)
MP- MP- MP-drip TP- TP- TP- Drum drip
furrow sprinkler canal basin furrow kits
Mean 1.327 1.303 1.288 1.228 1.227 1.350 1.435
Std. Dev 0.018 0.021 0.022 0.021 0.016 0.025 0.028
CV 1.338 1.583 1.739 1.676 1.327 1.850 1.974
Min 1.275 1.243 1.212 1.147 1.176 1.274 1.353
Max 1.384 1.361 1.351 1.284 1.270 1.419 1.544

Table 5-9. NPV simulation results for MP (without pests)
MP-furrow MP-sprinkler MP-drip
Mean (MK) 135,177 115,479 95,695
Std. Dev 4,808 5,989 7,082
CV 3.56 5.19 7.40
Min (MK) 122,804 96,485 75,415
Max (MK) 151,818 135,835 118,235

Table 5-10. Extract of probability positive cash flows (MP Scenarios)
MP-Furrow MP-Sprinkler MP-Drip
2010 2011 2010 2011 2010 2011
Mean 100.0% 100.0% 97.4% 100.0% 93.8% 100.0%
Std. Dev 0.0% 0.0% 15.9% 0.0% 24.1% 0.0%
CV 0.0 0.0 16.4 0.0 25.7 0.0
Min 100% 100% 0% 100% 0% 100%
Max 100% 100% 100% 100% 100% 100%
















-No-irrigation
M P-furrow
-MP-sprinkler
-MP-drip





60,000 110,000 160,000 210,000 260,000


Figure 5-1. PDF of NPVs for motorized pumps (without pest prevalence).









-No-irrigation
-TP-canal
-TP-basin
-TP-furrow





40,000 90,000 140,000 190,000


Figure 5-2. PDF of NPVs for treadle pumps (without pest prevalence).









-No-irrigation
-Drum drip kits


I I I
40,000 90,000 140,000
Figure 5-3. PDF of NPVs for drum


I I
190,000 240,000
drip kits (without pest prevalence).




MP-furrow
^-MP-drip
^-MP-drip


50,000 100,000 150,000 200,000
Figure 5-4. PDF of NPVs for motorized pumps (with pest prevalence).


C


\1
















-TP-basin
-TP-furrow




40,000 90,000 140,000 190,000


Figure 5-5. PDF of NPVs for treadle pumps (with pest prevalence).









CHAPTER 6
CONCLUSIONS

Introduction

More than 50% of smallholder farmers in Malawi are poor and food insecure

because of lack of crop diversification and reliance on rain-fed agriculture. Customarily

farmers rely on maize for food and grow their crops during the rainy season which runs

from November of one year to April of the following year. There is potential for farmers

to engage in crop diversification and invest in irrigation technologies. Crops other than

maize are becoming more important in food security; and one such crop is the potato.

Additionally, the Government of Malawi is advocating the adoption of irrigation

technologies by smallholder farmers.

A simulation model was developed to determine the financial viability of investing

in small-scale irrigation technologies for potato production. The first objective of this

study was to determine initial investment and operating costs of different irrigation

technologies. The second was to determine projected net cash flows per hectare of

irrigation. Third, was to determine the net present value (NPV) and benefit cost ratio

(BCR) of each irrigation technology. The final objective was to estimate the probability

of generating positive cash flows from each irrigation technology.

Contributions of the Research

Currently, there is inadequate information on the financial viability of investing in

irrigation technologies in Malawi. The National Irrigation Policy and Development

Strategy (Malawi Government, 2000) identified financial viability from a farmer's

perspective as one of the research needs in the irrigation sub-sector. The analyses in

this study provide relevant information about initial costs of investing in irrigation









technologies for potato production and the benefits of undertaking such investments. In

addition, the model used in this study gives a framework that may be useful to other

crops.

To date, studies analyzing financial viability of irrigation technologies in Malawi

have been based on deterministic results. This study uses stochastic stimulation and as

such provides entire probability distributions. This enables the reporting of risk

outcomes and provides farmers and other decision makers with more sensible

information.

Summary

The overall objective of this study was to determine the financial viability of

investing in small-scale irrigation technologies for potato production in Dedza and

Ntcheu districts of Central Malawi. The study identified motorized pumps (MP), treadle

pumps (TP) and drip as the three technologies that take water from water sources to the

field. The study also identified furrow, sprinkler, drip, canal and basins as the

technologies that take water from the field to the actual growing plant. A combination of

the technologies resulted in seven irrigation technology scenarios: MP-furrow, MP-

sprinkler, MP-drip, TP-furrow, TP-canal, TP-basin and drum drip kits (Figure 2-1).

Financial viability of investing in the irrigation technologies was evaluated using

three key output variables (KOV); net present values (NPV), benefit cost ratios (BCR)

and probability of generating positive cash flows. To achieve this, a stochastic

simulation model was developed. Times series data on potato yields, prices and costs

were input into the model to estimate future production costs and revenues from which

net farm cash incomes (NFCI) were calculated. Software Simetar was used to carry









out simulation analysis. Distributions of probable outcomes were generated for each

KOV from which tables and PDF graphs were constructed.

Data on initial investment costs and operating costs for the irrigation technologies

was collected from irrigation equipment suppliers. This data was analyzed under a

certain set of assumptions to satisfy the first objective.

Stochastic yields and prices were used to estimate revenues generated per

hectare of irrigation. The revenues were matched with stochastic cash costs to obtain

net farm cash income (NFCI) per hectare of irrigation so as to satisfy the second

objective.

To satisfy the third and fourth objectives a simulation model was run. In the model;

a) the sum of discounted future NCFI were matched with the initial investment costs
to obtain NPV from each irrigation scenario,

b) the sum of the discounted future revenues were matched with the sum of
discounted future cash costs to determine BCR from each irrigation and

c) probabilities of generating positive cash flows were determined.

The procedure used in this study and the results of the simulation analysis allowed

us to test the hypothesis: "investment in small-scale irrigation (SSI) for potato production

is a financially viable investment option". All the irrigation scenarios have positive NPV,

BCR of greater than one and probability of generating positive cash flows of at least

80%. This leads us to fail to reject the hypothesis.

Limitations of the Study Further Research Needs

There are a number of limitations of this study. First, the study assumes that the

farmers have enough funds to invest in the technologies. Alternative financing options

were ignored because, at the time of this study, it transpired that smallholder farmers









find it difficult to access credit from financing institutions. The financing institutions

demand collateral which most smallholder farmers cannot afford.

Second, this study assumed that the different irrigation scenarios have the same

level efficiency. This would not be case; the different scenarios have different efficiency

levels and this has a direct impact on the yields achieved by each scenario. There may

be variations in yields from scenario to scenario due to operational and water use

efficiencies of the technologies.

Third, this study assumed that the only factor that determines whether a farmer

should invest in an irrigation technology or not is the farmer's risk preference. However,

the choice of investing in a technology also depends on other factors such as familiarity

with the technology, cost of the technology, slope of the farm and water source.

Lastly, there is very limited times series data on yields and prices in Malawi. Most

farmers do not keep farm records. The information that farmers provide is from recall

and personal experiences.

Further Research Needs

Based on the limitations outlined in the preceding section, there are four areas that

need further research. First, a study should be conducted to determine the exact role

that banks and other money lending institutions play in providing financing to farmers.

The results of that study should be incorporated into the model used in this study so that

the risk that farmers may face by getting credit is accounted for. Second, the model

proposed in this study should be expanded to take into account the different efficiency

levels of the different irrigation technology scenarios. Third, the techniques and

proposed model used in this study should be applied to other crops in an attempt to

answer the Malawi Government's call of looking at financial viability from the farmers'









perspective in the irrigation sub-sector. Lastly, a study should be carried to document

historical yields, costs and prices for the different crops grown in Malawi so that the

hitch of obtaining farm time series data is overcome.









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BIOGRAPHICAL SKETCH

Bonet Chikhawo Kamwana was born on 20 May 1976 in Lilongwe, Malawi. He

obtained his Bachelor of Accountancy degree from University of Malawi in March 2001

and began his professional career as a Finance Assistant with University of Malawi's

Chancellor College in April 2001 before he moved to Malawi College of Accountancy in

October 2002 to teach accounting and finance. He rejoined University of Malawi's

Bunda College of Agriculture in January 2004 as a Teaching Staff Associate in Financial

and Managerial Accounting in the Agribusiness Management Department.

In August 2008, Bonet Chikhawo Kamwana entered the University of Florida's

Food and Resource Economics Master of Science program. He specialized in risk

management under the direction of Dr. Richard Weldon.

Bonet Chikhawo Kamwana is married to Chrissie Chisomo Chinkolenji and has

two sons, Chris and Peter.





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1 ASSESSING THE FINANCIAL VIABILITY OF INVESTING IN SMALL SCALE IRRIGATION TECHNOLOGY FOR POTATO PRODUCTION IN DEDZA AND NTCHEU DISTRICTS OF CENTRAL MALAWI By BONET CHIKHAWO KAMWANA A THESIS PRESENTED TO THE GRADUATE SCHOOL OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE UNIVERSITY OF FLORIDA 2010

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2 2010 Bonet Chikhawo Kamwana

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3 To my wife, Chrissie and my two sons, Chris and Peter for their love

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4 AC KNOWLEDGMENTS Many individuals have provided support and unruffled encouragement throughout my graduate school. They have contributed significantly, briskly, and unwearyingly towards the successful completion of my studies. I would like to express my appre ciation for their countless contributions. I would like to thank Dr. Richard Weldon, the chair of my supervisory committee, who made it possible for me to complete this project. Over the two years that I have been studying, Dr. Weldon has been an excellent instructor, an inspired researcher, a great academic counselor, a father and a friend. I would also like to thank Dr. John VanSickle for being part of my committee and for his untiring support and effort. I also extend my thanks to Dr. Richard Kilmer, Dr Michael Gunderson and all the instructors in the FRE Department for laying a solid foundation on which my success was built. Thanks should also go to Dr. Walter Bowen and Dr. David Sammons for making my stay in the USA the most memorable. I would also li ke to thank my wife Chrissie and my two sons Chris and Peter for enduring long periods of my absence. I also give special credit to personnel in the Faculty of Development Studies at Bunda College of Agriculture for their support especially Dr. Charles Mas angano and Mr. Ronnie Mvula. Finally I would like to thank the United States Agency for International Development (USAID) for providing funding for my studies through the UILTCB Program in Malawi.

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5 TABLE OF CONTENTS page ACKNOWLEDGMENTS ................................ ................................ ................................ .. 4 LIST OF TABLES ................................ ................................ ................................ ............ 7 LIST OF FIGURES ................................ ................................ ................................ .......... 8 LIST OF AB BREVIATIONS ................................ ................................ ............................. 9 ABSTRACT ................................ ................................ ................................ ................... 10 CHAPTER 1 INTRODUCTION, PROBEM STATEMENT AND OBJECTIVES ............................ 12 Introduction ................................ ................................ ................................ ............. 12 Potatoes and Food Security ................................ ................................ .................... 13 Irrigation and Food Security ................................ ................................ .................... 15 Problem Statement ................................ ................................ ................................ 15 Hypothesis ................................ ................................ ................................ .............. 16 Objectives ................................ ................................ ................................ ............... 16 2 LITERATURE REVIEW ................................ ................................ .......................... 17 Introduction ................................ ................................ ................................ ............. 17 Financial Viability ................................ ................................ ................................ .... 17 Potato Production ................................ ................................ ................................ ... 20 Irrigation Technologies ................................ ................................ ............................ 22 Chapter Summary ................................ ................................ ................................ ... 24 3 METHODOLOGY ................................ ................................ ................................ ... 25 Introduction ................................ ................................ ................................ ............. 25 Methods ................................ ................................ ................................ .................. 25 Net Present Value (NPV) Method ................................ ................................ ..... 26 Benefit Cost Ratio (BCR) Method ................................ ................................ ..... 26 Probability Positive Net Cash Farm Income (NFCI) ................................ ......... 27 Annuities ................................ ................................ ................................ ........... 27 Simulation Analysis ................................ ................................ ................................ 28 Developing a Forecasting Model ................................ ................................ ...... 28 Probability Distributions ................................ ................................ .................... 29 Correlation Conditions ................................ ................................ ...................... 29 Simulatio n Runs ................................ ................................ ............................... 30 Analysis of Simulation Output ................................ ................................ ........... 3 0 Summary ................................ ................................ ................................ ................ 31

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6 4 DATA COL LECTED ................................ ................................ ................................ 35 Introduction ................................ ................................ ................................ ............. 35 Historical Prices ................................ ................................ ................................ ...... 35 Historical Potato Yields ................................ ................................ ........................... 36 Initial Investment Costs ................................ ................................ ........................... 36 Treadle Pumps (TP) ................................ ................................ ......................... 37 Mot orized Pumps (MP) ................................ ................................ ..................... 37 Drip Technology ................................ ................................ ............................... 38 Annual Operating Costs of Irrigation Technologies ................................ ................. 38 Irish Potato Production Costs ................................ ................................ ................. 39 Non irrigated and Irrigated Operations assumptions ................................ .............. 39 5 RESULTS AN D DISCUSSION ................................ ................................ ............... 44 Introduction ................................ ................................ ................................ ............. 44 Non Irrigated Scenario ................................ ................................ ............................ 44 Net Pr esent Values (NPV) ................................ ................................ ................ 44 Benefit Cost Ratios (BCR) ................................ ................................ ................ 45 Probability of Positive Net Cash Flows ................................ ............................. 45 Irrigation Scenarios without Pests Prevalence ................................ ........................ 45 Motorized Pump (MP) Scenario ................................ ................................ ....... 45 Treadle Pump (TP) Scenarios ................................ ................................ .......... 46 Drum Drip Kits Scenario ................................ ................................ ................... 47 Irrigation Scenarios with Pests Prevalence ................................ ............................. 47 Discussion of Results ................................ ................................ .............................. 48 Motorized Pumps (MP) ................................ ................................ ..................... 48 Treadle Pumps (MP) ................................ ................................ ........................ 49 Drum Drip Kits ................................ ................................ ................................ .. 49 Probability of Generating Positive Cash Flows ................................ ................. 49 Pests Prevalence ................................ ................................ ............................. 50 6 CONCLUSIONS ................................ ................................ ................................ ..... 56 Introduction ................................ ................................ ................................ ............. 56 Contributions of the Research ................................ ................................ ................ 56 Summary ................................ ................................ ................................ ................ 57 Limitations of the Study Further Research Needs ................................ .................. 58 Further Rese arch Needs ................................ ................................ ......................... 59 LIST OF REFERENCES ................................ ................................ ............................... 61 BIOGRAPHICAL SKETCH ................................ ................................ ............................ 65

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7 LIST OF TABLES Table page 4 1 Summary statistics for yields and prices ................................ ............................. 42 4 2 Initial investment costs ................................ ................................ ....................... 42 4 3 Potato production costs per hectare ................................ ................................ ... 42 4 4 Labor, repairs and pests assumptions ................................ ................................ 43 5 1 NPV simulation results for non irrigated operations ................................ ............ 50 5 2 BCR simulation results for non irrigated operations ................................ ........... 50 5 3 Extract of probability positive cash flows (Non irrigated Scenario) ..................... 50 5 4 NPV simulation results for TP and drip (without pests) ................................ ....... 51 5 5 NPV simulation results for MP (with pests) ................................ ......................... 51 5 6 NPV simulation results for TP and Drip (with pests) ................................ ........... 51 5 7 BCR simulation results for irrigated operations (without pests) .......................... 51 5 8 BCR simulation results for irrigated operations (with pests) ............................... 52 5 9 NPV simulation results for MP (without pests) ................................ .................... 52 5 10 Extract of probability positive cash flows (MP Scenarios) ................................ ... 52

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8 LIST OF FIGURES Figure page 2 1 Irrigation technology scenarios. ................................ ................................ .......... 24 3 1 Ris k analysis process. ................................ ................................ ........................ 31 3 2 Forecasting model. ................................ ................................ ............................. 32 3 3 Minimum NPV greater than zero. ................................ ................................ ....... 32 3 4 Minimum NPV less than zero. ................................ ................................ ............ 33 3 5 NPV between less than zero and greater than zero. ................................ .......... 33 3 6 Non overlapping PDFs. ................................ ................................ ...................... 34 3 7 Overlapping PDFs. ................................ ................................ ............................. 34 4 1 Historical prices time seri es. ................................ ................................ ............... 41 4 2 Historical yields time series. ................................ ................................ ............... 41 5 1 PDF of NPVs for motorized pumps (without pest prevalence). ........................... 53 5 2 PDF of NPVs for treadle pumps (without pest prevalence). ............................... 53 5 3 PDF of NPVs for drum drip kits (without pest prevalence). ................................ 54 5 4 PDF of NPVs for motorized pumps (with pest prevalence). ................................ 54 5 5 PDF of NPVs for treadle pumps (with pest prevalence). ................................ .... 55

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9 LIST OF ABBREVIATION S BCR Benefit Cost Ratio FAO Food and Agricultural Organization GDP Gross Domestic Product IRR Internal Rate of Return KOV Key Output Variables MoAFS Ministry of Agriculture and Food Security MP Motorized Pumps MK Malawi Kwacha NFCI Net Farm Cash Income NFI Net Farm Income NPV Net Present Value ODI Overseas Development Institute PBP Pay Back Period PDF Probability Density Function TP Treadle Pumps UNDP United Nations Developm ent Programme

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10 Abstract of Thesis Presented to the Graduate School of the University of Florida in Partial Fulfillment of the Requirements for the Degree of Master of Science ASSESSING THE FINANCIAL VIABILITY OF INVESTING IN SMALL SCAL E IRRIGATION TECHNOLOGY FOR POTATO PRODUCTION IN DEDZA AND NTCHEU DISTRICTS OF CENTRAL MALAWI By Bonet Chikhawo Kamwana August 2010 Chair: Richard Weldon Major: Food and Resource Economics Over 50% of small scale farmers in Malawi leave on less than $1 .00 a day and are food insecure. This stems from scarcity and seasonality of rainfall, lack of access to fertile arable land suitable for sustained rain fed farming and lack of crop diversification. In response to this the Malawi Government developed a Nat ional Irrigation Policy and Development Strategy in June 2000. The Policy Document highlights financial viability of investing in small scale irrigation as one of the research needs. This study examines and analyzes the financial viability of investing in small scale irrigation technolog ies for potato production in Central Malawi The study identifie d seven irrigation scenarios: motorized pump furrow, motorized pump sprinkler, motorized pump drip, treadle pump furrow, treadle pump basin, treadle pump canal and drum drip kits. The financial viability of investing in the seven scenarios was assessed using net present value s, benefit cost ratio and probability of generating positive net farm cash incomes. With the help of risk analysis software Simetar, a di stribution of 500 iterations for the three key output variables for each irrigation technology was generated. The results

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11 show that the individual irrigation scenarios are financially viable. Each scenario gives a positive net present value and the benefit cost ratio for each scenario is greater than one. The scenarios also have a probability of at least 80% of generating positive net farm cash incomes The motorized pump furrow scenarios and treadle pump furrow scenarios provided the highest mean net pres ent value The drip scenarios yielded the lowest mean net present value The probability of generating positive net farm cash income increased with the passage of time. After three years of operations, the probability of generating positive net farm cash i ncome rose to 100%.

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12 CHAPTER 1 INTRODUCTION, PROBEM STATEMENT AND OBJECTIVES Introduction Malawi is one of the poorest countries in the world with per capita gross domestic product (GDP) of $190, 30 % of under five children being malnourished and the infant mortality rate of 229 per 1,000 live births and a life expectancy at birth of 42 years (World Bank, 2001) Poverty levels have remained relatively high despite the Malawi government instituting several poverty alleviation programmes over the decades. The 1 998 Integrated Household Survey and the 2004 Integrated Household Survey show that while poverty rate was estimated at 54.1 % in 1994, th e figure went down to only 52.4% in 2004 (Malawi Government/World Bank, 2006). The economy is heavily dependent on agric ulture, which accounts for over 80 % of employment and foreign exchange earnings, and nearly 40 % of GDP (UNDP, 2005) The agricultural sector is divided into two subsectors: the estate subsector and smallholder subsector. The estate subsector has a small nu mber of large scale farmers covering about 17% of the cultivated land and is the major contributor to growth and employment; with the major export crops being tobacco, sugar and tea (Overseas Development Institute, 2005) The smallholder subsector covers t he rest of the cultivated land. It dominates food production providing livelihood to over 2.4 million households (Academy for Educational De velopment, 2007) The main crops grown by the smallholder farmers are maize, tobacco, cassava, groundnuts, potatoes cotton, sorghum and millet. Of these crops maize occupies 75% of the cultivated land and is cultivated by over 95% of the farmers (Academy for Educational D evelopment, 2007) A ccording to the A cademy for Educational

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13 D evelopment for most Malawians, maize is synonymous with food and a sense of food security at the household level. However, maize production has been declining over the recent years and demand for food has been increasing steadily. Malawi is not able to meet its food requirements Kundell (20 08) identified the following as the major reasons a) the failure of food production to keep pace with increases in the human population; b) lack of water (droughts) and inability to use it for agricultural production; c) declining soil fertility, combined with s hrinking average farm holdings; d) inappropriate and outdated agricultural technologies; and e) the perception by many that maize is the only food even if other crops that are more adapted to drought are available. Thus Vulnerability to shocks such as climatic hazards dry spells, seasonal droughts, intense rainfall and fl a sh floods ( Malawi Governmnet 2006) has led to a decline in productivity. This is aggravated by mounting land pressure, declining soil fertility, lack of diversification in the agricultural se ctor and reliance on rain fed agriculture (Overseas Development Institute, 2005) Potatoes and Food Security It has been argued that crop diversification, rather than increased maize production, is the way off the poverty treadmill (Rubey, 2003) One of t he crops that is becoming important as a food security crop is the potato. Globally the potato is an integral part of the food system (FAO, 2009 ) According to FAO, the potato is a) grain food commodity and its consumption is expan ding strongly in developing countries; where its ease of cultivation and high energy content have made it a valuable cash crop for millions of farmers. b) a highly recommended food security crop that can help low income farmers and vulnerable consumers ride out the turmoil in world food supply and demand because, unlike major cereals, the potato is not a globally traded commodity, and

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14 its prices are determined usually by local production costs, not by the vagaries of international markets. Roots and tubers a re a major source of sustenance in Sub Saharan Africa (International Food Policy Research Institute (IFPR), 200 1 ). A h igh d emand and p roduction scenario shows that the total use of roots and tubers in developing countries is likely to increase by 74% betwe en 1993 and 2020; with more than half of the increase attributable to faster growth in the use of potato (IFPR, 200 1 ). Roots and tubers also serve as sources of cash income for low income farm households and raw material for processed products for both ru ral and urban consumption In Malawi, roots and tubers play an important role in food security and providing income to rur al farm households. D uring the 2001 food crisis which recorded a 32 % reduction in national maize production, the Ministry of Agricult ure and Irriga tion believed that the high production of roots and tubers (cassava, sweet potatoes, Irish potatoes) in the same year offset the dip in maize production and provide adequate, if not surplus, food for the country (UNDP, 2008) I n addition a pi lot phase of a tripartite partnership among Universal Industries Limited (the largest confectionary manufacturer in Malawi), International Potato Centre (a leading research institution) and Concern Universal working with communities and the Government of M alawi to improve potato production and to bring about improved incomes of smallholder farmers shows that improved potato production brings about increased income for smallholder farmers (Concern Universal, 2008) The crop is deemed important enough today to warrant a program of research and extension by the national government in cooperation with international organizations, notably the International Potato Center (Nsanjama, 1984)

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15 Irrigation and Food Security A study by GTZ ( 2006) noted that p opulation pr essure in many countries, including Malawi, has exhausted the access to fertile arable land suitable for sustained rain fed cultivation This has forced millions of su bsistence farmers to toil land that has minor potential to meet their household food requ irements. According to GTZ t hese physical constraints are often compounded by harsh climatic conditions with scarce rainfall and a more pronounced seasonality of the rains As a result there is an increasing need for developing small scale irrigation sch emes for smallholder farmers. According to NEPAD/FAO (2005), t he development of irrigation is critical to offering real prospects for boosting productivity, diversifying production and mitigating against the effects of drought Postel ( 1999) noted that irr igated plots in developing countries commonly yield twice as much as rai n fed plots do. Postel argues that w ith irrigation, farmers can choose to invest in high yielding seeds, grow higher value crops, have a normal harvest even during periods of scarce r ainfall, and harvest two or more crops from same piece of land in a year Malawi is gifted with large water resources lakes, rivers and the traditional dambos (wetlands). Almost one fifth of the country is covered by water. However, despite the huge water resources, agriculture is rain fed. Irrigated land comprises only 0.6% of total arable land in Malawi. T he existing potential for irrigation is far from utilized, especially in the area of low cost water harvesting measures (Carr, 1997) Problem Statement More than 50% of smallholder farmers in Malawi are poor and food insecure. This stems from increased pressure on land due to rapid population growth, weather shocks, reliance on rain fed agriculture and lack of crop diversification. All this is happening

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16 w hile there is potential for diversifying from maize and developing small scale irrigation for smallholder farmers. NEPAD/FAO ( 2005 ) noted that i rrigation resources are underutilized and there has been no recent detailed study to identify and evaluate the p otential to utilize the groundwater resources for small scale wet season supplementary irrigation and dry season irrigation of high value crops. Furthermore there is limited information among farmers, investors and policy makers on the viability of small s cale irrigation systems for potato production in Malawi. Hypothesis I nvestment in small scale irrigation (SSI) for potato production is a financially viable investment option. Objectives The overall objective of th is study is to assess the financial viab ility of investing in small scale irrigation technology for potato production in Dedza and Ntcheu Districts of C entral Malawi. The specific objective of the study is to develop a model which, under a given set of assumptions, should be able to a) determine i nitial in vestment and operating costs of different irrigation technologies, b) determine the projected net cash flows per hectare for each irrigation technology, c) determine net present value (NPV ) and benefit cost ratio (BCR) for each irrigation technology, a nd d) determine the probability of generating positive cash flows from each irrigation technology It is the aim of this study to become a tool for potato farmers for analyzing investments in irrigation The study should be of interest to farmers, government departments and other stakeholders in the agricultural sector. The study should give them a tool for decision making.

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17 CHAPTER 2 LITERATURE REVIEW Introduction The purpose of this chapter is to provide a review of work already done on determining finan cial viability of investments. The chapter also reviews some work on potato production and irrigation technologies. Financial Viability In June 2000, the Malawi Government developed a National Irrigation Policy and Development Strategy. Article 7.3.6 of t he Policy Document highlights as one of the research needs in the Irrigation Sub sector. Fi nancial viability is t he extent to which project can be justified financially A financiall y viable project is the one that is a sound business proposition capable of earning a rate of return that satisfies the investors and which generates cash flows sufficient enough to keep it going. Financial viability of an irrigation system is important t o farmers. Investing in an irrigation technology involves committing huge sums of money. This has huge flows. The benefits of such commitments extend into the future and once the commitment is made the expen diture is irreversible (Seo et al, 2006). A large body of literature exists regarding techniques that are used to determine financial viability of investment projects. These methods range from the traditional p ayb a ck p eriod (PBP) to advanced methods such as n et p resent v alue (NPV) and i nternal r ate of r eturn (IRR). The traditional techniques rank projects based on accounting profits and do not take into account the time value of money while the

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18 advanced techniques, apart from taking into account the overal l profitability and returns of projects, also base the analysis on net cash flows (Akalu, 2003) and take into account the time value of money. These techniques are discussed further in Chapter 3. There are a number of studies analyzing the viability of i nvesting in different irrigation technologies. Mloza Banda (2006) and K adyampakeni (2004) used gross margin analysis to analyze the viability of different irrigation technologies based on a bean crop. They found that there were variations in viability acr oss different technologies. Farmers who used motorized pumps realized negative gross margins while those who used treadle pumps, watering cans, gravity irrigation and residual moisture realized positive gross margins. Another study by Mangisoni (2006) use d net farm income (NFI) to analyze the impact of treadle pumps on poverty and food security in Malawi. Mangisoni found that adopters of treadle pump irrigation technology had higher NFI than non adopters. The NFI of a dopters of the technology was five tim es higher than that of non adopters. Mangisoni found that, in Blantyre district the adopters got an average NFI of MK122,855 while the non adopters got NFI of MK15,987. Similar results were found for Mchinji district Postel, S., et al (200 1 ) focused on innovations that are designed to provide smallholder farmers with appropriate, affordable and highly efficient technologies. Postel et al. report ed that farmers who adopted low cost drip irrigation technology had reported yield increases of between 50% and 100% According to Postel et al. the adopters of the technology also had a decrease in water use of between 40% and 80%. Postel et al.

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19 a lso analyzed farmers who adopted treadle pumps It was found that the adopters of the treadle pump got extra income th at enabled them to graduate to higher levels of mechanization Malik and Luhach (2002) used NPV, IRR and BCR to determine the viability of drip irrigation for fruit production They found that investment in drip irrigation for fruit production was sound an d economically viable. Senkondo et al (2004) also used NPV, IRR and BCR to analyze investments in rainwater harvesting for dry season irrigation for maize, rice and onions They found that investing in rainwater harvesting for maize, rice and onions is fin ancially viable. To determine how sensitive the investment was to changes in variables, Senkondo et al increased input costs by 20% and reduced selling prices by 20% and found that the NPV was positive, IRR was above cost of capital and BCR was greater tha n 1 for maize and onions production only. There are some similarities between this study and the studies discussed above. The focus of all the studies is analyzing the viability of irrigation technologies. This study draws some lessons from the studies di scussed above. However, to accomplish its purpose, this study has several marked differences in approach from the above studies. a) The studies discussed above, except for Mloza Banda (2006) and Kadyampakeni (2004), analyze one irrigation technology only (fo r example drip only) or compare two different irrigation technologies ( such drip versus furrow ) This study analyzes and compares the viability of three different irrigation technologies (motorized pump treadle pump and drip) that lift water from the wate r source to the field and five technologies (basin, canal, furrow, sprinkler and drip) that convey water from the field to the plant. This is done to enable farmers to have a wider basis for decision making when it comes to investing in irrigation technol ogies b) There are some differences between the m ethods used in this study and the some of the methods used in the studies above. The use of gross margins and NFI were justifiable for the s tudies conducted by Mloza Banda, Kadyampakeni and Mangisoni respecti vely. Gross margin is the difference between revenues and cost of sales Gross margin analysis ignores some costs (such as marketing costs)

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20 accounting profit which is based on accru al accounting NFI includes both cash and non cash receipts and costs. This study use s net farm cash income (NFCI) and capital budgeting techniques as measures of financial viability. NFCI is used because the ability to generate cash goes a long way in det ermining the survival of entities including farms and capital budgeting techniques are used because they take into account the time value of money c) The other marked difference taken by this study is the use of simulation analysi s. While using measures suc h as NPV, IRR, BCR and PBR; this study recognizes that these measures are deterministic. To account for the stochastic nature of the variables involved a simulation analysis is carried out so that the farmers have a complete distribution of possible outco mes. d) While this study focuses on potato production, none of the studies above does so. Potatoes have been chosen because they are becoming a major part of the global food system as discussed in the next section. Potato Production Potatoes were brought to East and Central Africa in the 19th century by missionaries and European colonialists, but the crop did not become important to Malawians until the 1960s, when production was estimated at 60 000 tonnes a year (FAO, 200 9 ) The crop is deemed important enou gh today to warrant a program of research and extension by the national government in cooperation with international organizations, notably the International Potato Center (CIP) (Nsanjama, 1984) Now Malawi is sub In 2007 Malawi was the second highest producer of potatoes in Africa with a harvest of 2.2 million tonnes. Although a nnual consumption of the potato ha d more than tripled between the years of 1994 a nd 2009 to 88 kg per capita (FAO, 2009 ) central regions. The most suitable areas are those at altitudes of between 1 000 and 2 000 m above sea level which receive more than 750 mm of annual rainfall (Gondwe,

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21 1980) In the central region potato production is concentrated in the districts of Dedza and Ntcheu near the eastern border with Mozambique (Gondwe, 1980) While in the southern region, production is mainly around the districts of Blantyre and Mwanza (Gondwe, 1980) Although potato production appears to be relatively unimportant in the Northern region, suitable areas have been identified, particularly the Nyika Plateau and the northern border with Tanzania (Malunga, 1982) McDon C rop based farming livelihoods and policies in Malawi McDonagh found that potato farming is the most common new crop across all ( i rish potatoes, particularly) are a somewhat less risky option as they can be sold at local markets by FAO (2009 ). According to FAO (2009) the potato is a highly recommended food security crop that can help low income farmers and vulnerable consumers ride out the turmoil in world food supply and demand FAO argues that unlike major cereals, the potato is not a globally traded commodity, and its prices are determined usually by local production costs, not by the vagaries of international markets. Potatoes are als o becoming a major part of the global system because they can be used for a variety of purposes. According to FAO (2009 ) a) p otatoes are eaten fresh, frozen or dehydrated. b) p otato starch is used as an adhesive, binder, texture agent and filler. FAO states th plastics and used, for example, in dispos c) potatoes are used for feeding a nimal s Studies show that pigs fatten quickly on 6kg of boiled potatoes.

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22 d) peels and other potato wastes can be fermented to produce ethanol. A study shows that 440,000 tonnes of processing waste can produce between 4 to 5 million litres of ethanol. FAO estimates that less than 50 % of potatoes grown worldwide are consumed fresh and the rest are processed into potato food products and food ingredients, fed to cattle, pigs and chickens, processed into starch for industry, and re used as seed tubers In Malawi, the potato is also becoming very important. FAO statistics indicate that, in terms of the value of production, potatoes are among the top three crops produced in Malawi. In 2005, potatoes ranked first with a value of $261,090,000 and were seconded by maize at a value of $203,350,000 (FAO Statistics, 2009). The above and other statistics may indicate that potato production is a financially viable farming option that could help to improve incomes of smallholder farmers in Malawi. For this reason this study carries out a n analysis to d etermine if potato production is financially viable from the perspective of the smallholder farmer. Irrigation Technologies The unpredictability of weather patterns (especially erratic rainfall) has made agricultural production more risky. Weldon et al. ( pesticides and irrigation are examples of technologies that have reduced risk and the risk altogether but can reduce the risk of low yields on soils with low available water holding capacity Thus this study focuses on investing in irrigation as one of the measures for reduc ing risk, not eliminating it. Several studies on irrigation have been conducted in Malawi. The most notable of Irrigation Technologies

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23 Scale Irrigation Te chnologies and Water Management Techniques for Dry Season Cultivation Banda, 2006). All the above studies show that there is potential for irrigation farming in Malawi and Mloza Banda identified irrigation technologies that need amplification. The five technologies identified include : a) treadle pump irrigation b) river diversion irrigation (canalizat ion) c) residual moisture cultivation d) small earth dams and e) river impounding/weirs. Apart from the studies carried out in Malawi mentioned above, there are also studies completed in other countries The most notable is the FAO (1997) proceedings of a subreg (1997) from the proceedings discusses low cost irrigation technologies for food security in sub Saharan Africa. Perry classifies the technologies in technologies for small scale irrigation T he improved manual irrigation technologies include the traditional rope and bucket method, the motorized pump and the treadle pump; while the mechaniz ed technologies include high capacity mechanized pumps inserted in hand dug wells. Perry indicates that the mechanized technologies assist in water lifting, groundwater development and water distribution

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24 Considering that the target group is smallholder fa rmers, this study, focuses on both manual and mechanized technologies. The particular focus is the treadle pump, drip technology, motorized pump, basin, furrow, canal and spr inkler systems as shown in the Figure 2 1 Chapter Summary Studies show that the re are several types of irrigation technologies that smallholder farmers can adopt. This study applies these technologies to potato production as literature suggests that potatoes are becoming important to increasing smallholder incomes. Chapter 3 lays out the methodology for determin ing the financia l viability of the technologies. Figure 2 1. Irrigation technology scenarios.

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25 CHAPTER 3 METHODOLOGY Introduction Th is study use s secondary data. Data is collected through field visits to select ed Food Security and Sustainable Livelihoods Project The government schemes are chosen because the y are the oldest and largest irrigation schemes in Malawi Food Security and Sustainable Livelihoods Project is two components of integrated sustainable livelihoods that are getting increasing attention are crop diversification and the development of small scale irrigation schemes. Concern Un iversal is working with communities in Dedza and Ntcheu districts of Central Malawi to improve potato production and bring about improved incomes for smallholder farmers Other data is FAO website, University of Florida and University of Malawi libraries. The data collected includes : a) initial investment costs for each irrigation technology b) operating costs for each irrigation technology c) historical potato yields, prices and costs of production and d) energy (diesel) costs Methods This study evaluates f inancial viability of investing in different irrigation technologies using n et p resent v alue (NPV), b enefit c ost r atio (BCR) and p robability of generating p ositive net farm cash incomes (NFCI)

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26 N et Present Value (NPV) Method The NPV of an investment is the sum of discounted future cash flows matched with the initial investment. Under the NPV method, an investment is worth undertaking if the discounted cash r greater than the initial outlay. Thus the decision rule is to accept projects with positive NPV and reject those with negative NPV (Brigham & Ehrhardt, 2008). Future net cash flows are discounted to present values based on the modification of Barry et a l. (1995) formula NPV = I NCFI 1 /(1+i) 1 NCFI 2 /(1+i) 2 NCFI n /(1+i) n (3 1) Where : I is the initial cost of invest ing in an irrigation technology, NCFI 1 NFCI 2 NFCI n are net farm cash incomes for each year, i is the interest or discount rate and n is the life span of the irrigation technology N et farm cash incomes (NFCI) for each year are computed by deducting total operating cash payments from total cash receipts. Thus N FCI = Q.p TOC (3 2) Where : Q is yield per hectare, p is unit price and TOC is total cash costs. Benefit Cost Ratio (BCR) Method The benefit cost ratio (BCR) method compares the sum of discounted benefits to the sum of discounted costs. BCR of greater than 1 indicates that the project is profi table. The decision rule is to accept project with BCR of greater than 1 and reject those with BCR of less than 1. From Equation 3 2, BCR is given by :

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27 BCR = Q.p d / TOC d (3 3 ) Where Q.p d is the sum of discounted cash r eceipts and TOC d is the sum of discounted cash costs. In doing the analyses using the methods above, consideration is made explicitly about the discount rate. Enters ( 1998) noted that t here is a long debate about what the discount rate should be Accordin g to Enters, n ormally market rates are used when analyzing agricultural projects and most investment calculations use rates between 5% and 15%. In Malawi, the Reserve Bank set s the base lending rate for commercial banks and currently the rate is set at 15% Therefore, this study uses a rate of 1 5 % Probability P ositive Net Cash Farm Income (NFCI) NPV and BCR may not be the only key output variables (KOVs) that may be of concern to farmers. Other KOVs exit. One example of such KOVs is the probability that t he farmer will generate positive net farm cash incomes (NFCI) This study, therefore, also determine s the probability that farmers will generate positive NFCI under each of the irrigation technology scenario Annuities The different irrigation technologie s have different life spans. As such, the NPV calculations made are based on those different time horizons. If farmers are to decide between technologies that have different life spans, a direct comparison of the NPV generated by each technology would not be valid. A farmer who decides to invest in a technology with a shorter life has the opportunity to invest in a new technology sooner than if the farmer invested in a longer term technology. This has to be taken into account when analyzing the different te chnologies so that a direct comparison can be

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28 made between technologies with unequal lives. To overcome this problem, the NPV are converted to annuities A nnuit ies are constant cash flow s from year to year. B y converting the NPV for each technology to an annuity, a comparison was made between the NPV of technologies with different time spans This enables the farmer s to l ook at annual streams of cash The NPV are conve rted to annuities using Equation 3 4 : NPV i / (1 (1+i) n ) (3 4) Where NPV is t he net present value for a technology as determined using Equation 3 1 ; i is the discount factor; and n is the life span of the technology. Simulation Analysis The values estimated using the above procedures are single values. However a range of probable o utcomes exist because of risk This study uses simulation technique to capture the riskiness of investing in the different technologies. Under th is technique a forecasting model is used to forecast Q, p and TOC in E quations 3 1, 3 2 and 3 3. The study buil ds two scenarios (non irrigated operation and irrigated operation) during the simulation process Software Simetar (Simulation for Excel to Analyze Risk ) is used to carry out the simulation ana lysis. Figure 3 1 shows modificatio n of the risk analysis process developed by Savvides (1994) which is used in this study to generate a risk profile of investing in irrigation technology for potato production Developing a Forecasting Model The first s tage of the stochastic model involve s the identif ication of critical variables that ha ve an impact on the success or failure of investing in the irrigation

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29 technologies. It also involve s developing m athematical relationships between the variables This stu dy identifie s several risk variables. The variables identified include labor costs, energy (diesel) prices, pests and disease incidences, prices of inputs, level s of production, in flation and type of irrigation technology Figure 3 2 shows the model used t o define the m athematical formulae for process ing input variables to arrive at the key output variables ( KOVs ) This study use s NPV, BCR and P robability Positive Net Cash Flow as KOVs. Probability Distributions The next step involve s developing probabilit y distributions for the risk variables as was discussed by Savvides (1994), Poulinquen (1970), and Jones (1972). Several probability distributions are identified for each risk variable. The probability distributions used in this study include the empirical GRKS and triangle. The empirical distribution is used where the risk variable c can take on continuous values, or where there are limited obsevations for the risk variable such that it is difficult to estimate the the parameters of the true probabability density function (PDF) (Richardson 2006). The GRKS distribution and triangle distribution are used where only three pieces of information such as minimum, mode and maximum c an be identified (Richardson, 2006) Richardson suggest s that the three values (m inimum, mode and maximum) should be used to define a subjective distribution that c an be used until something better is developed. Correlation Conditions Two or more risk variables may be associated. S uch associations may bias the results of risk analysis. To avoid the bias software Simetar is used to test correlations

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30 among the variables. This is done to restrict the random selection of values for correlated variables to the direction and limits of their expected dependency (Savvides, 1994) Th e correla tions are determined using Equation 3 5 below. ( 3 5) Where is the correlation between risk variables i and j is the standard deviation existing between risk variables i and j, is the standard deviat ion of risk variable i, and is the standarddeviation of risk variable j. Simulation Runs The values of the risk variables are drawn from the specified probability distributions repeatedly by Simetar simulation engine This study use s a samp le of 500 iterations The stochastic results of the model (i.e. net present value, benefit cost ratio and probability of positive cash flows ) are computed and stored following each run. Analysis of Simulation Output The last part of analyzing the risk invo lve s statistical analysis and interpretation of the results from the simulation runs. P robability distribution f unctions (PDFs) graphs are constructed from the 500 iterations to compare risk profiles of the investment f or the various perspectives. To arriv e at a decision the following guide is used: a) If the minimum point of the PDF of the NPV for an irrigation technology is greater than zero, the technology is accepted (Figure 3 3) If the maximum point of PDF of the NPV for an irrigation technology is less than zero, the technology is rejected (Figure 3 4 ) b) If the minimum of the PDF of the NPV ofor a n irrigation technology is less than zero and maximum point is greater than zero the technology is neither accepted nor rejected. Assuming other factors remain constant, t he decision will depend on risk preference of the farmer (Figure 3 5 )

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31 c) If the PDFs of the NPV for the different irrigation technologies do not intersect when plot together, the technology whose CDF is on the far right is chosen (Figure 3 6 ) If PDFs of the NPV for the different irrigation technologies intersect, t he choice will depend preference (Figure 3 7 ) d) If the benefit cost ratio (BCR) of the irrigat ion technology is greater than zero, accept the technology. Summary This chapter describe s the outline o f the research methodology. The study use s secondary data. Capi tal budgeting techniques (NPV, BCR and probability positice cash flows ) are used to analyze and determine the viability of investing in irrigation t echnology for potato production. Simulation analysis is carried out to take account for risk. Figure 3 1 R isk a nalysis p rocess Stage 1 Fo recasting Model (Preparation of a m odel c apable of p redicting r eality) Stage 4 Simulation Runs (Generation of r andom scenarios based on a s et of assumptions) Stage 3 Correlation Conditions (Setting r elationships for c orrelated v ariables ) Stage 2 Probability Distributions (Definition and a llocation of p robability w eights to a r ange of v alues) Stage 5 Analysis of Simulation Output

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32 Figure 3 2 F orecasting m odel Figure 3 3 Minimum NPV greater th an zero

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33 Figure 3 4 Minimum NPV less than zero Figure 3 5 NPV between less than zero and greater than zero

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34 Figure 3 6 Non overlapping PDFs Figure 3 7. Overlapping PDFs

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35 CHAPTER 4 DATA COLLECTED Introduction Th is study use s secon dary data. D ata were collected from Bunda College of Agriculture, M inistry o f A griculture and F ood S ecurity (MoAFS) Concern Universal Sustainable Livelihoods Project, B ritish P etroleum (BP) Malawi, Sino Link, Lilongwe Mechanical Development and some onl ine sources. The data collected include : historical potato yields, historical potato prices, potato production costs, energy (diesel) costs, inflation, initial investment costs for each irrigation technology and operating costs for each irrigation technolo gy. D ata on historical potato production costs were collected from Concern Universal Sustainable Livelihoods Project. D ata on historical potato yields were collected from Mo AFS Historical data on i nflation was collected from the N ational S tatistical O ffice website. Finally data on initial investment costs and operating costs for each irrigation technology were obtained from two irrigation equipment traders in Lilongwe: Sino Link and Lilongwe Mechani cal Development Historical Prices Most small scale potato farmers sell their potatoes at the farm gate. They sell the potatoes in bags weigh ing between 200kg and 400 kg. At the time of this study each bag was s elling at MK15,000 which translates to an ave rage of MK50.00/kg. A fourteen year time series of prices was obtained from Bunda College of Agriculture stores bin cards and from farmers of Namphantha village in Dedza district These prices were used to forecast future prices using trend analysis.

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36 The prices showed an upward trend (Figure 4 1). From the trend line in Figure 4 1, the equation for forecasting future prices was determined and is given as Future Price = 2774.10 + 1.40x (4.1) Where x is the year for which the price is to be forecast. The mean price per kilogram for the observed data was MK17.52 with a minimum of MK 7.00 and maximum of MK28.57 (Table 4 1) Historical Potato Yields A f ourteen year time series was also collected on potato yield s. This was collected from MoAFS and C oncern U Food Security and Sustainable Livelihoods Project. The trend and its related equation for these data are shown in Figure 4 2 The minimum observed yield per hectare was 6,300kg and the maximum was 14,500kg. The mean yield was 10,258kg per hectar e with a standard deviation of 2 617kg (Table 4 1 ). Initial Investment Costs The irrigation technologies were split into two main categories: those that lift water from water source to the field; and those that convey water from the field to the actual gr owing plant. These technologies were summarized in the F igure 2 1. S even scenarios over which KOVs were computed and compared were identified The seven scenarios included : (1) treadle pump (TP) basin, (2) treadle pump (TP) canal, (3) treadle pump (TP) f urrow, (4) motorized pump (MP) furrow, (5) motorized pump (MP) sprinkler, (6) motorized pump (MP) drip, and (7) drum drip kits Data on initial investment cost was collected for the seven scenarios (Table 4 2 ). MP dri p scenario showed the highest initial investment cost of MK333,900 while TP furrow showed the lowest initial investment cost of MK50,000.

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37 Treadle Pumps (TP) Treadle pumps (TP) were introduced in Malawi in 1994. By 2005 the number of treadles pumps in Malawi was estimated at 64,000 (Mangisoni 2006) Currently there are two types of treadle pumps: the standard and the superlite. Commercial traders sell the standard treadle pump at MK19,000 and the superlite at MK26,000. Although the standard pump is cheaper than the superlite, most farmers pre fer the superlite. The superlite treadle pump is lighter and easier (requires less energy) to propel than the standard one. Therefore, the analysis of treadle pumps in this study was based on the superlite treadle pump. Commercial traders sell the pumps without suction and delivery pipes. The pipes are sol d separately at MK375/meter. Th is study assume s that farmers require 50 meters of pipes to deliver water to canals, basins and furrows. Thus the total cost for the pipes is estimated at MK18,750. Th is s tudy also assume s that treadle pumps have a life period of 5 years (Palanisami 1997) A ccordingly all the KOVs for treadle pump technology were calculated based on cash flows for 5 years Irrigation water from the treadle pump is delivered to the actual gr owing plant through canal s, basin s or furrow s. This le a d s to three treadle pump (TP) scenarios: TP c anal, TP b asin and TP f urrow The initial investment costs of the three scenarios were determined to be MK75,000 MK60,000 and MK50,000 (Table 4 2 ) respecti vely Motorized Pumps (MP) Motorized pumps (MP) come in different sizes depending on horsepower (HP). Th is study assume s a 5 HP pump The pump including suction and delivery pipes cost MK202,500 at SinoLink Limited and Lilongwe Mechanical Development (LMD) Like the

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38 treadle pump technology, motorized pumps are also combined with other technologies to deliver water to the plant, which leads to three motorized pump (MP) scenarios: MP furrow, MP s prinkler and MP d rip M P f urrow costs MK206,750; MP s prinkler co sts MK262,500; and MP d rip costs MK333,900 (Table 4 2 ). Based on Palanisami ( 1997) t he m otorized pumps are assumed to have a life span of 10 years. Drip Technology Drip irrigation applies water through small emitters to the soil surface at or near the p lant to be irrigated. At the time of this study d rip technology was relatively new in Malawi and was in a trial phase. A s a result the costs used in this study were obtained from comparable technologies from Zimbabwe. Palanisami determined that t he drip system costs about 1,150 U SD per hectare This translates to about MK168,900 at an exchange rate of MK147.00 to 1.00 USD If motorized pumps are used to convey water to the drip s, the total initial cost of both the pump and the drips is MK333,900 (Table 4 2 ). Annual Operating Costs of Irrigation Technologies This study identified labor, energy (diesel) and repairs as a nnual operating cost s of the irrigation technologies. The operating costs are high under the motorized pump technology as compared to the other two technologies, treadle pump and drip technologies. The reason for this is that unlike the other two technologies, the motorized pump requires energy (diesel) to operate. Drip technologies exhibit the lowest annual operating costs because drip ir rigation requires less labor and cost less to maintain as compared to motorized pumps and traditional furrow, basin or canal technologies.

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39 Irish Potato Production Costs Food Security and Susta inable Livelihoods Project in Ntcheu and from Bunda College of Agriculture These costs are shown in Table 4 3 and represent costs that a representative potato farmer would incur per hectare of potato production. Land preparation costs include costs inc urred on land clearing, ploughing harrowing and ridging. The cost of seed is included in planting costs. Harvesting and marketing costs depend on yield. The re is a harvesting and marketing cost of MK5.64/kg which include s MK2.41 /kg for actual harvesting, MK2.03/kg for packaging and MK1.20/kg for transportation. Non irrigated and Irrigated Operations assumptions Given that the purpose of this study was to determine the viability of irrigation, a non irrigated operation is used as a base and is compared to an irrigated operation. However, no yield data was available for an irrigat ed operation. As such some modifications and assumptions were made a) T he historical yield data is used to forecast future yields and an empirical distribution with trend is used to model the risk of yield on a single representative non irrigated operation. b) Deterministic forecast yields are used to represent an irrigated operation. The assumption is that irrigation reduces yield variability to zero c) R isk from pests and diseases is int roduced into the model to relax the yield variability assumption Since very limited information is available, we assume that this risk follows a triangle distribution (Table 4 4 ). T hree points (minimum, median and maximum yield loss ) are identified for bo th the non irrigated and irrigated operations. We also assume that there is higher pest prevalence during the rainy season than the dry season Hence higher pests and disease incidences for the non irrigated operation than the irrigated operation. d) Other s ources of risk for the irrigated operation are identified as risks emanating from repairs and energy costs. We assume that repairs follow a GRKS distribution

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40 (Table 4 4 ) We also assume that the cost of diesel is and follows an empirical distribution. A fo urteen year time series data for diesel prices were collected and are used in an empirical distribution with trend to model the risks of energy prices.

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41 Fi gure 4 1. Historical prices time series Figure 4 2. Historical yields time series

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42 Table 4 1. Summary statistics for yields and prices Yield (kg/ha) Unit Price (MK/kg) Mean 10,258.21 17.52 Standard Deviation 2,616.70 6.18 95 % LCI 8,503.16 13.38 95 % UCI 12,013.27 21.67 CV 25.51 35.24 Min 6,300.00 7.00 Median 10,350.00 18.82 Max 14,500.00 28.57 Skewness (0.12) (0.21) Kurtosis (1.11) (0.11) Table 4 2. Initial investment costs Initial Investment Cost (MK) Useful Life (Years) Treadle p ump c anal 70,000 5 Treadle p ump b asin 60,000 5 Treadle p ump f urrow 50,000 5 Motorized p ump f urrow 206,750 10 Motorized pump s prinkler 262,500 10 Motorized p ump d rip 333,900 10 Drum drip k its 295,000 8 Table 4 3. Potato p roduction c osts per h ectare MK Land Preparation 21,000 Planting 125,250 Fertilizers 75,500 Pest & Disease Control 16,800 Weed Control 6,000 Total Cost 244,550

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43 Table 4 4 Labor, repairs and pests assumptions Repairs assumptions (% of investment cost) Minimum 3.0% Median 7.0% Maximum 10.0% Loss of yields due to pests and diseases Irrigated Non i rrigated Minimum 3% 5% Mode 5% 10% Maximum 7% 15% MP furrow MP sprinkler MP drip TP canal TP basin TP furrow Drum drip kits Irrigation labor assumptions Minimum 7,500.00 4,500.00 3,000.00 15,000.00 15,000.00 15,000.00 10,000.00 Median 12,500.00 8,500.00 4,500.00 20,000.00 23,200.00 27,500.00 17,500.00 Maximum 15,650.00 11,250.00 7,500.00 37,500.00 32 ,500.00 40,000.00 26,520.00

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44 CHAPTER 5 RESULTS AND DISCUSSI ON Introduction Based on the methods described in Chapter 3 and the data collected in Chapter 4, a simulation model was built and simulation analysis carried out to measure the importance of ir rigation. We present results of the simulation analysis in this chapter. Yields, prices, energy costs, labor, repairs pest and diseases were identified as the risk variables that affect the key output variables ( KOVs ) Non Irrigated Scenario Results for the non irrigated scenario are linked to the three main KOVs: net present values (N PV ) benefit cost ratio ( BCR ) and p robability of generating positive cash flows. Each KOV for the non irrigated scenario is discussed in the next section s Net Present Valu es (NPV) Net present values (NPV) were converted to annuities so that valid comparisons could be made between different time horizons. Three time horizons ( 5 years, 8 years and 10 years ) were identified depending on the irrigation technology to be consider ed. A summary of simulation results for the non irrigated scenario are shown in Table 5 1 If the time horizon is 10 years, the mean NPV is MK 173 ,4 07 with a standard deviation of MK 1 6 652 and a coefficient of variation of 9.6 Where the time horizon is 5 years, the mean NPV is MK 104 872 with a standard deviation of MK 1 7 058 and a coefficient of variation of 1 6 27 The mean NPV for a time horizon of 8 years is MK 147,6 65 and its standard deviation and coefficient of variation are MK 1 6 841 and 11. 4 respectivel y P DF graph s for the NPVs for the non irrigated scenarios can be seen in Figures 5 1, 5 2 and 5 3

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45 Benefit Cost Ratios (BCR) Summary statistics for benefit cost ratios ( BCR ) from the simulation of the three time horizons are presented in Table 5 2 The m ean BCR for a 10 year time horizon is 1.43 with a standard deviation of 0.0 4 6. The mean BCR for a 5 year horizon is 1.26 and its standard deviation is 0.04 while the mean BCR for an 8 year span is 1.37 with a standard deviation of 0.037. The simulation res ults show that the minimum BCR is obtained under the 5 year life span while the maximum BCR is obtained under the 10 year period. Probability of Positive Net Cash Flows While NPV and BCR are good indicators of financial viability, other farmers may be inte rested in the ability to generate positive cash flows. Table 5 3 shows an extract of the probability of farmers generating positive cash flows during the first 5 years of operations. The simulation results show that the probability of generating positive c ash flows is 8 7.8 % during the first year, 99.6% during the second year and 100% during the third year and thereafter. These results are same for the three time horizons. Irrigation Scenarios without Pests Prevalence Like the non irrigated scenario, results for the irrigated scenario without pest prevalence were determined The three main KOVs, NPV, BCR and p robability of generating positive cash flows were computed. Motorized Pump (MP) Scenario Simulation results for the motorized pump (MP) scenario were split into MP furrow, MP sprinkler and MP drip depending on the technology that delivers water to the actual plant (Figure 2 1). Simulation r esults of the three MP scenarios are given in Table 5 9

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46 The mean NPV for the three MP scenarios ( MP furrow MP s prinkler and MP drip) are MK 135,1 77 MK115,4 79 and MK95, 695 respectively. MP furrow scenario g ives the highest maximum NPV of MK151, 818 while the MP drip g ives the lowest maximum NPV of MK1 18, 2 3 5. The standard deviations and the related coefficients for th e three MP scenarios are MK 4,808 and 3. 56 for MP furrow scenario, MK 5,989 and 5. 19 for MP sprinkler scenario and MK7 ,082 and 7.4 for MP drip scenario. Summary statistics for BCR the three MP scenarios are shown in Table 5 7. A similar pattern as that of NP V is obtained for BCR. MP furrow ha s the highest mean BCR of 1.38 while MP drip ha s the lowest mean BCR of 1.33. MP furrow show s both the smallest standard deviation and coefficient of variation as compared to MP sprinkler and MP drip (Table 5 7). An ext ract of the simulation results of the probability of generating positive cash flows for the MP scenario s is shown in Table 5 10. While the simulation results show that there is a 100% probability of generating positive cash flows under the MP furrow scenar io during the first two years of operations, the probabilities of MP sprinkler are 97.4% and 100% during the same period and those for MP drip are 93.8% and 100%. Treadle Pump (TP) Scenarios Results were generated for the three treadle pump (TP) scenarios: TP canal, TP basin and TP furrow. These results are shown in Tables 5 4 and 5 7. Firstly, t he mean NPV of the TP canal scenario is MK100, 806 with a standard deviation of MK6, 459 The minimum NPV for TP canal obtained during any single iteration is MK7 8, 2 21 while the maximum is MK111, 462 PDF graphs for NPV for this scen ario can be seen in Figure 5 2 The mean BCR for this scenario is 1.276 with a standard deviation of 0.02.

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47 The mean NPV of the TP basin scenario is MK103,5 11 and its standard deviation is MK4,8 41 The NPV for the TP basin scenario during any single iteration range between MK8 7 8, 247 and MK11 7,440 Figure 5 2 show s a PDF graph for NPV of the TP scenarios. BCR simulation results for this scenario are shown in Table 5 7. Finally the mean NPV o f TP furrow were also determined The mean NPV is MK146,1 79 with a standard deviation of MK6,9 01 The maximum NPV is MK16 5 213 while the minimum NPV is MK12 5 353 Like for the other TP scenarios PDF graph s for this scenario can be seen in Figure 5 2. Drum Drip Kits Scenario The mean NPV of the drum drip kits scenario is MK77,5 79 with a standard deviation of MK6, 020 (Table 5 4). A PDF graph of NPV for this scenario is shown in Figure 5 3. The minimum NPV for the drum drip kits scenario is MK 61,126 while the maximum is MK9 5, 857 Table 5 7 shows the BCR results. The mean BCR of the drum drip kits scenario is 1.49 and its standard deviation is 0.26 with a coefficient of variation of 1.78. Irrigation Scenarios with Pests Prevalence Pests and diseases were int roduced into the model to relax the yield variability assumption s made under the irrigation scenarios. The simulation r esults for the pest p revalence were determined These results are presented in Tables 5 5, 5 6 and 5 8. After introducing pests, PDF grap hs of the irrigated scenarios are shown in Figures 5 4 and 5 5. The highest mean N PV of MK 1 23 959 is obtained under the T P f urrow scenario while the lowest mean NPV of MK36,343 is obtained under the drum drip kits. MP drip

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48 gives the highest standard deviat ion of MK8,896 where as TP basin gives the lowest standard deviation of MK6,1 94 After introducing pests, the mean BCR for the scenarios range from 1.23 (TP basin) to 1.44 (drum drip kits). Discussion of Results Motorized Pumps (MP) Both NPV and BCR sugg est that investing in all the three motorized pump (MP) scenarios (MP furrow, MP sprinkler and MP drip) is financially viable. Th us a farmer can invest in any one of them. However, when the three MP scenarios are considered together, a question arises as t o which one a farmer should invest in. Results show that MP furrow scenario provides the lowest risk as shown by its standard deviation. Apart from providing the lowest risk, the results also show that MP furrow scenario has the highest maximum NPV of MK13 1,074 and the lowest minimum NPV of MK91,016. This lead s us to believe that holding other factors constant; MP furrow scenario is superior to the other MP scenarios T his is true if we compare MP furrow and MP drip scenarios only it may not be the case when we compare MP furrow and MP sprinkler scenarios. While t he maximum NPV ( MK118,235 ) of MP drip scenario is below the minimum NPV (M K122,804 ) of MP furrow scenario the maximum NPV for MP sprinkler of MK135,835 is above the minimum NPV of MP furrow A further analysis was done to identify why TP furrow was superior to the other technologies. We found that farmers were more familiar with this method. We also found that furrow irrigation is most appropriate to shallow rooted crops. Thus potato is best su ited to furrow irrigation as it cannot stand in very wet soils for a long period.

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49 Treadle Pumps (MP) Results for treadle pump (TP) scenarios suggest that investing in the individual scenarios, TP canal, TP basin and TP furrow, is financially viable. This is supported by the positive NPV and BCR of greater than one (Table 5 4 and Table 5 7). The results also suggest that, other things being equal, TP furrow is more superior to the other two TP scenarios The minimum NPV of TP furrow scenario obtained dur ing each iteration (MK125,353) is greater than the maximum NPV of both TP canal (MK111,462) and TP basin (MK117,440). As a consequence, regardless of risk preference of the farmers and holding other factors constant, TP furrow is the most preferred Drum Drip Kits Table 5 4 shows that the NPV obtained under the drum drip kits is positive and Table 5 7 shows that the BCR is greater than one. These results suggest that investing in drum drip kits irrigation technology is financially viable. Probability of Generating Positive Cash Flows The results suggest farmers have a high probability of generating positive cash flows both under the irrigated and non irrigated scenarios. The lowest probability of generating positive cash flows for the non irrigated scenar io is 88% with a standard deviation of 33% (Table 5 3 ) while the lowest probability for the irrigated scenario is 94% with a standard deviation of 24% (Table 5 10). After the first two years of operations the probability of generating positive cash flows i ncreases to 100% for all the scenarios. This may suggest farmers gain more experience with the passage of time such that the chance of getting loses decreases.

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50 Pests Prevalence Introducing pest into the model, shown in Figures 5 4 and 5 5, does not affect our results significantly. Still i nvesting in any of the irrigation scenarios is financially viable. The re is only a slight shift in the results. Pests reduce the mean NPV of all the irrigation scenarios while increasing the risk at the same time (Tables 5 5 and 5 6) Table 5 1. NPV simulation results for non irrigated operations 10 year l ife s pan 5 year life span 8 year life span Mean ( MK) 173,407 104,872 147,665 Std. Dev 16,652 17,058 16,841 CV 9.60 16.27 11.40 Min (MK) 117,260 47,311 96,050 Max (MK) 228,286 151,586 198,292 Table 5 2. BCR simulation results for non irrigated operations 10 year l ife s pan 5 year life span 8 year life span Mean 1.43 1.261 1.366 Std. Dev 0.046 0.040 0.037 CV 2.52 3.16 2.68 Min 1.33 1.12 1.26 Max 1.53 1.38 1 .46 Table 5 3. Extract of probability positive cash flows (Non irrigated Scenario) 2010 2011 2012 2013 2014 Mean 87.8% 99.6% 100% 100% 100% Std. Dev 32.8% 6.3% 0% 0% 0% CV 37.3 6.3 0 0 0 Min 0% 0% 100% 100% 100% Max 100% 100% 100% 100% 100%

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51 Table 5 4. NPV simulation results for TP and d rip (without pests) TP canal TP basin TP furrow Drum drip kits Mean (MK) 100,806 103,511 146,179 77,579 Std. Dev 6,459 4,841 6,901 6,020 CV 6.41 4.68 4.72 7.76 Min (MK) 78,221 87,247 125,353 61,126 M ax (MK) 111,462 117,440 165,213 95,857 Table 5 5. NPV simulation results for MP (with pests) MP furrow MP sprinkler MP drip Mean (MK) 109,397 89,699 69,914 Std. Dev 6,993 8,023 8,896 CV 6.39 8.94 12.72 Min (MK) 91,016 66,849 46,015 Max (MK) 131,0 74 117,353 99,374 Table 5 6. NPV simulation results for TP and Drip (with pests) TP canal TP basin TP furrow Drum drip kits Mean (MK) 78,586 81,291 123,959 58,192 Std. Dev 7,804 6,194 7,879 7,066 CV 9.93 7.62 6.36 12.14 Min (MK) 49,270 63,348 99,0 73 36,343 Max (MK) 94,602 97,720 146,233 79,695 Table 5 7. BCR simulation results for irrigated operations (without pests) MP furrow MP sprinkle r MP drip TP canal TP basin TP furrow Drum drip kits Mean 1.379 1.354 1.339 1.276 1.275 1.401 1.489 Std Dev 0.015 0.018 0.021 0.019 0.014 0.024 0.026 CV 1.076 1.326 1.539 1.487 1.094 1.708 1.779 Min 1.333 1.290 1.279 1.200 1.233 1.327 1.422 Max 1.429 1.407 1.401 1.314 1.316 1.473 1.585

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52 Table 5 8. BCR simulation results for irrigated operations (wi th pests) MP furrow MP sprinkler MP drip TP canal TP basin TP furrow Drum drip kits Mean 1.327 1.303 1.288 1.228 1.227 1.350 1.435 Std. Dev 0.018 0.021 0.022 0.021 0.016 0.025 0.028 CV 1.338 1.583 1.739 1.676 1.327 1.850 1.974 Min 1.275 1.243 1.212 1.147 1.176 1.274 1.353 Max 1.384 1.361 1.351 1.284 1.270 1.419 1.544 Table 5 9. NPV simulation results for MP (without pests) MP furrow MP sprinkler MP drip Mean (MK) 135,177 115,479 95,695 Std. Dev 4,808 5,989 7,082 CV 3.56 5.19 7.40 Min (MK) 122,804 96,485 75,415 Max (MK) 151,818 135,835 118,235 Table 5 10. Extract of probability positive cash flows (MP Scenarios) MP Furrow MP Sprinkler MP Drip 2010 2011 2010 2011 2010 2011 Mean 100.0% 100.0% 97.4% 100.0% 93.8% 100.0% Std. Dev 0.0% 0.0% 15.9% 0.0% 24.1% 0.0% CV 0.0 0.0 16.4 0.0 25.7 0.0 Min 1 00% 1 00% 0 % 1 00% 0 % 1 00% Max 1 00% 1 00% 1 00% 1 00% 1 00% 1 00%

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53 Figure 5 1. PDF of NPV s for motorized pumps ( without pest prevalence). Figure 5 2. PDF of NPV s for treadle pumps ( withou t pest prevalence).

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54 Figure 5 3 PDF of NPV s for drum drip kits ( without pest prevalence). Figure 5 4 PDF of NPV s for motorized pumps ( with pest prevalence )

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55 Figure 5 5. PDF of NPVs for t readle pumps ( with pest prevalence).

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56 CHAPTER 6 CONC LUSIONS Introduction More than 50% of smallholder farmers in Malawi are poor and food insecure b ecause of lack of crop diversification and reliance on rain fed agriculture. Customarily farmers rely on maize for food and grow their crops during the rainy s eason which runs from November of one year to April of the following year. T here is potential for farmers to engage in crop diversification and invest in irrigation technologies. Crops other than maize are becoming more important in food security; and one such crop is the potato. Additionally, the Government of Malawi is advocating the adoption of irrigation technologies by smallholder farmers. A simulation model was developed to determine the financial viability of investing in small scale irrigation techn ologies for potato production. The first objective of this study was to determine initial investment and operating costs of different irrigation technologies. The second was to determine projected net cash flows per hectare of irrigation. T hird w as to det ermine the net pres e nt value (NPV) and benefit cost ratio (BCR) of each irrigation technology The final objective was to estimate the probability of generating positive cash flows from each irrigation technology Contributions of the Research C urrently, t here is inadequate information on the financial viability of investing in irrigation technologies in Malawi. The National Irrigation Policy and Development Strategy (Malawi Government, 2000) identified financial viability from a farmer perspective as one of the research needs in the irrigation sub sector. The ana lyses in this study provide relevant information about initial costs of investing in irrigation

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57 technologies for potato production and the benefits of undertaking such investments. In addition, th e model used in this study gives a framework that may be useful to other crops. To date, studies analyzing financial viability of irrigation technologies in Malawi have been based on deterministic results. This study uses stochastic stimulation and as suc h provides entire probability distributions. This enables the reporting of risk outcomes and provides farmers and other decision makers with more sensible information Summary The overall objective of th is study was to determine the financial viability o f investing in small scale irrigation technologies for potato production in Dedza and Ntcheu districts of Central Malawi. The study identified motorized pumps (MP), treadle pumps (TP) and drip as the three technologies that take water from water sources t o the field. The study also identified furrow, sprinkler, drip, canal and basins as the technologies that take water from the field to the actual growing plant. A combination of the technologies resulted in seven irrigation technology scenarios: MP furrow MP sprinkler, MP drip, TP furrow, TP canal, TP basin and drum drip kits (Figure 2 1) Financial viability of investing in the irrigation technologies was evaluated using three key output variables (KOV); net present values (NPV), benefit cost ratios (BC R) and probability of generating positive cash flows. To achieve this, a stochastic simulation model was developed. Times series data on potato yields, prices and costs were input into the model to estimate future production costs and revenues from which net farm cash incomes (NFCI) were calculated. Software Simetar was used to carry

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58 out simulation analysis. Distributions of probable outcomes were generated for each KOV from which tables and PDF graphs were constructed. Data on initial investment costs an d operating costs for the irrigation technologies was collected from irrigation equipment suppliers. This data was analyzed under a certain set of assumptions to satisfy the first objective. Stochastic yields and prices were used to estimate revenues gene rated per hectare of irrigation. The revenues were matched with stochastic cash costs to obtain net farm cash income (NFCI) per hectare of irrigation so as to satisfy the second objective. To satisfy the third and fo u rth objectives a simulation model was r un. In the model; a) the sum of discounted future NCFI were matched with the initial investment costs to obtain NPV from each irrigation scenario, b) the sum of the discounted future revenues were matched with the sum of discounted future cash costs to determin e BCR from each irrigation and c) probabilities of generating positive cash flows were determined. The procedure used in this study and the results of the simulation analysis allowed in vestment in small scale irrigation (SSI) for potato production is a financially viable investment option BCR of greater than one and probability of generating positive cash flows of at least 80%. This lead s us to fail to reject the hypothesis. Limi tations of the Study Further Research Needs The re are a number of limitations of this study. First, t he study assumes that the farmers have enough funds to invest in the technologies Alternative financing options were ignored because at the time of this study, it transpired that smallholder farmers

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59 find it difficult to access credit from financing institutions. The fi nanci ng institutions demand collateral which most smallholder farmers cannot afford. Second, this study assumed that the different irrigati on scenarios have the same level efficiency. This would not be case; the different scenarios have different efficiency levels and this has a direct impact on the yields achieved by each scenario. There may be variations in yields from scenario to scenario due to operational and water use efficiencies of the technologies. Third, this study assumed that the only factor that determines whether a farmer the choice of inv esting in a technology also depends on other factors such as familiarity with the technology, cost of the technology, slope of the farm and water source. Lastly, there is very limited times series data on yields and prices in Malawi. Most farmers do not keep farm records. The information that farmers provide is from recall and personal experiences Further Research Needs Based on the limitations outlined in the preceding section, there are four areas that need further research. First, a study should be conducted to determine the exact role that banks and other money lending institutions play in providing financing to farmers. The results of that study should be incorporated into the model used in this study so that the risk that farmers may face by getti ng credit is accounted for. Second, the model proposed in this study should be expanded to take into account the different efficiency levels of the different irrigation technology scenarios. Third, the techniques and proposed model used in this study shoul d be applied to other crops in an attempt to

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60 perspective in the irrigation sub sector. Lastly, a study should be carried to document historical yields, costs and prices for the different crops grown in Malawi so that the hitch of obtaining farm time series data is overcome.

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61 LIST OF REFERENCES Academy for Educational D evelopment 2007 Malawi Food Security Programming Strategy FY 2008 2014. Food and Nutrition Technica l Assistance (FANTA) Project, Washington, DC. Akalu, M M 2003. "The Process of Investment Appraisal: the Experience of 10 Large British and Dutch Companies." International Journal of Project Management : 355 362. Barry P.J., P.N. Ellinger C.B. Baker and J.A. Hopkin. 1995. Financial Management in Agriculture: Capital Budgeting Methods 5th ed Danville, IL.: Interstate Publ. Brigham, E.F., and M.C. Ehrhardt 2008. Financial Management: Theory and Practice, 12th. Ed. Mason: South Western. Carr, S.J. 1997. "A Green Revolution Frustrated: Lessons from the Malawian Experience." African Crop Science Journal 5( 1 ): 93 98. Enters, T. 1998. "Methods for the Economic Assessment of the On and Off S ite Impacts of Soil Erosion." Issues i n Sustainable Land Management 2: IBSRAM FAO. 2009. New L ight on a Hidden T reasure. IYP E nd of Y ear R eview. Rome Gondwe, W.T. 1980. Report on Potato Production in Malawi. International Potato Course: Production, Storage, and Seed Technology. Report of Participants. International Agric ultural Center, Wageningen, The Netherlands. GTZ. 2006. Financing Small Scale Irrigation in Sub Sahara Africa (Volume 1: Desk Study) Internet Site: ht tp://www.gtz.de/de/dokumente/en water financing small scale irrigation 1 desk study.pdf (Accessed May 15, 2009). International Food Research Policy Institute (IFPR). 2001. 2020 Global Food Outlook: Trends, Alternatives and Choices. Washington, D.C. Itamur a S. and K. Shinohara. 2004. "The Impact of Treadle Pump on Small Scale Farmers in Malawi." Lilongwe: Total Land Care Jones, G.T. 1972. Simulation and Business Decisions. Harmondsworth, England: Penguin Books Ltd. Kadyampakeni, D Comparative Anal ysis of Different Irrigation Technologies and Water Management Techniques for Dry Season Cultivation of Beans in Chingale Agricultural Development Program M Sc Thesis University of Malawi. Kundell, J. Encyclopedia of Earth, June 8 Web Page : http://www.eoearth.org/article/Water_profile_of_Malawi ( accessed May 27, 2009).

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62 Makoko, M.S. 2000. S mallholder Flood Plain Development Program Irrigation Technology Diagnostic Study Lilongwe : Malawi Ministry of Agriculture. Malawi Government Environmental Affairs Department. 2006. Malawi's National Adaptation Programmes of Action (NAPA). Lilongwe : Min istry of Mines, Natural Resources and Environment. Malik D.P. and M.S. Luhach. 2002. "Economic Dimension of Drip Irrigation in Context of Fruit Crops." International Workshop "Economics of Water and Agriculture". Jerusalem, Isreal, December 18 20. Malunga, B.A. 1982. Malawi Country Report. In: Potato Development and Transfer of Technology in Tropical Africa S.Nganga, ed. International Potato Center Mangisoni, J H. Impact of Treadle Pump Irrigation Technology on Smallholder Poverty and Food Secur ity in Malawi: A Case Study of Blantyre and Mchinji Districts. International Wat er Management Institute (IWMI), Pretoria McDonagh, J. Crop based F arming L ivelihoods and P olicies in Malawi. Working Paper No.23, L ADDER Mloza riences with Micro Agricultural Water Management NEPAD/FAO. 2005. "Government of Malawi: Support to NEPAD CAAD Implementation. TPC/MLW/2906(I), (NEPAD Ref 05/11E), Vol. I of V National Medium term Investment Programme (NMTIP)." Nsanjama, R.A. 1984. Report on Potato Production in Malawi. International Potato Course: Production, Storage and Seed Technology. Report of Participants. International Agricultural Centre, Wageningen Netherlands. Overseas Development Institute. 2005. "Poverty Reduction Strategies and the Rural Productive Sectors: Insights from Malawi, Nicaragua and Vietnam ." Working Paper 258. London Palanisami, K. 1997. Economics of I rrigation T echnology T ransfer and A doption Web Page: http://www.fao.org/docrep/w7314e/w7314e0f.htm ( accessed January 26, 2010). Cost Irrigation Technologies for Food Security in Sub Saharan : Sub Regional Workshop on Irrigation Technology Transfer in Support of Food Security, 14 17 April 1997. Harare Postel, S. 1999. Pillar of Sand: Can Irrigation Miracle Last? New York : WW Norton & Co.

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63 Postel, S., P. Polak, F. Gonzales, and J. Keller. 2001. Association. Water International 26(1):3 13. Pouliquen, L.Y. Risk Analysis in Project Appraisal World Bank Staff Occasional Papers, Th e John Hopkins University Press Rahman S.A., K.M. Farhana, A.H. Rahman and A. Imtiaj. 2007. "An Economic Evaluation of the Multistrata Agroforestry System in Northern Bangladesh." American Eurasian Journal of Agriculture & Environmental Science 2(6) : 655 661. Richardson J.W. and H.P. Mapp Jr. 1976. "Use of Probabilistic Cash Flow in Analyzing Investments Under Conditions of Risk and Uncertainty." Southern Journal of Agricultural Economics 19 24. Richardson, J.W. Simulation for Applied Risk Manageme nt with an Introduction to Simetar. Dep a rtment of Agricultural Economics, Texas A & M University. Rubey, L. Malawi Food Crisis: Causes and Solutions. USAID (Malawi) : Lilongwe Savvides, S C. 1994. "Risk Analysis in Investment Appraisal." Project A ppraisal 9 : 3 18. Senkondo E.M.M., A.S.K. Msangi, E.A. Lazaro and N. Hatibu. 2004. "Profitability of Rainwater Harvesting for Agricultural Production in Selected Semi Arid Areas of Tanzania." Journal of Applied Irrigation Science 39 ( 1 ) :65 81. Seo, S., E. S egarra, P.D. Mitchell, and D.J. Leatham. 2006. "Irrigation Technology Adoption in the Texas High Plains: A real Options Approach." Selected Paper for Presentation at the A AEA Annual Meeting Long Beach, California. Sharmasarkar F.L., S. Sharmarsarkar, L.J. Held, S.D. Miller, G.F. Vance and R. Zh ang. 2001. "Agroeconomic Analyses of Drip Irrigation for Sugarbeet Production." Agronomy Journal 93 : 517 523. Singh A.K., A. Rahman S.P. Sharma, A. Upadhyaya, and A.K. Sikka 2009. "Small Problems and Options." Water Resources Managemen 23 : 289 302. UNDP. 2005. Human Development Report 2005. New York UNDP. 2008. Human Development Report 2007 2008 : Human Solidarity in a Divided World. Famine in Malawi: Causes and Consequences. Web Page: http://hdr.undp.org/en/reports/global/hdr2007 2008/papers/menon_roshni_2007a_malawi.pdf (Accessed April 12, 2009)

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64 Weldon R.N., J.L. Thompson, V.R. Eidmm M.R. G ois and G.A. Bauer. 1984. Management of Farm Business and Financial Risk Dept. Forestry and Home Economics. P84 27, University of Minnesota World Bank. 2001. World Development Report 2000 2001: Attacking Poverty. New York: Oxford University Press.

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65 B IOGRAPHICAL SKETCH Bonet Chikhawo Kamwana was born on 20 May 1976 in Lilongwe, Malawi. He obtained his Bachelor of Accountancy d egree from University of Malawi in March 2001 and began his professional career as a Finance Assistant with University of Malawi Chancellor College in April 2001 before he moved to Malawi College of Accountancy in October 2002 to teach accounting and finance. He rejoined University of Malawi Bunda College of Agriculture in January 2004 as a Teaching Staff Associate in Financial and Managerial Accounting in the Agribusiness Management Department. In August 200 8 Bonet Chikhawo Kamwana entered the Food and R esource E conomics Master of Science program He specialized in risk management under the direction of Dr. Richard Weldon Bonet Chikhawo Kamwana is married to Chrissie Chisomo Chinkolenji and has two sons Chris and Peter.