The Impact of Iranian Targeted Subsidy Plan on the Comparative Advantage of Dairy Farms Parisa Karbasi1, Ali Yousefi1,*, Amir Mozafar Amini1 Department of Rural Development, College of Agriculture, Isfahan University of Technology, Isfahan, Iran * E-mail of corresponding author: ayousefi@cc.iut.ac.ir Abstract Production of animal protein has a major role in the human nutrition and health and a large share of economic value-added in agricultural sector The Iran government implemented the Subsidy Reform Plan (SRP) on December 18, 2010 as the biggest surgery to the nation's economy in half a century in order to replace the subsidies on bread and energy (80% of total) with targeted social assistance Given the importance of dairy industry, it is essential to determine the positive and negative impact of SRP The aim of this study is to analysis the temporal effect of SRP on the comparative advantage of dairy farms in 2009 and 2011 Data was collected from a survey of 65 members of Isfahan Industrial Dairy Farms Cooperation through face-to-face interviews based on a structured questionnaire The comparative advantage of dairy farms has been analyzed in the Policy Analysis Matrix (PAM) framework by calculation the ratios of domestic resource cost (DRC), social cost benefit (SCB), nominal protection coefficient of the product (NPCO, NPCI) and effective protection coefficient (EPC) The results indicate that after SRP, the government introduced the new milk price distortion in order to support the consumers, the nominal protection coefficient on tradable inputs (NPCI) has been decreased and farmers pays indirect tax Moreover, the dairy farms still have the comparative advantage of production, but the DRC ratio has been increased In order to improve the dairy farm profitability and the farmer’s motivation, it is important to removal of the output price distortions and enhancing farmers' access to input markets Keywords: subsidy; dairy farms; Comparative advantage; policy analysis matrix Introduction Livestock industry is the most important subsectors of agriculture and food security Dairy products as a complete and balanced nutrition, has a principal role in human health In Iran, the value added of livestock production in 2010 was 21.2 billion Rials and the average rate of milk production between 2000- 2008 was 5.2 percent Figure (1): Time sereis of milk production in Iran (thousand tons) Subsidy is the governmental transfer payments in the forms of directly or indirectly in order to increase the real purchasing power of the consumers, sale power of the producers, more equitable income distribution, economic stability and compensation for the effects of governmental policies to improve the overall well-being In most industrialized countries, the subsidy is allocated only to agricultural producers, the government announces a guaranteed purchase prices higher than the market prices to support the agricultural sector But, there is no price input distortions in the process of planting This support has a positive impact on production and allocation of resources According to the Iran government, approximately $100 billion per year is spent on subsidizing energy prices ($45 billion for the prices of fuel alone) and many consumable goods including bread, sugar, rice, cooking oil and medicine However, some experts believe direct subsidies are about $30 billion, depending on oil prices The subsidy system has been inherited from the Iran-Iraq war era but was never abolished Iran is one of the largest gasoline consumers in the world, ranking second behind the United States in consumption per car The Iran government implemented the Subsidy Reform Plan (SRP) on December 18, 2010 as the biggest surgery to the nation's economy in half a century in order to replace the subsidies on bread and energy (80% of total) with targeted social assistance It is important to assess the impact of SRP on the comparative advantage of dairy farms According to the literature review, Nelson and Panggabean used the policy analysis matrix (PAM) was developed by Monke and Pearson to analyze the effects of Indonesian sugar policy on sugar production in irrigated and dryland areas on Java, the main sugarproducing region in Indonesia, and to identify the distribution of resource transfers The results indicates that DRC would reveal the negative social profitability of cane production but would not make clear the complex set of transfers that arise The EPC would indicate the impact of product market transfers but not show factor market transfers or measure social profitability Therefore, the limitations of the PAM should be made clear The PAM typically losses incurred by farmers Only a few cane growers using dry land benefitted (Nelson and Panggabean, 1991) William and Winter-Nelson, 1995 compared the comparative advantage of agricultural activities in Kenya by measuring DRC and the Social Cost-Benefit Ratio The results show that In typical agricultural settings, rankings of social profitability based on domestic resource cost (DRC) ratios are biased against activities that use few tradable inputs, such as more traditional land- and labor-intensive farming systems In general, the social cost/benefit (SCB) ratio provides more accurate rankings of the comparative advantage of alternative activities The use of a DRC may be justified only when the shadow exchange rate cannot be estimated, but the potential bias in the DRC should be acknowledged As long as a shadow exchange rate is estimated, the SCB is clearly superior Evidence from Kenya demonstrates the expected relationship between DRC and SCB rankings and illustrates the importance of using the SCB when comparing activities that have very different input combinations Yao assessed the costs and benefits of the Thai agricultural diversification policy in 1994-96 Three competitive crops (rice, soybeans and mungbeans) are selected in two provinces to study their comparative advantages in terms of a policy analysis matrix The results suggest that rice is more profitable than soybeans and mungbeans, implying that government intervention may incur efficiency losses Some sensitivity analyses, however, suggest that potential price changes, increasing water scarcity, and the effects of crop production on the environment are important concerns which may justify government intervention (Yao, 1997a) In an another study, Yao used a policy analysis matrix, PAM, to study the comparative advantage of rice production in comparison with two legume crops in northeastern Thailand It conducts some sensitivity analyses to study the effects of price changes and externality on the comparative advantage of rice against its competitive crops (Yao S., 1997b) Adesina and Coulibaly applies the (PAM) to analyze the social profitability of agroforestry-based technologies for maize production in the highland savanna zone of Cameroon, and the impacts of policy shifts on the financial competitiveness of maize production under these technologies The paper shows that maize production under agroforestry-based systems has high comparative advantage (Adesina and Coulibaly, 1998) Bidabadi et al (2011), analyzed the comparative advantage of date production in Kerman province, Iran by using PAM The Results show that the DRC equals 1.80, which shows no comparative advantage of date production due to this the low export prices and bulk packaging Answering the questions of the impact of SRP on dairy farms is of critical importance for policy analysis This study uses a modified policy analysis matrix (PAM) proposed by Monke and Pearson (1989) to calculate various indicators of comparative advantage and policy distortions to assess the costs and benefits of milk production before (2009) and after (2011) implementing SRP The aim of this study is to analysis the temporal effect of SRP on the comparative advantage of dairy farms in 2009 and 2011 Materials and Methods Data was collected from a survey of 65 members of Isfahan Industrial Dairy Farms Cooperation through face-to-face interviews based on a structured questionnaire Table (1): Inputs and outputs disaggregation in PAM Inputs Labor: manager, technicians, skilled workers and simple Capital: land, facilities, buildings, livestock, machinery and equipment Intermediate inputs Services: Veterinary services, expertise services, artificial insemination, vaccination Energy : electricity, petrol, diesel and gas Water Outputs Milk Calves Meat Fertilizer Construction of the PAM model starts with the estimation of dairy farms budgets that represent the costs and returns to production activities Production and inputs have to be first broken down into tradable outputs and inputs, factor or domestic inputs (e.g land, labor, services and capital) The model has two The input and output quantities in row one are multiplied by financial or observed market prices, with all of their associated distortions Net financial (or private) profit- ability (D) is defined as gross returns at market prices (A) less the tradable input costs (B) and the cost of domestic factors (C) Net private profitability (NPP) is a direct measure of the incentives to farmers to produce a commodity, and reflects the competitiveness of the commodity system at observed market prices If NPP>0, it is implied that the commodity system is financially profitable, given input and output prices, technology sets and existing government policy or market distortions The second row of the PAM model values outputs and inputs at their respective social prices Net social profitability (NSP) (H) measures revenue valued at social prices less value of tradable and domestic resource both valued at their respective social prices If NSP>0, the activity is implied to have a static comparative advantage, in that it effectively utilizes resources within the economy The last row of the model measures policy-induced transfers that come into play due to policy-induced market failures or distortions The divergence between the revenue at market and economic prices is the output transfer; a positive value implies that producers receive a subsidy due to existing policies as they receive a higher price than the world price for the commodity Input transfer measures difference between input prices at financial and social prices, a negative value implying that producers receive subsidy and a positive value implies a tax (i.e, producers pay more than they should) The extent of factor transfer is measured by The net transfers from policy distortions or market failures not corrected by efficient policies is measured by If (i.e, NPP>NSP), it is implied that transfers occur to producers from the government, i.e., a subsidy If , it is implied that a tax on producers exists Table (2):An Outline of the Policy Analysis Matrix Other traditional measures of effects of government policies (e.g., nominal and effective protection coefficient) and of comparative advantage or efficiency such as the domestic resource costs (DRC) are easily derivable from the PAM results DRC is the ratio of domestic factors valued at economic prices (G) over the difference between the gross benefit and the costs of tradable inputs It compares the opportunity costs of domestic factors to the value added at border prices If DRC1, the economy is implied to be incurring costs in excess of value added at social prices and foreign exchange is lost by producing the commodity under that technology set If DRC=1, it is indicated that the economy on balance neither gains nor saves foreign exchange through domestic production It is a summary measure of the relative efficiency of domestic production and can be used by researchers and research managers to decide on resource allocation between technologies (Adesina and Coulibaly, 1998; Morris, 1990) Results and Discussion To determining the shadow price of tradable inputs such as soy, corn, barley and soybean, we used the import prices of this products in FAO website, on the other hand, the shadow price of domestic inputs such as straw, forage corn forage based on the highest price the market Also, the shadow price of milk was based on the import price The average price of imported energy inputs such as diesel and gasoline are used as shadow prices Due to the nature of livestock farms, livestock owners prefer to employ more unskilled worker In addition, the market supply and demand for labor in the industry is limited and segmented Therefore, the shadow price of labor based on the highest price paid to any unskilled and skilled workers According to the very low share of water tariff from total cost and the complexity of calculating the shadow price of water, we used the results of Pakravan et al., 2009 study (781.25 Rials/m3) According to the Pakravan et al 2009, the shadow exchange rate has been considred, 16428.5 Rials and by using the price index for 2010 and 2011, 22764.97 Rials for 2011 Table (3): Indicators for policy analysis matrix Indicators 2009 2011 Nominal protection coefficient of the product Nominal protection coefficient of input Effective Protection Coefficient Domestic resource cost coefficient Measure of net social Social Cost Benefit Ratio 0.433 0.411 0.441 0.641 240.11 0.737 0.646 1.004 0.581 0.697 437.080 0.743 Nominal protection coefficient for the product in 2009 was less than one means that the shadow price is higher than the market price products Which imposes an indirect tax on dairy producers In 2011, nominal protection coefficient was less than one, but increased in comparison to 2009; which indicates that in spite of increasing milk price in 2011, there is a difference between market and shadow price of milk and indirect tax imposed to farmers This is due to the fact that government interventions to fix milk price to satisfying consumers which encountered to high inflation pressure The Nominal protection coefficient of input was less than one in 2009 which means the shadow price was more than market price and the farmers receives the indirect subsidy indirect subsidization of tradable inputs are paid by government to the producers But in 2011 the situation is reversed and the market price was higher than the shadow prices of these inputs and producers pay indirect tax Interpretation of the effective protection coefficient can help us to analysis the government intervention in both input and output market The index is still less than one after implementing SRP and the farmers should pay indirect tax and in spite of the governmental monthly cash transfer to consumers, there is discrimination for farmers Comparing the domestic resource cost coefficient show that although the comparative advantage of dairy farms reduced in 2011, but there is a capacity for continuing this business The social net profit (social revenue minus total social costs per liter) in both years is positive Indices were calculated for different size of dairy farm (number of cows) and the result indicate that all groups are in the same situation Table (4) show the statistical comparison between the two periods for various indicators Table (4):Comparison of indicators before and after the SRP Variable Nominal protection coefficient of the product Nominal protection coefficient of input Effective Protection Coefficient Domestic resource cost coefficient Measure of net social Social Cost Benefit Ratio t test -4.895 -9.229 0.432 0.660 -2.197 0.476 Sig 0.008* 0.001* 0.688ns 0.545 0.093* 0.659 ns significance at 5%, ns: no significance As shown in Table(4) the result of comparing the indicators for 2009and 2011 by t test show that there is no significant differences between the effective protection and domestic resource cost coefficients and social cost benefit ratio of 2009 and 2011 *: Conclusion This study show that dairy farms has a capacity and comparative advantage in the field of milk production After acting the SRP, the dairy farms still have the comparative advantage of production, but the DRC ratio has been increased Now, the government try to control the inflation and support the consumers, and also impose the fixed milk price sale to dairy industries On the other hand, by devaluation of the Rial against the dollar and increasing the import price of dairy farm inputs, the farm profitability has been severely affected In order to improve the dairy farm profitability and the farmer’s motivation, it is important to removal of the output price distortions and enhancing farmers' access to input markets References Akinwumi A A and Ousmane N C (1998) Policy and competitiveness of agroforestrybased technologies for maize production in Cameroon: An application of policy analysis matrix, Agricultural Economics, 19 (1-2): 1-13 Bidabadi, et al, 2011 Indices of relative advantage and support date Kerman, Agricultural Economics Research, 2: 99-116 Central Bank of Iran (CBI) 2010 Annual national accounts reports Masters, William A & Alex Winter-Nelson 1995 Measuring the Comparative Advantage of Agricultural Activities: Domestic Resource Costs andthe Social Cost-Benefit Ratio, American Journal of Agricultural Economics, 77: 243-350 Monke, E A and Pearson, S R (1989) The Policy Analysis Matrix for Agricultural Development, Cornell University Press, Ithaca and London Morris, M.L., 1990 Determining comparative advantage through DRC analysis, CIMMYT Economics Paper, No 1, International Maize and Wheat Improvement Center, Mexico Pakravan, M et al, 2012 Comparative advantage of crops in the city of Sari, Agricultural and Development Economics, 77: 1-28 Saiful Islam, Abu Hayat Md., Dieter Kirschke 2007 Protection and comparative advantage of rice production in Bangladesh: A policy analysis matrix, HumboldtUniversität zu Berlin Yao S (1997a) Comparative advantages and crop diversification: a policy analysis matrix for Thai agriculture, Journal of Agricultural Economics, 48( 1-3): 211-222 Yao S (1997b) Rice production in Thailand seen through a policy analysis matrix, Food Policy, 22(6): 547–560 ... The EPC would indicate the impact of product market transfers but not show factor market transfers or measure social profitability Therefore, the limitations of the PAM should be made clear The. .. On the other hand, by devaluation of the Rial against the dollar and increasing the import price of dairy farm inputs, the farm profitability has been severely affected In order to improve the. .. The Results show that the DRC equals 1.80, which shows no comparative advantage of date production due to this the low export prices and bulk packaging Answering the questions of the impact of