We extend the nominal rate of protection (NRP) methodology to a value chain framework. We develop our methodology for three types of value chains: a new value chain created by policy, a value chain in which a by‐product is created in the processing of a commodity, and a value chain in which processing of a commodity generates new product(s). We consider two cases of value chains: when the commodity is tradable and when it is non‐tradable.
By Simla Tokgoz and Fahd Majeed published in Mar 27 2020
Achieving food and nutrition security is a critical goal for the Government of India (GOI). The GOI implements a wide range of agricultural, trade, and domestic policies to achieve this goal, creating a complex policy environment with often overlapping and counteracting outcomes. This policy environment affects producers, processors, and consumers across the value chain, with vital implications for farmers. Therefore, analysis of distortions to agricultural incentives needs to include both individual commodities and their value chains. These distortions can affect various value chain actors in different ways. Measuring and understanding how distortions to agricultural incentives impact the value chain is necessary to form a complete picture and to design effective policies to minimise unintended consequences for value chain actors.
To support this effort, in our recent paper we propose a new methodology to extend the nominal rate of protection (NRP) approach that is estimated for commodities to a value chain framework and apply this new methodology to Indian agricultural markets. Specifically, we measure the impact of policies on farmers in India across two oilseed value chains (rapeseed and groundnut) and the biofuels value chain (ethanol-molasses-sugar-sugarcane). Policies in India, as elsewhere, often display contrasting policy goals which require a careful analysis of net impacts on the value chain and on the economic agents along those value chains. The paper conducts the analysis using state-level price data from the 2008–2009 marketing year to the 2011–2012 marketing year. Price data is taken from a variety of sources: international price data is taken from the USDA ERS and GAIN Reports, and the Indian state and country level domestic price data is taken from agricultural statistics published by the Indian Government and IndiaStat.
NRPs for commodities are computed by comparing domestic prices (actual prices faced by the producer, farmgate harvest price) and reference prices (free of influence from domestic policies’ and markets) for a given node in the value chain (see Krueger. Schiff, and Valdes, 1988). Figure 1 presents how price transmission is measured across different nodes in the value chain of a commodity. In this analysis, three nodes of measurement along the value chain are used: the border, the point of competition, and the farmgate. In the proposed methodology, first, we compute the relative price of the downstream value chain products (processed goods and by-products from agricultural commodity under analysis) in agricultural commodity equivalent; then we measure distortions to agricultural incentives within the value chain framework to compute NRP for the value chain. Rather than computing NRPs for an agricultural commodity (such as rapeseed) and its downstream products (such as rapeseed oil) individually, we incorporate their respective relationships to compute a value chain NRP (VCNRP). The NRPs for sugar and sugarcane commodities indicate that the sugar sector is subsidised, assisting both sugarcane farmers and sugar mills. However, gains are not evenly distributed among value chain agents – sugar processors are protected at higher levels than sugarcane farmers. Molasses value chain NRP results indicate that the molasses sector is, on average, taxed. Ethanol-molasses value chain NRP is also negative, but remains higher than the molasses value chain NRP. These results show that both the molasses and the ethanol products are disincentivised in India, but that taxation is lower for ethanol than for molasses. When we sum commodity NRPs (sugar and sugarcane) and product value chain NRPs (molasses and ethanol), we find that VCNRP for Molasses&commodity and VCNRP for Ethanol&Molasses&commodity are at high positive values. These results show that the net subsidisation of the overall value chain is due to much higher subsidisation of sugar and sugarcane producers, exceeding the taxation of the two products in the value chain.
Fig 1. Price transmission across different locations of measurement
Source: Authors’ description.
In conclusion, the proposed VCNRP methodology enables a comprehensive analysis of policies targeting different nodes of a value chain, allowing policy makers and analysts to identify the overall impact. The methodology can also be used to show policy makers where to focus interventions, either by re-evaluating the existing policy framework or by focusing on other sources of inefficiencies and distortions along the value chain. It should be noted that policy makers need to consider that new value chain development requires stable policy framework and that legislation alone is not enough to generate new value chains.
The full study can be accessed here.