Grain Storage and Information for Agricultural Competitiveness Project
Part A
Project specification
The Mexican economy ranks 11th amongst the largest economies globally. The country’s economic growth is partly contributed by the strong macroeconomic institutions, integration of open trade, and promotion of private investment (The World Bank, 2018, p.20). Nevertheless, the country has been undergoing moderate growth over the past years. The country’s economic growth declined from 2.6% in 2015 to 2% in 2016. The decline was associated with the fiscal and monetary policy implemented by the Mexican government to respond to the external shock affecting the country’s growth in aggregate demand. Among the external shocks that have adversely affected the country include a decline in the oil prices, change in the political environment, and a decline in economic growth in the emerging economies. These external market shocks contributed to a significant reduction in the value of the Mexican peso (the World Bank, 2017, p.23).
Agriculture plays a fundamental role in the Mexican economy and accounts for approximately 3% of the country’s annual Gross Domestic Product through its forward and backward linkage with the country’s food system (Statista, 2018, p.1). The sector further employs approximately 13% of the country’s labor force. The country’s agriculture sector further provides livelihood to over 45% of the country’s rural labor force (OECD-FAO, 2020, p.2). The Mexican government has over the recent past focused on establishing support programs aimed at eliminating economic inequality by reducing poverty. The agriculture sector was considered critical in promoting the country’s productivity. However, the effectiveness of the agricultural sector in alleviating poverty in Mexico is likely to be hindered by diverse challenges amongst them storage capacity. The country is characterized by insufficient storage capacity hence affecting the effectiveness of the agriculture sector in stabilizing demand for grain products. There are also significant disparities regarding storage infrastructure within the country, especially in the central and southern regions (World Bank, 2018, p.32).
To overcome the disparity, the Mexican government initiated a plan aimed at improving the country’s grain storage infrastructure. Initially, the project targeted maize because of its significance to Mexico’s national food security. The project largely targets small farmers. The project is further focused on improving farmers’ access to information on grain management, marketing, and monitoring hence enhancing their borrowing capability. The project was estimated to cost US$195 million, which was shared between three entities that include the International Bank for Reconstruction Development ($120 million), the Local Farmer Organisations ($15million), and the Borrowing Country’s Financial Intermediaries ($60 million). The project was approved in March 2017 and completed in January 2020.
The project’s objective is to improve access in regards to grain storage facilities and information for small scale grain producers across Mexico. By pursuing this goal, the project intends to contribute to the promotion of food security, strengthen market inclusion, and hence the small grain producer’s competitiveness in regards to grain production (World Bank, 2018). The project success was evaluated by examining two main indicators that include; (a) the number of beneficiaries that used the grain storage facilities established through the project (in terms of gender), and (b) the number of beneficiaries that have access to the grain market information provided through the project (by gender) (World Bank, 2018). Table 1 below illustrates a summary of the project cost.
Part B: Project feasibility and economic analysis
Understanding the feasibility of the project was considered critical in examining its success concerning diverse dimensions (Dey, 2001, p. 34; Badiru, 2003, p.83). The project feasibility was undertaken in relation to different dimensions.
BI; Economic feasibility
First, a cost-benefit analysis was undertaken to examine the project’s future viability. As such, the different costs likely to be incurred in the project were examined. These related to the project’s total implementation cost financed by the World Bank. Secondly, a cost-benefit analysis was undertaken concerning the cost incurred in establishing the requisite storage infrastructure that was to be funded by the private sector. The private financiers included organized producers. The third component of the cost-benefit analysis included an analysis of the projected incremental recurrent expenses that would have arisen from possible operational and maintenance costs of the project’s equipment (World Bank, 2017).
The analysis further entailed examining the cost of the project to society with respect to greenhouse gas emission. The rationale of considering greenhouse gas emission as one of the dimensions of cost-benefit analysis is underlined by the fact that greenhouse gases contribute to an increase in the cost of operating grain storage facilities. The increase in storage cost emanates from the incremental energy expended in running rehabilitated storage facilities. The economic benefits examined related to the gains by the small scale grain farmers that are likely to be derived from averting grain losses because of expanded and improved grain storage facilities. Minimizing food loss and wastage is largely considered as a critical approach in enhancing efficiency within a country’s food system. This subsequently contributes to improved food security and environmental sustainability (Food and Agriculture Organisation of the United Nations, 2019). The benefits further included the improved grain handling capability by the producers. The project would be also expected to contribute to a significant reduction in greenhouse gas emissions.
By assuming that the project would not be affected by price alterations other than a change in taxes, results from an economic-benefit analysis conducted estimated that the project would yield an Internal Rate of Return (IRR) of 17%. The cost-benefit analysis further showed that the project’s Net Present Value (NPV) would amount to approximately US$40.4 million. A sensitivity test of these results was conducted to determine the possible simultaneous variability of the fundamental project parameters by applying the Monte Carlo simulation technique. The parameters considered in the sensitivity analysis include the exchange rate (Mexican Peso’s exchange rate relative to the US dollar), the size of loss averted (in terms of value and volume), and the projected storage turnover ratio. Findings from the sensitivity analysis revealed that the project was economically viable and it’s expected economic IRR would remain at 11% while the project’s minimum NPV would amount to approximately US$6.2 million (World Bank, 2017). Given the public investment nature of the project, it was assumed that conducting a financial cost-benefit analysis was not necessary because the Mexican government does not intend to generate financial returns from the project.
B2; Environmental sustainability
An environmental assessment conducted in relation to the project showed that activities associated with the project were highly unlikely to harm the natural environment and landscapes or any other aspects that are considered to be of significant cultural and archaeological significance to Mexico.
B3; Social feasibility
The process of examining project feasibility further entailed conducting a social feasibility study. The rationale of the social feasibility was to examine the capability of the project in contributing to improved agricultural capability especially amongst the indigenous population. Results from the social feasibility study showed that the project would not have adverse effects on society since it did not entail the implementation of extensive infrastructure work. Extensive stakeholder consultation was conducted with different parties that included private and public organizations, non-governmental organizations, local governments, and representatives of diverse producer organizations. The stakeholder consultation was intended at designing a strategy and action plan to be followed in implementing the project while observing the country’s biodiversity. In light of the project’s goal, which entails reducing the prevailing gender gap in regards to economic opportunities especially among female farmers, the social feasibility analysis appreciated the importance of establishing and developing a strong relationship with women. This move was motivated by an appreciation of the critical role that women play in regards to drying, shelling, grading, and winnowing different grain products, which are critical in achieving effective grain storage.
Part C: Literature Review
Developing agricultural competitiveness constitutes a fundamental element in countries’ economic growth. According to the Organisation for Economic Cooperation and Development (OECD), competitiveness refers to the capability of a state, firm, nation or region to sustainably generate high factor level employment and income despite the pressure that may arise from the international market (Latruffe, 2010, p. 5). Conversely, the European Commission (2009) defines competitiveness to include the sustained improvement in a country’s standard of living hence resulting in a significant reduction in the level of voluntary unemployment. The two definitions of underline highlight sustainability as a fundamental aspect of achieving competitiveness.
Improving agricultural competitiveness, especially amongst the countries in which agriculture contributes a significant proportion to their GDP, constitutes a fundamental approach through which countries can enhance sustainable economic growth. Among the approaches in which countries can achieve agricultural competitiveness entails developing the sector’s comparative advantage as stipulated under the trade theory. The theory hypothesizes that trade flow between countries is enhanced by the prevailing country differences with respect to production cost (Schumacher, 2012, p. 26).
The growth in the size of the global population has resulted in a considerable increase in pressure on the food sector (Gunasekera, 2017, p. 303). Given this, food wastage is increasingly being considered an undesirable aspect that should be avoided. It is estimated at approximately 1.3billion tonnes of the total food produced for human consumption is wasted annually (Gustavsson et al., 2011, p. 11). In the developing economies, it is estimated that over 40% of the 1.3 tonnes lost occurs during the post-harvest and the processing period. Conversely, 40% of the total food wastage/loss in the industrialized economies occurs in the retail and consumption phases. (Gustavsson et al., 2011, p. 12). This represents a considerably high loss amount of food wasted. However, there are only a few or no international policies on food wastage (Food and Agriculture Organisation of the United Nations, 2019).
Food production in Eastern Europe and Latin America is expected to experience at a considerably high rate largely because of increased investment in the agricultural sector, higher yields, and increased agricultural area (OECD-FAO, 2012, p. 52). Nevertheless, the benefits associated with the growth in agricultural productivity in regards to food production in the Eastern European and Latin American countries may be negated if incidents of food wastage and loss are not addressed.
The growth in demand for food products has contributed to a rapid increase in price for agricultural products. Research results show that the increase in food prices coupled has raised concern on a range of aspects amongst them, countries’ capability to feed their citizens and the increase in economic disparities amongst the citizens (Organisation for Economic Cooperation and Development –Food Association Organisation, 2012, p. 51). This has subsequently drawn attention to the importance of addressing food wastage. Reducing food wastage is therefore considered integral in contributing to improved agricultural competitiveness, enhancing environmental sustainability, and strengthening countries’ food security. The food insecurity facing the world has resulted in growth in the significance of minimizing food wastage and loss. This will subsequently contribute to the agriculture sector’s capability to feed over 10 billion people globally by 2050 (Gustavsson et al., 2011, p. 11).
The global agriculture sector is subject to diverse shocks arising from different macro-environmental forces. For example, the 2007/2008 global economic crisis led to significant disruption of commodity prices, amongst them grains. The disruption in commodity prices presented a major challenge to governments. Governments were subsequently forced to implement short-term policies to curb the effects of rising commodity prices. Nevertheless, a study by the World Bank (2018) shows that food prices continue being volatile. Countries are increasingly adopting short-term approaches to manage the validity of grain prices. However, countries’ success in addressing the volatility in grain prices will depend on their effectiveness in implementing long term grain management policies.
Storage and agricultural competitiveness
Improving agricultural competitiveness demands governments to focus on eliminating the challenges facing the agriculture sector. Nevertheless, Tefera et al. (2011, p. 240) assert that some of the issues affecting agricultural competitiveness are structural in nature, for example, land fragmentation, and hence difficult to address. However, some challenges, for example, storage, are relatively easy to address. In respect to this, governments must consider implementing strategies that will contribute to improvement in their food storage capabilities. A study by Attila and Chandra (2017, p.2) identifies investing in physical infrastructure as an integral element in strengthening a country’s agricultural competitiveness. Storage ranks amongst the most important physical infrastructures in the agricultural sector. Attila and Chandra (2017, p.2) is of the view that storage infrastructure contributes to a reduction in production cost and improved income amongst the farmers. The unpredictability of future grain prices coupled with the high loss associated with ineffective grain storage underlines the importance of improving grain storage. Improving grain storage can, therefore, result in improvement in a country’s agricultural competitiveness. As graph 1below illustrates, increasing the grain buffer stock results in price stabilization. The stabilization in grain prices partly arises from a reduction in post-harvest losses.
A study by Tefera et al. (2011, p. 240) asserts that traditional storage practices especially in the developing economies are ineffective in protecting their food products, especially grains, from major storage pests. This subsequently results in approximately 20-30% of the total grain losses. Tefera et al. (2011, p. 240) affirm that the lack of storage capacity forces the smallscale farmers to dispose of their grain produce soon after harvesting to avert the post-harvest losses. As a result, the small scale farmers are trapped in a perpetual poverty trap. For example, the farmers are forced to repurchase the grains later at a considerably high price a short-timer after disposing-off their produce. If the small scale farmers are not supported in regards to grain storage, it becomes extremely challenging for the agricultural sector to contribute to improvement in the farmer’s livelihood. The farmers lose the opportunity of selling their produce at an attractively high price because of their inability to store the grains.
Mexico is characterized by inadequate and or insufficient food storage capacity in terms of availability of food storage equipment and capacity to maintain the grain products’ quality. This has subsequently contributed to a reduction in the country’s capability in smoothing the commercialization of the agricultural sector (World Bank, 2014, p.10). This has subsequently contributed to a reduction in the competitiveness of the country’s agricultural sector. Moreover, the country’s reliance on traditional storage infrastructures has culminated in a considerable increase in post-harvest losses.
A study by the United Nations Food and Agriculture Organisation showed that Mexico’s post-harvest losses in regards to different grains (wheat, beans, and maize) range between 5-25% of the country’s total production. The loss is largely associated with high grain humidity, pest, and fungal infestation. At the farm level, the post-harvest losses are considerably high at 13-28% (World Bank, 2014, p. 13). The incurrence of these losses presents a major hurdle in the country’s quest to achieve agricultural competitiveness. Thus, Mexico must consider improving the small scale farmers’ storage capability.
Information and agricultural competitiveness
Despite the growth in global demand for food, contemporary farmers continue to be faced with narrow profit margins. The decline in profit margin can be associated with diverse factors such as the high cost of agricultural inputs, for example, fertilizers and seeds (Milovanovic, 2014, p. 471). Milovanovic (2014, 45) asserts that most smallscale farmers continue to experience challenges arising from rapid market deregulation and globalization. Agriculture has experienced a remarkable change from being bid-driven to being demand-driven. However, it is expected that information will play a major role in the future growth and sustainability of the agricultural sector (Gennaaro & Forleo, 2019, p. 13). Achieving competitiveness in the agriculture sector requires that the farmers, as the end-users of information in the food production chain, to access relevant information efficiently to succeed in leveraging on the available opportunities (Jambor & Babu, 2016, p. 151).
Improving the farmers’ access to information relating to seeks, plant nutrients, and plant protection increases the farmers’ success in conducting farming activities (Milovanovic, 2014, p. 34). Beluhova-Uzunova, Roycheva land Atanasov (2018) affirm that farming is increasingly being transformed into an information-intensive industry. Success in farming will continue to be influenced by the farmers’ capability to leverage on knowledge (Samah et al., 2009, p.93). Improving the farmer’s accessibility to information is critical in connecting the grain farmers to the market. Establishing an effective information system is therefore critical in enhancing the farmers’ productivity. providing farmers’ access to information on early weather system and climatic changes amongst other climatic variables can help the farmers in limiting post-harvest losses (World Bank, 2014, p. 29). For example, the farmers can achieve an edge in making decisions that improve their capability in adapting their farming and grain storage activities to the changing climatic conditions.
In its study, the World Bank (2014, p. 45) revealed that improving the grain farmers’ access to information relating to production volumes, grain climate variables, and availability of storage facilities can result in a significant reduction in the incurrence of high transaction cost, and enhance transparency in the flow of grains through the commercialization process. Moreover, the centrality of information in the grain management and marketing process is also essential in improving the grain producers’ decision making capability. One of the fundamental elements in improving farmers’ effectiveness in exploiting knowledge in their farming process includes tailoring information to fit the farmers’ language, and other cultural characteristics (Milovanovic, 2014). The rationale of this approach is to enhance the usability of the information to the farmers.
Conclusion
The literature review highlights the critical aspects necessary for enhancing agricultural competitiveness by leveraging the concepts of grain storage and information. The review highlights that storage comprises a critical infrastructural component in strengthening agricultural competitiveness by minimizing the incurrence of post-harvest losses. Improving the grain storage capability can aid in improving the smallscale farmers’ quality of life by minimizing poverty occasioned by the post-harvest loss and lack of storage capability. Farmers can store the grains and sell them when the prices are attractive as opposed to having to dispose-off their sales immediately after harvesting. Similarly, information plays a central role in improving agricultural competitiveness by enhancing the farmers’ capability in adopting knowledge-based approaches with respect to different aspects of their farming, product storage, and marketing processes. The significance of improving agricultural storage capability and access to information cannot, therefore, be underestimated in improving agricultural competitiveness.
References
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