L_Leonetti_FINAL_Report_Assignment_I_final.pdf.pdf

Acknowledgements

AUGUST 2012

This publication was produced for review by the United States Agency for International Development. It was prepared by Tetra Tech ARD.

KOSOVO NEW

OPPORTUNITIES FOR

AGRICULTURE PROGRAM

TECHNICAL ASSISTANCE FOR THE ANALYSIS OF

PROFITABILITY OF SELECTED FARM ACTIVITIES

FINAL REPORT: TECHNICAL ASSISTANCE

ASSIGNMENT I

This report was prepared by the New Opportunities for Agriculture project team of Tetra Tech ARD based on a Final Report prepared by:

Luciano Leonetti, Rome, Italy

Prepared for the United States Agency for International Development, USAID Contract Number EDH-I-00-05-00006-00, TO AID-167-TO-11-0000, Kosovo New Opportunities for Agriculture Program, under the Rural and Agricultural Incomes with a Sustainable Environment (RAISE Plus) Indefinite Quantity Contract (IQC).

Implemented by:

Tetra Tech ARD 159 Bank St., Suite 300 Burlington, VT 05401

KOSOVO NEW

OPPORTUNITIES FOR

AGRICULTURE

PROGRAM

TECHNICAL ASSISTANCE FOR THE

ANALYSIS OF PROFITABILITY OF SELECTED

FARM ACTIVITIES

FINAL REPORT: TECHNICAL ASSISTANCE

ASSIGNMENT I

August 2012

DISCLAIMER

The authors’ views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

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FARM ACTIVITIES

FINAL REPORT ASSIGNMENT I

TABLE OF CONTENTS

TABLE OF CONTENTS ............................................................................................................ I ACRONYMS AND ABBREVIATIONS ..................................................................................... II EXECUTIVE SUMMARY ....................................................................................................... IV

1.0 INTRODUCTION

2.0 OBJECTIVES OF THE ASSIGNMENT

3.0 ORGANIZATION OF ACTIVITIES

4.0 OUTCOMES OF THE MISSION

5.0 RECOMMENDATIONS AND CONCLUSIONS

5.1 USE OF PROFITABILITY ANALYSES AND PRODUCTION COSTS

5.1.1 Use of Profitability Analyses and Production Costs in Other EAU

Activities

5.1.2 Use of Profitability Analyses and Production Costs in Exchange of

Information and Joint Activities with other MAFRD Departments and External Public and Private Organizations

5.2 RECOMMENDED EAU ACTIVITIES RELATED TO PROFITABILITY ANALYSES AND

PRODUCTION COSTS

5.2.1 Profitability Analyses and Production Costs

5.3 CONCLUSIONS

ANNEX 1: TERMS OF REFERENCE

ANNEX 2: ASSESSMENT OF CURRENT AVAILABILITY AND SUITABILITY OF

DATA AND DATA SOURCES

ANNEX 3: PROPOSED COST ANALYSIS MODELS

A3.1 PROPOSED METHODOLOGY FOR PRIMARY DATA COLLECTION AND VALIDATION

A3.1.1 Assumptions and Characteristics of the Models A3.1.2 Cost Configurations and Model Structures A3.1.3 Calculations Related to the Use of Farmer-Owned Resources A3.1.4 Development of Working Tools A3.1.5 Data Collection, Validation and Feedback Cycle

A3.2 PRODUCTION COST MODELS

A3.2.1 Wheat A3.2.2 Maize A3.2.3 Alfalfa A3.2.4 Grapes A3.2.5 Apples A3.3.6 Sheep A3.3.7 Dairy

ANNEX 4: PROPOSED INTER-ACTION OF EAU WITH OTHER MAFRD

DEPARTMENTS AND OFFICES AND WITH OTHER SECTOR DEVELOPMENT

ORGANIZATIONS

A4.1 INTER-ACTION BETWEEN EAU AND EXTENSION SERVICES

A4.2 INTER-ACTION BETWEEN EAU AND DEVELOPMENT PROJECTS

A4.3 INTER-ACTION BETWEEN EAU AND UNIVERSITY OF PRISHTINA, FACULTY OF

AGRICULTURE ECONOMICS

ANNEX 5: COMPLETION OF THE COST ANALYSIS AND RELEVANT ACTION

PLAN

ANNEX 6: PROPOSED TOR AND ACTION PLAN FOR A DATA COLLECTION

INITIATIVE TO BE JOINT IMPLEMENTED BY EAU AND UNIVERSITY OF

PRISHTINA

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ACRONYMS AND

ABBREVIATIONS

ARDP Agriculture and Rural Development Program 2007–2014

CAP Common Agricultural Policy

EAU Economic Analysis Unit

EC European Commission

EU European Union

EUROSTAT European Union Trade Statistics Database

FADN Farm Accountancy Data Network

FAO Food and Agriculture Organization of the United Nations

FAOSTAT FAO Trade Statistical Database

GDP Gross Domestic Product

GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH

IEP Information Exchange Protocol

KPEP Kosovo Private Enterprise Program

Ha Hectare

HPK Horticultural Promotion in Kosovo project

M&E Monitoring and Evaluation

MAFRD Ministry of Agricultural, Forestry and Rural Development

MDC Municipal Development Center

MFI Microfinance Institutions

MIS Market Information System

MOU Memorandum of Understanding

NGO Nongovernmental Organization

NOA New Opportunities for Agriculture Program

SO Standard Output

SWR Standard Work Requirement

TA Technical Assistance

TOR Terms of Reference

UP University of Prishtina

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USAID United States Agency for International Development

USD US Dollar iv KOSOVO NOA: TECHNICAL ASSISTANCE FOR THE ANALYSIS OF PROFITABILITY OF SELECTED

FINAL REPORT ASSIGNMENT I

EXECUTIVE SUMMARY

Within the framework of the gradual expansion of Ministry of Agricultural, Forestry and Rural

Development (MAFRD) activities and services, the Economic Analysis Unit (EAU) was established in January 2012, with the mission to perform agriculture related economic research. A capacity building program for the Unit was designed in January 2012, including short term technical assistance

(STTA) inputs. One of the STTA inputs, financed by the United States Agency for International

Development (USAID), consists of two short term technical assistance missions to build up the capacity of the EAU in production cost analysis and analysis of profitability of selected farm activities, starting with winter wheat, maize, alfalfa, apples, grapes, and milk production (bovine and ovine). These activities were selected by MAFRD because of their importance in Kosovo agriculture and because they are included (except alfalfa) in MAFRD support programs. The first mission was performed in May, 2012.

The decision to give priority to building up the capacity of the EAU to prepare production costs and profitability analyses comes from the assessment that production costs and profitability analysis are a key tool to enhance several MAFRD functions and activities, namely policy-making (knowing more to make better decisions), extension (knowing average performance to assess clients’ starting situation and provide advice for improvement) and management of support programs by Payment Unit

(measuring impact of support). Building EAU capacity will also help the work of partners in sector development (development projects, nongovernmental organizations [NGOs], organizations, and enterprises dealing with investments in agriculture) by providing benchmarks and baseline information to evaluate and prepare business and investment plans.

The main findings of the mission can be summarized as follows:

1. Quality of already available data necessary to calculate production costs and profitability were generally better than expected and access to information was good. Production cost models were developed in the past, mostly by development projects. Quantities in these models (inputs, yields) are still valid or slightly changed, while data on prices are obsolete. Some information on present prices is collected by MAFRD Statistical Office through the Market Information System (MIS).

Development projects continue to calculate investment costs for different crops, thus contributing to data updates. Finally, some work on investment and production cost has been done by MAFRD research institutes.

2. The information was generally relatively easy to access, but very few officers and sector operators (enterprises, consultants, NGOs, etc.) had a clear knowledge of what information can be sourced from where and a there is a certain skepticism regarding quality of data, which is only partially justified. The role of the EAU and Statistical office as “information brokers”, i.e., knowing if some information is already available and where, can, in the short term, increase their credit and appreciation within MAFRD and with other stakeholders.

3. It is necessary to increase awareness of decision-makers and MAFRD technical services regarding the need for information and to improve capacity to determine and specify what kind of information is needed. To improve this situation, internal informative seminars should be periodically organized to streamline the circulation of information within the MAFRD and to create the know-how necessary to pose the right questions to the offices that are in charge of producing the information.

4. It is possible to gather basic, but key, information with relatively few efforts, improving cooperation between different officers and stakeholders and making best use of the information that is already available. However, beyond basic information, there is a steep gap in terms of skills, resources and cooperation that could prevent the production of more complex information without sizeable investments in terms of time, human resources and training.

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5. The existing cost production models are made to plan new investments and/or to optimize production systems, they do not provide a picture of the situation as it is, but as it will (or should) be after investments and technical assistance are provided. This is half of the information needed for policy-making, the other half being the situation before investments. The EAU can play a key role in filling this information gap.

6. The standardization of parameters to calculate production costs, investment plans and profitability analyses is a priority to facilitate exchange and quality of information. With existing skills and resources, the EAU is well suited to provide reliable and up-to-date basic data that can be used by other stakeholders to produce more complex information. This would be already an important achievement, as presently most stakeholders are often looking for the same information and getting it in different ways, with the results being that baseline information (such as use of inputs, prices of inputs and products) is often quite inhomogeneous. EAU will gradually build up its capacity to autonomously produce complex information, but now it must gain the trust of counterparts by providing few, but reliable and timely data.

During the first mission, the following results were achieved:

1. A clear definition and consensus regarding production cost configuration has been achieved. The selected cost configuration is the one of “prevalent production cost,” i.e., the one reflecting the most common production structure of a commercial or semi-commercial farm in Kosovo.

2. The data collection, processing and validation process was defined and production cost models drafted. In the next weeks the models will be refined and the data collection process completed, finalizing by the end of September the cost and profitability analyses for the foreseen seven agricultural products.

3. EAU is well advanced in acquiring the capacity to manage the work of data collection in full autonomy for the seven agricultural productions which are the object of the mission. EAU can now replicate and adapt the data collection and processing activities carried out so far and, up to a certain level, replicate the some process regarding other productions. Full ownership and sustainability of the process should be achieved by the end of the second mission. This will ensure the sustainability of the process and EAU ownership of the process itself.

4. The EAU has been networked with other MAFRD departments and offices, with informants from the private sector and with other key stakeholders. As mentioned, knowing what information can be obtained where and communicating information to partners is probably the most important immediate objective of EAU.

The recommendations emerging from the mission findings and outcomes can be summarized as follows:

1. Improving communication and exchange of information inside MAFRD and between MAFRD and other stakeholders is as important as producing additional information. Seminars and awareness-building activities should be organized to improve capacity to understand information needs pertaining to each subject and to improve capacity to seek the right information from the right subject. At the present stage, learning to pose the right questions is as important as building up capacity to provide the right answers.

2. Make further effort to standardize reference data and formats of business and investment plans.

Several entities, from the private and public sectors are working on analysis of investment proposals and there is interest in building up local capacity for evaluation of investment proposals coming from farmers and other agribusiness entrepreneurs (first of all, from banks and other financial organization). Each organization has its own needs and requirements; EAU can contribute significantly by providing standards and reference data to facilitate and speed up the work of others.

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1.0 INTRODUCTION

Rural development and development of agricultural and food production play a key role for the development of Kosovo as a whole. The contribution of agriculture to national Gross Domestic

Product (GDP) is relatively modest (around 12 percent); however, activities related to the agrifood sector represent a major source of employment (about 35 percent of the active population) and a large share of the resident population obtains, from agriculture and livestock breeding activities, some contribution to their livelihood. Approximately 90 percent of the population owns some land and over

50 percent of the population has some livestock.

The Ministry of Agriculture, Forestry and Rural Development (MAFRD), established in 2008 as a national ministry but active since 2002, has the responsibility to regulate and support agrifood sector development and rural development. The MAFRD strategy is formulated within the Agriculture and

Rural Development Plan 2007–2013 (as revised in 2009) and in the Action Plan of the Economic

Vision of Kosovo 2011–2014.

Within the framework of the gradual expansion of MAFRD activities and services, the Economic

Analysis Unit (EAU) was established in January 2012, with the mission to perform agriculture related economic research. This activity is performed in most transition and EU pre-accession countries and in EU member states by independent agencies or is included in the mission of research or national statistics institutes. In Kosovo, the EAU has been established as a staff unit, reporting directly to the

Permanent Secretary. The unit is composed of three specialists with agriculture economics, economics and accounting background and is presently hiring a manager.

In addition to the establishment of EAU, another major initiative started in the first quarter of 2012 to widen the range and quality of services provided by MARFD is the establishment of a Ministry extension service, to scale up, improve and coordinate extension activities provided, to date, at the communal level. Part of the extension officers now working under the communes and municipalities will be transferred to MAFRD (still working at field level) and a unit at central level will be gradually built. One of the activities of EAU will be to inter-act with the newly established extension services to provide the economic and financial data and information required for extension activities.

At present, the EAU core mission consists of producing analyses and studies on the following topics:

1. Production costs and agrifood investments;

2. Market and trade analyses, surveys, outlooks, and scenarios; and

3. Farm management and farm accounting.

EAU is expected to operate in close co-operation with the other MAFRD offices, such as the statistical office, technical departments, the MAFRD extension services, the MAFRD research institutes and the payment unit (i.e., the unit in charge of administering MAFRD economic support programs), and with external organizations, such as the University of Prishtina, foreign donors’ financed projects and NGOs dealing with rural and agriculture development.

A GIZ and United States Agency for International Development (USAID) -funded technical assistance mission was deployed in January 2012 to draft a capacity building program to improve

EAU staff skills and build work experience. The program identified as a priority the building up of

EAU capacity to analyze the profitability of enterprises, including production cost analysis, gross margin analysis and prevalent cost analysis. For this purpose, the resources for two short term technical assistance missions, financed by USAID, were provided, to be performed between May and

September, 2012. An international consultant was hired to lead the EAU team effort to build production cost models for seven agriculture products, gathering and processing the relevant data. The outcomes of the four-week first mission are presented in this report.

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2.0 OBJECTIVES OF THE

ASSIGNMENT

The objective of the assignment, to be accomplished within the time span of the two missions combined, is to provide short term technical assistance to EAU to build its capacity and jointly develop appropriate and sustainable models for production cost and gross margin calculation and analysis of the profitability of seven products produced in Kosovo at commercial and semi-commercial levels, namely: 1) winter wheat; 2) maize (grain production and silage production); 3) alfalfa; 4) grapes for wine and table grapes; 5) apples; 6) milk production and; 7) sheep breeding.

These productions were chosen because they are eligible for direct support programs, financed by

MAFRD.

The relevant analyses are intended to be used for the following purposes: 1) policy-making, including design and adaptation of economic support programs; 2) assessment of policy implementation measures; 3) tools for extension services.

The technical assistance mission was required to perform a comprehensive support activity including the following:

1. Capacity building of EAU staff;

2. Design the models, with relevant assumptions and data collection and validation procedures;

3. Define and agree with decision-makers and stakeholders on the assumptions on which the models are based;

4. Provide support in planning and implementing actual data collection;

5. Review and process the data collected to perform the cost analysis of representative enterprises in the seven above mentioned relevant sectors;

6. Provide support in the establishment of data collection and validation networks;

7. Provide support in establishing and consolidating exchange of information practices and protocols with other MAFRD offices and external organizations,

8. Agree with decision-makers and stakeholders on the short term development path and relevant work plan for fulfilling the EAU tasks for production costs analyses, considering the skills available and acquired, the available sources and quality of data and information, the level of integration reached and achievable in the short term with MAFRD other offices and external organizations;

9. Help to define the needs of the agricultural extension services regarding the farm management program, presently in phase of development.

The inputs of the first mission accounted for 50 percent of total allocated inputs. The relevant outcomes and findings are described in Sections 3.0 and 4.0 below.

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3.0 ORGANIZATION OF

ACTIVITIES

The first mission was performed during the period from May 2 to May 30, 2012. The activities were organized in accordance with the following logical steps:

Assessment of situation and data sources;

Assessment of information flows;

Design a process for a gradual development of EAU skills, tools and outreach;

Design user-friendly and affordable cost production models;

Build procedures and tools for data collection; and

Integrate with the team to ensure ownership of model and process.

The planned and actual mission schedule are provided in Diagram 3.1 below. As can be seen in the diagram, the organization of actual activities differs from initial planning.

Diagram 3.1: Planned and Actual Activities st week 2 nd week 3 rd week 4 th week 5 th week

Main briefings, meet.

T ri p st round primary data

P nd round primary data

Secondary data collection

Preparation of documents, questionnaires, reporting

Milestones B W B C

F C

W D B

B B C

W W D B

Legend:

Planned activities Actual activities

B: Briefing with team and EAU; P: Panel/focus group meeting; BC: Presentation of basic cost tables;

FC: Presentation of final cost tables; W: Workshop; DB: Debriefing with team and EAU

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The changes introduced and the relevant reasons can be summarized as follows:

1. Main briefings were concentrated at the beginning of the mission. The mission was well prepared prior to execution, and it was possible to meet most of the main stakeholders in the first four days of mission. Further meetings with important stakeholders (University of Prishtina, Payment unit, development projects) were organized in the following weeks, but most of the activity was completed within the first half of the second week.

2. The first round of primary data was concentrated on a relatively small number of farms, as much information was collected from secondary sources and from key informants in the focus group meetings. The original TOR assumed that a more intensive field data collection process would be required. Based on the assessment of quantity and quality of data already available (better and more detailed than expected), it was decided to limit the field work mostly to an activity of data validation and to accelerate the whole process of data collection and analysis.

Different production costs models had been developed by stakeholders (development projects, research institutes etc.), which allowed us to focus during the field visits mostly on validation of production models and data obtained from other sources. This approach (to rely more on secondary data and focus groups than on individual meetings with farmers) was based on the following considerations: i) the opportunity to use an information base from secondary sources wider and better than expected; ii) the practical impossibility (in terms of cost and time) to build up and perform full-fledged research based on a stratified sample of farmers, as the cost/opportunity of getting additional information through an extensive field research was considered not sufficiently effective.

In practice, it was decided to focus the effort on building capacity of EAU regarding the data collection and validation processes (how to get data, agree about system of data controls and feedback, how to obtain economies of scale etc.) rather than on focusing on getting exact data on a few items (which would be the only possible alternative, given the time and the resources available). In general, two representative farms for each key crop were interviewed, mostly with the purpose of validating the data previously acquired.

3. The second round of field data collection was cancelled. Rather, it was decided that this would be performed in June and July by EAU team members. The team preferred to use the time to build up the capacity of EAU team in autonomously collecting data and acquiring experience in comparing data from different sources to identify inconsistencies. Also, we collectively decided to create some tools that will facilitate any future data collection exercise (i.e., the reference tables and the check lists: see chapter 4 below). However, this choice creates an actual delay vs. the objective of finalizing the cost configuration values to be included in the models within the mission timespan.

4. Secondary data collection was faster than expected and quality of data better than expected;

analysis took more time than expected, as the number and degree of detail of figures analyzed was larger than expected. Actually, quantity and quality of secondary data was good enough to allow building up more detailed and articulated models than initially expected. However, this required more data validation. As compared with planning, the sharing of time between primary and secondary data collection was differently distributed, with some days totally devoted to secondary information and others to primary information, while a more piecemeal process was expected. Actually, the main sources of secondary data had been already identified and some data collected before the beginning of the mission. The preparatory work made by EAU was quite accurate, so that not much time was necessary before obtaining all the main secondary sources available (mostly models developed by different subjects either in the last two years or more than five years ago). Some very useful secondary information was also collected during field visits to research institutes of Peja (field crops) and Rahovec (wine and viticulture). Some information on production costs, that could have been useful and had been the object of an EC financed project

(in 2008) proved impossible to recover. The person who materially produced the data base was interviewed, but meanwhile the database had been materially lost and nobody in MAFRD (to

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which the database had been handed over) had a copy of it. Finally, data available in the statistical department proved useful too, even if for different purposes than initially expected (see Annex 2 below).

5. Preparation of documents, questionnaires and reporting. Preparation of documents was the main activity performed during the mission. Check lists have been developed for each product (to be used in focus groups and interviews) and the capacity to produce and use such tools were acquired by EAU, thus ensuring sustainability of this segment of the process. Models have been prepared, for each product, based on available data and considering the structure of models with which national consultants are more conversant. By the end of the mission, most stakeholders received the mission outcomes through the debriefings handouts. However, there were considerable delays in formalizing the ultimate structure of the models and in formal reporting, initially delivered in

June. Delay in formalizing the models was due to the priority given to the sustainability of the process of modeling, i.e., to ensure that EAU staff has acquired the capacity to master the content

(formulas, calculation procedures, assumptions of different costs configuration) of each model and to ensure that the presentation of the models is, as much as possible, custom-oriented, i.e., easy to understand and manage both for EAU staff and possible users. The initial draft report was delivered to MAFRD on June 24, 2012.

6. Milestones. There were some modifications in milestones as well. The following changes were introduced:

a. The first workshop was cancelled. This workshop was intended to ensure that all main stakeholders have a shared view of what kind of cost configuration (among the many possible ones) will be developed by EAU and that limits and potential of such configuration are well understood. By the time the workshop was planned to be conducted, the same result had already been achieved through individual and repeated meetings with all the main stakeholders and most of MAFRD potential users of EAU work.

b. Two debriefing workshops were performed, instead of the one planned. The first was internal to MAFRD decision makers and, attended by the minister, was focused on the assessment of the capacity of MAFRD different offices (first of all EAU) to generate information and to make use of it. The second was attended by development project and donors representatives and was more technically oriented, to make the point about the kind of information that, by the end of the mission, can be provided by EAU and to facilitate the exchange of information through a more specific understanding of quality and type of information available to the projects and to/within MAFRD.

c. The final presentation of the models was cancelled, since, as previously mentioned, the consultant preferred to focus on the sustainability of the process of acquiring and processing data into a model than on transferring an already-made model, without also transferring the capacity to adapt it. However, a proposal for the final structure of the models is annexed to the present report (see Annex 3 below)

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4.0 OUTCOMES OF THE

MISSION

By the end of the mission the results described below were accomplished.

1. A clear definition and consensus on production cost configuration has been achieved. The selected cost configuration is the one of “prevalent production cost,” i.e., the one reflecting the most common production structure of a commercial or semi-commercial farm found in the country. At this stage, no regional differences have been taken into consideration, even if some differences have been found for some cereal crops. Also, differences between commercial and semi-commercial farms have been not taken into consideration. However, in the case of milk, the production system of commercial farms (defined as those with 10 dairy cattle in production or more) is so different from that of semi-commercial farm (5- 10 dairy cattle in production), that different structures have been analyzed. In the case of perennial crops (apple and grapes) the cost is referred to a full production year.

2. The data collection, processing and validation process and the information feedback system have been defined and tested and the relevant basic tools produced and defined. Taking into consideration the available resources (human, financial, technical) for data collection and processing and the need to ensure the sustainability of the cost analysis system within the existing framework of responsibilities and functions, we decided to adopt a system based on data collection through a Delphi panel (established as a focus group of key informants created and summoned for the purpose and different for each product) and two steps of data validation, the first through a very limited number of field visits and interviews to farmers and input suppliers and the second submitting for comments the draft model to MAFRD potential users and other stakeholders. In case of major discrepancies between the outcomes of each step (working hypothesis obtained through the panel first and then draft document submitted to stakeholders) the panel is consulted again to reach a consensus on the data. The process of formulation of the analysis of profitability is depicted in Diagram 4.2 below. A more detailed analysis of the methodology adopted for the analysis of profitability is provided in Annex 3 below.

3. The draft cost configurations have been prepared for seven agricultural activities included in

MAFRD support programs, namely winter wheat, maize in grain and maize for silage, grape growing, apple growing, milk production and sheep breeding.

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Diagram 4.1: Analysis of Profitability Process Flow Chart

Legend: Document

Activity

Key informants focus group/panel

Work hypothesis on production structure, production costs and profitability

Data validation with farmers and input suppliers

Feedback

Data validation with farmers and input suppliers

Final draft

Data validation with

MAFRD and stakeholders

Feedback

Final production profitability analysis

Transfer of information to MAFRD and dissemination of results

Documents for information transfer and dissemination

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4. The EAU ownership of the process was achieved; the sustainability of the whole process of cost analysis and analysis of profitability (i.e., regardless of the crop) was partially achieved.

The mechanism of data collection through panels and validation through interviews has been tested and the responsibility to prepare the check lists for the collection of information

(through panel and interviews) and conduct the interviews gradually transferred to EAU team members. The EAU is now able to replicate the process of data collection, including the formulation of questionnaires/check lists and to compare data obtained from the panel with data sourced from field interviews. The autonomous capacity of EAU to test the working models (obtained from panel) and to assess critical points, i.e., the most critical and irremediable differences between data sourced from panel and data obtained from interviews

(data validation process) still needs improvement.

5. The ownership of the model (i.e., capacity to update, modify and adapt the model) was partially achieved. The structure of the models has been extensively discussed with the EAU teams as well as the rationale on which formulas are based. At least in one case, an error in formulas has been identified by a team member. Notes have been added to the models to explain some of the formulas.

6. The EAU capacity for replication of the process partially achieved: This achievement will be verified in the next few months. The EAU should be now able to perform the first steps leading at least to the formulation of a first draft cost analysis, preparing the check lists for panel meeting and data validation interviews, summoning and conducting a panel meeting and interviews, collecting and keeping up-to date the price of the most common agricultural inputs (reference tables) and adapting the existing models for open field crops, perennial crops and animal breeding activities. The skill acquired will be tested during preparation of the analysis of profitability of seven more crops, foreseen by September 2012.

7. The EAU has been networked with other MAFRD department and offices, with informants from the private sector and with other key stakeholders. As part of the process of identification and assessment of data sources, EAU has now established direct relations with potential suppliers of information. Quality and type of information available in MAFRD

(technical departments, statistical office, extension service, payment unit) have been assessed and officers suitable for being part of panels have been identified. The consultant estimates that by the end of the mission the EAU team will know what type of primary data can be sourced from whom inside the Ministry (and also what data are produced through data processing and what type of data processing is used).

Direct links have been also established with input suppliers, service providers and agribusiness entrepreneurs. The already existing links with development projects and with

University of Prishtina have been maintained and potential roles specified (i.e., who can provide what information).

8. The steps for improving the quality of data in the models and finalizing the research have been detailed and the sources of relevant information identified. Relevant indications are detailed in Annex 4 (activities of EAU) and in Annex 5 (ToR for a joint research activity with UP).

All activities were performed in the form of teamwork with EAU staff and with another short term consultant on production cost estimates, Dr. Alexandra Martinovska. The joint activities with the

EAU team members were performed giving emphasis to the sustainability of achievements and EAU ownership of the process, thus focusing on developing information tools simple to use and as much standardized as possible and applying a “learn by doing” approach to ensure that EAU staff members are conversant and convinced about the decisions made in choosing among different possible cost actors calculation option.

The key methodology choices made in the formulation of the models (use of panels instead of questionnaires collected from a stratified sample of farmers, use of prevalent costs rather than best

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practice costs etc.) have been agreed upon with MAFRD and discussed with the short term consultant on production cost estimates.

As part of the creation of the profitability analysis models, other standard information tools were introduced, namely: 1) check lists for data collection; 2) reference tables for cost of inputs and calculation of amortizations and; 3) standard work requirements (SWR) by crop, providing information on the average number of hours of work necessary to cultivate 1 ha of a certain crop or to perform a breeding activity of given size. This last tool has been only conceptually introduced, as the calculation of standard work requirements calls for a great deal of research work. In the short term, it may be possible to use the tables adopted in some regions of EU Mediterranean member states with comparable climatic and land tenure structures, e.g., Region Campania, in Italy.

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5.0 RECOMMENDATIONS

AND CONCLUSIONS

5.1 USE OF PROFITABILITY ANALYSES AND PRODUCTION

COSTS

5.1.1 Use of Profitability Analyses and Production Costs in Other EAU

Activities

Building up the capacity of EAU in producing profitability analyses and production costs will enable the unit to provide one of its core services, but will also contribute to developing other services, such as the tools for farm management and farm accounting and sector analyses. The capacity building of

EAU in producing the cost analyses should proceed in parallel with users’ capacity to use information to provide other services and information.

In the field of farm accounting and farm management, the development of some components of the profitability analyses and production costs are particularly important, as they will contribute to the preparation of standard work requirements by crop, which are a key tool to calculate employment in agriculture (including family work) and to measure performance and competitiveness.

As for sector analyses, profitability analyses and production costs are necessary components of margin analyses, i.e., the analysis of the distribution of costs and margins along the supply chain, from production to retail. The margin analysis is an important tool of analysis and policy-making.

5.1.2 Use of Profitability Analyses and Production Costs in Exchange of

Information and Joint Activities with other MAFRD Departments and

External Public and Private Organizations

The analysis of profitability of agriculture productions, the production cost analysis and the analysis of gross margin and returns on investments and family labor, which are part of it, are one of the main tools necessary to inform decisions for agricultural policy-making on the basis of facts and information, and to measure the impact of previously made decisions and policies.

Building up production costs tools and procedures has a direct impact on several functions and departments of MAFRD and on external subjects, as listed below.

1. Policy making and policy implementation. The availability of data and information on profitability, structure of costs and capacity to generate employment is very useful both for short term and log tem decision-making.

In the short term, this information allows a better formulation of development policies, including the design of support measures and programs and the assessment of their impact. The analysis of structure of costs also gives information on the costs of services in agribusiness (access to inputs and credit, technical services, marketing etc.) and hints about the areas for improvement.

Development of services are generally not much considered (except marketing) in agriculture development programs and scarce knowledge is usually available on this topic, but they are a key issue for competitiveness. The analysis of costs provides benchmark data to improve services to agribusinesses.

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In the longer term, the analysis of profitability and cost structures helps in designing scenarios for policy-making (which is also a capacity that EAU must develop) and in identifying market gaps

(through the analysis of profitability, as high margins in a certain stage of the production cycle show opportunities and loss-making activities points to a need for restructuring the business model) and service gaps, through the comparison between the cost of hired services and the cost of in-house ones, e.g., comparing the cost of hiring an agronomic service (e.g., spraying plant protection products) with the cost of providing the same service using one’s own equipment

2. Extension services can make extensive use of production cost and profitability analyses. The analysis of production systems and the analysis of costs in representative farms provides the extension officer with the following tools: 1) a benchmark for the assessment of the performance of his/her clients, providing advice for improvement; 2) baseline information to guide applied research , showing the most critical aspects to be improved; 3) a first tool for the introduction of farm management and farm planning advice in the portfolio of extension services; 4) data, information for farm investment analysis and hints for development of innovative business models; 5) a risk assessment and management indicator, through sensitivity analysis and comparison of different cost structures, cash flows and profits when relying on purchased inputs and services or self-produced inputs (e.g., in milk production) and in-house services.

A more detailed analysis of the use of production costs and analyses of profitability in extension services is provided in Annex 4.

3. The Payment Unit can also make great use of production costs and profitability analysis and its components (first of all the reference tables), when assessing applications and business plans and when measuring the impact of support programs, comparing the performance of supported farms

vs. average or those not supported. Specifically adapted cost configurations can be also easily developed for monitoring and evaluation functions of the Payment Unit (e.g., focusing only on farms that do not receive support).

4. The inter-action between EAU and Statistics department is a key factor for the effectiveness of both offices. Even in the present configuration, data from FADN can be used to define the structure of the average or most representative farm in each crop and data supplied by the Market

Information Service (MIS) are very useful to update the EAU reference tables. In turn, the cost analyses provided by EAU can be used to improve the quality of data included in FADN, which are partially obtained from primary sources and partially calculated (e.g., total costs) on the base of parameters that need to be continually updated.

5. EAU is establishing a network of direct relations and exchanging information with agriculture sector development partners. In this category fall other public organizations dealing with information in agriculture and agribusiness such as the Kosovo Statistical Office, Universities, NGOs, development projects financed by international cooperation organizations, and private service providers, including financial service provides (banks, microfinance institutions [MFI], etc.). The profitability and production cost analyses and its components (first of all the reference tables) produced by EAU will facilitate the work of these stakeholders through the adoption of standardized tools and will accelerate their activities in preparing investment proposals, feasibility and sector studies (e.g., investment analyses). This also is a key factor to focus activity of EAU on producing the most necessary information and to enhance the work of development partners.

1 In this case it is also necessary to compare the cost/opportunity and access to credit, as the use of hired services implies a cash cost, where in-house services are based on family work and already owned equipment.

2 In this case, choosing a cost configuration based “most common” production practices rather than on “best practices” is inevitable

3 The present proposals for the organization of extension services in Kosovo envisage that applied research will be part of the service.

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5.2 RECOMMENDED EAU ACTIVITIES RELATED TO

PROFITABILITY ANALYSES AND PRODUCTION COSTS

5.2.1 Profitability Analyses and Production Costs

Based on the assessment of existing EAU skills and information and on the outcomes of the capacity building activity performed, it is possible to set targets for the EAU in the field of profitability analyses and production costs for the remaining part of 2012 and to propose an action plan for 2013, which will unfold in parallel with the transition from the capacity building phase to routine service provision. The following targets are proposed:

2012 Targets

1. Complete analysis of 14 crops and animal products, including: six open field crops (three vegetable products, two cereal products and one forage crop), a standard protected crop scheme

(greenhouses) with two variants, two perennial crops (apples and grapes) and five animal products

(milk production, sheep and goat breeding, broilers factories and egg commercial production).

2. Update the analysis of cereal crops with 2012 campaign data.

3. Extend and complete the reference table and circulate them to partners.

4. Start a joint research with University of Prishtina on the field of competitiveness of products or on provision of services to agriculture.

5. Build up capacity for assessing investment plans.

2013 Targets

1. Update profitability analyses and production costs of the 14 crops and animal products analyzed in 2012.

2. Extend analysis to 10 more products.

3. Produce profitability analyses of post-harvest services for fruit and vegetables.

4. Build up capacity for performing investment analysis .

5. Consolidate network of cooperation with other departments and organizations and formalize modes, contents and procedures to acquire data, process and disseminate information

(Information Exchange Protocols [IEP]). In this respect, one of the first issues to be addressed is to formalize the procedure for dissemination of information produced by EAU: who gives the final endorsement to the documents, where and how they can be published, to whom and with which procedure they can be disseminated, the rights (or denial) to third parties to access and use the original data used to produce information, etc.

6. Refine the cost analysis models, increase the number of cost configurations (e.g., with and without irrigation, in lowland and hilly areas, etc.) and the range of information provided

(sensitivity to variations in price of inputs or in yields etc.) for each product.

7. Introduce Standard Work Requirements (SWR) by agriculture activity, i.e., the average number of working hours required to cultivate one hectare or to manage a breeding farm with a given number of animals.

Farm Management and Farm Accounting

In relation to profitability analyses and production costs activities, the following targets are proposed:

Cooperation with Extension services and with NOA in introducing farm accounting practices compatible with production cost analysis structure and, in parallel, adaptation and improvement of

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the models to the type and quality information that can be retrieved from farms where farm accounting has been introduced. The introduction of farm accounting will improve the work of data validation and will eventually pave the way for the introduction of a more sophisticated system of data collection, based on farm clusters.

Build capacity of EAU to train extension service staff (ToT) in using reference costs for extension purposes. Reference production costs will be helpful in extension services as a benchmark to spot inefficiency of their clients and suggest actions for improvement. Considering the importance of this activity, accelerating the acquisition of full EAU ownership of the cost models is particularly important. EAU team training and presentation skills should be also tested and, if necessary, improved.

A relevant schedule should be defined in accordance with an overall EAU work plan update.

Sector Analysis and Market Surveys

In relation to profitability analyses and production costs activities, the following targets are proposed:

Build EAU team skills in margin analysis and test the feasibility of performing margin analyses on two or three vegetable crops or animal products. It is advised to choose one fruit crop (e.g., apples), one highly seasonal vegetable crop (e.g., tomatoes) and one animal product (e.g., eggs).

Prepare a SOW and a proposal, in cooperation with the University of Prishtina for a comparative competitiveness study of a few key products (three or four) at regional level (e.g., in Kosovo, Albania and Republic of Macedonia) and seek for financing. A first draft is provided in Annex 6 below.

Also, in this case, a relevant schedule should be defined in accordance with an overall EAU work plan update. In the case of the joint research with the University of Prishtina, should it prove impossible to find the financial resources in all the countries…