Sudan - Gezira study mission (Vol. 12 of 15) : Annex VI : computation of possible effects of proposed income formula

UNN39 Vol. 12 o m := CDOO GE Z I R A STUDY MISS IO N m ANIEX VI u o C = COMPUTATION OF POSSIBLE EFFECTS OF PROPOSED 3 INCOME FORMULA D C  - ii - ANNEX VI COMPUTATION OF POSSIBLE EFFECTS OF PROPOSED INCOME FORvULA TABLE OF CONTENTS PAGE INTRODUCTION ............................. ... .. ... 1 1. Output of cotton and irrigable areas as in 1964/65 .............. . 1 2. Distribution of gross profit of cotton 2 3. The S.G.B. accounts for 1964/65 2 4. Government charges and revenues 3 5. Farmers' own costs and income 3 I. CALCULATION OF PROFIT SHARING a.......4 II. ILLUSTRATION OF CALCULATION OF LAND AND WATER CHARGES 5 III. COMPARISONS OF INCOME TO GOVERNMENT AND RETURNS ON INVESTMENT FROM PRESENT AND PROPOSED FORMULAE AT VARIOUS YIELDS ......... ............ 5 IV. COMPARISON OF FARMERS' GROSS INCOME FROM COTTON ONLY 6 V. SUGGESTED FORMULA FOR ANNUAL CALCULATIONS OF FARMERS' PRICES FOR COTTON, GROUNDNUTS AND WHEAT ......... 7 1. Cotton ............................... .8 2. Groundnuts and Wheat .................. 8 VI. RECOVTERINTG THE PROPOSED LAND AND WATER CHARGE FROM ALL CASH CROPS .................................. 9 VII. POSSIBLE INCOMES IN THE GEZIRA AROUND 1975 ........ 10 1. Estimating Farmers' Incomes ........... 10 2. Incomes from Individual Crops (per feddan) before LWC. ............ 11 a. Income from cotton ................. 11 b. Income from other cro psp............ 13 3. Incomes for Typical Land Units ........ 14 4. Concluding Remarks ................... 16  - iii - ANNEX VI PAGE TABLES: A. Estimated Net Assets of Gezira Scheme 1950/51-1965/66 ............................... 17 B. Present Formula - Summary of Net Income to Government and Return of Investment..... 18 C. Present Formula - Summary of Farmers' Gross Payment from Cotton at Various Yields assuming Five Feddan of Cotton .......... 19 C.l.Present Profit Sharing Formula - Proceeds, Costs and Income from Cotton, at various yields . ... , ........ ..... 20 D. Proposed Formula - Summary of Farmers' Gross Payment from Cotton at various yields assuming Five Feddan of Cotton .......... 21 D.l.Proposed Income Formula - Proceeds, Costs and Income from Cotton, at various yields 22 E. Gezira Around 1975: Cotton Crop,Tentative Estimates of Proceeds,Cost and Income per Feddan ....... . ... , .. . ...... . .. 23 F. Gezira Around 1975: Tentative Estimates of Farmers' Income from other Crops per Feddan under Crop listed ....................... 25 G. Gezira Around 1975: Tentative Estimates of possible Incomes for Typical Land Units in Managil and Gezira Main ................. 26  ANNEX VI COMPUTATION OF POSSIBLE EFFECTS OF PROPOSED INCOME FORMULA INTRODUCTION This annex gives the calculations which serve as a basis for the proposals set forth in Chapter 6 of the main report entitled 'Proposed Income Formula"t. Its purposeis (a) to compare the possible effects of the present profit-sharing system and of the proposed payment formula on the income accruing to the government on the one hand and to the farmers on the other; (b) to estimate the income of the farmers whose yields differ from the average, under the present formula and under the proposed one; (c) to attempt an estimate of the relative shares of cotton, groundnuts and wheat in the farmers' income. But before going into details, it is necessary to define the terms which will be used in this annex and to state the basic assumptions which underlie the computations. The starting point must be7 e preseiilpoten- tial income of government and farmers, and the comparison is based on the Scheme's performance in 1964/65, the most recent year for wihich actual data are available.' It is worth noting that the results for 1964/65 closely approximated the corresponding averages for the five-year period 1960/61 - 1964/65, especially as regards the yield and sales prices of cotton. The assumptions made are therefore the following: 1. Output of cotton and irrigable area are as in 1964/65, i.e. Average cotton yield 3.554 kantar per feddan, the corresponding average for 1960/61 - 1964/65 being 3.692 kantar per feddan Area irrigable 1,775,088 feddan, of which 508,228 were under cotton Average sales price of LS, 1414 per kantar, the lint and sec!d per kantar correspunding average for of seed cotton 1960/61 - 1964/65 being LS. 141oO  - 2 - AND= VI 2. Distribution.ofgross profit of cotton is on the basis of the currently (`l90) efrective profit-sharing formula, i.e.: a. 50% to the farmer (including Reserve Fund) b. 2% to Local Government c. 2% to Social Development d. an amount sufficient to cover the estimated expenses on Board account e. the balance to Central Govemment. 3. The S.G.B. accounts for 1964/65 give following basic figures. Actual Gezira Board expenses LS. 1,362,823 Actual Joint Account costs LS. 7,843,587 For computations relating to the present formula, picking advances are assumed to be added to Joint Account. For computations relating to the proposed formula, picking and pulling out which are not services provided by the Scheme, are treated as a charge to be borne by the farmer. It does not affect the payments made by the Scheme to him under the proposed formula, since neither profit nor cost are divided among the parties anymore. Marketing and Ginning Contrary to other Joint Account elements (except picking) which are consi- dered non-variable with yield, these two items are considered fixed for 50%, and variable with yield for 50%. On this basis, total Joint Account expenses to be deducted from sales proceeds would be: Joint Account costs for agricultural purposes (actual 1964/65) LS. 41,139,045 Joint Account costs for marketing and ginning (actual 1964/65) 3,704h542 Sub-total 7,43.,57 Plus assumed transfer of picking advances to Joint Account (at LS. 1 per kantar) 1,806,242 Total 7, W9,829  -3- ANNEX VI 4. On Government charges and revenues the following comments should be maae: a. Expenses covered by government amounted to LS. 2,250,000 in 1964/65, including operation of irrigation works, payments of rent to landowners, moving of pickers and Gezira contribution to Research. b. Other charges (2% to Local government and 2% to Social Development) are assumed for the purpose of these compu- tations to be additional charges to Government subject to retransfer to the responsible agencies. c. Government investment in the Scheme (Irrigation works and Gezira Board) is estimated as follows in order to compute the return on investment. i) net assets on original cost basis less amounts written off, mean of 1964/65 LS. 63,100,000. ii) net assets, estimated current cost basis, assuming annual increase in replacement cost of 3%1,mean 1964/65 LS. 100,400,000. Details of these estimates are given in the attached Table A. d. Government revenue other than the direct share of the government in Gezira profits are disregarded in the compu- tations below, because they represent strictly fiscal revenue deriving from levies on the Sudanese economy generally. They include export taxes on Gezira produce (about LS. 1,600,000 in 1964/65) and import duties attri- butable both to imports necessary to the Gezira and to imports made possible by export of Gezira produce (about LS. 10,000,000 in 1964/65). 5. Farmerst on costs and income a. Area cropped Separate computations are made for i) an average 20 feddan land unit in the Gezira Main, of which 5 feddansare under cotton, 1/2 feddan under groundnuts, and 1 1/2 feddans usider vheat; and ii) an average 15 feddan land unit in Managil, of which 5 feddansare under cotton and 3/4 feddan under groundnuts (and none under wheat). b. Gross and net income: In the computations below farmers' "gross income" means payments made by the Scheme to the fa!ineI_ r5Edoes not take into account the charges --  - 4 - ANNEX VI mostly labor costs -_ which the farmer may or may not choose to incur since in many cases he can perform the work himself. FUll farm production costs are esti- mated by the Mission at LS. 15.O per feddan -- including pulling out (LS. 2.5 per feddan) and picking (LS. 5.2 per feddan at 3.554 kantar per feddan yield). To estimate the "net income" of a farmer who relies entirely on hired labor (aMtteMJy an extreme hypothesis) a reduction of LS. 75 per 5 feddan of cotton may be expected on the gross income accruing to him and shown in the tables. On the other hand, since these computations relate to cash crops only, other income which he may earn from livestock, dura or vegetables is disregarded. c. Other crops In most of the computations cotton only was taken into account. In the last section of this Annex, however, an attempt is made to show the effect of recovering part of the land and water charge from other crops also. The following figures, relating to 1964/65, have been used: Groundnuts Wheat Feddanage 59,691 75,065 Yields 0.60 ton p.f. 034 ton p.! Selling price at farm LS. 28 p. ton LS. 25 p. ton Payment to farmer per feddan of crop LS. 16.8 LS. 8.5 Here also, the farmer's own costs (labor and other) have been disregarded. They are estimated by the Mission to represent LS. 12.5 per feddan for groundnuts and LS. 10.0 per feddan for wheat. * CALCULATION OF PROFIT SHARING of 1964/65 cotton crop under existing arrangement as described above. The figures are as follows: Sales income of cotton only 508,228 feddans at 3.554 k.p.f. = 1,806,242 k.; 1,806,242 k. at LS. 14.143 per kantar of seed cotton LS. 25,546,507 Joint Account as estimated under (3) above 9,649,829 Gross profit to be shared LS. 15,896,678  - 5 - ANNEX VI Fanmer's share 50% LS. 7,948,339 Board costs LS. 1,362,823 LS. 9,311,162 The Government share is the balance and includes 2% Local Government share and 2% Social Development share LS. 6,585,516 II - ILLUSTRATION OF CALCULATION OF LAND & WATER CHARGE In order to return to Government the same amount as shown in I above a land and water charge assessed on each irrigable feddan would have to be as follows: Amount to Area Equivalent recover irrigable land and water charge LS. 6,585,516 1,775,088 f. LS. 3.710 per irrigable feddan III - COMPARISONS OF INCOME TO GOVERNMENT AND RETURNS ON INVESTMENT FROM PRESE[T AND PROPOSED FORMULAE AT VARIOUS YIELDS A statistical attachment to this Annex gives detailed calculations of sales proceeds, costs and income to government and farmers, at various yields, on the basis of both the present and proposed formulae. The calcu- lations are based on the relevant assumptions described in the Introduction (inclusion of picking in Joint Account and the increase of farmers total share of gross profit to 50%), and the land and water charge used for the calculation relating to the proposed formula is LS. 3.71 per irrigable feddan, corresponding to the government share of profits under the above assumptions for 1964/65 (see preceding paragraph). The attached Table B summarizes Government net income from the Scheme, after meeting Irrigation and other Governmen department costs and making payments to Local Government and Social Development. The incomes shown do not include the additinnal amounts which the government collects from export taxes and import duties. The main figures and the resulting returns on investment at both book value and current cost values, are as follows: Income to Government Net Income Present Proposed Average Yield Formula Formula LS. LS. 2 kantars per feddan - 703,043 3,699,648 3 I " " 2,1l7,430 3,699,648 3.554 t " 3,699,648 3,699,648 4 II l} Il 4,962,741 3,6993649 5 It f l Il 7,795,636 3,699,648 6 10,628,527 3,699,648  _6- ~ ANNEX VI Return to Investment At Book value assets At Current Cost assets Present Proposed Present Proposed Average Yield Formula Formula Formula Formula 2 kantars per feddan minus 5.9% p.a. minus 3.7% p.a. 3 I t " 3.4% p.a. 5.9% p.a. 2.1% p.a. 3.7% p.a. 3.554 t 5.9% p.a. 5.9% p.a. 3.7% p.a. 3.7% p.a. 4 W I 7.9% p.a. 5.9% p.a. E79 pea. 3.77 -p.a. 5 II n , 12.4% p.a. 5.9% p.a. 7.8% p.a. 3.7% p.a. 6 n II WI 16,8% p.a. 5.9% p.a. 106% p.a. 3.7% p.a. The following salient points arise from a comparison of the present and proposed formulaes a. The income to Government by definition would be constant under the proposed formula, whatever the yield. b. At an average yield of 3.554 k.p.f. the net income to Government, of LS. 3,699,648, is the same for both the present and the proposed formulae since this is the basis on which the comparison is made. This gives a return on investment of 5.9% on book value assets and 3.7% p.a. on current cost value assets c. At an average yield below 3.554 k.p0f., Government's net income would be higher under the proposed formula than it is from the present one. d. At an average yield above 3.554 k.p.f., Government's net income would be lower under the proposed formula than it is from the present one. IV - COMIPARISON OF FARMERS GROSS INCOME FROM COTTON ONLY on basis of present and proposed payment methods at various yields. The attached Table C and D (and the subsidiary tables C-1 and D-1) summarize farmers' gross payments from cotton, at various yields, under the present and the proposed formulae, respectively. The calculations refer to 5 feddans of cotton and no deduction has been made from the payment figures for costs which a farmer may incur on the farm. As indicated in the Introduction, on the extreme assumption that a farmer contracts all labor and for an average yield of 3e554 kantars per feddan, these costs at farm level could be estimated at LS. 75 for 5 feddans of cotton. The following figures indicate the differences in gross payments to farmers, under the two formulae, for an "average" farmer, e.g. one who produces the average yield of the Scheme in any year.  -7 - AIRNEX VI Gross Payments When average Present Proposed Yield is Formula Formula Differences LS. LS. LS. 2 kantars per feddan 54 6 - 48 minus 3 " " " 89 72 - 17 minus 3.554 " " " 108 108 no change no change 14 " " " 13 plus 1= plus l11% 5 " " 160 203 plus 43 plus 27% 6 " I If 195 269 plus 74 plus 38% The following figures indicate the differences in gross payments to farmers who, in a year when the average yield for the total Scheme is 3.554 kantars per feddan, produce different yield levels: Gross Payments Individual farmers Present Proposed Producing Yields of Formula Formula Differences LS. LS. LS. 2 kantars per feddan 61 33 - 28 minus 3 " If if 92 81 - 11 minus 3.554 t" 108 108 no change no change i4 " '- :X5 plus plus 7 5 " " " 153 179 plus 26 plus 17% 6 t 183 228 plus 45 plus 25% The following salient points emerge from these comparisons: a. At an average yield of 3.554 k.p.f., the gross payments to farmers are the same since this is the basis on which comparisons are made. b. At an average yield below 3.554 k.p.f., farmers would receive lower gross payments. c. At an average yield above 3.554 k.p.f.,, farmers would receive higher gross payments. V - SUGGESTED FORMULA FOR ANNUAL CALCULATIONS OF FAdIES PRICES FOR COTTON, GROUNDNIUTS AND WIHEAT Another recommendation made in the main report concerns the timing of the payments to the farmers for cotton. They would start almost as soon as the deliveries of seed cotton to the ginneries have begun, in other words, before the crop has been ginned and sold. To malce this possible, assumptions must be made on a number of items, including the future sales price of lint and seed. The following paragraphs briefly describe how these computations would be made for cotton and the other cash crops.  - 8 - ANWJ{EX VI 1. Cotton Sales Price = 90% of the average of previous three years actual price per kantar = LS. per kantar Less a. Budgeted crop production costs of the Scheme divided by the number of kantars estimated from the yield budgeted (which would be the average yields of the last five years). - LS. per kantar b. Budgeted cost of the ginning and marketing services, divided by the total number of kantars estimated from the yield budgeted for (which would be the same as under (a)). = LS. per kantar c. Budgeted general administrative cost of Board apportioned to cotton production. = LS. per kantar Next year's cotton price to farmers = LS. per kantar At the end of the year, the selling prices used in the above formula (i.e. 90% of the previous three years) would be compared with the actual average selling prices secured for the year just ended. Any difference will be added to or deducted from the outstanding payments still to be made to the farmers for the crop delivered during the same financial year. 2. For Groundnuts and Wheat the problem is much simpler, inasmuch as these crops can46sold quickly and hence the producer can be paid from actual sales proceeds and according to actual sales prices. Actual selling price realised per ton LS. per ton Less The average cost per ton of all costs budgeted to be incurred by the Scheme on behalf of the farmer for these crops and of any costs appor- tioned thereto. The yield budgeted for will be based on the average of the previous five years. = LS. per ton Wheat/Groundnuts prices to farmers = LS, per ton  _ 9 _ ANNEX VI VI - RECOVERING THE PROPOSED LAND AND WATER CHARGE FROM ALL CASH CROPS - effects on farmers' income. Two examples are given below based on actual crop yields and prices in 1964/65. The first regards an average 20 feddan land unit in Gezira Main, with 5 feddansunder cotton, 1/2 feddan under groundnuts and 1 1/2 feddansunder wheat. The second concerns an average 15 feddan land unit in Managil, with also 5 feddansunder cotton but only 3/4 feddan under groumd- nuts in addition. In either case the land and water charge is assumed to be at the level calculated above for illustrative purposes, i.e. LS. 3.71 per irrigable feddan, or LS. 74 and LS. 56 per land unit, respectively. These amounts are apportioned to the cash crops pro-rata to the gross payments from cotton and the sales income received at the farm from groundnuts and wheat. 1/ Example 1 - 20 Feddan Unit Gezira Main- Cotton Groundnuts Wheat Total LS. LS. LS. LS. Cotton gross payments, and sales income, at the farm, for groundnuts and wheat 173.3 8.4 12.8 194.5 Land and water charge pro- rated 66.1 3.2 4.9 74e2 Gross income 107.2 502 7.9 120.3 Gross income per cropped feddan 21.4 10.4 5.3 17.2 Gross income per irrigable feddan 6.0 Example 2 - 15 Feddan Unit Managil Cotton Groundnuts Total LS. LS. Cotton gross payments and sales income, at the farm, for groundnuts 173.3 12.6 185.9 Land and water contribution pro-rated 51.9 3.8 55.7 Gross income 121.4 8.8 130.2 Gross income per cropped feddan 24.3 11.7 22.6 Gross income per irrigable feddan 8.7 1/ The corresponding figures for a Gezira standard tenancy of 40 feddan would be exactly double throughout.  - 10 - AlNNEX VI These calculations would suggest that 85 or 90% of the LWC could initially be charged to cotton, or rather collected from cotton payments, the balance being collected from other cash crop payments. If the fore- casts of the Ilission come true and if intensification and diversification bring about an increased production of groundnuts and wheat, it should be possible within very few years, perhaps 4 or 5, to reapportion these rates of collection. They could well turn out to be only 75% for cotton or even less. It should be emphasized in conclusion that the figures given in this Annex do not at any stage represent the total income which the fanmer would receive under the assumptions described.ThRey completely disregard any income derived from "non-cash" products such as dura, vegetables, lubia or livestock. VII - POSSIBLE INCOMES IN THE GEZIRA AROUND 1975 The proposed income formula is designed to provide a strong incentive to the farmers to increase their cooperation and efforts and thereby help bring about the increases in crop yields, and in the Scheme's productivity generally, which the mission considers can be achieved. The present report, therefore, would be incomplete without an attempt to indicate possible incomes of farmers in the Gezira by such future time when all the mission's recommendations may be assumed to have taken full effect. This might be envisaged by the mid 1970's and the mission's estimates are drawn up in this perspective. Looking that far into the future naturally involves a large element of conjecture, and the figures presented below are to be viewed w7ith this in mind. 1. Estimating Farmers' Incomes The estimates of possible farmers' incomes by 1975 are developed here along the same lines as the corresponding estimates relating to 1-664/65 and presented in Annex V. Accordingly, incomes from individual crops are first estimated on a per feddan basis, as shown in Table E for cotton and Table F for other crops. Individual crop results are then combined on the basis of areas cropped in typical land holdings, namely, an average 15-feddan unit in Managil and an average 20-feddan unit in the Gezira Main, as showm in Table G. The latter includes lump sum estimates of net incomes from gardens and livestock production for either land unit considered.  - 11 - ANNEX VI Prices 1/ are assumed to remain about the same by 1975 in the case of groundnuts, and to increase by 5 to 10 percent at farm level for wheat, and dura. For cotton however they are assumed to decline to around LS 7 or 8 per kantar for G5L Port Sudan. As to cropping patterns and crop yields they are assumed to correspond by 1975 to the figures developed elsewhere in the present report.2/ The related farm production expenditure estimates are predicated on the assumption that the proportion of field work performed by hired labor will drop to 70 percent (from an estimated 85 percent in 1964/65), and that the wage rate for hired labor will be 30 P.T. per man day (as against 25 P.T. per man day in 1964/65). Further details on each of these and other assumptions are given as the estimates are developed in the following paragraphs. 2. Incomes from Individual Crops (per feddan) before LWC. Under the proposed income formula, the farm value of all crops would accrue entirely to the farmer. However, from the proceeds of his cash crops - cotton, groundnuts and w.heat - would be deducted the land and water charge (LWC) as determined by the size of his individual land holding. Since the LWC would be levied per irrigable feddan rather than per crop feddan, it can only be related to the farmer's income from all crops combined, i.e. on the basis of definite land units with specified crop rotations as discussed in the following section. The estimates of farmers' income per feddan presented here are therefore all "before land and water charge". a. Income from cotton. For the period around 1975 possible farmers income per feddan of cotton has been calculated as shown in some detail in Table E. The sales value of the crop is estimated on the following yield and price assumptions: i. an increase in average yield to 5.2 k.p.f.3/ (from 3.554 k.p.f. in 1964/65), and ii. a decline in the price for lint (G5L) to fS 7-8 per kantar, ex-store Port Sudan (from an average of about fS 12 in 1964/65); and a price for cottonseed of fS 23 per metric ton ex-store Port Sudan (as compared with fS 24 in 1964/65). 1/ See Chapter 2 of the Main Report, pages 27-29. 2/ See Annex II,'Agriculture in the Gezira, especially Table 3. 3/ W4hile Annex II, Table 3 indicates a yield potential for cotton of 5.8 k.p.f., for present purposes a more conservative figure is used.  - 12 - ANNEX VI The sales value of a kantar of seed cotton, in terms of the combined proceeds of the lint and seed components would thus decline to about fS lO,compared with fS 14.14 in 1964/65. Accordingly, the sales proceeds realized by the Scheme per feddan under cotton may be valued at LS 52. Related Scheme production costs are taken to cover the same range of operations as undertaken by the S.G.B. in 1964/65, except for stalk pulling which, under the proposed income formula, would be the farmer's responsibility and hence paid for by him. Regarding first the element of processing costs, i.e. essentially ginning and marketing, these are assumed to increase to a level of about fS 10 per feddan (against fS 7.3 in 1964/65) partly because of the substantial increase in the average cotton yield assumed here, and to a lesser extent on account of an assumed increase in wage rates and other cost prices. Secondly, agricultural production cost on the part of the Scheme may be valued at,say1 fS 8 per feddan; the assumed increase from a comparable-