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Agric. sci. dev., Vol(5), No (1), March, 2016. pp.

6-10

TI Journals

Agriculture Science Developments


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ISSN:
2306-7527
Copyright 2016. All rights reserved for TI Journals.

Economic Impacts of Fertilizers Subsidy Removal


in Canola Production in Iran
Behrooz Hassanpour*
Assistant Professor of Agri-Economics, Agricultural & Natural Resources Research & Education Center, Kohgiluyeh-va-Boyerahmad Province, Yasouj, Iran.

Esa Asadi
MSc. Researcher of Agri-Economics, Agricultural & Natural Resources Research & Education Center, Kohgiluyeh-va-Boyerahmad Province, Yasouj, Iran.

Farahnaz Kariminejad
Member of Scientific Board of Agricultural Faculty, Yasouj Payam Noor University, Yasouj, Iran.
*Corresponding author: beh_hassanpour@yahoo.com

Keywords

Abstract

Canola
Chemical fertilizer
Input demand function
Subsidy removal

Chemical fertilizers make contribution to rise in production of agricultural products including canola. Due to
importance of optimized consumption of these inputs in production process, for the purpose of reduction of
production costs, and for economization of granted subsidy to chemical fertilizers, this study evaluates
impact of subsidy cut for chemical fertilizers upon canola production in Iran. In order to accomplish this
objective, we randomly collected from 90 canola farmers in Kohgiluyeh-va-Boyerahmad (KB) province in
2012-2013. Profit function, input demand function, and canola production function were calculated and
analyzed. Our findings revealed that subsidy removal in case of chemical fertilizers in KB province incurred
greater production expense by 14.95% and reduced profitability of producers to 22.26% because demand for
chemical fertilizers is not affected by changes in prices. Accordingly, pricing policy can not sufficiently
optimize level of consumption in case of chemical fertilizers. Rather, complementary and compensatory
strategies are required to be implemented.

1.

Introduction

Agriculture is one of crucial economic sectors in Iran, which develops 12% of gross domestic product (GDP), offers 33% of employment, and
generates substantial revenues of non-oil exports. Due to their role in supply of 80% food demands, allocation of enormous resources to
industries, and creation of context for Iran's economic and political stability, performance of agriculture departments should be improved locally
and nationally (Torkamani and Jamali Moghadam, 2005). A variety of parameters including rapid growth of population in recent decades,
increase in per capita income, and dietary changes boosts demands for agricultural products. Oil seeds, next to cereals, are the second food
reservoir of world. These products contain protein along with fatty acids. Canola is one of significant oils worldwide (Khajepour, 2006), which
is used for food consumption and industrial application (Angadi et al., 2002). According to official statistics of 2009-2010 crop year, Canola is
ranked in the first place as regards extent of cultivation among industrial-agricultural products (including sugar beet, cotton, canola, sugar cane,
and tobacco i.e. canola is cultivated in 117323 hectares of lands (22.4% of industrial products). Sugar beet and cotton are cultivated respectively
in 19% and 17.3% of Iran's agricultural lands (Iran's Ministry of Agriculture, 2011). Also, as regards level of production, canola (22452 tons) is
ranked in third place next to sugar cane and sugar beet. Canola is intensively cultivated in Iran regions including Kohgiluyeh-va-Boyerahmad
(KB) province, owing to supportive policies of government such as distribution of subsidized chemical fertilizers.
Level of subsidy granted for chemical fertilizers soared from 2001-2005. Even in some years, a multiplied increase occurred so that enormous
costs and expenses were incurred in government departments. In general, chemical fertilizers were increasingly distributed and used. In period of
2001-2005, fertilizers were distributed 1.5 times while level of agricultural production is distinctly different from the mentioned values. This
excessive consumption increases financial burden to government more enormously than that it boosts production. Subsidization of chemical
fertilizers is the main determinant for this consumption pattern. Constraints of GDP resources for manufacturing chemical fertilizers and rise in
international price of oil in two recent years caused rise in price of chemical fertilizers and increase in the related sea freight charges.
Accordingly, level of subsidy increased enormously and subsequently government faced difficulties for payment of subsidy. For instance, in
2004, relatively 1150 billion Rials of subsidy were not provided. Moreover, in 2005, the granted subsidy level was distinctly different (relatively
2000 billion Rials) from the requested level (6000 billion Rials). A mean rise of 7% occurred in import of chemical fertilizers in 2006, as
compared with 2005. However, despite rise in international price of fertilizers and increase in subsequent costs, their price did not change in
2006. In this year, a price of 2090 Rials was set per one kilogram of chemical fertilizers, which means 29% increase in their distribution.
Because of government budget constraint and side effects of excessive and cheap consumption of fertilizers, professionals should examine
financial and welfare-related impact of changes in consumption patterns and then put in performance in market of fertilizers on the basis of
revealed findings.
Studies on subsidy to agricultural products view subsidy removal as one of economic objectives of government in recent years. Also, they
evaluate parameters affecting use of agricultural inputs and the subsequent changes after subsidy removal. Subsidy is defined as direct or indirect
payment and grant of privilege to private institutions, families, or other manufacturing units for accomplishment of considered public objectives
(Najafi, 1993). Minot et al. (2000), also, examine causes for difference in consumption of fertilizers between Benin and Malawi countries. Their
findings reveal that after subsidy removal in 1980, consumption of fertilizers in Benin increased ten times while 30% increase in consumption
occurred in Malawi. Additionally, family size and price of products significantly impact upon use of chemical fertilizers. Najafi and Farajzadeh
(2010) evaluate impact of subsidy cut for chemical fertilizers upon welfare in wheat and rice market and reveal that due to subsidy cut, producers
bear dead weight burden while suppliers experience welfare. However, social welfare of both groups is improved, after subsidy cut and removal.
In case of full subsidiary removal, their welfare was promoted respectively by values of 3927.6 Milliard Rials and 404.4 billion Rials. Dashti et
al. (2012) assess economic effects of chemical fertilizer subsidy removal upon cultivation of onions in Tabriz. According to their findings, with
regard to demands for fertilizers, subsidy removal does not bring about significant impact upon their consumption despite decline in
consumption. Since, subsidy removal of chemical fertilizers is viewed as greater actualization of their price, it makes contribution to decline in

Economic Impacts of Fertilizers Subsidy Removal in Canola Production in Iran


Agriculture Science Developments Vol(5), No (1), March, 2016.

consumption and ultimately to economization of manufacturing process. Dening et al. (2009) suggest that inputs are supported more than
products and due to input subsidy plans, irrespective of farm size, producers have access to a similar amount of input while small producers do
not gain great advantage. As Minde et al. (2008) points out, subsidy to chemical fertilizers is not the best strategy for food crisis and price of
fertilizers. Bahrami (2002) measures effect of subsidy removal upon tomato cultivation in Khorasan and indicates that rise in price of inputs does
not greatly cut down their consumption. Therefore, for optimization of fertilizer consumption, other devices such as promotional devices should
be used. Nikookar (2002), examining impact of subsidy removal upon sugar beet, suggests gradual removal of subsidy to chemical fertilizers
because immediate removal of subsidy suddenly incurs higher expenses and causes loss against small-scale farmers lacking financial resources.
From his viewpoint, subsidy removal and competitive prices relieve government's heavy financial burden on one hand and prevent from
environmental harms, inefficiency due to intervention in market system, and public sectors' inefficiency on the other hand.
Similarly, Freeman and Kagouongo (2003) analyze different dimensions of subsidy removal in market of chemical fertilizers as well as
parameters impacting upon participation of private units in free trade of chemical fertilizers in Kenya. They find that omission of subsidy
removal and control rules and regulations encourages participation of units in markets of chemical fertilizers. Also, credits, transportation, and
stock ownership are other determinants of participation.
Karimzadegan et al. (2006), measuring effect of subsidy to chemical fertilizers upon their excessive consumption in wheat market, show
inefficient consumption of chemical fertilizers in wet land farming of wheat. A comparison between present gain and profit and the optimal state
indicates that optimization improves profitability of farmers and increases their average cultivation. Grant of subsidy to chemical fertilizers
stimulates their excessive consumption. Moreover, current pricing policy for chemical fertilizers, which is based on direct subsidy payment and
cheap inputs, is inefficient and is subject to revision.
Biniaz et al. (2013) in their research using the estimation of the profit function and derived trans-log function on of paddy growers in Iran
revealed that the labor demand elasticity in terms of wage ratio, prices and the cultivation area expressing this elasticity is sensitive and elastic.
In other words, change in wage ratio, price and cultivation area have positive effect on labor demand. The present study evaluates impact of
removal of subsidy to chemical fertilizers upon welfare in case of canola (one of crucial agricultural products in vegetable oil market). Along
with calculation of chemical fertilizer demand function, this paper assesses effect the removal subsidy.

2.

Methodology

Input demand function is derived from profit function and/or agricultural cost function. Accordingly, input demand is a function of input price,
product price, and other parameters affecting demand, which result in shift of input demand function. In the case that we use input for formation
of input demand function, this function is defined in terms of chemical fertilizer inputs and producers in KB province (Iran). In micro level,
welfare of selected producers can be analyzed. In farm level, demand function is calculated by profit function and then effect of chemical
fertilizers upon incomes, costs, and profit of producers is measured. For calculation of input demand functions, model of Sidhu and Baanante
(1981) is used:
m

ai

k 1

(1)

A P Z k i
i 1

: Profit (total income of production-total cost of inputs);


Pi : Price of input X normalized by price of product;

i : Elasticity of profit function relative to input price of Variable i;


Z k : Amount

of input k; and

k : Elasticity of profit function relative to amount of input k

If we calculate logarithm in profit function, we will have:


m

ln ln A i ln P i k ln Z K
i 1

(2)

k 1

Ratio of variable i to profit can be written as follows:

si
As sum of

Pi X i

(3)

s i is equal to 1, calculation of input demand function is rewritten as follows (Sidhu and Baanante, 1981):

Pi X i ln

ln Pi
Equation (5) is derived from equation 2 and equation 4:
ln
Xi

Pi ln Pi
Now consider the following profit function:
si

APF1 PL 2 PP 3 PM 4 PW 5 PS 6 PE 7 AC 8

(4)

(5)

(6)

Where is profit, PF is price of chemical fertilizer, PL is price of labor force, PP is price of poison, PM is price of machinery, PW is price of
water, PS is price of seeds, PE is price of product sale, and AC is cultivated lands.
2.1. Derivation of Inputs Demand Functions
First, we calculate logarithm in profit function:

ln A 1 ln FP 2 ln LP 3 ln pp 4 ln MP 5 ln WP 6 ln SP 7 ln PE 7 ln AC

Behrooz Hassanpour *, Esa Asadi, Farahnaz Kariminejad

Agriculture Science Developments Vol(5), No (1), March, 2016.

We measure relationship 4 with regard to relationship 3:

Si

Pi X i ln

ln Pi

(7)

By measuring parameters of input demand functions, we can calculate Equation (7) for inputs i.e. chemical fertilizers:
ln
XF

PF ln PF

(8)

2.2. Measurement of Different Elasticity of Input Demand Function


Equation (9) is written by measuring logarithm of Equation (8):

ln
ln X F ln ln PF

ln PF

(9)

Accordingly, we will have Equation (10) for elasticity of demands:

FF

ln X F
ln
ln

1
ln PF
ln PF
ln P F

ln

ln PF

(10)

Cross elasticity of inputs is calculated, of which we mention elasticity of chemical fertilizers. Cases of elasticity are as follows:

ln

ln PF

FP

ln X F
ln
ln

ln PP
ln PP ln P P

FM

ln X F
ln
ln ln

ln PM ln PM ln P M ln PF

(12)

Fl

ln X F
ln
ln

ln PP
ln PP ln P P

ln

ln PF

(13)

FW

ln X F
ln
ln ln

ln PW
ln PW ln P W ln PF

(14)

FS

ln X F
ln
ln ln

ln PS
ln PS ln P S ln PF

(15)

(11)

Finally, the ratio of demand elasticity to the price of canola is measured as follows:

FE

ln X F
ln ln PF
ln

ln PC
ln PC ln PC ln P C

ln

ln PF

(16)

2.3. Canola Production Function


For examining impact of input price change upon production, we used Cobb-Douglas function. This production function determines relationship
between certain products and inputs and highlights impact of labor force, irrigation, and technology upon production. Cobb-Douglas function in
this study is as follows:

q AF 1 L 2 P 3 M 4 W 5 S 6

(17)

Where q is production quantity, A is constant coefficient, a1-a6s are production elasticity per one input, F is chemical fertilizer, L is labor, P is
poison, M is machinery, W is water price, and S is seed price. The above equation calculates profit for demand of chemical fertilizer input in
case of canola production in a given year. In this study, we measured parameters of profit function by using ordinary method of least square and
in turn it accounts for demand function. Necessary data were collected by conducting face-to-face interview with 90 canola producers and
distributing questionnaires among them in crop year of 2012-2013. For data analysis, we used Excel and Eviews.

3.

Results and discussion

Table 1 demonstrates the producer profit function in case of canola product. As values show, all calculated coefficients are in line with
expectations. Price of poison, cultivation, and seeds significantly and negatively impacted upon profit while price of product sale significantly
and positively affected profit. On the other hand, profit was not significantly affected by price of chemical fertilizers, machinery, and price of
water. In other words, difference in profit between different producers only arises from difference in price of product sale. There were numbers
with minuses for most inputs, which mean that rise in price of inputs equates with reduction in profitability. A number of variables were not
statistically significant but were satisfactory in value. This result is statistically significant and composed errors were distributed normally. There
is no heteroscedasticity in error terms of estimated model. The determination coefficient of function showed that 92% of variability in producers
profit in canola production is explained by independent variables. Moreover, coefficient of chemical fertilizers was not statistically significant
i.e. it showed no sensitivity to price changes and greater expenses were incurred in production.

Economic Impacts of Fertilizers Subsidy Removal in Canola Production in Iran


Agriculture Science Developments Vol(5), No (1), March, 2016.

Table 1. Results of Canola Profit Function Calculation


Variables
Intercept
Price of chemical fertilizer
Price of Poison
Price of Labor
Price of Machinery
Price of Product (Maize)
Price of Water
Price of Seeds
Cultivated Lands

Coefficient
-93.85
-0.06
-1.01
0.23
0.13
14.57
-0.01
-0.95
-0.48
White test
0.41 (0.87)

Statistics

Standard Deviation
46.56
0.55
0.23
0.29
0.22
5.25
0.35
0.21
0.18
F
14.28

T Statistics
-2.01
-0.11
-4.38
0.77
0.58
2.77
-0.04
-4.47
-2.65
R2
0.92

(*), (**) and (***) indicate meaningful level in 10%, 5% and 1%, respectively.
Source: Research findings

As above mentioned, canola profit function on the basis of level of significance is calculated as follows:

PP1.01PE14.57 PS0.95 AC 0.48


Profit is:

ln 1.01 ln PP 14.57 ln PE 0.95 ln PS 0.48 ln AC


Profit function involves price of chemical poisons, cultivation, price of seeds and price of canola sale. As regards coefficient of chemical
fertilizer price, we can suggest that demand for chemical fertilizers is not affected by their price. To put it differently, rise in price of chemical
fertilizers does not cause reduction in their consumption. However, greater expenses are incurred and profitability is decreased.
Results of canola production function according to Table 2 shows, only input of seeds exerted significantly negative impact upon production
while other variables positively impacted upon production of canola. Input of seeds covered third area of production. Accordingly, rise in
consumption of this input cuts production of canola i.e. a 10% rise in consumption equates with a 2.7% reduction of canola production.
Implicitly, impact of chemical fertilizer upon canola production can be suggested as follows: chemical fertilizers cause demands not to show
sensitivity to price changes. Production function is in an optimal state although a large number of variables do not significantly impact upon
canola production. As a result, this function is statistically significant in 10% level of significance and composed errors are distributed normally.
This result can predict 81% of difference between producers.
Table 2. Results of Canola Production Function
Variables
Intercept
Chemical fertilizer
Poison
Labor
Machinery
Water
Seeds
Statistics

JarqueBera test
0.1 (0.94)

Coefficient
14.61
0.23
-0.48***
0.31**
0.21**
-0.009
-0.27**
White test
1.39 (0.35)

Standard Deviation
2.43
0.12
0.09
0.1
0.09
0.14
0.092
R2
0.81

T Statistics
6.003
1.89
-5.12
2.85
2.33
-0.06
-2.97
F
8.51**

(*), (**) and (***) indicate meaningful level in 10%, 5% and 1%, respectively.
Source: Research findings

In analysis of chemical fertilizer subsidy cut, due to demand's lack of sensitivity to rise in price, only production costs changed without any
alteration in production and revenue of farmers. Findings demonstrated that a 15% subsidy cut increased costs of chemical fertilizers from 6.41%
to 9.22%. Likewise, full removal of subsidy to chemical fertilizers increased costs by 19.22%. According to prices in 2009, canola production
costs per on hectare of lands is relatively 7.22 million Rails. Total cost of canola production increases by 8.30 million Rials per one hectare of
land as the result of full removal of subsidy to chemical fertilizers. Contrarily, in case of subsidy removal, producers' profitability is reduced
from 4.85 million Rials to 3.77 million Rials per one hectare of land. Indeed, canola production costs increase by more than 19% while canola
production profit is reduced by more than 22%.
Table 3. Fertilizer Subsidy Removal, Canola Production Costs and Producers' Profits
Fertilizer Subsidy removal (%)
Share of chemical fertilizers cost relative to total production costs (%)
Costs per one hectare (MRls*)
Increase in costs with regard to present situation (%)
Net profit per one hectare (MRls)
Reduction of profits with regard to present situation (%)

Present Situation
6.41
7.22
4.85
-

15%
9.32
7.45
3.18
4.62
-4.74

30%
12.06
7.68
6.37
4.39
-9.84

50%
15.48
7.99
10.66
4.08
-15.87

Full Removal
19.22
8.30
14.95
3.77
-22.26

*MRls= Million Rials


Source: Research findings

In compliance with our findings, canola production is viewed as the main determinant of economic activities in KB province. As a result, any
fluctuation in canola production affects welfare of families in this province. Our findings show that subsidy removal in case of chemical
fertilizers incurs greater production expense by 14.95% and reduces profitability of producers to 22.26% because demand for chemical fertilizers
is not affected by changes in prices. In other words, pricing policy can not sufficiently optimize level of consumption in case of chemical
fertilizers. These findings were consistent with findings of Karimzadegan et al. (2006) and Najafi and Farajzadeh (2010) with respect to the
removal of chemical fertilizer subsidy in wheat production. Rather, complementary and compensatory strategies are required to be implemented.

Behrooz Hassanpour *, Esa Asadi, Farahnaz Kariminejad

10

Agriculture Science Developments Vol(5), No (1), March, 2016.

4.

Conclusion

The results of the research have shown that there is the low rate of response to increase in chemical fertilizer inputs among canola producers.
Accordingly, rise in price of chemical fertilizers immediately causes increase in production costs. In this regard, it is suggested that (a) subsidy
to fertilizers are proposed to cut gradually because immediate removal of subsidy suddenly incurs higher expenses and causes loss against smallscale farmers lacking financial resources circulation of information among farmers improves efficiency of agricultural inputs especially chemical
fertilizers; (b) circulation of information among farmers improves efficiency of agricultural inputs especially chemical fertilizers; (c) studies
should concentrate on agricultural products which need lower consumption of fertilizers in order to build foundation for subsidy cut without any
influence on production; and (d) tax should be introduced on environmental damage.

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