White Paper On Agribusiness Innovation in Macedonia

WHITE PAPER ON
AGRIBUSINESS
INNOVATION IN
MACEDONIA
ECONOMIC IMPACT ASSESSMENT OF A
GOVERNMENT FUNDED PROGRAM FOR
THE INTRODUCTION OF DRIP IRRIGATION
IN CORN PRODUCTION WITHIN THE
MACEDONIA DAIRY SECTOR
2014
Publisher:
The USAID Small Business Expansion Project
SMALL BUSINESS
EXPANSION PROJECT
For the Publisher:

Carl Larkins, Chief of Party
Author:
PointPro Consulting LTD
Expert Contributors:
Dimche Damjanovski
Martin Trajchev
The publishing and printing of this publication is made possible by:
USAID United States Agency for International Development
Design:
koma.mk
Circulation:
50
TABLE OF CONTENTS
1 EXECUTIVE SUMMARY....................................................................................................................................................6
1.1 Purpose and Methodology of the White Paper.....................................................................................................................................6
1.2 Current State of Irrigation and Corn Cultivation in Macedonia.............................................................................................................6
1.3 The Drip Irrigation Technology and Corn Yields Increase Potential.......................................................................................................7
1.4 Assessment of Economic Impact from Program for Drip Irrigation for Growing Corn (DIGC)................................................................8
1.5 Policy Recommendations for the Implementation of the Program for Drip Irrigation for Growing Corn (DIGC).....................................9
2 STRATEGIC OBJECTIVES...............................................................................................................................................12
2.1 Overall Purpose and Objectives of the White Paper...........................................................................................................................12
2.2 White Paper Outcomes and Preparation Methodology ......................................................................................................................12
3 STATE OF PLAY AND SYSTEMIC SOLUTION DRIP IRRIGATION CONCEPT APPLIED TO CORN PRODUCTION IN MACEDONIA.........14
3.1 Current State of Irrigation and Corn Production Performance in Macedonia......................................................................................14
3.1.1 Current State of Irrigation in Macedonia..................................................................................................................................14
3.1.1 Current State of Corn Production Performance in Macedonia..................................................................................................16
3.2 Corn Production Yields Comparison...................................................................................................................................................17
3.3 The Drip Irrigation Technology and Corn Yields Potential...................................................................................................................18
4 ASSESSMENT OF THE ECONOMIC IMPACT FROM DRIP IRRIGATION.....................................................................................24
4.1 The Rationale behind the Economic Cost-Benefit Model (Corn Production vis--vis Dairy Value Chain)............................................24
4.1.1 Shared Underlying Assumptions for all Stages of the Economic Model...................................................................................28
4.1.2 Cost-Benefit Analysis of Primary Corn & Silage Producers - With and Without Drip................................................................29
4.1.3 Combined Primary Production Fodder and Milk...................................................................................................................30
4.1.4 Categorization of Combined Producers by Size of Farm (5 Target Groups)...............................................................................32
4.1.5 Cost-Benefit Analysis of Combined Producers - With and Without Drip...................................................................................33
4.2 The Economic Framework Description (Definition of Economic Model Structure, Internal Linkages
and Metrics of Ultimate Economic Impacts)...........................................................................................................................................35
5 THE CASE FOR GOVERNMENT INTERVENTION - COMPOSITION AND MAGNITUDE OF THE POSITIVE
ECONOMIC IMPACT INDUCED BY THE DRIP IRRIGATION PROGRAM........................................................................................38
5.1 Target Hectares under Drip and Investments....................................................................................................................................38
5.2 Estimated Value-Adding Potential.....................................................................................................................................................40
5.2.1 Primary Corn Production and Import Substitution Potential.....................................................................................................40
5.2.2 Primary Milk Production and Import Substitution Potential.....................................................................................................41
5.2.3 Dairy Processing Industry, Wholesale and Retail Effects.........................................................................................................42
5.3 Water Savings and Avoided Investments in Irrigation Systems..........................................................................................................44
5.4 The Aggregate Monetary Value of Economic Impact to the National Economy..................................................................................45
5.4.1 Scenario Analysis....................................................................................................................................................................46
5.5 Overview of Other Potential Economic Benefits ...............................................................................................................................47
6 MAIN CONCLUSIONS (SUMMARY OF ECONOMIC IMPACT FROM NATIONAL FISCAL PERSPECTIVE)..........................................50
7 POLICY RECOMMENDATIONS FOR THE IMPLEMENTATION OF THE PROGRAM FOR DRIP IRRIGATION
FOR GROWING CORN (DIGC)............................................................................................................................................52
LIST OF TABLES:
Table 3.1 Water consumption per hectare of corn (with/without drip irrigation)............................................................................................21
Table 4.1 Summary of metrics and present value of benefits........................................................................................................................26
Table 4.2 Main assumptions, inputs and expected outputs............................................................................................................................30
Table 4.3 Categorization of combined farms farms that produce ALL types of cereals...............................................................................31
Table 4.4 Total number of farms....................................................................................................................................................................31
Table 4.5 Total number of farms that produce corn.......................................................................................................................................32
Table 4.6 Total number of farms that produce fodder....................................................................................................................................32
Table 4.7 Main assumptions and inputs to dairy farm model.........................................................................................................................34
Table 4.8 Specific feed productivity increase per farm size due to drip irrigation...........................................................................................34
Table 4.9 Net expected effects per farm........................................................................................................................................................35
Table 5.1 Recommended distribution of government financial support..........................................................................................................40
Table 5.2 Macro level economic impact of primary corn production with drip...............................................................................................41
Table 5.3 Macro level economic impact of combined milk and corn production with drip.............................................................................42
Table 5.4 Macro level economic impact on dairy processing industry, 2013..................................................................................................43
Table 5.5 Value added for the dairy sector 1 year......................................................................................................................................43
Table 5.6 Value added for the dairy sector total.........................................................................................................................................44
Table 5.7 Water savings impact from drip irrigation......................................................................................................................................44
Table 5.8 Comparative overview of economic impact....................................................................................................................................45
Table 5.9 Comparison of economic impact for alternative scenarios.............................................................................................................46
Table 7.1 DIGC Program Proposed Monetary Allocations...............................................................................................................................54
LIST OF FIGURES:
Figure 3.1 Structure of land area..................................................................................................................................................................14
Figure 3.2 Types of irrigation.........................................................................................................................................................................15
Figure 3.3 Area under irrigation.....................................................................................................................................................................15
Figure 3.4 Annual freshwater withdrawals by sector....................................................................................................................................15
Figure 3.5 Area under corn, annual production and yields.............................................................................................................................16
Figure 3.6 Corn Yields Comparative Overview Balkan Region (kg/ha).........................................................................................................17
Figure 3.7 Corn Yields Benchmarks (kg/ha)...................................................................................................................................................17
Figure 3.8 An example of a drip irrigation system layout...............................................................................................................................19
Figure 3.9 Yield per ha (with and without drip irrigation)...............................................................................................................................20
Figure 4.1 Simplified model of dairy value chain in Macedonia.....................................................................................................................24
Figure 4.2 Rationale behind the Economic Model..........................................................................................................................................27
Figure 4.3 Value adding potential (EUR).........................................................................................................................................................28
Figure 4.4 Total number of farmers per category..........................................................................................................................................31
Figure 4.5 Key steps for economic impact analysis.......................................................................................................................................36
Figure 5.1 Increase in RM average yield due to drip irrigation.......................................................................................................................39
EXECUTIVE SUMMARY
ITS BETTER TO FARM ONE

HECTARE OF LAND UNDER DRIP
IRRIGATION, THAN TWENTY
HECTARES WITHOUT DRIP
IRRIGATION
FERHAN BIBEROVIC,
CORN AND DAIRY FARMER
Executive Summary
1 EXECUTIVE
SUMMARY
1.1 Purpose and Methodology of the White Paper
This White Paper serves as the key policy document to the Government of the Republic of Macedonia to
formulate an effective funding program introducing drip irrigation systems for corn production in the
Macedonian dairy sector.
To adequately assess the desired outcomes of the proposed program, the White Paper follows the analytical
process described below:
STEP 1:
STEP 2:
STEP 3:
STEP 4:
STEP 5:
Carry out a
structured and
cross-cutting analysis within the body
of the macedonian
statistics and data
related to the
agriculture farming
in dairy (cow) and
corn farms.
Determine the
size, structure,
and key factors
within Macedonian dairy value
chain.
Formulate the
economic impact
model for each
stage within the
value chain positively impacted by
the incremental
corn production
such as: (i) corn
and dairy farms,
(ii) dairy processors and (iii)
wholesalers and
retailers of dairy
products.
Calculate aggregate economic

benefit to the national economy to
be induced by the
implementation
of the pilot drip
irrigation program
in Macedonia for
advanced corn
production, and
the effective
leverage on the
public funds to
be used in the
program.
Propose policy
recomendations
based on the
economic impact
assessment.
1.2 Current State of Irrigation and Corn Cultivation in Macedonia

Based on the land use structure, Macedonia has a solid potential for high-value agricultural output if
adequate irrigation systems are provided. Irrigation water demand is high and makes agriculture the top
water consuming sector in Macedonia. Macedonia has approximately 170,000 ha of arable land under
various irrigation infrastructure schemes, yet with inadequate status: assets are old and not operational;
the locations of pipes and canals are inadequate considering the current farm size.
Thus, even though Macedonia has a solid agricultural potential, the future national agro-economical policies
must take into the account two vital and inter-locked courses of actions: (1) fundamental reconstruction and
upgrade of existing water irrigation infrastructure, and (2) state programs for development of sustainable
and proven water irrigation techniques and practices. This White Paper addresses the second issue applied
to corn cultivation in Macedonia and the upward effect its introduction has across the entire dairy value chain.
The average harvested area under corn in Macedonia over the last five 5 years (2008-2012) is around 30,000
hectares which produces only 70% of the Countrys needs; the remaining 62,000 tons are imported. The
significant role that imports play in satisfying Macedonian annual corn consumption demonstrates the
potential economic impact that a significant increase in yields could have on the domestic corn market, i.e.
import substitution. Furthermore, the low baseline of 4.3 tons/ha in average yields puts Macedonia at the
bottom of productivity in both European and regional contexts.
Corn yields comparative overview (kg/ha)
15.000
11.913
10.000
Greece
8.686
Macedonia
7.131
Slovenia
5.987
Turkey
5.000
Albania
5.682
Croatia
5.531
Bulgaria
5.149
Serbia
4.270
4.177
Montenegro
3.899
Bosna & Herzegovina
0
Corn yields benchmarks (kg/ha)
15.000
10.000
5.000
10.298
Wester Europe
7.578
European Union
7.547
7.490
Southern Europe
Northern Europe
6.658
Europe
5.538
Eastern Europe
5,161
World
0
Source: FAOSTAT, Production/Crops, 2014
1.3 The Drip Irrigation Technology and Corn Yields Increase Potential
USAID Macedonia Small Business Expansion Project (SBEP) started with the implementation of the
GMCI (Grow More Corn Initiative) with the purpose of demonstrating that through the introduction of new
technologies and good agricultural practices - such as advanced drip irrigation and fertigation solutions productivity can be significantly increased, thereby creating a positive effect on a macro-economic (but also
micro) level more specifically, by increasing corn yields, directly contributing to import substitution of corn,
condensed milk, while concurrently growing the upward dairy supply chain in Macedonia.
The results from the GMCI pilot drip program are truly impressive. The initial season average yields achieved
with the pilot portfolio amount to significant 11.4 tons/ha. Compared to the Macedonia average corn yield of
derived 4.3 tons/ha, the after-drip yield is a multiple of 2,65. So far, this is an unprecedented corn production
outcome given the Macedonian agricultural context. The SBEP built on these experiences and has so far laid
120 drip systems covering 120 hectares of corn and farmers have additionally installed another 80 hectares
of equipment bringing the number to 200 hectares.
Executive Summary
Yield per ha (with/without drip irrigation)
SBEP 2013 drip farmers
163% increase
11,400
Average MK (RM Stat)
4,325
Source: SSO 2014, SBEP Data 2013
In addition, the total amount of water consumption with drip irrigation systems is on average 30% lower
than the amount required under conventional irrigation systems, such as linear and sprinkler systems.
This is also a core comparative advantage of drip irrigation resulting in sustainable irrigation practices and
significant capital cost saving in development of additional infrastructure.
1.4 Assessment of Economic Impact from Program

for Drip Irrigation for Growing Corn (DIGC)
Given the significant results and potential for increased

corn yields by introduction of drip irrigation (estimated at
realistic 13 tons per hectare), the economic cost-benefit
model enables the calculation of the incremental value
added at each stage of the dairy value chain. In conceptual
terms, the logic behind the model is the following:
Dairy Farms
Dairy Processors
Wholesalers
Trade
The key growth driver across the dairy value chain is the
productivity of corn production, directly influenced by the
average yields per hectare of agricultural land. Most of
the medium and large size dairy farms produce their own
fodder, especially corn and silage since their contribution
to overall farm operating costs is instrumental for an
economically viable farming. Therefore, the output
and growth of dairy farms is directly influenced by the
available fodder, or given the same available agricultural
land, the average yields of corn growing.
Food processing
Therefore, the economic cost-benefit model presented is

based on the following: (i) combined dairy farms producing Model of dairy value chain in Macedonia
their own corn and silage as core fodder inputs, (ii) dairy
processors that are direct buyers of raw milk, and (iii)
the trading sub-chain comprised of both wholesalers and
Corn Cultivation
retailers who supply products to the final customer.
Agriculture (farming)
As already mentioned, this White Paper formulates the rationale and analytical framework applied for sound
assessment of the positive impact that the Program could bring to the national economy of Macedonia,
taking into account the upward linkages between the corn cultivation and the entire dairy value chain.
The monetary allocation projected for the implementation of the DIGC (based on the economic model) is
17,500,000.00 EUR invested over a seven year period, covering 7,000 hectares planted with corn with drip
irrigation systems and, as a result, effectively substituting 97% of the total corn that is currently imported.
Retailers
1. The higher the corn yields at corn growing farms or dairy farms producing their own corn higher their economic
output and corresponding earnings (value added);
2. The higher the output, or simply the volume of raw milk produced at dairy farms due to more available fodder
higher the volume of dairy products, economic output and earnings (value added) at dairy processors;
3. The higher the output of dairy processors higher the volume of traded goods and corresponding trade margins in
absolute amounts achieved by traders while supplying goods to the final customer groups.
There are also several other positive economic externalities resulting from the execution of the Drip Program,
such as: (a) corn import substitution worth 11.3 mil EUR P/A, (b) incremental employment of 2,800 new jobs
along the entire dairy value chain, and (c) capital cost savings due to water savings achieved by the drip
irrigation compared to the more conventional systems worth 8.4 mil EUR.
For each key segment within the dairy value chain in Macedonia (farming, processing, trading) a cost-benefit
model for calculating annual benefits was prepared, across a 7-year forecasting horizon. The economic
benefit is summarized as a single aggregate present value figure, derived by discounting each annual benefit
to the present. The total net benefit ( 110 million EUR), calculated as present value of all benefits over
7-year period ( 128 million Euro) minus the original investment (17.5 million Euro), is highest under the
100% combined dairy farmers/corn growers scenario. This indicates the full potential of economic return of
7.3 Euro for each 1 Euro (under high impact scenario) invested in the DIGC Program, if the program is fully
implemented (7,000 ha) over the 7-year horizon. This is an impressive economic return and demonstrates the
outstanding use of the national economy resources.
Net benefit (economic impact cost) or NPV
Combined farms (Dairy + Fodder)
11.842.662
Dairy industry
51.483.214
Wholesale of dairy products
24.711.943
Retail of dairy products
14.209.367
Avoided CapEx due to water savings
8.400.000
1.5 Policy Recommendations for the Implementation

of the Program for Drip Irrigation for Growing Corn (DIGC)
Background
The DIGC Program is designed to induce governmental financial support for investments in drip irrigation
for corn production and at the same time to increase awareness among farmers about the importance of
technology of drip irrigation/fertigation in corn production.
10
Target
Financial support should be provided for
implementing drip irrigation/fertigation
on combined farms.
Farms with more than 5 heads of cattle per farm

that are part of the dairy value chain and at least
1 plot of 1 hectare planted with corn should be
included with the measure for financial support
for investment in drip irrigation.
The size of the funds should have the target to financially support investments for drip irrigation for 7.000
hectares of land under corn.
Measures for the implementation of the DIGC Program
Measure 1 (2015): Introduction of a drip irrigation pilot program that is to be carried out in 4 regions (Skopje, Eastern,
Southeastern and Southwestern), covering 20 hectares of land planted with corn, per region, in order to even out
the efforts made by the SBEP so far. 1 Measure 1 is estimated at 475,000.00 EUR; 200,000.00 for procurement of drip
irrigation systems, 15,000 for GPS equipment, training for NEA advisors that will implement the measure educational
workshops for farmers and 260,000.00 EUR for a government national campaign promoting the DIGC (advertisement on
National and local TV stations, billboards, posters and fliers that are to be disseminated among the farming community)
Target: 80 combined farms2
Measure 2 (2016): Increase of the amount for drip irrigation for corn in the Program for Financial Support of Rural
Development (PFSRD) and widening it with drip irrigation for sunflower3 to 300,000 EUR.
Target: 300 hectares (combined farms)
Measure 3 (2017-2021): Introduction of a 5 year plan (as part of the 7 year plan envisaged with the economic model on
which the Paper bases its recommendations) that will gradually increase the amounts allocated in the PFSRD for drip
irrigation for corn/sunflower and will reach the area targeted with the White Paper4.
Target: 6,500 hectares (combined farms)
DIGC Program monetary allocations
Year
2017
2018
2019
2020
2021
Amount (50/50 combination)

EUR
1,200,000
Hectares
600
2,400,000
2,400,000
3,500,000
3,500,000
13,000,000
1200
1200
1750
1750
6500
Previous SBEP/NEA
efforts-hectares (2013-2016)
731
Total (Hectares)
1331
1200
1200
1750
1750
7231
The introduction and implementation of the Drip Irrigation for Growing Corn Program can have a significant effect
not only on the dairy sub-sector but on the Macedonian economy in general. The numbers that are provided by the
metrics applied in the economic impact assessment are very convincing, with each of the three scenarios provided
with this White Paper. If the High Impact Scenario materializes, as is expected due to the significant increases in yields
and the subsequent investments along the entire value chain, 101.2 million Euros Net Present Value over a seven
year period will be added to the dairy sector and 8.4 million Euros in capital investments for irrigation infrastructure
will be avoided. In addition, other externalities that will be made possible with the implementation of the DIGC
Program such as annual import substitution of corn worth 11.3 million Euros and the possibility of the creation of
new 2,800 jobs along the entire value chain. All of the above makes the DIGC Program a key government policy for
the strengthening and revival of the Macedonian Dairy Sector. The program is also expected to have a knock-on effect
on other industries such as the poultry and meat sectors, and not least on the sunflower industry with the potential
to substitute 34 million worth of imports of crude sunflower oil.
1 The amounts and the cost justification are listed below in the policy recommendations
2 Combined farms means both dairy and fodder farms
3 Sunflower should also be included in the program for several reasons: crop rotation with corn, high yields and improved quality, the
drip irrigation system for corn is the same for sunflower and has great potential to also substitute imports and even induce exports
4 DIGC Program monetary allocations
STRATEGIC
OBJECTIVES
11
12
2 STRATEGIC
OBJECTIVES
2.1 Overall Purpose and Objectives of the White Paper
This White Paper serves as the key policy document to the Government of the Republic of Macedonia to
formulate an effective funding program introducing drip irrigation systems for corn production in the
Macedonian dairy sector.
The White Paper effectively demonstrates: (i) the core problem to be addressed, (ii) the essence of the
proposed solution, and (iii) the effects and monetary value of the related public benefits (across the entire
value chain impacted by the increase in corn yields) to be brought into the Macedonian national economy via
implementation of the proposed Financial Support Program.
2.2 White Paper Outcomes and Preparation Methodology

The White Paper analyzes and evaluates the specific economic benefits generated along the entire dairy
value chain, from the implementation of a well-structured Financial Support Program of the Macedonian
Government to a selected category of dairy farms involved in dairy farming and corn production.
The process of preparation of the White Paper enabled the delivery of the following outcomes:
1. Analyzed Macedonian statistics and data related to dairy (cow) farms and corn farmers, including imports of
both milk (evaporated, concentrated, and final products), and corn. The analysis revealed the size, structure,
and distribution of Macedonian dairy and corn/silage production practices. More specifically, it identified the
baseline data as well as illuminated the optimal target for implementation of the pilot financial support
program.
2. Determined size, structure, and key factors within the Macedonian dairy value chain.
3. Formulated an economic impact model for each representative player within the value chain impacted by
the incremental corn production, including primary agricultural holdings involved in corn farming, dairy (cow)
farmers, dairy processors reliant on raw material supply (milk), and dairy product wholesalers and retailers.
4. Calculated the aggregate economic benefit to the national economy (including import substitution of both
corn and milk and the ensuing effects on the trade balance) added by implementation of the pilot financial
support program for drip irrigation introduction in Macedonian corn production, as well as the effective
leverage on the public funds to be used in the program.
5. Proposed policy recommendations based on the economic impact assessment findings.
The rationale behind this White Paper is aligned with the fundamental economic principle of any public
fiscal policy: each denar invested in any Government program from the national budget, in fact does buy a
certain magnitude of the desired result. In more general terms, it buys an economic benefit that should be a
multiple of the original investment/cost. The economic impact elaborated here follows this logic. Therefore,
the ultimate outcome of this White Paper is to properly assess the scope and evaluate the monetary value
of all the benefits to be brought back to the national economy over a certain time horizon by the up-front
investment from public funds into the DIGC Program in Macedonia.
13
STATE OF PLAY AND

SYSTEMIC SOLUTION
DRIP IRRIGATION
CONCEPT APPLIED TO CORN
PRODUCTION IN MACEDONIA
14
3 STATE OF PLAY AND SYSTEMIC SOLUTION

DRIP IRRIGATION CONCEPT APPLIED TO
CORN PRODUCTION IN MACEDONIA
3.1 Current State of Irrigation and Corn Production Performance in Macedonia
3.1.1
Current State of Irrigation in Macedonia
The total land area of Republic of Macedonia (Macedonia) amounts to 25,713 km2, or 2,571,300 ha. Macedonia
has a diverse land use as determined by the country geographical conditions with the following distribution:
Figure 3.1 Structure of total land area
Unproductive land
11%
Forest area
28 %
Grasslands
26 %
35%
Arable land
Source: Irrigation Systems in the Republic

of Macedonia Aleksandar Radevski, 2009
Macedonia has high agricultural potential, with arable land amounting to 26.1 % of total land area,5.
Approximately 400,000 ha of total available arable land (16% of the total land) are categorized as suitable
for irrigation. This is a solid foundation for future high-value and high-yield agricultural output if adequate
irrigation systems are provided.
With regard to the existing irrigation infrastructure in Macedonia, data from the FAO6 Aquastat database
indicates that only 127,800 ha are currently equipped for irrigation; only 79,638 ha of these are actually
irrigated. These data on currently irrigated exactly match those from the State Statistical Office gathered
from the Census of Agriculture 2007.
5 CIA 2011 Factbook

6 FAO = Food and Agriculture Organization of the United Nations
15
Figure 3.2 Types of irrigation
Figure 3.3 Area under irrigation
Unproductive land
4%
Area actually
irrigated (ha)
0%
Unirrigated
area suitable
for irrigation
49 %
1%
96 %
Area equipped
for irrigation
Unproductive land
Source: Irrigation Systems in the Republic of
Macedonia Aleksandar Radevski, 2009
However, two other sources of data indicate a rather

different situation concerning the area equipped for and
under irrigation. The first by an experienced Macedonian
water expert7, indicates that Macedonia has built a
total of 173,000 ha of water irrigation infrastructure.
The other source, a recent World Bank Report8 states a
similar conclusion:
Figure 3.4 Annual freshwater

withdrawals by sector
Power
Industry
29 %
Domestic
43%
27
1%
Agriculture
Since the 1980s, irrigated area in the country has

shrunk, and the majority of irrigation infrastructure
has been abandoned. Currently, only one-quarter of
land suitable for irrigation is actually irrigated, and
much of that depends on local groundwater wells
for supplemental water. i.e. 162,500 ha have or had
infrastructure for irrigation, but only 127,000 ha are
considered suitable for irrigation.
According to the same study, irrigation water demand is

high; agriculture is the top water consuming sector in Macedonia with 43% of total freshwater withdrawals.
Municipal water demand follows with 29%, then industry (particularly mining, metallurgy, chemicals, and
textiles) with 27%, and finally cooling water demand for the thermal power sector with 1% (Figure 3.4).
The World Bank report continues, Water availability is a critical issue for agriculture, with inadequate
irrigation already limiting productivity, and climate change expected to exacerbate the problem. The country
is already experiencing moderate water stress, and climate change is pushing up water demand in agriculture.
The rising frequency of water shortages is undermining the dependability of irrigation and, consequently,
pushing down crop yields. Irrigation is critical to achieve expansion of production of high-value crops,
for which Macedonia has a comparative advantage. However, the Macedonian irrigation system is highly
inefficient: assets are old and not operational, the location of pipes and canals is inadequate considering the
7 Irrigation Systems in the Republic of Macedonia Aleksandar Radevski, 2009
8 FYR Macedonia Green Growth Country Assessment 2014 THE WORLD BANK GROUP
16
current location of farms, and the system is designed to serve large-scale farms, while todays agriculture
is based on small farms.
As a result, only 20 percent of the available irrigation infrastructure is actually used and farmers invest
in their own independent irrigation systems, usually based on wells. These individual schemes are rarely
registered, and the groundwater is often used without being paid for, which leads to overuse. Sustainability
of this system is questionable.9
Even though Macedonia has great agricultural potential, based on total percentage of arable land and
previously developed water irrigation systems, future agro-economic policies must take into account the
following inter-connected courses of action: (1) fundamental reconstruction and upgrade of existing water
irrigation infrastructure, and (2) state support programs for introduction of sustainable and proven water
irrigation techniques and practices. This White Paper addresses the second issue, applied to corn production
in Macedonia and the upward effect its introduction will have across the entire dairy value chain.
3.1.1
Current State of Corn Production Performance in Macedonia
The average area dedicated to corn production in Macedonia over the last five 5 years (2008-2012) is around
30,000 hectares (Figure 3.5). The compounded annual growth rate (CAGR) for the same 5-year period (-1.5%)
indicates a slight downward annual trend in the harvested area under corn with a standard deviation of 1,580
ha or +/- 5% from the average. Total corn production and yields also have the similar declining trend (see
Figure 3.5).
Figure 3.5 Area under corn, annual production and yields

Sown (ha)
40.000
30.000
20.000
Harvested (ha)
Production (tons)
160.000
31 582 31 013 32 737 32 466
140.000
28 644 28 623 29 390 29 369 29 198 29 180
10.000
0
127 125
154 237
120.000
129 045
126 096
100.000
2008
2009
2010
2011
4 751
4 508
4 294
2012
115 928
2008
2009
2010
2011
2012
Yield (kg/ha)
6000
4000
4 099
3 973
2000
0
2008
2009
2010
2011
2012
Source: SSO, 2014
9 FYR Macedonia Green Growth Country Assessment 2014 THE WORLD BANK GROUP
17
2012 annual production amounts to 115,928 tons, covering only 65% of total corn consumption over the
same period (178,636 tons). The remaining 35% was covered through imports from Serbia (88.7%), Bulgaria
(6.0%), Greece (3.1%), and Argentina (1.7%), together representing 99.5% of Macedonias total corn imports
for the same year (62,832 tons).
The significant role that imports play in satisfying annual corn consumption in the country (30% on average)
demonstrates the potential economic impact an increase in yields could have on the domestic corn market.
Import substitution with higher quality domestic corn and increased domestic production could ultimately
result in increased production of milk and dairy products (See Chapter 4 for details). Furthermore, the low
baseline in average corn cultivation yields (4.27 tons/hectare) indicates significant room for improvement in
the sector. Production can be easily increased through systemic implementation of highly effective, advanced
drip irrigation systems in combination with effective supply of nutrients, i.e. fertigation. See Chapter 3.3 for
more details on actual performance achieved by drip irrigation so far in Macedonia.
3.2 Corn Production Yields Comparison

Available data on corn yields from the FAO database puts Macedonia in the lowest performing group when
compared to the wider Balkan region, led by Greece (with above average yields even when compared to the
benchmarks of the highest performing regions).
Figure 3.6 Corn Yields Comparative Overview
Balkans Region (kg/ha)
Figure 3.7 Corn Yields Benchmarks (kg/ha)
11,913
Greece
Slovenia
10,298
Western Europe
8,686
Turkey
7,131
Albania
5,987
Croatia
5,682
Bulgaria
5,531
Serbia
4,270
Montenegro
4,177
Bosnia & Herzegovina
5000
Southern Europe
7,547
Northern Europe
7,490
6,658
10000
5,538
Eastern Europe
2011
2012
3,899
0
7,578
Europe
5,149
Macedonia
European Union
5,161
World
15000
2011
2012
2000 4000 6000 8000 10000 12000

Source: FAOSTAT, Production/Crops, 2014
Although 2012 data was available from the FAOSTAT database, 2011 was taken as a more representative
year, since in 2012 a significant part of the Balkan region had a problem with aflatoxin in the corn and average
yields decreased dramatically. For example, Serbias corn yields in 2012 have decreased by 46% compared to
2011 which is the highest decline from all the 10 countries in the group. Only Macedonia, Greece and Turkey
display one-digit percentage changes in yields from 2011 to 2012, and they are (-7%), (-8%), and (+4%)
respectively, whereas all the other countries display double-digit declines (except for Albania which has a
double-digit growth in yield (+12%)). Macedonia is at the very bottom of the group) with yields under 5 tons/
ha. This falls below the world average of 5.2 tons/ha; in comparison the European production average is over
18
6.6 tons/ha. The USA is the worlds largest corn producer with yields over 10 tons/ha, similar to the yields
in Western Europe. This seems to indicate that the long-term investment in modern agronomy practices and
science delivers a high return.
Comparing Macedonian corn yields with the Balkan and EU countries suggests that Macedonian agricultural
practices and technologies are far behind those applied in both neighboring Balkan countries and across
Europe. This trend is the key rationale behind the idea of implementing of advanced drip irrigation and
fertigation across Macedonia.
3.3 The Drip Irrigation Technology and Corn Yields Potential

As a brief introduction, drip irrigation is the slow, even application of low pressure water to soil and plants in a
precise and targeted way so that the exact amount of water reaches the specific location at the root of the plant
that is most effective in supporting growth and development. Drip irrigation uses a system of plastic tubing with
embedded water emitters placed throughout the tubing (drippers), enabling release of water at the plant to (a)
maximize water utilization and (b) prevent water evaporation, runoff, and waste. Not only does water run through
the irrigation tubing; farmers can also channel fertilizers and nutrients through the same tubing, thereby enabling
the same precision application of fertilizers and nutrients. This is often called fertigation or nutrigation. So far,
it represents the most effective way to increase the yield and quality of a crop by feeding the plant according
to its specific, ever-changing needs. So far, only surface drip irrigation has been applied in Macedonia, as the
simplest, least expensive method of drip irrigation, requiring the placement of dripper lines on the surface of the
agricultural field at a defined distance from the base of the crop. However, SBEPs Grow More Corn Initiative has
begun to implement advanced drip irrigation in combination with controlled fertigation as described above.
USAID Macedonia Small Business Expansion Project (SBEP) is a four-year project, implemented by CARANA
Corporation, focused on strengthening private sector capacity to drive regional economic development and
job creation in Macedonia. It aims to engage business leaders, local governments, regional development
centers, and other institutions to identify market opportunities for growth and job creation, upgrade the
capacity of micro, small, and medium-sized enterprises (MSMEs), respond to new market opportunities, and
strengthen the capacity of business service organizations (BSOs) to better identify and serve the needs of
the MSMEs while building necessary workforce. In its two years of operation to date, the Project has started
a number of initiatives, including the Grow More Corn Initiative (GMCI) in 4 targeted regions. GMCI was
piloted in Polog and Pelagonija, and has now expanded to the Northeastern and Vardar regions.
The Small Business Expansion Project began the GMCI to demonstrate that the introduction of new
technologies and good agricultural practices - such as advanced drip irrigation and fertigation solutions can
significantly increase productivity and positively affect the macro economy. More specifically, increasing corn
yields not only directly contributes to corn import substitution, but also import substitution of condensed
milk, while concurrently growing the locally significant upward dairy supply chain,. The Macedonian dairy
supply chain links dairy farms (who largely produce their own corn and silage as basic fodder inputs) to the
dairy processors, to wholesale and retail traders that make dairy products available to the consumer. Prior
to the commencement of the Initiative, the SBEP held numerous discussions with all stakeholders, starting
from farmers who had lowered the number of dairy cows due to expensive feed, through dairy companies
such as Zdravje Radovo, BiMilk, Ideal Shipka, Sutash who had lowered their production due to lower milk
yields on farm level, to wholesalers and retailers who started distributing and selling more imported dairy
products, and they all agreed that if the domestic corn production (both grain and silage) and productivity
can be increased, a great impact on the entire dairy industry can be achieved.
19
Prior to the introduction of the GMCI in Macedonia, drip irrigation for growing corn was virtually unknown in
the country and was initially received with a great degree of doubt, by both individual farmers and the larger
agricultural/food community. The GMCI began with a carefully planned process of selecting a supplier of drip
systems and services (such as installation, training and subsequent monitoring and extension), and a preselection process of a number of corn/dairy farmers who would agree to the installation of the equipment.
The results for the 2013 growing season, for 42 hectares under drip irrigation, were astounding and set a new
baseline for corn production in Macedonia, averaging yields of 11.4 tons/ha.
The SBEP built on these experiences and has so far laid 120 drip systems covering 120 hectares of corn;
individual farmers have installed another 80 hectares of equipment, bringing the total to 200 hectares.
Drip irrigation in many diverse agro-ecological situations registered higher yields (GMCIs achievement of
11.4 tons/ha represents an increase of almost 200% over the national average)) and set a national record of
17 tons/ha of grain and 112 tons/ha of silage. Multiple accomplishments such as water savings (a 25%-35%
reduction compared to furrow and sprinkler irrigation), significantly better grain quality, lower labor costs
and hours (in comparison to conventional furrow irrigation), precise fertilizer application, and low operating
pressures (in comparison to the centre pivot sprinkler irrigation method) demonstrate that the drip irrigation
system for growing corn has wider implications for the vertical supply chain in the dairy and other cornreliant industries.
Drip technology provides for precise irrigation and fertigation/nutrigation: 95% of the water, fertilizers, and
nutrients are directly applied to the root of the plant thereby creating a stress-free growing environment
enabling maximum yields. The SBEP has created an important messaging system to notify farmers when
to irrigate and/or fertigate and what fertilizers to use. This practice was highly recommended by the World
Banks FYR Macedonia Green Growth Country Assessment, which stressed the importance of optimizing
agronomic practices (including timing of water and fertilizer application) across the country.
Figure 3.8 An example of a drip irrigation system layout10
10 Source: Netafim irrigation systems - NetaKit
20
The drip irrigation system consists of a main water supply pipe connected to a water source (hydrant, well,
river, or water tank), followed by attached filters and a small injector for fertilizer application. The filters are
connected to a system of plastic water supply tubing with embedded water emitters (small plastic drippers),
with appropriate valves - serving as a secondary network and directly providing water and fertilizers.
The system is very easy to maintain and has a 10 year warranty, even though its economic life in the economic
model is estimated at 7 years.
For Macedonian weather and soil conditions, approximately 28 m3 of water per hour are needed for irrigation
of 1 hectare of corn or a total of 2,750 m3 for the entire corn growing season, a reduction of at least 25%
when compared to conventional irrigation methods (3,750 m3). The drip irrigation system itself is very easy
to install taking about 4 hours in total.
The system saves many labor hours during operation, making it even more advantageous in comparison to
conventional irrigations systems. Drip irrigation requires only 10 hours of labor when compared to the 50
hours of labor when another method of irrigation is used.
Based on data from the State Statistical Office and progressive farmers monitored by the SBEP, the average
yield of corn per ha is 6.113 kg (Figure 3.9). Farms that have implemented drip irrigation & fertigation systems
have on average achieved 86% higher yields from the Macedonian derived average taken as the comparison
basis, or over 1.5 times the yields of the average Macedonian farmer.
Figure 3.9 Yield per ha (with and without drip irrigation)
SBEP 2013 drip farmers

11,400
Progressive farmers13
7,900
3,500 (+44%)
National average
4,325
kg/ha yield with conventional irrigation
7,075 (+164%)
kg/ha yield increase with drip irrigation

Source: SSO 2014, SBEP Data 2013
The results from the GMCI pilot drip program are truly impressive. The initial season average yields achieved
during the pilot amount to 11.4 tons/ha. Compared to the current Macedonia progressive farmers average
of 7.9 tons/ha, it denotes an 44 % increase, while compared to the Macedonia 5-year average corn yield of
derived 4.3 tons/ha, the after-drip yield is a multiple of 2,65. So far, this is an unprecedented corn production
outcome in the Macedonia agricultural context.
The achieved growth in yield per hectare can vary depending on the baseline agricultural conditions and
practices, i.e. the lower the starting point the higher the difference in achieved yield growth. Based on the
two SBEP pilot seasons (2013 and 2014) in Polog and Pelagonija, it is possible to conclude that a farmer
implementing a drip irrigation system over the course of the next 7-year time horizon can achieve an average
21
yield of approximately 13 tons per hectare. The yield of 13 tons per hectare is derived on the premise that, if
small farmers that currently produce corn at the national average of 4.3 tons double their production in the
first year to 8 tons (as current results of SBEP efforts demonstrate), while progressive farmers go up to 14
tons in the same year, improved practices over the course of seven years will result with a 7-year average
of 13 tons per ha across the board. Of course, this assumption represents the progressive scenario based on
current experiences. However, in order to present the fair sensitivity of program outcomes in relation to the
key variables, such as baseline and after-drip corn average yields, several scenarios have been developed
within the economic cost-benefit model, elaborated in the next chapter.
The total amount of water consumption with drip irrigation systems is on average 30% lower than that
required under conventional irrigation systems, such as linear and sprinkler systems (Table 3.1). Overall, the
total amount of water needed for the entire corn season is in the range of 3,500-4,000m for conventional
irrigation compared to 2,300-2,700 m for drip irrigation. The experience of the SBEP with farmers from Polog
and Pelagonija indicates that 2,750 m/ha is a realistic and achievable level of water consumption with the
drip irrigation system, implying a decrease of 27% compared to average consumption with conventional
irrigation (3,750 m/ha).
Based on the corn yields increase by the GMCI, and the potential that this the drip irrigation system has, the
following chapter formulates the fundamentals of the economic impact that a likely Government supported
drip program applied for corn cultivation in Macedonia could have along the entire dairy value chain within
the national economy.
Table 3.1 Water consumption per hectare

of corn (with/without drip irrigation)
Conventional irrigation
(m3/ha)
Drip irrigation
(m3/ha)
% decrease
Stage 1 - Germination and emergence
20
14
-30.0%
Stage 2 Stalk rapid growth phase
40
28
-30.0%
Stage 3 Corn tasseling and silking
55
39
-29.1%
Stage 4 - Pollination and fertilization
60
42
-30.0%
Phase of corn production
Source: Faculty of Agricultural

Sciences and Food (FASF) 2014
Stage 4
Stage 3
Stage 2
Stage 1
22
23
ASSESSMENT OF THE
ECONOMIC IMPACT FROM
DRIP IRRIGATION
24
4 ASSESSMENT OF THE ECONOMIC IMPACT

FROM DRIP IRRIGATION
4.1 The Rationale behind the Economic Cost-Benefit Model
(Corn Production vis--vis Dairy Value Chain)
This chapter elaborates on the positive impact the likely Government Drip Irrigation Program could bring
to the national economy of Macedonia, including the upward linkages between the corn cultivation and
entire upward dairy value chain. This approach defines both the key drivers that induce growth to various
inter-linked segments of the Macedonia dairy value chain and the metrics to calculate the magnitude of the
positive economic impacts compared to the initial investment or cost from the national economy point of
view.
Effectively, the rationale behind this White Paper is very much aligned with the fundamental economic
principle of any public fiscal policy, that each denar invested from the national budget in any Government
program, in fact buys a certain magnitude of the desired result, or in more general terms, buys an economic
benefit that should be a multiple of the original investment/cost. The economic impact elaborated here
follows this logic.
Dairy processing companies represent the core of this

particular value chain. They are direct buyers of raw milk
produced at the dairy farms, and direct vendors to traders
up the value chain. Hence, their growth is directly influenced
(and limited) by the growth of raw milk produced at the farms.
Not surprisingly, there are many strategic alliances between
the dairy processors and farms. As a general practice, most
of the dairy farms, especially the economically viable ones,
grow their own corn and silage as key fodder inputs.
Corn Cultivation
Dairy Farms
Dairy Processors
Wholesalers
Value is added at each stage of this food chain. Even though

in many cases stages might be overlapped and performed
by the same player, the value-adding concept remains the
same.
Retailers
Trade
Dairy processors convert the raw milk in various final

consumer product categories, which are then distributed
to customers via the trading sub-chain comprised of
wholesalers and retail outlets.
Agriculture (farming)
Figure 4.1 Simplified model of dairy value chain in Macedonia
Food processing
Therefore, the economic cost-benefit model presented

here is based on the following model of the Macedonia
dairy value chain, starting with the (i) corn growing
farmers or combined dairy farms producing their
own corn and silage as core fodder inputs, followed
by the (ii) dairy processors, that are direct buyers of
raw milk, finally followed by the (iii) trading sub-chain
comprised of both wholesalers and retailers who
supply products to the ultimate customer.
25
The key growth driver across the dairy value chain is corn production, directly influenced by the average
yields per hectare of agricultural land. Most of the medium and large size dairy farms produce their own
fodder, especially corn and silage, since their contribution to overall farm operating costs is instrumental to
be an economically viable operation. Therefore, the output and growth of dairy farms is directly influenced by
the available fodder, or given the same available agricultural land, average corn yields. Given the potential
for increased corn yields through the introduction of drip irrigation, the economic cost-benefit model enables
the calculation of the incremental value added at each stage of the dairy value chain, beginning with the
implementation of the wider Drip Irrigation Program. The exact metrics of the value added are elaborated
later in the text; the logic behind the model is the following:
`` The higher the corn yields at corn growing farms or dairy farms producing their own corn, the higher
their economic output and corresponding earnings (value added);
`` The higher the output (volume of raw milk produced at dairy farms due to more available fodder), the
higher the volume of dairy products, economic output and earnings (value added) for dairy processors;
`` The higher the output of dairy processors, the higher the volume of traded goods and corresponding
trade margins in absolute amounts achieved by traders supplying consumers.
There are also several other positive economic externalities resulting from the execution of the Drip Irrigation
Program, including corn import substitution, incremental employment, and capital cost savings due to drip
irrigations relative water efficiency.
The economic impact analysis model first assesses the value added to the economy that drip irrigation
stimulates per hectare of arable land under corn, grain, and silage (NPV/hectare), i.e. the incremental increase
in yields in cultivating corn, grain, and silage and the benefit for the farmer. The analysis then replicates the
effect on a macro level by entering the target number of hectares to be financed by a potential Government
program.
A separate analysis across a category of combined farming operations that produce both fodder and raw milk
was undertaken as well, in order to provide insight into the effects that drip irrigation could stimulate on a
vertically integrated model of farm, i.e. : (a) the increase in yields of corn and silage production, (b) the cost
savings due to increased own production of corn and silage, as well as (c) the increase in milk production due
to the investment in additional cattle heads that would be fed with the increased volume of fodder, based on
incremental corn grain and silage yields per hectare.
For each key segment of the dairy value chain in Macedonia (farming, processing, trading) a cost-benefit
model for calculating annual benefits was prepared, across a 7-year forecasting horizon. The economic
benefit is summarized as a single aggregate present value figure, derived by discounting each annual benefit
to the present. Table 4.1 summarizes the metrics and present value of benefits for each segment within the
value chain:
26
Table 4.1 Summary of metrics and present value of benefits
Segment of the Value Chain
Key Value Drivers
Economic Benefit Metrics
`` Increased corn yields
`` Net Present Value (NPV) of

incremental free cash flow to firm over
7-year forecast horizon
`` Increased earnings
Agriculture:
Corn Growers
`` Increased corn yields
`` Cost savings due to avoided
purchase of fodder
`` Net Present Value (NPV) of

incremental free cash flow to firm over
7-year forecast horizon
`` Increased milk production

Agriculture:
Dairy Farms
`` Increased output
`` Increased earnings
`` NPV of value added of the dairy

industry to the national economy
(Income GDP method) over 7-year
horizon
Food
Processing:
Dairies
`` Increased trade volume
`` Increased trade margins and
earnings
`` NPV of value added of the trading

industry to the national economy
(Income GDP method) over 7-year
horizon
Trade:
Wholesalers
and Retailers
The entire logic behind the model explained in the subsequent sections of the report is as follows:
dairy farmer and his corn, double his height
27
Figure 4.2 Rationale behind the Economic Model
COMBINED PRIMARY PRODUCTION
1600 NEW JOBS

11,8 MIL EUR
NET PRESENT VALUE (NPV)
DAIRY PROCESSING INDUSTRY
70.000 TONS OF MILK

700 NEW JOBS
51,5 MIL EUR NPV
30.000 TONS OF DAIRY PRODUCTS
WHOLESALE
24,7 MIL EUR NPV
500 NEW JOBS
14,2
RETAIL
MIL EUR NPV
Source: Internally developed cost-benefit model
TOTAL
EUR 101,2 MIL

2.800 NEW JOBS
28
Although the incremental () value added on a macro level from the combined farmers alone (nearly 12
million Euro) is smaller compared to the incremental value added to the corn growing farms (41 million Euro),
(the NPV of 7-year economic benefits from the corn growers was over 3.5 times the NPV of the combined
farmers), the increase in milk production provided an additional opportunity for leveraging the positive effects
of the drip irrigation up the dairy value chain, i.e. in the dairy processing industry, through the wholesalers
distribution system, and finally to the ultimate consumers from the retail outlets as end beneficiaries, making
the combined and vertically integrated farms the target group for the Government support (Figure 4.3). Thus,
the combined added value induced by the Drip Irrigation Program up the entire dairy value chain is ultimately
of a higher magnitude than the added value from the corn growers alone.
Figure 4.3 Value adding potential (EUR)
120000000
102247186
100000000
80000000
51483214
60000000
40000000
41151196
24711943
14209367
11842662
20000000
0
Corn growers
Dairy Value
Chain
Combined
farmers
Dairy industry
Wholesale of
dairy products
Retail of dairy
products
The following section summarizes the structure of the model, key input variables, as well as the monetary
value of the economic benefits elaborated in this chapter, separately for each segment of the entire dairy
chain: (i) corn growers, (ii) vertically integrated dairy farms, (iii) dairy processors, and, (iv) traders of dairy
products.
4.1.1
Shared Underlying Assumptions for all Stages of the Economic Model
Although the integrated model aggregates the separate economic cost-benefit models of each stage within
the dairy value chain there are a number of assumptions in common for all stages, as follows:
Forecast horizon of 7 years, taken as the average economic life of the drip irrigation system;
Capital cost of drip irrigation system per 1 [ha] of 2,500 EUR11;
Discount rate of 10% for calculating NPV (net present value);
Return based on net added value expressed as the incremental NPV [Euro]/ha;
11 This is the maximal price for the first hectare; the subsequent 5 hectares installed are 1,500 EUR each
29
The economic return indicators used are as follows:

Incremental net present value @ 10% discount rate per hectare (based on incremental revenues,
cost savings and earnings);
Internal rate of return (IRR), the discount rate that produces a zero NPV;
Benefit-cost ratio (BCR) as the ratio of the benefits of a project or proposal, in monetary terms,
relative to its costs, also in monetary terms expressed in discounted present values;
Payback period, as the period of time required to recover the up-front investment, or to reach the
break-even point; and
Return on investment (ROI) multiple as a ratio derived as NPV divided by the total investment to
calculate and compare the share of the net return to the original value of the investment at present
day.
4.1.2
Cost-Benefit Analysis of Primary Corn & Silage Producers - With and Without Drip
All analyses and forecasts are done on per hectare basis, i.e. investment costs, operation costs, yields
(before and after investment), revenues, and returns per hectare.
The main inputs to the cost-benefit analysis model for the primary producers of corn and silage refer to the
following:
`` Size of investment in drip for both corn grain and corn silage (2,500 EUR/ha);
`` Increase in yield per hectare with drip irrigation, from an average for RM of 4.3 tons/ha to 13 tons/ha, and
23.1 tons/ha to 70 tons/ha for corn grain and corn silage respectively, or an approximately 200% increase
in yields for both cultures, resulting in a 200% increase in sales revenues per hectare for both corn grain
and silage;
`` Increase in variable expenses for water soluble liquid crystal fertilizers; however, adecrease in fixed labor
budget and operating costs for irrigation (water savings);
`` Decrease in production price per unit of output (primarily due to yields increase), from a RM average of
12.95 to 4.17 MKD/kg for corn grain; a total decrease in overall production costs for hectare with drip
irrigation, from 911 EUR/ha to 882 EUR/ha.
`` Decrease in production price per unit of output, from a RM average of 2.75 to 0.79 MKD/kg for corn silage;
a total decrease in overall production costs for hectare with drip irrigation, from 1,034 EUR/ha to 894
EUR/ha.
The main outputs or results of the cost-benefit analysis model for corn grain and silage were replicated on a
macro level based on the micro level models (per hectare) to provide an estimate of the required investment
and the economic return for the corn growers.
Table 4.2 summarizes both the main inputs and outputs of the cost-benefit analysis leading to the conclusion
that an investment in just 1 hectare of land under corn could provide a return of 5,879 EUR in NPV (over 2.3
times the initial investment), almost 67% in IRR, a benefit-cost ratio of 3.3 and a payback period of less than
1.5 years over the 7 year time horizon. This is an impressive economic return, and positions drip irrigation as
a priority investment for average corn growers in Macedonia.
30
Table 4.2 Main assumptions, inputs and expected outputs
Since the analysis was conducted on a per hectare basis, the same results were then replicated on a macro
level, requiring a total investment of 17.5 million EUR for an NPV of over 41 million EUR and the same return
metrics applied at the micro-economic analysis. Because of insufficient data on the planted hectares under
silage in RM, the main focus of the analysis was placed on the primary production of corn grain, even though
the estimated results for the silage were even greater (Table 4.2).
4.1.3
Combined Primary Production Fodder and Milk
The main focus of the analysis of the effects of drip irrigation in the corn production was placed on the
hereinafter called combined farms. In this case, the term combined farms is used for farms that are
registered as farms for milk production but also own or rent land for their own feed production, especially
corn and silage as key inputs and major cost drivers.
The combined farms were identified based on a 2013 AFSARD12 database of all the farmers that have applied
for subsidies for cattle breeding, milk, and crop production. The database included 64,999 farms (producers
of different kinds of crops) and 20,617 cattle-breeding farms (Figure 4.4). The two types of farms were
matched based on the id-number of the application. The result showed that 7,223 farmers were repeated in
both lists; therefore, they could be considered combined farms.
12 AFSARD = Agency for Financial Support of Agriculture and Rural Development
31
Figure 4.4 Total number of farmers per category
Crop Farmers
all cereals
64,999
Combined
Farmers
The combined farms were categorized in 9

groups based on the number of cattle on
the farm (Table 4.3). In the sample of 7,223
combined farms, the total number of cattle is
54,382 and the total crop cultivation area is
9,352 hectares. It can be concluded that small
farms dominate the sample, both based on
the number of cattle and the land cultivation
area. The sample is considered a reliable
representation of the population because it
is backed by data from the Macedonian State
Statistical Office.
Cattle
Farmers
7,223
20,617
Source: AFSARD, 2014
Table 4.3 Categorization of combined farms farms that produce ALL types of cereals
ALL GROWERS All types of cereals

Cattle farm size
>1 3
>35
>510
>1020
>2030
>3050
>50100
>100
TOTAL
Matched
Number of farmers
867
2,348
1,384
1,388
769
247
160
50
10
7,223
Number of cattle
867
5,660
6,122
10,391
11,012
6,118
6,231
3,430
4,551
54,382
Land under crops
597
1,784
1,126
1,363
1,078
431
401
131
2,441
9,351
Average ha / farm
0.7
0.8
0.8
1.0
1.4
1.7
2.5
2.6
244.1
1.3
Average # cattle / farm
1.0
2.4
4.4
7.5
14.3
24.8
38.9
68.6
455.1
7.5
Number of farmers
12%
33%
19%
19%
11%
3%
2%
1%
0%
100%
Land under crops
6%
19%
12%
15%
12%
5%
4%
1%
26%
100%
Additional arguments supporting the significance of the sample of combined farms is the fact that, they take
up 35% of the total number of farmers that have applied for subsidies and 32% of the total number of cattle
subsidized (Table 4.4).
Table 4.4 Total number of farms
Categories
TOTAL
Matched All cereals
% of total
Total number of farms
20,617
7,223
35%
Total number of cattle
168,697
54,382
32%
32
4.1.4
Categorization of Combined Producers by Size of Farm (5 Target Groups)
To better understand the distribution of drip irrigations incremental effects along the entire value chain,
categorization of the combined farms based on the number of cattle (Table 4.3 and Table 4.4) was conducted.
The main goal of this categorization was to identify the total land under fodder and its distribution in each
category of farm.
The study initially aimed at identifying the land under corn production on the combined farms. The results
from the database showed that only 315 farms matched this profile; the group only used 240 hectares for
corn cultivation. This was neither a significant sample for in-depth analysis nor a suitable target for the
proposed Government support program (Table 4.5).
Table 4.5 Total number of farms that produce corn
Cattle farm size

CORN PRODUCER
>1 3
>35
>510
>1020
>2030
>3050
>50100
>100
TOTAL
Matched
No. of farmers (c )
32
98
53
64
34
18
14
315
Number of cattle (c )
32
231
230
457
507
468
524
110
2,559
Land under crops corn
14
48
33
46
28
26
37
240
Average ha / farm corn
0.4
0.5
0.6
0.7
0.8
1.4
2.7
4.3
0.8
Average # cattle / farm
1.0
2.4
4.3
7.1
14.9
26.0
37.4
55.0
8.1
Number of farmers
10%
31%
17%
20%
11%
6%
4%
1%
0%
100%
Land under crops
6%
20%
14%
19%
12%
11%
16%
4%
0%
100%
Average ha/cattle head
0.4
0.2
0.1
0.1
0.1
0.1
0.1
0.1
0.1
Therefore, for the purpose of the analysis the final sample is the segment of matched farms that consists of
dairy farms that also produce any types of fodder considered to be potential corn growers (Table 4.6). Hence,
further in the text, combined farms refer to this type of farms.
Table 4.6 Total number of farms that produce fodder
Cattle farm size

FODDER PRODUCER
>1 3
>35
>510
>1020
>2030
>3050
>50100
>100
TOTAL
Matched
No. of farmers (f)
565
1.691
1.043
1.129
652
207
140
45
10
5.482
No. of cattle
565
4.097
4.629
8.454
9.381
5.149
5.451
3.094
4.551
45.371
Land under crops (f)
340
1.213
807
1.055
890
356
342
123
2.441
7.567
Average ha
0,6
0,7
0,8
0,9
1,4
1,7
2,4
2,7
244,1
1,4
Average no. cattle
1,0
2,4
4,4
7,5
14,4
24,9
38,9
68,8
455,1
8,3
Number of farmers
10%
31%
19%
21%
12%
4%
3%
1%
0%
100%
Land under crops
4%
16%
11%
14%
12%
5%
5%
2%
32%
100%
Average ha/cattle head
0.6
0.3
0.17
0.12
0.09
0.07
0.06
0.0
0.5
0.2
33
The categorization of the combined farms and the analysis of the ratio of land per head of cattle showed that
land per cattle decreases with the size of the farm. This conclusion was the main incentive to continue the
analyses of the economic effects from the implementation of drip irrigation based on particular farm size. The
goal was to incorporate the different level of farm productivity (based on their relative size), being the key
driver of the investment payback potential.
4.1.5
Cost-Benefit Analysis of Combined Producers - With and Without Drip
The main inputs to the cost-benefit analysis model for the dairy farms combined with corn grain and silage
production refer to the following:
`` Initial investment per ha for both corn grain and corn silage (2,500 EUR/ha);
`` Same expected increases in yields of corn and silage per ha (see section 4.1.2);
`` Same yield per cow for all sizes of farms (4,82513 l/head);
`` Same average wholesale price of milk for all farms (19.6814 MKD/l);
`` Different productivity factors based on the size of the farm expressed in the form of average number of
hectares per cattle head (ranging from 1.2 to 0.7, starting from the smallest with 3 to 5 cattle heads, to
the largest with 30 to 50 heads, or 10 times the size of the smallest);
`` Decrease in feed costs with drip irrigation for corn grain (from 12.9 to 4.2 MKD/kg) and silage (from 2.7 to
0.8 MKD/kg) per kg, due to increased yields and own production quantities, and the same consumption
per cattle head for all types of farms;
`` The same other variable costs per cattle head for all sizes of farms15 (see Table 4.7);
`` Same fixed cost per hectare for all farm sizes (50 EUR/ha);
`` Investment in additional dairy cows depending on the incremental feed availability due to increased corn
and silage yields on the same piece of land owned by the farm (2,000 EUR/ head);
13 Source: Strategy for Improvement and Tracking the Quality of Milk 2013-2020
14 Source: Agricultural Market Information System Annual Report, 2013
15 Source: Strategy for Improvement and Tracking the Quality of Milk 2013-2020
34
A summary of the most important inputs to the forecast model can be found in Table 4.7.
Table 4.7 Main assumptions and inputs to dairy farm model
A detailed cost-benefit analysis was conducted for each type of farm under two scenarios in order to be able
to calculate the incremental net benefits per farm from the drip irrigation, i.e. Scenario 1 AS IS reflecting
business as is with usual performance, and Scenario 2 DRIP reflecting an investment in drip irrigation and
corresponding yields for the entire land the farm owns (for full effects). One of the major improvements in the
performance of the combined farms is the increase in productivity, expressed as number of hectares of land
per cattle head, and it is different for different sizes of farms (Table 4.8).
Table 4.8 Specific feed productivity increase per farm size due to drip irrigation
Hectares/cattle head (milk cow)
Scenario 1
AS IS
>
Scenario 2 DRIP
3<5 cows
ha/head
1.2
0.7
5<10 cows
ha/head
1.1
0.7
10<20 cows
ha/head
1.0
0.7
20<30 cows
ha/head
0.9
0.6
30<50 cows
ha/head
0.7
0.5
The expected improvements and results of the implementation of the drip irrigation system per farm can be
found in Table 4.9.
35
Table 4.9 Net expected effects per farm
NET EFFECTS PER FARM / FARM SIZE

Net increase in number of cows
UNIT
#
>35
> 5 10
> 10 20
> 20 30
> 30 50
9.0
17.0
31.0
51.0
81.0
Average yield per cow
l/head
4,825
4,825
4,825
4,825
4,825
Net increase in litres milk (# cows)*(l/head)
litres
43,422
82,020
149,566
246,059
390,800
Net revenues per cow - RM Stat
EUR/head
17
21
25
29
38
Net revenues per cow - DRIP
EUR/head
490
495
505
523
557
EUR/ha
585
819
1,168
1,783
3,378
Average INCREMENTAL NPV per hectare
The above results were used to calculate the macro effects of the increased yields and number of cows on
the production of milk in the total sector, as well as the additional effects on the dairy industry (see section
5.4).
4.2 The Economic Framework Description (Definition of Economic Model Structure, Internal
Linkages and Metrics of Ultimate Economic Impacts)
Economic impact analysis provides a quantitative method to estimate the economic benefits that a particular
project or industry brings to the national economy and surrounding communities where the specific project
or industry is located.
Typically, economic impact studies use financial and economic data to generate estimates of output, GDP,
employment, and tax revenues associated with changes in the level of economic activity resulting from the
project or industry being analyzed.
This particular model focuses on measuring the economic impact output using a more conservative measure,
which is the Gross Domestic Product (GDP) calculated on industry level by Income Method (or value-added
approach). The Income Method for GDP calculation applied to a selected industry, refers to the value-added,
i.e. the additional value of a manufactured good (or service) within that industry, over the cost of intermediate
inputs used to produce it from the previous stage of production or supply.
The Income Method for GDP to evaluate the potential economic impacts of the drip implementation on the
dairy supply chain (farms, dairies and traders) was chosen due to the following advantages:
`` GDP per industry (farming, dairy processing or trading) equals the net economic effect of that industry,
or the difference between the economic output (revenues) and intermediate consumption (expenses on
intermediate inputs). Thus, it is a relevant metric used for estimating gross value added from a particular
industry and comprises the following sub-categories of income in key economic sectors (enterprises,
households, and government):
`` Net Operating Surplus in corporate sector (Income to enterprises)
`` Gross Employee Compensation (Income to households, i.e. individuals)
`` VAT, Corporate and Product Taxes minus Subsidies (Income to the Government).
`` GDP is the incremental value created through mechanical processes, labor and knowledge in each industry
category (farming, manufacturing, trade)
`` Total GDP is a more meaningful measure of economic impact than output, as it avoids double counting
during each round of impacts.
`` GDP is smaller than total Economic Output but is more important to government stakeholders, since it
aggregates the value added across a specific supply chain.
36
The main inputs of the model as follows:

`` Data used as inputs to the model are current expenditures; either capital expenditures or operating
expenditures as outputs from the model are static.
`` A distinction between capital expenditure associated with drip irrigation execution and recurring annual
operating costs has been made - CapEx vs OpEx.
`` Only the incremental cash flows directly influenced by the proposed project implementation are taken
into account.
`` Secondary data from state statistics agencies are used to support the expenditure inputs in the economic
benefit-cost model.
Figure 4.5 Key steps for economic impact analysis
STEP 1:
STEP 2:
STEP 3:
STEP 4:
STEP 5:
Estimate
required capital
and operating
expenditures for the
project
Build input-output model

based on project
expenditures
Derive impacts
from built model
Generate impact
results from the
model
Stakeholder
communications Reporting
Source: Adapted from the PWC Economic Impact Analysis 2012 Americas School of Mines
37
THE CASE FOR

GOVERNMENT
INTERVENTION COMPOSITION AND
MAGNITUDE OF THE
POSITIVE ECONOMIC
IMPACT INDUCED BY
THE DRIP IRRIGATION
PROGRAM
38
5 THE CASE FOR GOVERNMENT INTERVENTION

- COMPOSITION AND MAGNITUDE OF THE
POSITIVE ECONOMIC IMPACT INDUCED BY
THE DRIP IRRIGATION PROGRAM
5.1 Target Hectares under Drip and Investments
The purpose of the economic assessment model is two-fold: to provide a platform for designing an efficient
Government-funded drip irrigation program in corn production, and to initiate the implementation of a
program that will effectively demonstrate its positive effects to a sufficient number of farmers (explained in
more detail in Chapter 7). Additionally, if the measure proves successful then it can be used as a universal
model which can be further adapted and replicated for other similar Government funded programs, such as
drip irrigation for sunflower or other cultures significant to Macedonian agriculture.
The models main finding suggests that the proposed drip irrigation program should focus on combined
dairy farms producing their own feed. The rationale behind this conclusion is that through support of such
combined farms, higher added value in the agriculture sector is feasible in comparison to focusing solely
on corn-producing farmers. Furthermore, supporting this type of vertical integration of fodder and milk
production, would considerably contribute to higher milk production, increased supply of raw milk from local
producers, condensed milk import substitution, increased dairy processing production capacity, improved
competitiveness of domestic production in comparison to imported milk, and job creation potential at the
farm and industry level.
The previously presented cost-benefit analysis was conducted according to the above mentioned concept
of supporting combined farms. The focus was on the pre-selected 5 categories of combined farms based
on their size and productivity, from 3 to 50 cattle (Table 5.1). The aim was to provide the logic behind the
distribution of the financial support for the targeted total land of 7,000 ha, in turn chosen as a target based
on the corn import substitution potential a land plot of this size possesses through increased output. A land
total of 7,000 ha represents approximately 24% of the total land under corn (29,198 ha - SSO 2012); if drip
irrigation is installed on this land, the incremental increase in corn production would provide the opportunity
to substitute 97% of total corn imports (average of 62,700 tons for 2011/2012). Furthermore, if the total
harvested area under corn remains the same as in 2012 (29,180 ha), the same target hectares of 7,000 with
an average yield of 13,000 kg/ha would cause the average country yield to grow to approx. 6,400 kg/ha,
raising the national average by 48% from the current 4,325 kg/ha and reaching the European average of
6,658 kg/ha (Figure 5.1).
39
Figure 5.1 Increase in RM average yield due to drip irrigation
Yield (kg/Ha)
0
18
13,
000,000
91 ,
00
000
22,
Target hectares
5
32
4,
7,0
Production
,928,500
5
9
2012
Remaining hectares
Another important aspect of the model is that smaller size of farms (fewer than 3 cattle) and large farms
(larger than 50 cattle) are excluded from the model. The final analysis showed that, the first category of
combined farms (3-5 cattle) has the lowest NPV per hectare and therefore is the least economically feasible.
The results showed that the NPV of the investment increased in the bigger size of farms, as a result of higher
level of productivity in the farms as an influence of the economies of scale, experience, and better position
on the wholesale market. With this in mind, the distribution of the land that will be financially supported for
installation of drip irrigation is 10% for the second category of combined farms, 20% for the following two
categories of farms, and 25% for the last category. The total number of farms included in the total target
land is 462 farms; the average number of hectares per farm that will be financially supported is 15.2 ha.
40
Table 5.1 Recommended distribution of government financial support
DISTRIBUTION OF FINANCIAL SUPPORT
Unit
Government investment
EUR
Structure of target farmers
per ha
17.500.000
100%
Target ha
2.500
Corn
7.000
Possible import substitution
60.725
62.700
96,8%
Corn growers
0%
100%
7.000
0%
10%
20%
20%
25%
10%
Structure of combined farms
0%
19%
41%
19%
21%
100%
# of hectares per size of group
1.305
2.845
1.364
1.486
7.000
# cumulative hectares
1.305
4.149
5.514
7.000
# of farmers/farms per size of group
162
190
60
50
462
Average # of hectares per farm
8,1
15,0
22,7
29,5
15,2
Average return per ha (NPV/ha)
Corn growers
EUR/ha
EUR/ha
EUR
>35
> 5 10
5.879
>35
> 10 20
> 5 10
> 20 30
Size - # of cattle per farm
> 10 20
> 30 50
> 20 30
> 30 50
585
819
1.168
1.783
3.378
1.068.569
3.321.583
2.432.473
5.020.036
Dairy industy
EUR/ha
7.355
EUR/ha
3.530
EUR/ha
2.030
5.2 Estimated Value-Adding Potential

The macro effects calculated based on primary production of corn by corn growers alone, and primary
production of corn and milk by combined producers are mutually exclusive. Taking this into consideration,
the economic impact is multiplied and transferred along the dairy value chain to the retailers, only for the
targeted hectares under the combined farms, implying a strong recommendation for financial support for
such types of farmers.
5.2.1
Primary Corn Production and Import Substitution Potential
The macro effects and the import substitution potential for corn are calculated based on the following inputs:
`` implementation of drip irrigation systems on 7,000 ha of land, explained in more detail in section 5.1, and
`` incremental benefits per hectare of land for corn from the cost-benefit analysis of primary producers of
corn (see section 4.1.2)
41
The simple multiplication of the two inputs provides the expected economic impact in the sector for primary
production of corn (Table 5.2).
Table 5.2 Macro level economic impact of primary corn production with drip
PRIMARY CORN PRODUCTION

Targeted hectares
UNIT
ha
MACRO EFFECTS
7,000
Required investment for drip
EUR
17,500,000
Incremental increase in corn production
kg/ha
8,675
tons
60,725
Total benefit
EUR
58,651,196
Net present value (NPV) @ 10%
EUR
41,151,196
Internal rate of return (IRR)
66.9%
Benefit-Cost Ratio (BCR)
3.35
yrs
1.49
2.35
Payback period
ROI multiple
The net added value to the farmers is expressed through the NPV with a discount rate of 10% and it is over
41 million EUR over a 7 year time horizon, for a total investment of 17.5 million EUR, with a BCR of 3.35, a
payback period of 1.5 years, and over 2.3 times the coverage of the investment with the NPV (ROI multiple).
The economic impact can alternatively be expressed in the form of import substitution. The last available
data for corn import from the State Statistical Office of Macedonia (2011: 62,568 tons; and 2012: 62,832 tons)
indicates an average import of 62,700 tons. Thus, the incremental increase in corn production of 60,725 tons
takes up almost the entire imported quantity, estimating the potential import substitution given competitive
prices of domestic corn. With an average price of 11.4 MKD/kg, the entire value of the import substitution can
be estimated at approximately 11.3 million EUR.
5.2.2
Primary Milk Production and Import Substitution Potential
The incremental benefits in the primary milk production sector are calculated based on the following inputs:
`` implementation of drip irrigation systems on approx. 7,000 ha of land, targeted based on a pre-determined
structure of farms by size, (see section 5.1),
`` the net increase in milk production based on the incremental increase in number of milk cows as a result
of the increased yields and corn production (see section 4.1.5), and
`` the same average yield of milk per cow16 as the micro models explained in the cost-benefit analysis (see
section 4.1.5).
16 Although potential for increase in yields exists, there is insufficient data to back that claim at the time being
42
Table 5.3 Macro level economic impact of combined milk and corn production with drip
MACRO LEVEL
Net increase in # of cows

Average yield per cow
Net increase in litres milk
>35
> 5 10
> 10 20
> 20 30
> 30 50
TOTAL Matched
2.750
5.879
3.071
4.080
15.780
4.825
4.825
4.825
4.825
4.825
4.825
13.268.214
28.364.486
14.815.154
19.683.910
76.131.763
Average wholesale price of milk
MKD/l
19,68
19,68
19,68
19,68
19,68
Net increase in revenues
MKD
261.118.447
558.213.092
291.562.221
387.379.343
1.498.273.104
Net increase in revenues
EUR
4.245.828
9.076.636
4.740.849
6.298.851
24.362.164
585
819
1.168
1.783
3.378
1.068.569
3.321.583
2.432.473
5.020.036
Average INCREMENTAL NPV per

hectare
INCREMENTAL NPV per hectare (ALL
HECTARES)
EUR/ha
EUR
11.842.662
Source: Internally developed cost-benefit modell
The net added value to the combined farmers is expressed through the NPV with a discount rate of 10% and it
is approximately 11.8 million EUR over a 7 year time horizon, for the same total investment of approximately
17.5 million EUR, with a BCR of 1.68, a payback period of 3.5 years, and a 68% coverage of the investment
with the NPV (ROI multiple) (Table 5.3).
This implies that the added value for the combined farmers is lower than the added value for the corn
growers alone; yet, another factor must be considered:, the additional investment requirements besides the
drip irrigation system. The model foresees a sizeable increase in the number of cows per farm (see Table 5.3:
Main assumptions and inputs to dairy farmer model) and an additional investment of 2,000 EUR per cow,
that ultimately results in increased milk production, and the potential to multiply the benefits up the dairy
value chain.
Additional benefits arise in the form of import substitution of condensed milk. Of the total increase in milk
production of approximately 70,041 tons, 92% will enter the dairy processing industry; the remaining 8%
(6,091 tons), would be intended for import substitution of condensed milk (an increase of approximately 14%
over the quantity imported in 2013). The latest data from the SSO indicate that 2,662 tons of condensed milk
was imported in 2013; with a conversion factor 2, this is approximately 5,234 tons of raw milk.
5.2.3
Dairy Processing Industry, Wholesale and Retail Effects
As mentioned in the previous section, the total incremental increase in milk that enters the dairy processing
industry amounts to 70,041 tons, which is a 60% increase in total milk production compared to 2013 (SSO:
182,783 tons). The estimation of the economic impact of the additional milk entering the dairy processing
industry is based on the following inputs and calculations:
`` The total production of dairy products in 2013 in tons (79,890 tons, SSO);
`` Conversion of the total production of dairy products, from tons to liters of milk used for the production
of the same quantities, and establishing the structure by which the increase in milk would be distributed
(182,783,455 liters);
`` Distributing the milk into the different finished dairy product categories and converting the liters back to
tones of additional output of the entire dairy sector (30,613 tons additional output of the industry);
`` Applying the average producer market prices to the calculated quantities of finished product and
estimating the total increase in the output of the dairy processing industry (38.4 million EUR incremental
output);
43
Table 5.4 summarizes the impact on the incremental dairy processing output, induced by the drip project,
out of which the value added for the dairy processing industry, wholesale and retail of dairy products was
derived, applying estimated gross value added margins based on data from the SSO and prior industry
knowledge of the wider team.
Table 5.4 Macro level economic impact on dairy processing industry, 2013
Milk products, 2013
Conversion
factors
tons
Milk, pasteurized
liters
Increase
in tons
MKD/kg
Increase in
value
EUR/ton
6.556
1,00
6.556.000
3,6%
2.512
35,0
569
1.429.712
26.583
1,00
26.583.000
14,5%
10.186
40,0
650
6.625.302
Soft cheese
7.582
6,00
45.492.000
24,9%
2.905
200,0
3.252
9.448.340
Hard cheese
3.895
11,00
42.845.000
23,4%
1.493
300,0
4.878
7.280.655
Cream
1.553
1,00
1.553.000
0,8%
595
200,0
3.252
1.935.277
31.679
1,50
47.518.500
26,0%
12.139
50,0
813
9.869.228
189
20,00
3.780.000
2,1%
72
500,0
8.130
588.808
1.647
5,00
8.235.000
4,5%
631
100,0
1.626
1.026.208
168
0,20
33.695
0,0%
65
200,0
3.252
209.943
37
5,00
187.260
0,1%
14
175,0
2.846
40.837
79.890
2,29
182.783.455
100,0%
Milk, sterilized
Curdled milk and yoghurt

Butter
Fresh cheese (non-fermented)
Ice cream
Dairy spreads and other
Total
30.613
38.454.310
Total milk import equivalent
63.023.013
Total milk processed in dairies
119.760.441
Source: SSO, Internally developed cost-benefit model 2014
The total value added on each level for the dairy industry is summarized in Table 5.5 presented below. The
added value from the dairy processing industry takes up 57% of the total value added of the dairy sector, the
wholesale another 27%, and retail the remaining 16%.
Table 5.5 Value added for the dairy sector 1 year
INCREMENTAL OUTPUT AND VALUE ADDED - DAIRY

Dairy industry
OUTPUT
VALUE ADDED
38,454,310
25.0%
9,613,577
1.20
46,145,172
10.0%
4,614,517
1.15
53,066,948
5.0%
2,653,347
137,666,429
16,881,442
TOTAL DAIRY SECTOR
Source: Internally developed cost-benefit modell
The added value presented above refers to only one year of increased output; expecting the same added
value over the entire 7 year time horizon, the total net added value has been calculated and expressed
through the NPV for each of the three parts of the dairy sector. The results are presented in Table 5.6.
44
Table 5.6 Value added for the dairy sector total
NET PRESENT VALUE - DAIRY SECTOR (NPV)
EUR
EUR per ha
Dairy industry
51,483,214
7,355
24,711,943
3,530
14,209,367
2,030
90,404,523
12,915
TOTAL DAIRY SECTOR - NPV
The total value added was also calculated on a per hectare basis so that the model provides flexibility and
can be calculated for different levels of investment and hectares under drip irrigation.
5.3 Water Savings and Avoided Investments in Irrigation Systems

One of the major benefits shared by both model approaches to economic impact assessment, i.e. the corn
only production vs. the dairy value chain model, is the water savings potential through avoided capital
expenditures necessary in other irrigation techniques. The impact of drip irrigation on water savings was
calculated based on the following inputs:
`` Current average water consumption for corn irrigation in m3/ha (3,750 m3/ha)17;
`` Water consumption for corn irrigation with drip irrigation in m3/ha (2,750 m3/ha), a 27% decrease
compared to traditional irrigation methods (sprinklers, linear systems, typhoons);
`` Translate the additional available water into additional hectares of land that could be irrigated (3.75 ha);
`` Calculate the additional hectares under irrigation based on the target hectares for drip irrigation (1,867
ha = 7,000/3.75 ha);
`` Estimate the avoided capital costs for irrigation due to the water savings with the drip irrigation system
implementation on the 7,000 ha (8,400,000 EUR=4,500 EUR/ha x 1,867 ha).
Table 5.7 Water savings impact from drip irrigation
Calculation of water savings
Average
Min
Max
Current water consumption
m /ha
3,750
3,500
4,000
Water consumption with DRIP
m /ha
2,750
2,500
3,000
-26.7%
Required # hectares per additional available water
3.75
Target hectares for drip investment
ha
7,000
Additional hectares under irrigation
ha
1,867
EUR/ha
4,500
8,400,000
Specific capital cost per hectare

Avoided capital costs for irrigation
3
3
EUR
Source: Internally developed cost-benefit model 2014
17 Source: Faculty of Agricultural Sciences and Food (FASF) 2014
45
No matter which approach is implemented, the benefits from the water savings are the same at 8.4 million
EUR for the invested 17.5 million EUR in drip irrigation for approximately 7,000 ha. In other words, the
investment in drip is expected to provide water for an additional 1,867 hectares of land that would otherwise
require capital expenditures of approximately 8.4 million EUR (Table 5.7).
5.4 The Aggregate Monetary Value of Economic Impact to the National Economy
The developed model offered the possibility of assessing the monetary value of the proposed program
aggregate economic impact by changing the structure of corn growers and combined farmers that would be
eligible to receive Government funding for the entire 7,000 hectares. The following scenarios were considered
to assess the impact of the change in the structure (Table 5.8):
1) 100% combined farmers 0% corn growers;
4) 25% combined farmers 75% corn growers; and
5) 0% combined farmers 100% corn growers.
Table 5.8 Comparative overview of economic impact
100%
Combined
50%
Combined
25%
Combined
112.873.188
97.599.190
82.325.193
67.051.196
75% Combined
0% Combined
Total benefit (economic impact)
EUR
128.147.185
Net benefit (economic impact cost)

or NPV
EUR
110.647.185
100%
95.373.188
80.099.190
64.825.193
49.551.196
Corn growers
EUR
0%
10.287.799
20.575.598
30.863.397
41.151.196
EUR
11.842.662
11%
8.881.996
5.921.331
2.960.665
Dairy industry
EUR
51.483.214
47%
38.612.410
25.741.607
12.870.803
EUR
24.711.943
22%
18.533.957
12.355.971
6.177.986
EUR
14.209.367
13%
10.657.025
7.104.683
3.552.342
EUR
8.400.000
8%
8.400.000
8.400.000
8.400.000
8.400.000
25% Corn
Only
50% Corn
Only
75% Corn
Only
100% Corn
Only
ROI Multiple
6,3
5,4
4,6
3,7
2,8
7,3
6,4
5,6
4,7
3,8
The total net benefit ( 110 million EUR), calculated as present value of all benefits over 7-year period ( 128
million Euro) minus the original investment (17.5 million Euro), is highest under the 100% combined dairy
farmers/corn growers scenario. This indicates the full potential of economic return of 7.3 Euro for each 1 Euro
(under high impact scenario) invested in the DIGC Program, given the program is fully implemented (7,000
ha) over the 7-year horizon. This is an impressive economic return and demonstrates the outstanding use of
the national economy resources.
46
If one analyzes the distribution of the net economic benefits across the various players within the dairy value
chain, the major portion (almost half) belongs to the dairy processing segment, representing the core of the
analyzed supply chain. Value added within the final trading segment of the respective supply chain is also
significant, representing more than one third of the project resulted net economic impacts. Avoided capital
costs due to water savings to be achieved by the DICG Program are also very important to the national
economy.
5.4.1
Scenario Analysis
Taking into consideration the uncertainty of future events as well as the complexity of the assumptions used
in establishing the economic impact model, several alternatives were developed using scenario analysis, in
order to determine a wider scope of possible future outcomes and minimize such uncertainties. Furthermore,
the scenario analysis should provide the basis for improved decision-making by allowing consideration of
several possible outcomes and their implications on the end results, in this case the economic impact.
Since the 100% combined-0% corn growers scenario was the highest net benefit scenario (Table 5.8) it
ended up being used as a comparison basis for the additional three scenarios developed based on different
assumptions concerning corn grain and silage yields. The scenarios are as follows:
1. Scenario 1 LOW Impact: Yields growth from base to - CORN 7,000, SILAGE 40,000;
2. Scenario 2 MEDIUM Impact: Yields growth from base to - CORN 10,000, SILAGE 55,000;
3. Scenario 3 HIGH Impact: Yields growth from base to - CORN 13,000, SILAGE 70,000.
The base corn and silage yields remain the same, at 4,325 kg/ha for corn grain, and 23,121 kg/ha for corn
silage for all three scenarios considered, whereas the changes are in the yields achieved with the application
of drip irrigation and fertigation systems. Table 5.9 below summarizes the different economic impacts
achieved under every scenario, based on the difference in the key driver corn production yield growth i.e.
incremental corn yields.
Table 5.9 Comparison of economic impact for alternative scenarios
% change in net benefit
0,0%
84,1%
172,9%
SCENARIO 1
SCENARIO 2
SCENARIO 3
Total benefit (economic impact)
EUR
58.048.414
92.131.485
128.147.185
Net benefit (economic impact cost) or NPV
EUR
40.548.414
74.631.485
110.647.185
Corn growers
EUR
EUR
3.915.708
7.628.607
11.842.662
Dairy industry
EUR
16.077.851
33.372.937
51.483.214
EUR
7.717.368
16.019.010
24.711.943
EUR
4.437.487
9.210.931
14.209.367
EUR
8.400.000
8.400.000
8.400.000
ROI Multiple
2,3
4,3
6,3
3,3
5,3
7,3
47
As can be seen from the presented results of the scenario analysis, each scenario considered on a standalone basis, even the low impact scenario, implies a very strong economic feasibility of the proposed program
for the Government i.e. the Program for Drip Irrigation for Growing Corn (DIGC).
5.5 Overview of Other Potential Economic Benefits

The economic cost-benefit model that assesses the monetary value of gross value added across the entire
dairy value chain, and as an aggregate value derived from each segment of the chain, i.e. farms, diaries and
traders. These monetary values do incorporate the monetary value of the incremental employment resulting
from the DICG implementation. The same is valid for the monetary value of the corn import substitution.
Adding those values to the overall economic benefits to the model would be double accounting.
However, we believe it is important to summarize, in rather physical or practical terms, the aggregate effect
this program could have on the Macedonia trade balance and employment:
1. Trade Balance Effects. If implemented, the DICP could almost substitute the entire volume of
corn imported in Macedonia in recent years. The last available data for corn import from the State
Statistical Office of RM (2011 - 62,568 and 2012 - 62,832 tons) indicates an average import of 62,700
tons. Thus, the incremental increase in corn production of 60,725 tons takes up almost 97% of the
total import, estimating the potential import substitution given competitive prices of domestic corn.
With an average price of 11.4 MKD/kg, the entire value of the import substitution can be estimated
at approx. 11.3 million EUR.
2. Employment impact. The potential for incremental employment as a direct effect form implementation
of the proposed DICG Program is impressive, and amounts to 2.800 in total. Highest employment
potential belongs to the farming sector, with 1,600 new employees due to significant increase in
total dairy herd (approx. 16,000 or 12 %) this program could provoke. The new employment potential
of the diary sector is also significant, amounting to 700 new employees in total. Finally, within the
trading sector (both wholesale and retail) the marginal employment potential in high impact scenario
is up to 500 new jobs.
48
49
MAIN
CONCLUSIONS
(SUMMARY OF ECONOMIC
IMPACT FROM NATIONAL FISCAL
PERSPECTIVE)
50
6 MAIN CONCLUSIONS (SUMMARY OF

ECONOMIC IMPACT FROM NATIONAL FISCAL
PERSPECTIVE)
The main conclusions that can be drawn from the economic impact model refer to the following:
Of the 400,000 ha suitable for irrigation, only 127,800 ha or 32% are equipped for irrigation, whereas
only 79,638 ha or 20% are actually irrigated. Furthermore, irrigation water demand is high and makes
agriculture the top water consuming sector in Macedonia with 43% of total freshwater withdrawals;
65% of total corn consumption in 2012 was covered by domestic production, with the remaining 35%
was supplied by import. The significant role import plays in satisfying the annual consumption of corn
in the country makes clear the potential effects a significant increase in corn yields can have on the
domestic corn market, i.e. import substitution with higher quality domestic corn and/or increased
domestic production that would ultimately result in increased milk production and dairy products.
The total value of the import substitution can be estimated at 11.3 million EUR with an average
import price of 11.4 MKD/kg;
Concerning corn yields, available data from the FAO database puts Macedonia at the very bottom
of the group of 10 Wider Balkan Region countries with average yields of 4.3 tons/ha, below both the
world average of 5.2 tons/ha and the European average of over 6.6 tons/ha;
Drip irrigation provides much higher yields. The GMCI achieved an average of 11.4 tons/ha in the
first year for the initial 2 regions and set a national record of 17 tons/ha of grain and 112 tons/ha of
silage. Besides savings in water (less water by as much as 25 % to 35% when compared to furrow
and sprinkler irrigation), producing better grain quality, lowering labor costs and hours (in comparison
to conventional furrow irrigation), precise application of fertilizers, low operating pressures (in
comparison to centre pivot sprinkler irrigation method), the drip irrigation system for growing corn
has wider implications in the vertical supply chain in the dairy and other corn-reliant industries;
Investing in drip irrigation systems for the combined farms (vertically integrated farms) provides
much higher returns and economic impact to the national economy, due to multiple effects up the
dairy value chain. Although the added value on a macro level from the combined farmers alone is
smaller compared to the added value from the corn growers, the increase in milk production provides
an additional opportunity for replicating the effects of the drip up the dairy value chain, in the dairy
processing industry, through the wholesalers to the retailers as end beneficiaries, making the
combined farms the target for Government financial support;
When defining eligible combined farms to receive Government funding, the economy per different farm
categories should be taken into consideration, establishing the minimum number of heads per farmer
at 5 milk cows, having minimum 5 hectares of arable land or more.
51
POLICY RECOMMENDATIONS
FOR THE IMPLEMENTATION
OF THE PROGRAM FOR DRIP
IRRIGATION FOR GROWING
CORN (DIGC)
52
7 POLICY RECOMMENDATIONS FOR THE

IMPLEMENTATION OF THE PROGRAM FOR
DRIP IRRIGATION FOR GROWING CORN
(DIGC)
Background
The DIGC Program is designed to induce governmental financial support for investments in drip irrigation
for corn production and at the same time to increase awareness among farmers about the importance of
technology of drip irrigation/fertigation in corn production. The measure of financial support of drip irrigation
(based on a sound economic model) will deliver effects on multiple levels in the dairy sector (primary corn
production, production of raw milk, milk processing industry, wholesale and retail industry) with a benefitcost ratio of 7:1.
Target
Financial support should be provided for implementing drip irrigation/fertigation on combined farms.
The fundamental argument behind the reasoning is that through the support of combined farms, the added
value in the dairy sector will be higher than the value added only on corn growing level. (A net present value
(NPV) of 101.2 million EUR compared to 41 million EUR).
Farms with more than 5 heads of cattle per farm and at least 1 plot of 1 hectare planted with corn
should be included with the measure for financial support for investment in drip irrigation. The model
has proven that the NPV and the IRR (internal rate of return) are the least economically feasible in the case
of combined farms with fewer than 5 heads of cattle.
The size of the funds should have the target to financially support investments for drip irrigation for
7,000 hectares of land under corn. The proposed Program (based on the economic model) shows the
effects of financial support on the target of 7,000 hectares which represent approximately 24% of the total
land currently planted with corn. If drip irrigation/fertigation systems are installed, the incremental increase
in corn production will provide the opportunity to substitute nearly all of the corn import.
Implementing body: National Extension Agency, supported by the Federation of Farmers in the Republic of
Macedonia
Planning, monitoring and quality assurance: Small Business Expansion Project
Legal basis: The program is in accordance with article 11 of the NEA Statute and article 2 of the Law for the
Establishment of the National Extension Agency, as well as the Law on Agriculture and Rural Development
articles 73 and 93, 101 paragraphs (1)(2) and (3).
53
Measures for the implementation of the DIGC Program

Measure 1 (2015): Introduction of a drip irrigation pilot program that is to be carried out in 4 regions (Skopje,
Eastern, Southeastern and Southwestern), covering 20 hectares of land planted with corn, per region, in order
to even out the efforts made by the SBEP so far. 1 Measure 1 is estimated at 475,000.00 EUR; 200,000.00 for
procurement of drip irrigation systems, 15,000 for GPS equipment, training for NEA advisors that will implement
the measure educational workshops for farmers and 260,000.00 EUR for a government national campaign
promoting the DIGC (advertisement on National and local TV stations, billboards, posters and fliers that are to be
disseminated among the farming community)18
Target: 80 combined farms19
Measure 2 (2016): Increase of the amount for drip irrigation for corn in the Program for Financial Support of Rural
Development (PFSRD) and widening it with drip irrigation for sunflower20 to 300,000 EUR (totaling 600,000 EUR in
combination with farmer co-financing).
Target: 300 hectares (combined farms)
Measure 3 (2017-2021): Introduction of a 5 year plan (as part of the 7 year plan envisaged with the economic
model on which the Paper bases its recommendations) that will gradually increase the amounts allocated in the
PFSRD for drip irrigation for corn/sunflower and will reach the area targeted with the White Paper21.
Target: 6,500 hectares (combined farms)
Scenario for the Implementation of the Government Program for Drip Irrigation for
Growing Corn (DIGC)
Year 2015
`` 200,000.00 EUR to be invested in 80 hectares, at 2,500 EUR (for a first hectare) in 4 regions; 20
hectares per region a measure that is in line with the Governments program for establishing
demonstrative sites for growing corn (with a view to diminish the countrys reliance on import of corn)
`` 15,000.00 EUR for operational costs (for GPS devices, gas and training for the designated NEA advisors
as well as representatives from the other four centers for development of the planning regions (Skopje,
East, Southeastern, Southwestern) that have not yet been covered by SBEP project activities
`` 260,000.00 EUR National Media Campaign (production of a commercial and airtime on regional
and national TV; billboards, fliers/posters and a Caravan. The Campaign is to take place after the
2015 harvest season i.e. October when SBEP will have laid additional 160 hectares in four regions
(Polog, Pelagonija, Northeastern and Vardar) and the NEA in cooperation with SBEP 80 hectares,
or a total of 240 hectares. The Campaign will inform farmers for the possibility to apply for the
National Program for Rural Development (NPRD) in the upcoming 2016 corn and sunflower season.
Year 2016
`` 300,000.00 EUR to be placed in the NPRD which, in combination with the 50% participation, will equal
600,000.00 EUR, or 300 hectares (it is expected that the average price for a drip system/hectare will
be drop to 2,000 EUR because 1. not all investments will be for a first hectare so the price of 2,500
EUR will not apply and 2. due to large procurement lower prices for the system can be acquired)
`` The combined efforts between the SBEP (seasons 2013-2015) and the NEA (seasons 2015-2016)
are expected to result with a total of 731 hectares under drip irrigation for corn.
The amounts and the cost justification are listed below in the policy recommendations
Combined farms means both dairy and fodder farms
Sunflower should also be included in the program for several reasons: crop rotation with corn, high yields and
improved quality, the drip irrigation system for corn is the same for sunflower and has great potential to also
substitute imports and even induce exports
18
19
20
21 Table 7.1
54
SBEP 40 Ha (2013) +
SBEP 80 Ha (2014)
SBEP farmers extra drip

71 Ha (2013-2014)
Total: 731 Ha
SBEP 160 Ha (2015)
NEA 80 Ha (2015)
NPRD 300 Ha (2016)
Table 7.1 DIGC Program Proposed Monetary Allocations
Year
Amount (50/50
combination) EUR
Hectares
Previous SBEP/NEA effortshectares (2013-2016)
Total (Hectares)
2017
1,200,000
600
731
1331
2018
2,400,000
1200
1200
2019
2,400,000
1200
1200
2020
3,500,000
1750
1750
2021
3,500,000
1750
1750
13,000,000
6500
7231
The introduction and implementation of the Drip Irrigation for Growing Corn Program can have a significant
effect not only on the dairy sub-sector but on the Macedonian economy in general. The numbers that are
provided by the metrics applied in the economic impact assessment are very convincing, with each of the
three scenarios provided with this White Paper. If the High Impact Scenario materializes, as is expected due
to the significant increases in yields and the subsequent investments along the entire value chain, 101.2
million Euros Net Present Value over a seven year period will be added to the dairy sector and 8.4 million
Euros in capital investments for irrigation infrastructure will be avoided. In addition, other externalities that
will be made possible with the implementation of the DIGC Program such as annual import substitution
of corn worth 11.3 million Euros and the possibility of the creation of new 2,800 jobs along the entire
value chain. All of the above makes the DIGC Program a key government policy for the strengthening and
revival of the Macedonian Dairy Sector. The program is also expected to have a knock-on effect on other
industries such as the poultry and meat sectors, and not least on the sunflower industry with the potential
to substitute 34 million worth of imports of crude sunflower oil.
DRIP IRRIGATED SUNFLOWER

DRIP IRRIGATED SUNFLOWER
NON-IRRIGATATED SUNFLOWER
55
56
This p ublication is made possible with support from the American people
delivered through the United States Agency for International Development
(USAID). The contents are the sole responsibility of the authors and do not
necessarily reflect the views of USAID or the United States Government.
CIP -
. ,
633.15:631.674.6(497.7)
631.674.6:330.341(497.7)
WHITE paper on agribusiness innovation in Macedonia / [
, ]. - :
, 2014. - 56 . : . ;
21
ISBN 978-608-65640-5-6
) - - - )
- - -
COBISS.MK-ID 97070346

White Paper On Agribusiness Innovation in Macedonia

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

White Paper On Agribusiness Innovation in Macedonia

Uploaded by

Copyright:

Available Formats

WHITE PAPER ON

For the Publisher:

ITS BETTER TO FARM ONE

Calculate aggregate economic

1.2 Current State of Irrigation and Corn Cultivation in Macedonia

Yield per ha (with/without drip irrigation)

SBEP 2013 drip farmers

1.4 Assessment of Economic Impact from Program

Given the significant results and potential for increased

Therefore, the economic cost-benefit model presented is

Combined farms (Dairy + Fodder)

1.5 Policy Recommendations for the Implementation

Farms with more than 5 heads of cattle per farm

Amount (50/50 combination)

2.2 White Paper Outcomes and Preparation Methodology

STATE OF PLAY AND

3 STATE OF PLAY AND SYSTEMIC SOLUTION

Current State of Irrigation in Macedonia

Figure 3.1 Structure of total land area

Source: Irrigation Systems in the Republic

5 CIA 2011 Factbook

Figure 3.2 Types of irrigation

Figure 3.3 Area under irrigation

However, two other sources of data indicate a rather

Figure 3.4 Annual freshwater

Since the 1980s, irrigated area in the country has

According to the same study, irrigation water demand is

Current State of Corn Production Performance in Macedonia

Figure 3.5 Area under corn, annual production and yields

3.2 Corn Production Yields Comparison

Figure 3.7 Corn Yields Benchmarks (kg/ha)

Bosnia & Herzegovina

2000 4000 6000 8000 10000 12000

3.3 The Drip Irrigation Technology and Corn Yields Potential

Figure 3.8 An example of a drip irrigation system layout10

10 Source: Netafim irrigation systems - NetaKit

Figure 3.9 Yield per ha (with and without drip irrigation)

SBEP 2013 drip farmers

kg/ha yield with conventional irrigation

kg/ha yield increase with drip irrigation

Table 3.1 Water consumption per hectare

Stage 1 - Germination and emergence

Stage 2 Stalk rapid growth phase

Stage 3 Corn tasseling and silking

Stage 4 - Pollination and fertilization

Phase of corn production

Source: Faculty of Agricultural

4 ASSESSMENT OF THE ECONOMIC IMPACT

Dairy processing companies represent the core of this

Value is added at each stage of this food chain. Even though

Dairy processors convert the raw milk in various final

Figure 4.1 Simplified model of dairy value chain in Macedonia

Therefore, the economic cost-benefit model presented

Table 4.1 Summary of metrics and present value of benefits

Segment of the Value Chain

Key Value Drivers

Economic Benefit Metrics

`` Increased corn yields

`` Net Present Value (NPV) of

`` Net Present Value (NPV) of

`` Increased milk production

`` NPV of value added of the dairy

`` NPV of value added of the trading