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L a ' Kh IN? . . u A ‘k I \ alwa '— ‘W This is to certify that the dissertation entitled ECONOMICS OF NEPALESE RICE MILLS presented by Ganesh Man Singh Adhikary has been accepted towards fulfillment of the requirements for Ph.D. degeehl AgricuIturaI Economics 1- profess mm mya,wm mm“ M. ,. . . 2 m - . ...- 0.12771 ECONOMICS OF NEPALESE RICE MILLS BY Ganesh Man Singh Adhikary A DISSERTATION Submitted to Michigan State University in partial fulfilment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics 1987 ABSTRACT ECONOMICS OF NEPALESE RICE MILLS BY Ganesh Man Singh Adhikary In 1981, 90 per cent of the rice milling capacity in Nepal was in the Tarai. Also, small mills of less than one ton per hour capacity, accounted for 81 per cent of the milling capacity. These mills were scattered all over in the Tarai which is the main rice growing area. The large mills were located mainly in the Eastern Tarai and served internal urban and export markets. The literature on Nepal's rice mills lacked information on size economies although bigger rice mills were often recommended. This study sought to fill the knowledge gap on the size economies of rice mills from both the financial and economic perspectives. Completed survey records were obtained from 79 mills or. 87.7 per cent of the random sample selected in two stages from two representative districts in the Central Tarai. The findings indicated that the financial and economic cost of milling a ton of paddy declined as the size of the electrical mill increased. However, this is a tentative conclusion because the sample sizes for the largest two size groups of electrical mills were small. The cost of milling with the diesel mills seemed size neutral because the total cost as well as the amounts milled by different size groups varied proportionately. The relative economic cost of milling by different size groups of electrical mills changed little with reasonable alternative values for the economic parameters. Removal of milled grain collection by the miller in addition to the cash milling charge (the lappy) would push all size groups of diesel mills and the smallest group of electrical mills into loss. Also, with the current rice recovery rate of 55 per cent, a change in which the miller mills 25 per cent of paddy on his own account would be profitable only if the byproduct could be sold. However, if the rice recovery rate were 60 per cent, the millers could make substantial profit from milling 25 per cent of paddy on their own 'account even if lappy were abolished and the byproduct was not sold. Encouraging bigger electrical mills for custom milling entails a trade off between lower milling cost and a higher mill user's total cost due to higher transportation costs of the users at greater distances. In areas with no electricity. small diesel mills were found to be the most economic. Policies to improve the performance of rice milling include: support for importing and testing new rice milling machines, making finance more accessible to small millers, providing ,incentives for the adoption of better technology, and encouraging milling on the miller's own account. Future studies need to clarify the linkage between changes in the rice marketing system and the technical and economic potential of newer small rice milling machines, as well as the effects of the byproduct market on rice milling business. ACKNOWLEDGMENTS Many individuals and organizations have made it possible for me to complete this dissertation. It is impossible to specify all of them. The Institute of Agriculture and Animal Science (IAAS), The Midwest Universities' Consortium for International Activities (MUCIA), and the United States Agency for International Development (USAID) made almost all of the funding available for completing the course work. The Winrock International footed a major part of the fieldwork expenses. Finally, the IAAS / Utah State University / USAID Project enabled me to return, to the Michigan State University for completing my doctoral studies. I am deeply thankful to all of these organizations and related officials. The gratitude I owe to Dr. Robert D. Stevens, Professor, Department of Agricultural Economics, Michigan State University is beyond my power of expression in any language. He served as my Dissertation Director, inspirer and affectionate guide. I am highly grateful to Dr. Vernon L. Sorenson, Professor. Department of Agricultural Economics, Michigan State University for serving in my committee and for his extremely valuable comments on this study. I thank Dr. Darrell F. Fienup, Professor of Agricultural Economics, Michigan State University for serving as my Major Professor during course work. Coments from Dr. Michael T. Weber and Dr. James D. Shaffer, both Professors of Agricultural Economics at Michigan State University and members of my committee have been very helpful in shaping this study. I am thankful to Mr. Bindeswori P. Sinha, the previous Dean of the IAAS, Rampur for his extremely helpful role in getting this research initiated. Later, Dr. Kailash N. Pyakuryal, Dean. Institute of Agriculture and Animal Science, provided a strong administrative support to enable me complete the degree. Without his support this degree would have been an unfulfilled dream. Thanks are due to all of the government officials contacted during the fieldwork. Cooperation of the respondant millers and users of the milling services of Rautashat and Dhanusa is commendable. Also, sincere hard work put in by the enumerators has enabled me to complete the work. Among the enumerators Naresh Pradhan and Suryavinod Pokharel helped in data coding. A number of friends have directly or indirectly helped me in the process of obtaining this long cherished academic objective, and I am thankful to all of them. Finally, my wife Manju suffered more than any one else during my busy days of graduate work. She typed all of my class papers and suplemented the income needed for subsistence of the family while in Michigan. Also, she helped tabulate the survey data. Her understanding and affection has been extremely valuable for me. I thank her for all of this and for her love. Item TABLE OF CONTENTS List of Tables List of Figures List of Maps Definition of Terms CHAPTER ONE Introduction 1.1 Problem Statement 1.2 Research Objectives 1.3 Organization of the Dissertation Summary CHAPTER TWO Rice Marketing in Nepal M (II [\2 U! NNNNN OthONv-t 0) Trend in Paddy Production Growth in Internal Demand Growth in Exports Changes in the Real Price of Rice Marketing Channels and Marketing of Paddy and Rice .1 Current Problems in Rice Marketing .2 Methods of Rice Milling Further Review of Studies on Rice Milling in Nepal .1 Machine Milling of Paddy in Terai Current Problems, Policies. and Proposals in Rice Milling Summary vi Page xiv xv xvi p—A 01:5me 9 10 12 13 15 15 16 17 19 21 CHAPTER THREE Research (00360000000 030115me Methods and Sampling Data Need Selection of the Study Area Sampling Procedure Execution of the Fieldwork The Field Problems in Brief Data organization Summary CHAPTER FOUR Rice Mills in the Terai 4. .2 .2. 4 4 lb N in. N thbhbb CDOJODNNNN 1 General Description General Perspective on Milling Operations 1 Role of Rice Milling in the Entreprenuers' Businesses 2 Sizes and Types of Mills 3 Type of Ownership and Operation of the Mills 4 Mill Structures 5 Equipment Combinations 6 Energy Sources 7 Sharing of Power Current Rice Milling .1 Extent of Custom Rice Milling .2 Recent Changes in the Extent of Custom Milling .3 Expected Changes in Rice Milling Technology Summary CHAPTER FIVE Financial and Economic Analyses of Rice Mills 0101010101010101010’1 NNNNNNNNNI—t cosiaacnboomp Allocation of Joint Costs Cost of Resources Used in Rice Milling Cost of Land Used by the Mill Premises Building Costs in Milling Cost of Power Unit Cost of Water Pump Salaries and Wages Taxes Cost of Hullers Cost of Power Unit Spareparts vii 23 23 24 25 32 34 35 36 41 41 42 43 43 44 45 46 47 48 50 51 53 54 56 58 61 66 67 7O 71 72 72 74 75 77 .9 Cost of Buildings Repair .10 Fuel or Energy Bill .11 Miscelleneous Costs .12 Miller's Financial Cost Incurred by Different Mills .13 Quantity of Paddy Milled Miller's Financial Milling Costs Assembly and Distribution Cost .1 Average Haulage Distance for Each Category Mill Miller's Financial Milling Costs Plus Transportation Economic Analysis of Milling Costs .1 General Economic Environment for Rice Milling 2 Cost of Land Engine and Equipment Housing Cost of Machinary and Spareparts Salary and Wage Building Repairs Energy and Fuel Cost Interest on Capital Economic Cost of Milling .10 Economic Transfer Cost .11 Economic Cost of Milling with Transportation Summary 01010101 NNNN UIOIUIOI 1590)“) OI OI (JIOIUIUIOIOIUIOIOIOIUIOI (DQQODOIDOO mmmmmwmmmmmm CHAPTER SIX Sensitivity of Size Economics to Changes in Important Factors Shadow Wage Rate Shadow Interest Rate Shadow Exchange Rate Decrease in the Extent of Custom Milling Elimination of Lappy Increase in Paddy Production Combinations of Factors Summary 03030503070905 QCDUIJBCDNH CHAPTER SEVEN Summary and Conclusion 7.1 Introduction 7.2 Rice Milling in Nepal 7.3 Research Methods and Sampling 7 4 Rice Mills in the Terai viii 78 78 79 80 84 86 88 89 96 97 98 100 100 101 102 103 103 104 104 107 109 110 118 122 124 124 131 132 137 139 141 141 142 142 143 7.5 Financial and Economic Analysis of Rice Mills 7.6 Sensitivity of Milling Cost to Changes in Important Factors 7.7 Policy Implications 7.8 Implication for Future Research BIBLIOGRAPHY Appendix I Enumeration Questionnaire Appendix II In-depth Survey Questionnaire Appendix III Cost Breakdown for Different Building Construction on Average Appendix IV Custom and Sales Tax Effective During the Study Period on Various Construction Items Appendix V Custom Duty and Sales Tax on Power Units, Huller and Spareparts Appendix VI Percentage Cost Breakdown for Building Repairs by Major Cost Catagories Appendix VII Import Content, Custom Duty and Sales Tax on Electricity and Diesel ix 144 145 145 147 149 154 158 172 173 175 176 177 N éArD-ub 0‘pr H H List of Tables Paddy Production by Year for Recent 17 Years Total Production, Net Export, Share of Production Exported and Nepal's Share in World Rice Market National Consumer's Price Indices and Coarse Rice Price Indices Number of Mills and Machine Milling Capacity in Tons Per Hour by Mill Size in the Tarai Part of Each Development Region (1980/81) Paddy Production and Milling Share of Big and Small Mills in the Tarai of Each Region (1980/81) Total Cultivated Physical Area and Irrigation Water Availability in Five Central Tarai Districts Total Number of Rice Mills and the Sampling Frame Incomplete Records and Corresponding Reasons Number of Mills by Category With Completed Records in the First Stage Survey Number of Electric and Diesel Mills by Size and Miller's Income Share in the First Stage Survey Number of Mills Selected for Second Stage Survey by Power Source, Income Share and Horsepower Size Mills by Size Group and Power Source With Completed Second Stage Interview Schedules Number of Mills and Share of Income From Milling in the Entreprenuers' Businesses Prevailling Mill Engine Sizes in the Study Area Ownership and Operation of the Mills Mill Structures in the Study Districts Number of Steel Hullers and Shellers in the Mills Page 17 18 25 27 28 29 30 31 31 43 44 44 45 46 .5; 07 .1 .1 .1 .1 .2 .2 I—J O .10 .11 N 60 pp 01 .16 .17 .18 .19 O H Equipment Combinations With the Rice Mills Average Daily Number of Hours for the Power Source Use by Milling Season Number of Hours for Rice Milling Machine Use by Season Number of Mills and the Kinds of Milling Services Estimation of the Extent of Custom Milling in Rautahat and Dhanusa Extent of Power Unit Use on Rice Milling and Other Grain Milling by Season Freqency Distibution on the Beginings and Endings of Various Milling Seasons Dates and Duration of Various Rice Milling Seasons Derived Weights Used for Allocating Joint Costs to Rice Milling Land Occupied by the Mills in Dhur Gross Value of Farm Production Foregone by Land Area Equal to that Used by Average Mill Total Cost of Producing Paddy and Wheat on an Area Equal to that Occupied by the Mill in a Year Net Profit Foregone from the Land Area Used by the Mill in One Year Average Current Value of Engine and Equipment Housing and Expected Remaining Life Annual Cost on Engine and Equipment Housing Average Current Value and Expected Remaining Life of Power Unit by Horsepower Group Average Current Price and Expected Remaining Life of Water Pumps Salary Expenses by Mill Category During 1984/85 Taxes, Compulsory Donations. and Other Expenses on Average for 1984/85 Current Value and Expectd Remaining Life of Hullers Sparepart Bill for Hullers in 1984/85 Expenses on Power Unit Spareparts During 1984/85 Cost of Buildings Repair During 1984/85 Fuel or Energy Cost Across Mill Catagory for 1984/85 Miscelleneous Expenditure by Mill Category for 1984/85 Miller's Financial Total Annual Rice Milling Cost by Cost Catagory for Various Size Electric Mills xi 47 49 50 51 52 61 63 64 66 67 68 69 69 70 70 71 72 73 75 76 76 77 78 79 79 81. 01 .22 .23 .24 .25 .26 .27 .28 .29 .30 .31 .32 .33 .34 .35 .36 Miller's Financial Total Annual Rice Milling Cost by Cost Catagory for Various Size Diesel Mills . Quantity of Paddy Milled and Revenue Received by Size and Type of Mills Miller's Financial Cost and Return of Rice Milling on Average for 1984/85 Market Area Determination for the Mills by Catagory Share of Paddy and Rice Transported by Various Means To and From the Mill Average Financial Tansport Cost Per Quintal Per Kilometer by Mode Total Financial Assembly and Distribution Cost Consumer's Financial Milling Costs with Transportation Miller's Financial Milling Costs Plus Financial Transportation Annual Economic Cost of Milling by Electric Mills (excludes assembly and distribution) Annual Economic Cost of Milling By Diesel Mills (excludeds assembly and distribution) Economic Cost Per Ton for Rice Milling on Average for 1984/85 (excludes transfer cost) Economic Trasfer Costs Economic Cost of Rice Milling with Transportation for a Ton of Paddy by Mill Catagory Milling Cost Per Ton by Mill Catagory and Perspective Economic Cost of Rice Milling with Transportation for Electric Mills with a Shadow Wage Factor of .6 Economic Cost of Rice Milling with Transportation for Diesel Mills with a Shadow Wage Factor of .6 Economic Cost of Transportation with a Shadow Wage Factor of .8 Economic Cost of Rice Milling with Transportation with a Shadow Interest Rate of 8 Per Cent Per Year Partial Financial Budget for Milling 25 Per Cent of Paddy on Miller's or Trader's Account xii 83 84 87 92 93 94 94 95 96 105 106 107 108 109 111 119 120 121 123 127 Partial Financial Budget for Electric Mills with Milling and Trading Together Partial Financial Budget for Electric Mills Mills With 60 Per Cent Rice Recovery and Milling and Trading Together Effect of Elimination of Lappy on Custom Miller's Financial Size Economies Economic Cost of Rice Milling with Transportation for Electric Mills with 10 and 20 Per Cent Higher Amount of Paddy Milled .10 Economic Cost of Rice Milling with .11 Transportation for Diesel Mills with 10 ,and 20 Per Cent Higher Amount of Paddy Milled Miller's Financial Size Economies of Diesel Mills with 25 Per Cent Milling on Own Account, 60 Per Cent Recovery and Elimination of Lappy xiii 129 134 136 138 Figure 1: Figure 2: Figure 3: List of Figures Marketing Channels for Paddy and Rice in Tarai Miller's Financial Milling Cost Per Ton by Mill Catagories Economic Milling Cost Per Ton by Mill Catagories 113 114 List of Maps Map 1 Map of Nepal Showing the Study Districts 38 Map 2 Mills in Rautahat 39 Map 3 Mills in Dhanusa 40 xv DEFINITION OF TERMS Beaten rice: This is a popular snack of Nepal made from paddy. After soaking paddy in water it is boiled and dry roasted before heating it flat to take the husk off. Consumers and Mill users are interchangably used because they may be both farmers and non farmers. Economic milling cost with transportation: Cost of milling plus cost of transporting paddy to and from the mill adjusted for shadow wage rate. shadow interest rate, shadow exchange rate, custom duty, annual tax, and sale tax. Economic milling cost without transportation: Miller's financial milling cost adjusted for shadow wage, shadow interest rate. shadow exchange rate, custom duty, annual tax and sale tax. Electric millPB in table titles are used to mean electrical mill Custom customer: Person who gets his own paddy milled on milling Charge. Engleberg huller: Uses a solid steel screw conveyor which rotates in a cast iron case and rubs the paddy against steel blades to mill paddy. Haat: A haat is a periodic market organized in the rural areas or the market town centers nun—«12.- Hand pounding: Milling by use of a traditional wooden device in which paddy is put in a wooden container and crushed with a hand operated pounder made of wood. Huller: Old type of machine used to mill paddy. It is fed by a funnel type feeder and delivers all the outputs from the same spout (see Engleberg huller). Husker: This is a machine that takes the bulls off of paddy. Jet polisher: After removing the paddy hulls by the rubber roller sheller or by huller the rice is passed through a jet and this polishes the rice. To obtain desired level of polish rice can be put into the jet polisher for several times. Khapda: A locally made earthen semi—cylinder used for roofing Leg pounding: Traditional method of milling in which the pounding is accomplished by a wooden lever with a pounder. It is repeatedly lifted by the leg muscles and released. Lappy: A certain amount of milled grain taken by the miller in addition to the cash milling charge after milling a custom customer's grain lot. Manual grindstone: A pair of of flat circular stones 10 to 15 inches in diameter and 2 to 4 inches thick used to mill grains for making flour. Markettown Tradeshop: These are the grain traders located in small market towns in the rural areas. Mill user's financial milling cost: Milling charge plus transportation cost. xvii Miller's cost: Miller's cost to mill the paddy. It excludes the transportation cost. Milling on own account: In this case the miller buys paddy, mills it and sells it in the market. Nepal Food Corporation: This is the parastatal corporation responsible for food distribution to the food deficit areas. Oil expellers: Mechanical device used to extract oil from mustsrd or rape seed. Paddy: This term is used to denote the unmilled or rough rice (with hulls) Parboiled rice: The rice obtained from paddy that is soaked in water, bioled and then dried before milling. Besides others this process results in higher rice recovery rate, better keeping quality, and lass brokens on milling. However. parboiled rice commands a lower price in the market place. Plate mill: This is a mechanical device used to make flour out of grains maize, wheat, millet and so on. Polisher: This is a machine used to polish rice after dehusking or hulling. Rubber roller sheller: This is a rice milling device in which paddy is fed betweem two rubber rollers rotating in the same direction but with different speeds and hulling is accomplished. Rupee: The Nepalese currency unit. Currently one rupee is equal to about $US 0.045. At the time of fieldwork a rupee was equal to about $US 0.05. Water mill: Mill driven by water turbines. xviii CHAPTER ONE INTRODUCTION Located between India and China, Nepal is a landlocked small country with about 141,056 square kilometers. Nearly 80 per cent of the area is rugged, hilly, and mountainous. The remaining part is flat land in the South of the country, commonly called the Tarai. It stretches along almost the entire length of the country which borders on India. Only 22 per cent of the total physical area of the country is used for crop production of which about 62 per cent is in Tarai. Ninety—three per cent of the 16.2 million people depend on agriculture. The Hills and the Mountains regions contain 56 per cent of the population. Over 60 per cent of the Gross Domestic Product (GDP) comes from agriculture. Paddy, maize, and wheat in that order are the most important crops, both in terms of area and production. Other crops such as millet, barley, mustard. jute, tobacco, sugarcane, and potatoes are also grown in the country. Per capita annual GDP was estimated at US$ 160.00 in 1984 (Acharya, 1987). The average annual growth rate of real GDP was 2.78 per cent while population grew by 2.65 per cent per year. Therefore, per capita real GDP grew by 0.13 per cent per year between 1977/78 and 1984/ 85 ( MOF,1985; and MOF, 1986). The importance of paddy in the economy is well established not only by its share of about 25 per cent in the GDP, but also by its share of between 24 and 55 per cent of the Nepalese export earnings between 1962/63 and 1977/78 (Adhikary, 1981). However, the share of rice in Nepal's export declined to about 4 per cent in 1984 ( United Nations, 1984). Many factors are responsible for such a decline in any year. But the fact remains that rice is still an important export item of Nepal. Between 1967/68 and 1981/82 paddy production grew by 1.1 per cent per year on the average. But the yield declined by .08 per cent annually during the same period (Svejnar and Thorbecke. 1984). However, when the figures between 1969/70 and 1985/86 were considered the average growth rate of paddy production worked out to be 2.76 per cent per year (Table 2.1). Increased farm production of paddy has been emphasized in all the development plans of Nepal over the last 30 years (MOF, 1986). However, in relative terms, marketing problems have been neglected. Within marketing, the ecunomics of processing paddy has been negleted even more. Yet increasing the performance of the paddy processing industry would help improve Nepal's rice economy. 1.1 Problem Statement To increase the performance of rice milling in Nepal a few studies have proposed that the currently predominant huller machines should be replaced by new machines or that some of the small mills should be replaced by larger mills (APROSC, 1983; APROSC, 1982; Basnyat, 1984; Economics Analysis and Planning Division, 1972; and Giri, 1972). Specifically, two of the studies recommended that the currently used steel hullers should be replaced by rubber roller Shellers with jet polishers (APROSC, 1983; and Basnyat, 1984). However, there is no adequate information on the economics of milling with the current machines from a financial or an economic viewpoint. In particular, little information is available on the economics of size of rice mills in Nepal. The APROSC Study (1983) recommends making continuing additions to large mill capacity to compensate for depreciation. If the economies of size are such that smaller mills are more cost effective, expansion of the large mills would increase the real costs of milling and reduce the performance of the rice milling sector. The literature on the rice milling sector in Nepal lacks an adequate empirical data base on representative mills. Systematic study of Nepal's small rice mill population has not been found. Especially needed are estimates of the relative importance of custom milling for home consumption, proportion of milling for local sale, and other activities of the mills and the millers. Better information on the rice milling sector and the economics of rice milling is useful to private entrepreneurs (both present and prospective) as well as public policy makers. Past research data does not allow evaluation of the milling cost for different sizes of mills from either a private or an economic point of view. In a given situation, a certain type and size combination of machines will be the most cost effective. Changes in the relative costs of labor and capital and in other economic parameters such as taste or preference modify the cost effectiveness of the mill. Inclusion of assembly and distribution costs may show that small mills are more costeffective from an economic point of view. Policy makers need to know the current milling costs of different size classes of rice mills and how the real costs of rice milling can be reduced. 1.2 Research Objectives The present research aims to generate reliable information on the economics of the Nepalese rice mills. The specific objectives are: 1. To obtain descriptive information on the relative importance of Custom rice milling and the role of all foodgrain processing in the miller's business as well as the role of rice milling in food grain milling business. 2. To estimate the financial (private) cost of machine milling of paddy by type and size of mills. 3. To explore the size economies of rice mills from a financial and from an economic point of View. This includes assembly, processing, and distribution costs. 4. To make recommendations which help improve the performance of rice milling in Nepal. 1.3 Organization _g the Dissertation The next chapter of this dissertation describes various aspects of rice marketing in Nepal with emphasis on current policies and proposals as well as on current problems of rice milling. This sets the background for choosing the objectives of this work. The third chapter deals with the needed data, choice of the study area, sampling procedure, actual survey and the problems encountered in the fieldwork. Chapters four through six are devoted to the presentation of data generated by the study. These chapters respectively cover the descriptive analysis of rice milling, financial and economic analyses of rice milling with and without assembly and distribution costs, and the effect of changes in important factors on the economic cost of rice milling. The last chapter summarizes the findings, draws conclusions and implications for rice milling policies and for future research. The interview schedules and some relevant tables are included in the appendices. Summary As a landlocked, small, hilly country Nepal has only 22 per cent of its land under cultivation. About 93 per cent of its 16.24 million people depend on agriculture that makes up about 65 per cent of the GDP. Per capita real income in 1984 was estimated at USS 160.00. Paddy is the most important crop and the marketing of paddy has been a relatively neglected research area. Paddy processing has been even more neglected. However, some authors did recommend the replacement of currently used steel huller machines by new sheller machines or by larger mills. No adequate information on the economics of rice mills with the currently used machines from a financial or from an economic viewpoint is available. Little is known about the size economies. Hence, this study aimed at obtaining more descriptive information on grain milling, assessing the importance of grain milling in the mill entrepreneur's business, and estimating the financial and economic costs of rice milling for each size and type of mill both with and without assembly and distribution cost. This exercise would help identify policies that could improve the performance of rice milling in Nepal. “its CHAPTER TWO RICE MARKETING IN NEPAL The marketing of rice and paddy which includes milling is an important part of the Nepalese economy for three reasons. First, despite a subsistence oriented agriculture, significant imbalances between geographical distribution of population and paddy production are present. Second, paddy is a seasonal crop and storage is needed to spread the supply over the entire year between harvests. Third, paddy needs milling before consumption. Geographical imbalance in rice production and consumption within Nepal is due to the fact that the Tarai has 44 per cent of the population but it produces about 80 per cent of the paddy (Dharmadasani, 1984; and ADB, 1982). Almost all of the 52 hill districts are normally food deficit (FAMSD, 1983). Rice is normally supplied to these food deficit districts from the other 23 districts in the Tarai and the Inner Tarai. Even though maize is grown mainly in the Hills and Mountains, an insufficient amount is produced. An analysis of production trends, domestic demand growth, and export growth of paddy helps visualize the forces that affect the direction of processing. The milling capacity suitable for the taste of domestic consumers should keep pace with the growth in internal demand and that suitable for the foreign markets should keep pace with the growth in the excess supply of rice. The following three sections deal with the production trend, internal demand growth, and export of the Nepalese rice. 2.1 Trend 1g Paddy Production Table 2.1 displays the paddy production and simple sign trend 17 years through 1985/86. Table 2.1: Paddy Production by Year for Recent 17 Years ('000 M.T.) Year Pdn. i or-over Year Pdn. i 9; :over the Prev.yr. the Prev.Yr. —‘--——-——-—_-—-————m—_——~——~*—-————_——~———-_———————‘————_——--_——_— 1969/70 2241 1970/71 2305 + 1978/79 2339 - 1971/72 2344 + 1979/80 2060 - 1972/73 2010 - 1980/81 2464 + 1973/74 2416 + 1981/82 2560 + 1974/75 2452 + 1982/83 1833 - 1975/76 2605 + 1983/84 2757 + 1976/77 2386 — 1984/85 2709 - 1977/78 2282 - 1985/86 2804 + ————-—-——-————_—-——————————————_~-——— -—.——_————_.—.——.~_--.—_———_———.—.—--_—--—- Source: FAMSD, 1985. ( Figures for 1985/86 are provisional) Of the 16 signs, 9 had a uptrend while 7 had a downtrend. On an average, the growth rate in paddy production amounted to be 2.76 per cent per year between 1969/70 and 1985/86. In 1983/84 paddy production increased by 50.4 per cent over the previous year. In 1984/85 paddy production declined only slightly but did not fall down to the level of the previous low of 1982/83. In 1985/86, provisionally, paddy production has been estimated to hit -an all time record high of 2804 thousand metric tons. A possible begining for a new trend line is indicated even though there are big fluctuations from year to year. 2.2 Growth 1g Internal Demand Population growth and real income growth are the two important factors that affect the internal demand growth for paddy over time. Population is growing at a linear rate of 2.65 per cent per year ( MOF, 1986). The real GNP is estimated to have grown linearly by 2.78 per cent per year between 1977/78 and 1984/85 ( based on Economic Survey, 1984/85, and Economic Survey, 1985/86). Therefore , real per capita income has been growing by 0.13 per cent per year. The income elasticity of demand for paddy has been estimated at .37 based on annual price, income, and consumption figures (Tulachan, 1979).* Therefore, the annual growth rate in internal demand for paddy is estimated by: Where, D = demand growth rate, P = population growth rate, Y = real income growth rate per capita, and 0 = income elasticity of demand. —._—.—-—————————————-————-_———-—————.————._————--_—. * The income elasticities estimated of demand between 1973 and 1980 in selected rice importing countries near Nepal were 1.78, 0.87, 2.62, 0.26, 0.96, and 1.23 respectively for Bangladesh, India, Indonesia, Malaysia, Philippines, and Sri Lanka. Rice exporting countries such as Burma, Nepal, and Thailand were estimated to have respective income elasticty of.0.83, 0.28, and 0.15 (Siamwala, 1983). These figures indicate that the estimate for Nepal made by Tulachan appears to be representative of the demand conditions. 10 An annual rate of growth in demand of 2.7 per cent is obtained. Paddy production is growing slightly faster than the growth in internal demand. However, the rate of growth in domestic demand for paddy, far exceeds the rate of growth for export. The difference between the production growth rate and internal demand growth rate is negligible (.06 per cent per year). It implies that relatively more of rice milling services suitable for domestic needs would be needed. For policy, the additional rice milling services have to be more productive from the viewpoint of the economy as a whole. 2.3 Growth 1g Exports Nepal exported a record of about 35 per cent of its rice in the 1969 to 1971 period. The main export markets are India, Bangladesh, Malaysia, and Mauritious. However, no rice would likely be exported if all the Nepalese people had sufficient income to buy enough rice to meet their calorie needs (Shrestha, 1978). If there were sufficient growth in the income of the domestic consumers, internal demand would compete with demand at the export markets more intensely. Only increased production can meet both domestic demand and maintain the level of export. If production increases become insufficient, the internal demand has to be met by reducing exports. With an absolute reduction in export, besides the adverse effects in foreign exchange earnings, the nature of paddy milling technology needed would be different as it has to suit the preference of the internal consumers who 11 generally prefer unparboiled rice. Especially the Indian export markets demand parboiled rice. Also, with lower exports, relatively more of custom milling services might be needed. Table 2.2 has the available recent figures on the Nepalese rice exports. Table 2.2: Total Production, Net Export, Share of Production Exported and Nepal's Share in World Rice Market ——--——-.-—-—-—_————_———-———_---————--—-—-———————-————————~———m—-——-._ Year Total Pdn. Net Export % Share of % Share of ('000 Tons) (Tons) Pdn. Exported World Mkt. 1974 2452 58500 2.4 .70 1975 2605 58500 2.2 .70 1976 2386 181025 7.6 2.00 1977 2282 105950 4.6 .97 1978 2339 84500 3.6 .85 1979 2060 100100 4.9 .84 1980 2464 9750 0.4 .07 1981 2060* 34900 1.7 .27 1982 1833 13048 0.7 .11 1983 2757 53736 1.9 .46 1984 2760* 72200 2 6 58 ——-————————-—-——————————_——.————_—_—.——————————.————————~ .—-—-...~. ~_.___ Sources: Relevant FAO year books on Trade and on Production. Note: Figures with asterisks disagree with obtained from another source (Table 2.1) Nepal exported a maximum of 7.6 per cent of its rice. Its volume share in the world rice market has been less than one per cent except for the year 1976. The share of rice production exported has widely fluctuated between .71 and 7.6 per cent. However, paddy production has been growing by 2.76 per cent annually (calculated from Table 2.1 figures). Internal demand growth has been 2.7 per cent per year. Therefore, a major part of capacity expansion in rice milling has to be suitable for the taste of the internal consumers. Most of the internal consumers get their paddy milled on a custom basis. Table 2.2 has the price indices of coarse rice and consumer price indices for 12 years beginning 1973/74. Table 2.3: National Consumer's Price Indices and Coarse Rice Price Indices (1972/73 = 100) Years CPI RPI RPI/CPI 1 Years CPI RPI RPI/CPI 1973/74 118.2 110.9 .938 1979/80 177.6 125.9 .709 1974/75 138.0 124.1 .899 1980/81 201.4 139.1 .691 1975/76 137.0 124.1 .905 1981/82 222.4 143.8 .647 1976/77 140.7 110.6 .786 1982/83 254.0 183.2 .721 1977/78 156.4 114.6 .733 1983/84 269.8 212.4 .787 1978/79 161.8 123.4 .763 1984/85 280.9 217.5 .774 Sources: FAMSD, 1983; FAMSD, 1985: MOF, 1986. The ratio of rice price index to the consumer price index shows reasonable stability in real rice price over the last 9 years. Hence, a higher rice recovery rate may not be of overriding importance as some analysts tend to suggest. 2.5 Marketing Channels ggg Marketing 9f Paddy d Rice Rice marketing relationships in Nepal's Tarai are indicated by Figure 1. Major part of paddy produced moves from the farm households to the small rice mills and again back to the farm households (57 per cent in 1981). The farmers sell part of their paddy to the local shopkeepers or village assemblers or the wholesalers of the market towns. Some farmers sell their paddy directly to the large rice millers. Participants such as the itinerant traders and village level assemblers function only during the harvest season. Some of the larger rice mill owners also work as market town wholesalers, wholesale rice traders and exporters. Depending on their location they have considerable amount of power in the internal markets. They can influence the price of paddy paid to the farmers, the price of rice sold to the Nepal Food Corporation and to the internal urban consumers (Shrestha, et. al. 1985). As such, rice mills play a pivotal role in paddy and rice marketing in Nepal's Tarai because all of the paddy must be milled before consumption. Rice milling capacity is reported to be increasing by more than 9 per cent a year. This means that Nepal is experiencing a fast disappearence of traditional hand milling of paddy (APROSC, 1983). The big mills which are defined in the national literature as being able to process one or more tons of paddy per hour FARMERS . —-Y:—e-iEK—ild-& —‘Non farm rural people (Consumarsawroducors) \\ 3‘“ 7 & landless labors / l / l Itinerant trader: / ‘\ \ Local shopkeepers 81 \I l \ (Hawkers) Periodic Hoots + Village assemblers ' / i i i l / / Harkeitovn Tradeshops ’ I / / - 1 \\ \I Small Rice hills I l “‘ Vffimke— —-—‘___1 and Wholesalers l Large Rice Hills 1 traders and exporters 1 // Wholesale Rice _4\ 50" Agency Exporters Trblders Nepal Food Corporation -ealcr: I I I l I {m L —. \\" I LLLLLLLJ DOMESTIC CONSUMERS (mainly urban dweller: and food deficit hill people) Poddg ------ Rite Figure 1: Marketing Chanels for Paddy and Rice in Tarai l4 15 (TPH), mill and store rice for selling to the domestic urban, and the foreign markets. Their role in monetized market coordination is crucial. Small mills which are reported to process about 57 per cent of paddy produced in Tarai mainly provide custom milling services to farm households (APROSC, 1983; and field observation). About 69 per cent of paddy milled by big mills is parboiled. Small mills generally mill only unparboiled paddy (APROSC, 1983). 2.5.1 Current Problems lg Rice Marketing A review of available literature in rice marketing indicates that the important general problems are: assuring distribution of rice from Tarai to the Hills and Mountains, lack of storage facilities and finances, lack of price and quantity information at different markets, enforcement of standard weights and measures, high transaction costs, low rice recovery on milling, and a general lack of road infrastructures (ADB, 1982; APROSC, 1983; APROSC, 1982; EAPD, 1972; Girl, 1972; Basnyat, 1984; Manandhar et. a1. 1984; Shrestha, 1978; and Tulachan, 1979). 2.5.2 Methods 92 Rice Milling Rice milling in Nepal is accomplished by a mixture of traditional means (hand pounding / leg pounding) and machine technologies which use electricity or diesel powered engines to propel hullers or rubber rollers Shellers or disc Shellers. In 1980/81, Nepal was estimated to have had 1,746 tons per hour (TPH) paddy milling machine capacity (APROSC, 1983). Total paddy production in 1980/81 was 2,454,310 metric tons (Svejnar and 16 Thorbecke, 1984). So if all paddy, allowing 13 per cent for seed, feed. and wastage were machine milled the mills would run for an average of about 123 ten hour days per year. Milling capacity is not evenly distributed throughout the country. For example, 20 per cent of the total paddy is produced in the Hills and Mountains but it has only 10 per cent of the machine milling capacity. In the Hills and Mountains about 95 per cent of the households process their grain by traditional methods such as hand pounding, leg pounding, manual grindstone, and water mills (APROSC, 1983). The 1976/77 census of manufacturing states that rice milling and oil extraction units made up about 74 per cent of the total number of industrial establishments and produced 78 per cent of the total manufacturing output. They employed about 27 per cent of the industrial workers and contributed about 51 per cent of Nepal's industrial value added (APROSC,1983). The fact that paddy took 56 per cent of the total cropped area nationally in 1980/81 also supports the predominance of rice processing in the national economy. Rice processing is important in the Tarai where paddy is produced on about 73 per cent of the total cropped area. Problems various authors thought to reduce the performance in paddy processing were a combination of: the belief that small rice mills are obsolete, apparent excess milling capacity, lack of management skills, shortage of Spareparts and skilled mill workers, and lack of information on what milling technologies are 17 more productive (ADB, 1982; APROSC, 1983; APROSC, 1982; EAPD, 1972; Giri, 1972; and Basnyat, 1984). 2.6.1 Machine Milling g: Baggy ip Igggi Table 2.4 presents the distribution of machine milling capacity in the Tarai part of the five national development regions. (For development purposes the country is longitudinally divided into five administrative regions namely the Eastern, Central, Western, Mid-Western, and Far—Western development regions.) About 90 per cent of Nepal's total machine milling capacity in 1980/81 was found in the Tarai. Small mills (less than one TPH capacity) accounted for’ respectively 81 and 92 per cent of milling capacity and number of mills in the Tarai (Table 2.4). Table 2.4: Number of Mills and Machine Capacity in Tons Per Hour (TPH) by Mill Size in the Tarai Part of Each Development Region (1980/81) Total Small Mills Big Mills Less than 1 TPH 1 TPH or more Development Region TPH NO. TPH N0. TPH NO. Eastern 494.0 771 336.5 673 157.5 98 Central 568.0 1063 507.5 1015 60.5 48 Western 317.0 595 284.5 569 32.5 26 Mid—Western 109.4 375 88.4 354 21.0 21 Far~Western 77.8 212 44.8 179 33.0 33 Total 1565.2 3016 1261.7 2790 304.5 226 Source: APROSC,1983 (compiled from Tables 3.1, 3.2.3.4, and 3.5) 18 The Tarai of the Central region had the highest machine milling capacity and the largest number of mills ( both of total and of the small ones). The Eastern region followed the Central region in terms of total rice milling capacity, small rice milling capacity, and also in the number of small rice mills. Between 1972/73 and 1980/81 the annual growth rate in the number of big mills in the Tarai was 8 per cent whereas that for small mills was 9.5 per cent. During this period the total small rice milling capacity in the Tarai increased form 609.5 TPH to 1261.7 TPH (APROSC,1983). Comparable figures for the big mills were from 170.97 to 304.5 TPH. If these trends continue, small rice mills will continue to remain very important in Tarai. Table 2.5: Paddy Production and Milling Share of Big and Small Mills in the Tarai of Each Region (1980/81) ————_———————————_— —— — _——._——-—v——..———— Paddy Pdn. % Share of Production Machine Milled Region --------------------- '000 MT Big Mills Small Mills Total at665494291 Central 674 14 69 83 Western 340 12 74 86 Mid-Western 172 21 47 68 Far-Western 130 33 32 65 “11981275784 """ —_-——-——-—————-———-—-_—-—-———.————————_-—-——-—_——-———_n—n-c-_.—.—._--—-—~ __-— Source: APROSC, 1983 (compiled from tables 3.9, 3.11,and 3.12). Note: Thirteen per cent paddy is allowed for seed, feed, and wastage. 19 In Western, Central, Mid—Western, Eastern and Far—Western regions the share of paddy production milled by the small mills is respectively 74, 69, 47, 42, and 32 per cent. The Eastern region is reported to mill paddy produced in the Mid- and Far~ Western regions as well (APROSC, 1983). This can be observed in Table 2.5 above as the Eastern region is shown to mill 91 per cent of its total production. If seed, feed, and wastage is allowed 13 per cent of the production, this is not possible unless this region milled paddy produced in other regions. 2.7 Current ProblemsI PolicesI gag Proposals 1g Rice Milling The available literature on rice milling in Nepal suggests the following problems in small rice mills. a) A low recovery rate of milled rice because of obselete old machines. b) Lack of uniformity in paddy brought to the mill yielding a low quality milled rice. c) Relatively small amount of paddy is milled after boiling and drying. Such a practice reduces the amount of edible rice available for human consumption as milling of parboiled paddy gives a higher recovery rate. d) Excessive number of mills in some areas and a shortage of milling capacity in other areas. e) Distribution of milling capacity that does not match paddy production within individual geographical as well as development regions. 20 One of the important recommendations of past studies, as indicated earlier is that the older smaller size machines need to be replaced by technically efficient rubber roller sheller machines or by bigger machines. However, this recommendation is not based on the relative profitability of the old machines versus the new ones. Obviously, such a recommendation must be based on relative profitability if it is to be adopted by the entrepreneurs. For government policy purposes mere technical efficiency is not enough if paddy milling is to be accomplished in the most cost effective way. The economics of such changes needs to be looked into from the standpoint of the economy as a whole. Until recently the government had been relatively silent on the specific policies and programs for the small rice mills which make up the largest single manufacturing activity in the country. It authorised the district administration to issue the license and simply collected the tax. Last year the government added a tax on technological improvements in huller rice mills. If a husker were added an additional 40 per cent excise tax is to be charged and if a polisher were added another 10 per cent excise tax is to be charged (Nepal Rajpatra, 1985). To increase the rice recovery rate and to improve the quality of rice a miller may add a husker and a polisher. But the miller has to pay a higher excise tax. Such a tax may increase the government revenues, but, it would discourage market oriented technological changes and contradicts the recommendations of the existing literature on the issue. 21 During 1971/72 to 1981/82 modernization of Nepal's big rice mills was included as an objective in planning documents. Incentives such as subsidized loans and reduction in excise taxes were provided to those establishing large (one TPH or more) modern mills (Shrestha, 1978; and APROSC, 1983). In the government's current Seventh Plan for the 1985—90 period no such aid is provided. The big mills were built to meet the rice and quality requirements of internal urban and export markets. Since, a 2.7 per cent growth in internal demand was accompanied by only a 2.76 per cent growth in paddy production, the role of small rice mills continues to be much greater than that of the bigger mills. Hence, studying the size economies of the existing rice mills is important. The size economies need to be studied from the financial standpoint of the millers and from the standpoint of the entire economy both with and without assembly and distribution cost. Summary This chapter provided an outline of rice production and marketing in Nepal. Within Nepal there are notable imbalances between geographical distribution of production and consumption. The rice export markets are also important because Nepal exported between 0.4 and 7.6 per cent of its production during 1974 and 1984. Between 1969/70 and 1985/86 paddy production grew by 2.76 per cent while demand grew by 2.7 per cent per year. Supply of exportable paddy grew by only .06 per cent per year when internal demand growth based on population expansion and real per capita 22 income growth were taken into account. This implies that paddy milling capacity may need to expand proportionately for both the markets. The capacity expansion can be achieved either by using the existing machines for longer hours or by a net addition to the country's rice milling capacity, or both. The rice market organization is a complex one and the rice mills, especially the big ones, play a central role in both domestic urban and export markets. The small mills milled 57 per cent of the paddy production on custom basis in 1980/81. At that time there were 3016 rice mills in Nepal's Tarai of which 226 were able to process one or more tons of paddy per hour (referred to as big mills). The Eastern Tarai milled paddy that came from the Mid- and Far-Western regions as well. A few authors proposed the replacement of existing hullers with rubber roller sheller machines or with big mills despite a conspicuous lack of any systematic information on the economics of the rice mills from the viewpoint of the mill entreprenuer and of the economy as a whole. Study of the economics of rice milling from the society's viewpoint is important if rice milling has to be done by the most cost effective means. Answer to the replacement issue is to be based on careful study on the economics of the existing mills and of proposed ones. CHAPTER THREE RESEARCH METHODS AND SAMPLING This chapter is devoted to discuss the data needs and sources, selection of the study area, the sampling procedure, the survey instruments, problems during the field work, and organisation and management of the survey and data. 3.1. 2233 322g As outlined earlier, an objective of this work was to gather systematic and representative factual information on the Nepalese rice mills. To achieve this goal primary data was obtained through sample surveys of two representative districts in the Central Tarai of Nepal. Macroeconomic data such as the shadow interest rates, shadow wages, and shadow exchange rates were drawn either from secondary sources or from informed individuals. Information on custom duties and sales taxes was obtained from relevant government publications. Civil engineering data needed was obtained from a civil engineering mannual and from an engineer who has been working in the construction field. 23 24 3.2 Selection 9: Egg §£ggy Aggg The Central Tarai was reported to have the highest amount of machine milling capacity as well as the highest number of rice mills. A priori this area was therefore thought to be appropriate to study. A wider variety of mills in reasonably good number was anticipated to be found in this area. In addition, the Eastern Tarai produces a major part of Nepal's rice exports whereas the Mid— and Far— Western Tarai individually depend on other regions for milling their paddy. A study based on the rice mills of the Eastern Tarai is more likely to represent export market oriented rice mills. Similarly, the economics of rice mills based on Mid— or Far—Western Tarai is likely to represent the situation in which the mills are likely to be working for longer hours than an average rice mill in the Tarai because there is a reported shortage of rice milling capacity in these regions. Hence, the Central Tarai was expected to represent average rice mills in Nepal. 0f the six districts in the Central Tarai, Parsa was excluded because it is on the high traffic corridor between India and the capital city of Kathmandu and therefore, not likeky to be representative. Of the remaining 5 districts, two were selected for this study on the basis of irrigation water availability. Irrigation was chosen because milling capacity in the long run is likely to depend on the availability of the raw material (paddy) which in turn depends on land productivity, and water for irrigation is an important factor. This was an effort to avoid studying the rice mills in areas with outlying paddy yields. 25 The total irrigation water availability in the 5 Central Tarai districts is indicated by Table 3.1. Together, these districts had an average of 42.16 per cent land under irrigation. Table 3.1: Total Cultivated Physical Area and Irrigation Water Availability in Five Central Terai Districts District Total Irrigated Area % Irrigated land Bara 64,000 46720 73.00 Rautahat 60,715 22277 36.69 Mahottari 70,460 9286 13.18 Dhanusa 75,500 21438 28.39 Sarlahi 71,296 14470 20.30 Source: Irrigation related offices at the respective district headquarters Rautahat and Dhanusa districts had respectively 36.69 per cent and 28.39 per cent of land under irrigation. These districts fall closest to the average percentage of land under irrigation in the region. Economics of rice mills based on the data of these districts is more likely to represent the Central Tarai which in turn is likely to be representative of Nepal's Tarai (see Map 1). 3.3 Sampling Procedure To develop the sampling frame separate lists of all the rice mills in the two study districts were obtained from two sources. One source was the Cottage Industry Office and the other was the Excise Tax Office in each district. 26 Upon discussion with the Excise Tax Inspectors and other workers in the Excise Office, it was found that their list was more accurate. To confirm this assessment a quick check of the list was made by observing about 20 mills in the town areas of the two districts. The Excise Tax Office list was found to be more accurate.* Therefore, this list served as the first stage (initial) sampling frame. In the first stage survey, a 50 per cent sample from the Excise Tax Office list was selected by systematic random sampling procedure. These mills were briefly surveyed to obtain the sampling frame for this study. (Appendix I is a copy of the first stage interview schedule.) Table 3.2 provides an overview on the first stage survey that aimed at obtaining a list of the mills in the two selected districts with additional descriptive information. Of the 286 mills sampled in the first stage, records of 218 mills were completed. In all, 68 mills did not complete survey records. Map 2 and Map 3 show the mills listed in the Excise Tax Office list, mills selected in the first stage, and the mills included in second stage survey for the two districts. * The District Cottage Industry Office maintained a record of all the business establishments in the district but did not eleminate those that went out of business over time. The Excise Tax Office maintained an updated record. 27 Table 3.2: Total Number of Rice Mills and the Sampling Frame Total First Stage Record Cmpleted Incomplete District No. Sample (No.) No. % No. % Rautahat 280 140 99 70.7 41 29.3 Dhanusa 292 146 119 81.5 27 18.5 Total 572 286 218 68 The extent of incomplete records was found to be higher in Rautahat than in Dhanusa. However, in View of the reasons for incomplete records a number of mills selected in the first stage were not eligible to be included. Table 3.3 categorizes the reasons for incomplete responses in the first stage survey. Of the 68 incomplete responses only 24 mills (15 in Rautahat and 9 in Dhanusa) can be regarded as true non—responses. The remaining 44 mills (26 in Rautahat and 18 in Dhanusa) were invalid members of the first stage sample. The weighted per cent nonresponse in the first stage survey, thus, came to 9.92 per cent. Therefore, the adjusted number of mills selected in the first stage was 114 in Rautahat and 128 in Dhanusa. 28 Table 3.3: Incomplete Records and Corresponding Reasons Reason Total % of Sample Rautahat Dhanusa Sale of all machines 26 9.09 15 11 Only plate or oil mill 3 1.04 1 2 Mill not yet started 5 1.75 3 2 Mill not located 8 2.80 5 3 Mill being translocated 2 0.72 2 — Closed by family conflict 1 0.36 — 1 Closed due to losses 1 0.36 1 ~ Respondent away 9 3.15 5 4 Poor response 3 1.04 2 1 Engine Breakdown (long) 6 2.08 4 2 Closed (lack Spareparts) 4 1.40 3 1 Total 68 23.79 41 27 The responding mills were further divided into two major groups by power source, diesel or electric motor. Table 3.4 shows the number of mills in each district by power source with completed records for the first stage survey. The number of diesel mills far exceeded that of the electric mills in the study area. There were only two steam powered mills. Dhanusa district had more electric mills than Rautahat. Each power source group shown in Table 3.4 was again classified on the basis of horsepower. However, of the 2 steam operated mills one had hullers with parboiling facilities (boiling paddy before milling) and the other had rubber roller 29 Table 3.4: Number of Mills by Catagory With Completed Records in the First Stage Survey Power Source District Elec. Diesel Steam Total Rautahat 7 92 — 99 Dhanusa 19 98 2 119 Total 26 190 2 218 shellers. Also, both of these mills milled paddy exclusively on their own account and reported a loss during the study period. Such special mills need separate study and, therefore, were not included in this study. The electric and diesel mills were further subdivided by a dual criterion of horsepower size group and the share of income from milling business in the miller's total income. A classification based on size of the rice hullers could not be adopted because the Excise Tax Offices had horsepower as a proxy for rice milling capacity. Table 3.5 shows the number of electric and diesel mills in each size and income share group. 30 Table 3.5: Number of Electric and Diesel Mills by Size and Miller's Income Share in the First Stage Survey % Share of Miller's Income From Milling O - 25 26 - 50 51 - 75 Above 75 Tot. % Size E D E D E D E D E D E D 10HP or Less 12 116 4 34 1 7 2 6 19 163 8.8 75.5 11 - 15 HP 2 6 - 4 ~ 1 1 4 3 15 1.4 6.9 16 — 22 HP 1 5 1 4 - - - 2 2 11 .9 5.5 23 - 35 HP 1 - 1 — - 1 - - 2 1 .9 .5 Total No. 16 127 6 42 1 9 3 12 26 190 12 88.4 Per Cent 7.4 58.8 2.8 19.4 .5 4.2 1.4 5.6 12 88 — - To ensure good representation of all mill size groups, and groups according to the relative share of the miller's income from milling business, each cell of Table 3.5 was treated as a stratum for sampling in the second stage survey. (Appendix II is a copy of the second stage Interview Schedule.) From each cell a random sample of 20 per cent or of 6 mills whichever was higher was chosen. If the number of mills in any cell was less than 6 all were included in the second stage sample. After the survey the observations were combined together according to the type and size catagory of individual mill to ensure better representation of different size groups for both the electric and diesel mills for analysing the size economies. Table 3.6 shows the number of mills selected from each cell before combining. 31 Table 3.6: Number of Mills Selected in Second Stage Survey by Power Source, Income Share, and Horsepower Size Share of miller's Income from Milling O - 25% 26-50% 51-75% Above 75% Total Horsepower E D E D E D E D E D 10 HP or less 6 24 4 7 1 6 2 6 13 43 11—15 HP 2 6 — 4 ~ 1 1 4 3 15 16—22 HP 1 5 1 4 — — — 2 2 11 23-35 HP 1 — 1 — - 1 1 — 2 1 Total 10 35 6 15 1 8 3 12 20 70 In total 90 mills (20 electric and 70 diesel) were selected in the second stage survey but 9 cases were incomplete. Table 3.7 shows the number of mills in each size group with completed second stage interviews. Two cells were dropped from the analyses because of only 1 observation in each of them. Table 3.7: Mills by Size Group and Power Source With Complete Second Stage Interview Schedules Power Source 10HP or less 11~15 HP 16—22 HP 23—35 HP Tot. Electric 12 2 1 2 17 (13) (3) (2) (2) (20) Diesel 41 13 9 1 64 (43) (15) (11) (1) (70) (The number of selected mills in second stage are in brackets.) 32 3.4 Execution 9; Egg Fieldwork To assist on the fieldwork 5 enumerators were hired from among the Bachelor of Science in Agriculture final year students. The top 5 class performers in elective economics paper were invited to work. Since the time of field study coincided with summer vacation the students were quite willing to work for the research project. First, the figures on the extent of irrigation water availability as shown in Table 3.1 were gathered from the 5 districts. Then, as indicated earlier, two of the 5 districts were chosen. For both the districts two lists of the mills one from the Excise Tax Office and another from the Cottage Industry Office were collected. As indicated earlier, the Excise Office list was followed to select a 50 per cent first stage sample. Since the list contained the name of the milling firm and the name of its location the selected mills were divided into 5 geographical regions in the district. One enumerator was assigned to contact all the selected mill operators in each geographical region. Each enumerator had enough first stage interview schedules, a map of the district that also indicated his assigned area, and a diary with notes on the interpretation of each of the interview questions. A letter from the Dean of the Institute of Agriculture and Animal Science, Rampur, Nepal that introduced the research and the researchers was also ready to be delivered by the enumerators to each of the respondants. Each enumerator used a bicycle for transportation. 33 The enumerators initially worked for a day in their respective areas and returned with completed first stage interview forms. All the completed forms were checked by the author and the problems faced by each of the enumerators were discussed by the research team. Since the first stage interview was quite straight forward, the team felt that the enumerators were ready to administer the first stage interviews to all of the mill operators with no difficulty right after the first round of discussions. After the enumeration was completed the preliminary data tabulation was done in the field. Sample for the second stage survey was then selected as outlined earlier. Each enumarator prepared a list of the mills he was assigned to interview. The research team then went to Mahottari (a district in the Central Tarai but not selected for the second stage survey) to pretest the second stage interview schedule. A list of the mills in Mahottari was obtained from the Excise Office and 20 mills around the district headquarter were chosen randomly for pretesting. Before pretesting, each of the interview questions was discussed and clarified by the author. Every enumerator made his own diary notes on the interpretation of all the second stage questions. Two millers were first interviewed by the author while the enumerators observed the process. The next 3 millers were interviewed by three enumerators while all others observed. Then individual enumerator was then assigned to interview 3 mills each on his own. By the end of 2 days the team met together to discuss 34 the difficulties faced during interview. Some of the questions needed to be restructured and some others needed rewording. These changes were made and the interview schedules were reproduced. Changing and reproduction was done at Rampur and the night bus service allowed this to be done in two days. The actual second stage interview was first begun in Rautahat district because the forthcomming rainy season was more likely to delay the fieldwork in this district. During the second stage interview, the author went to the fields of each enumerator, talked to the mill operators and visited the mills. At the begining the enumerators were asked to return to the district headquarters with their completed forms after every 2 days. These were checked by the author for completeness before the enumerators left for the field the next day and the problems were discussed by the research team. After a week when all the enumerators were able to do the job correctly, checking of the completed forms was done once a week. At the end of the field work the completed records were rechecked, counted and properly packed to bring them to Rampur for further work. 3.5 lb; giglg Problems in figigg Notable field problems encountered were as follows. a) Some of the panchayats shown in the map of each of the two districts could not be located in the field basically for two reasons. One was the transfer of a couple of panchayats to other districts and another was the separation of some of the bigger panchayats into smaller ones with different names. Revised maps were not available. 35 b) A number of mills listed in the Excise Tax Office list had been sold or closed and the previous owners were not in a position to respond. 0) The survey was carried out in slack rice milling season. So, some mill operators were away from the mill at the time of field survey. d) Other usual problems of road access and limited physical facilities for spending a few days in some localities were also met. 3.6 Qgtg Qgganization The data was coded to fit to the limits posed by the MSTAT microcomputer software available at Rampur. Ten different code files with 54 to 90 variables were developed. After coding, all the variables for first 20 cases in each code file were double checked for correctness. If any mistake was found, all the cases were checked for the variables in which the mistake was found. Values of some of the variables had to be tramsformed for coding in order to suit the MSTAT program. All the transformed variables in each code file were checked for correctness. (Such a transformation of some variables was needed because in the MSTAT program a maximum only 6 digits without any decimal could be entered as a value for any varible.) Besides the first 20 cases. 20 per cent of the remaining cases were randomly sampled for checking. If any incorrect entry were found every case was checked for this particular variable. 36 When the codes were ready data entry was made. Two sets of printouts for each file were prepared and checked one by one by two persons. The mistakes found were rechecked for correct values and the computer files were corrected. This process was repeated a couple of times until no more entry mistakes were found. Then two sets of printouts for each data file were made. Various MSTAT subroutines were used to analyse the data. A hand calculator was also used whenever appropriate. Summary To ensure a good representation of the Nepalese rice mills. the Tarai of the Central region was purposively selected. This region had the maximum number of big as well as small rice mills in the country. Two districts in the region namely Rautahat and Dhanusa had irrigation water availability nearest to the average for the Central Tarai. Primary data needed was obtained from these districts by sample surveys in two stages. Macroeconomic data such as interest rates, shadow wage factor, shadow exchange rate was obtained from secondary sources and from informed individuals. Civil engineering data needed was obtained from a manual and a building engineer. A working list of all the mills was obtained from Excise Tax Office. A 50 per cent first stage sample was taken to administer the first stage survey that aimed at establishing the sampling frame. of the 286 mills selected 218 completed the first stage survey records. Based on the reasons for incomplete interviews only 242 mills were considered to be valid for the first stage 37 sample, hence only 9.92 per cent mills were non-responses. Two steam powered big mills were excluded as they milled paddy only on their own account and reported loss during the study period. The remaining 216 mills were divided into cells of a 3 way classification based on the type of power source, horsepower, and owner's income share. From each cell a 20 per cent random sample or 6 mills whichever was bigger was selected for the second stage survey. If any cell had less than 6 mills all of them were surveyed. Fieldwork was assisted by 5 enumerators. Data was coded in ten MSTAT microcomputer compatible files and analysed. Map 1: Map of Nepal Showing the Study Districts 38 * Mills studied ln-Ueplh(S¢-cond Stage) *,0 Mills enumerated (First Staqe) *.°.A Mills located from Excise Listt'hitialSatwling Fran.) Map 2: Mills in Rautahat 39 :0: '0 'Jr. )-2 35¢. ' .MYANAGAR * Mills studied in-depth (Second Stat. *.0 mils enumerated (First Stage) *.°.A Mills located from A Excise List (initial sampling Frame) Map 3: Mills in Dhanusa 4O CHAPTER FOUR RICE MILLS IN THE TARAI This chapter includes a general description of the rice mills in the Tarai. It is followed by a general perspective on milling oprations, current mixture of custom milling and milling on the miller's own accunt, recent changes and expected changes on the extent of custom milling, problems perceived by the millers and other general findings. 4.1 General Description Rice mills are widely scattered over the urban and rural areas of the Tarai. All the mills in rural areas, except for the big mills located near the Indian border towns, provide mainly custom milling services. Small mills in the urban areas or townships also concentrate on custom milling. The big mills Concentrate on milling on the miller's own account. The big millers and the rice traders supply rice to the internal and external markets (Adhikary, 1981). The big mills have either sheller machines or hullers with parboiling facilities. They are oriented to meet the quality requirements of the internal and external monetized markets and are more concerned with the rice recovery percentage in milling. There is a dualism in the rice milling industry. The big mills are more responsive to the needs of the monetized markets, whereas, the 41 42 small ones respond to the needs of the farm households. The farm households consider the value of the milling byproduct as feed for domestic fowl and animals being raised in the widespread mixed farming operations of rural Nepal. [For example, an average farm family in Terai maintains an average of 2.5 cattle and 0.85 buffaloes (ADB, 1982)]. Almost all the rice mills are either diesel or electric powered. there are a few steam powered mills. Some of the new mill enterprises are operated by biogas—cum—diesel. The Agricultural Development Bank has established a special line of credit for biogas operated mill enterprises through cooperatives. The diesel mills are widely distributed in the Tarai. The electrical mills are located only in areas where electricity distribution lines are available. In some newly electrified areas the previous diesel mills are still running. A quick replacement by electrical engines is probably not economic when both the cost and uncertainty from frequent power failures are considered. 4.2 General Perspective pp Milling Operations This section provides a general overview on rice milling in the study area, the size and type of mills, mill structures, equipment combinations, energy sources, role of milling in the entreprenuer's business and, a discussion of power sharing by different types of equipment in the mill. 4.2.1 Role 91 Rice Milling i the gptreprenpers' Businesses Of the 218 mill operators enumerated in the two study districts. 15 derived more than 75 per cent of their total income from milling in the study year (Table 4.1). Two mills reported to have made losses. Table 4.1: Number of Mills and Share of Mill Income in the Entreprenuers' Businesses (per cent) Loss 0 - 25 % 26 - 50 % 51 - 75 % 76 - 100 % Total Approximately two-thirds of the entreprenuers derived between one and 25 per cent of their income from the milling business. Only 11.6 per cent of the mill entreprenuers derived more than half of their income from the milling business. For a majority of the mill operators, the milling business is not half as important as their total business activities. 4.2.2 Sizes gpg Types pf Mills The most predominant engine sizes used by the rice mills are up to 10 horsepower. The 11 to 20 horsepower size group engines followed (Table 4.2 ). 44 Table 4.2: Prevailling Mill Engine Sizes in the Study Area _——~--—-—-———--——-————-—--—_————---a—--—-———.——-———n——————————--_———-— Dist Size 10 HP or less 11 — 20 HP Above 20 HP Total £;;E;£;£ """""" l; """"""""" I; """""" ' ””” 5 """"" QQ' Dhanusa 102 12 5 119 };E;I""""’“""'Z;;"""'"—‘”"’“SI'""’""”“”‘;’_”’"‘";Ié" M—_-——————_-—‘-—-_—_——_-—_———-——_—————-”‘---———_——_—-—-~———— The three biggest size engines in Rautahat were less than 35 horsepower. These mills had more than one engine. However, in Dhanusa, one of the five biggest size category mills was 90 horsepower with steam power. Another was 60 HP also with steam power. These two reported to have made losses during the study period. 4.2.3 Typg pf Ownership ppg operation _3 pp; Mills An great majority of the mills are owned by individual proprietors (Table 4.3). Only 2 of the 218 mills enumerated were rented out. This implies that private ownership and owner operatorship are the dominant features of the rice mills in the Table 4.3: Ownership and Operation of the Mills _______.___..___.______,..__.________._.._________________.__________._.._________ District Ownership Operationship ;;;;;;"";;;;;;;;g;;‘ “5;;;; """" §;;£;;’"‘ §;;£;Q;E """""" 5% """""""" 5 """""""" é; """""" 6 """"" Dhanusa 110 9 117 2 ‘-—————_—————-——————————_——__————______-___————__—.._—-._—-.__ ._-_._..._.——__— ——_—_——-_—- -__- ———_.___——__—_——_____.—___.___-——.-_.__ ____..____—____———~~——— 45 study area. Dhanusa and Rautahat had respectively 7.7 and 2 per cent mills on partnership. 4.2.4 Mill Structures Table 4.4 indicates the mill structures present in the two study districts. Table 4.4: Mill Structures in the Study Districts District ——Floor-- ——————— Wall ——————————————— Roofing ——————— Conc. Mud Brick Thatch Others Conc. Thatch Khapda Rautahat 9 99 9 90 — 1 20 78 Dhanusa 39 8O 34 83 2 6 35 78 Total 48 170 43 173 2 7 55 156 Of the 218 mills interviewed in the first stage 156 mills had khapda (earthen) roofing. Mud floor and thatch walls were also common. In percentage terms about 72 per cent of the mills were khapda roofed. About 78 per cent of the mills had mud floor, with concrete on the machinery foundation. About 80 per cent had thatched walls. However, between the two districts, Rautahat had more of temporary the types of mill structures. In other words. more mills in Rautahat had mud floor, thatched walls and khapda roofs. Such structures are cheaper to start with, but are likely to need more frequent repair and maintenance. 46 4.2.5 Equipment Combinations Of the 218 mills, all but 3 mills had a single huller without a husk separator (Table 4.5). One mill had 4 hullers with husk separators. One had 8 shellers with jet polisher and another had only oil expeller units as the rice milling had been permanently stopped. The fact that almost all (98.2 per cent) of the mills had one huller indicates they were small mills. (Only one steel huller mill, which was steam powered, milled paddy on owner's account had husk separators.) Table 4.5: Number of Steel Hullers and Shellers in the Mills Number of Hullers No. of Shellers Total District 0 l 2 4 O 8 Rautahat — 98 1 — - - 99 Dhanusa 1 116 — I — 1 119 Total 1 214 1 1 — l 218 Eleven of the 99 rice mills in Rautahat had one oil expeller. Only one mill had two oil expellers. Other mills did not have any oil expellers (Table 4.6). In Dhanusa, seven of the 119 mills had one oil expeller each. Two mills in Dhanusa had two oil expellers. Plate mills for milling maize and wheat were more common equipment combinations than the oil expellers. 47 Table 4.6: Equipment Combinations with the Rice Mills District Oil Expeller Plate Mills Beaten rice 0 1 2 O 1 2 O 1 Rautahat 87 11 1 ~ 97 2 96 3 Dhanusa 110 7 2 6 113 — 119 0 Total 197 18 3 6 210 2 215 3 In the study area over 96 per cent of the rice mills had plate mills. In terms of absolute numbers 97 of the 99 mills in Rautahat had one plate mill. The remaining tw0 had two plate mills. In Dhanusa 113 of the 119 mills had one plate mill. In percentage terms, the mills in Rautahat have more combined equipments than those in Dhanusa. Other equipment such as beaten rice milling unit was present in three of the rice mills in Rautahat. One mill in Rautahat had a sugarcane crusher. 4.2.6 Energy Sources Diesel is the predominant energy source for the rice mills of the area ( Table 3.4). By and large, electric power is used by the mills along the highways and in district towns. Steam and biogas are the other possible energy sources. Only 2 mills were run by steam power (Table 3.4). No biogas operated mill was found in the study area. 48 4.2.7 Sharing pf gpggp As indicated in Table 4.6, almost all of the mills (212 out of 218) had plate mills. Twentyone of the mills had oil expellers and three had beaten rice machine units. These other machines were also run by the same power source. Therefore, the expenses on power cannot be fully charged to rice milling while estimating the economics of rice mills. The time proportion of power unit used to run the hullers was chosen as a basis for allocating the joint costs of the total milling enterprise to rice milling. Even if if the huller and other machines were used simultaneously used all the time and therefore cost was accounted for the rice milling. Table 4.7 indicates the average number of hours for the power source (engine) use by season in the first stage survey. The power units in the study area were run 5.32 hours per day during the peak rice milling season (Nov. 28 to Feb. 6). The average number of hours per day the power source was used was found to be 2.36 hours for both the slack rice milling season (June 7 to Aug. 19) and the second intermediate season (Aug. 20 to Nov. 27). During the first intermediate seasson (Feb. 7 to June 6), the power unit averaged running 3.24 hours per day. 49 Table 4.7: Average Daily Number of Hours for the Power Source Use by Rice Milling Season w_——————————————o——c——————-—- ———_—__——_—_———————— Peak Slack Inter. I Inter. II District ————————————————————————————————— 71 days 74 days 121 days 99 days Rautahat 5.11 2.72 3.54 2.42 (2.54) (2.05) (2.33) (1.92) Dhanusa 5.50 2.05 3.15 2.30 (3 96) (1 00) (2 44) (1 54) Av. for both 5.32 2.36 3.24 2.36 districts (3.38) (1.60) (2.39) (1.72) — —-’--‘——-—---——_ (Standard errors are in parentheses) In Dhanusa, the daily average hours of power source that was used followed the pattern of the importance of the season for rice milling. For example, in the slack rice milling season the power source was used for 2.05 hours per day. This averaged less than the hours in the first and second intermediate seasons. But, in Rautahat the average number of hours per day power source was used in slack rice milling season was longer than that in the second intermediate rice milling seasons. This may be due to a higher degree of plate mill combination that accompanied milling of other grains in Rautahat than in Dhanusa. The average number of hours for the rice milling machines used in the two districts during the four milling seasons has been presented in Table 4.8. Not much season to season difference in the extent of rice milling machines use between the two districts was observed. Slightly higher average use found in 50 Dhanusa may be because of some paddy milling on the miller's own account. Table 4.8: Number of Hours for Rice Milling Machine Use by Season ———————-—_—————————————- "—__—————————————————-—————~— District Average Hours Per Day Peak Slack Ist Inter. 2nd Inter Rautahat 4.39 0.96 1.77 1.53 (5.11) (2.72) (3.54) (2.42) Dhanusa 4.48 0.93 1.78 1.53 (5.50) (2.05) (3.15) (2.30) -—_————_——-—_————————————————_——_————-———___—————————-——___——__—_———~—— (In brakets are the hours for power unit use from Table 4.7) 4.3 Current 3193 Milling Rice milling in the study area was predominantly on a custom basis (Table 4.9). In Rautahat, all of the mills studied in the first stage provided only custom milling service. In Dhanusa, four of the 119 mills milled on the custom basis as well as on the miller's own account. These mills individually milled 90. 85, 80 and 30 per cent of paddy on the custom basis. Altogether, only 3.3 per cent of paddy was milled on the miller's account. 51 Table 4.9: Number of Mills and the Kinds of Milling Services Kind of Service District Only custom Both custom Only and own A/C own A/C Total Rautahat 99 - — 99 Dhanusa 113 4 2 119 Total 212 4 2 218 Note: Two mills that milled paddy on miller's account only were the ones that reported losses in 1984/85 and were excluded from the second stage survey. 4.3.1 Extent 9; Custom Rice Milling Based on the number of mills, the average number of days in each season (Table 5.3), average number of hours the rice milling machines were used by season (Table 4.8), average tons per hour (TPH) capacity (calculated separately) an estimate of the amount of paddy that was machine milled in each district was calculated. By adjusting these figures with the average share of milling on the miller's account, the amount that was custom milled was obtained. Table 4.10 presents the relevant information needed for calculating the extent of custom rice milling in the two districts. 52 Table 4.10: Estimation of the Extent of Custom Milling in Rautahat and Dhanusa District Season and Item Peak Slack Inter. I Inter. II Rautahat Av. daily hrs. 4.39 0.96 1.77 1.53 No. of days 71 74 121 99 Total hrs. 311.7 71.0 214.2 151.5 Av. TPH .3343 .3343 .3343 .3343 Total mills 228 228 228 228 Milled Qty. 23757.9 5411.6 16174.0 11547.4 Dhanusa Av. daily hrs. 4.48 0.93 1.78 1.53 No. of days 71 74 121 99 Total hrs. 318.1 68.8 215.4 151.5 Av. TPH .3814 .3814 .3814 .3814 Total mills 256 256 256 256 Milled Qty. 31058.8 6678.5 21031.3 14792.2 Thus the total amount of paddy machine milled in Rautahat and Dhanusa were respectively 56890.9 and 73560.8 Estimated paddy production figures for 1984/85 were 101,350 and 105,660 tons (FAMSD, 1986 for seed, feed, and wastage, metric tons. respectively ). If 13 per cent was used 88,174.5 and 91,924.2 metric tons of paddy. the two were left with respectively Rautahat and Dhanusa respectively milled 64.5 and 80.0 per cent of the paddy produced. 53 Milling in other districts and in India involves the rest of the paddy production. All of rice milling in Rautahat and 96.7 per cent of rice milling in Dhanusa was on the custom basis. However, the respondant indicated that the local rice merchants also get their paddy milled on a custom basis. 4.3.2 Recent Changes in thg Extent 9; Custom Milling The mill operators enumerated were asked what changes were occuring in the extent of custom milling. 0f the 99 mill operators in Rautahat, one thought the extent of custom milling was increasing because of growth in demand for rice. But, 98 respondants thought that there was no increase in the extent of custom milling over the recent years. Sixty—five of these 98 operators thought the extent of custom milling was not decreasing either. Thirty—thre of the mill operators thought that the amount of custom milling in their mill was decreasing because of an excessive number of mills. Of the 119 respondants in Dhanusa, 5 thought that the extent of custom milling was growing. Sixty—seven thought that it was not changing and 45 mill operators thought that the extent of Custom milling was decreasing. The rest were not able to express any opinion. 0f the 45 who experienced a decline in the extent of custom milling, 26 thought the decline was due to an excessive number of mills. Ten did not know the reason for the decline. The other four respondants thought that the causes for the decline in custom milling were decrease in production, lack of operating capital, lack of improvement in transportation, and compitition from other millers. 54 4.3.3 Expected Changes i_ Rice Milling Technology Operators of the two mills that milled paddy exclusively on their own account and sold rice in the urban internal and the export markets, individually, reported losses during the study period. As these two mills had to be excluded from the detailed study, the kind of likely technological changes that encourages rice milling on the miller's account are hard to anticipate. Four other mills that milled paddy on custom basis as well as on the miller's account (to a very limited extent) made no losses. Milling on the miller's aaccount was reported only in Dhanusa. This was only about 3.3 per cent of what all of these mills milled together. The mills that milled paddy on a custom basis would not have strong incentive to bring in more profitable milling technology unless such profits came from savings on energy or on repair and maintenance. For instance, if profits expected from adopting new rice milling technology came through an increased rate of rice recovery, the millers who provide custom services do not capture any benefits from a higher rice recovery rate. They may incur loss from custom milling if they accepted byproducts as milling charge because, with a higher rate of rice recovery, the amount of byproduct gets be reduced and, there could be a different quality byproduct. Therefore, as earners of milling wages, the custom millers were not sensitive to improved milling technology. A kind of reinforcement for the existing rice milling technology seems to be in force. As atomistic users, the farm households are unlikely to be aware of better milling technologies. Even if some individual farmers 55 were informed, they will be too small to influence the miller to adopt better milling technology. If a custom miller adopts new machine milling technology, he might suffer a loss on the old machine in terms of opportunity cost. New machines might need more initial capital. On a custom milling basis, for several reasons, the operator does not receive the benefits of increased investment in a reasonable time period. First, the miller can not charge a higher milling fee compared to other millers at least until many of the custom customers in the same area realize the advantages of the new machines and accept to pay higher milling charges. Second, the saving in the miller's cost is likely to be relatively small compared to the benefits to customers if a higher rice recovery rate is obtained. Third, the farmers are using the byproduct as animal feed and new technology does not give the same quality byproduct. Finally, the problems of spareparts, availability of skilled men for repairs and maintenance and government tax policy are additional factors discouraging changes in milling equipment. Because of all these factors, no change in the current rice milling technology in the small mills studied can be anticipated. The millers surveyed were asked to comment on the recent changes in parboiling (boiling and drying paddy before milling) and on sheller milling. 0f the 79 respondants, 40 thought that the extent of parboiling was not changing, 24 thought that it was increasing and the rest did not express an opinion. Similarly, of the 79 responses 53 said that sheller milling was not increasing, 21 said that it was increasing, and five did not 56 express an opinion. 0n the addition of husk and bran separators, 53 of the 79 millers said that such equipments were not being added, one said husk separators were being added, five said both husk and bran separators were being added and the rest did not express an opinion. Since, none of the second stage respondants reported any addition of such equipment in his own mill, this information should be treated cautiously. Summary This chapter provided a general description of Tarai rice mills. Except for the big rice mills (one or more TPH) others mainly provide custom services. The big mills ran either rubber rollers shellers or steel hullers with parboiling facilities that give a higher rice recovery rate. All the small rice mills had compact hullers without any husk separator or polisher. These hullers delived rice and byproduct from one spout. The farm households raise livestock and seem to value the byproduct for feeding the livestock. The rice milling industry in Nepal is dualistic with relatively more modern milling machines used by the big mills to serve the cash markets. The old Engleberg type of compact steel huller mills are used to provide custom services. The smallest size group (up to 10 HP) mills predominate. About two—thirds of the millers derived only up to 25 per cent of their total income from milling. Private ownership and owner management were common. The common mill structures were mud floor with concrete machinery foundation. The walls were thatched and khapda roofs were used. 57 Plate mills followed by oil expellers were the most common other equipment combinations. The engines ran for 5.32 hours per day during the peak rice milling season. The average daily use of the rice milling machines in peak season were 4.39 and 4.48 hours per day respectively for Rautahat and Dhanusa. The small mills had a stagnant technology. The present milling technology is likely to continue for a long time. This is due to several reinforcing factors which include: the predominance of custom milling, value of husk for animal feed, government policies that discourage the adoption of new equipment, and lack of adequate incentives for the custom millers. CHAPATER FIVE FINANCIAL AND ECONOMIC ANALYSES 0F RICE MILLS First, this chapter sets out the different accounting perspectives taken to study the size economies of rice milling. The operational definitions of various costs follow. Then the required weights to allocate the total costs of the mill to the rice milling part of the enterprise are derived. The itemized annual financial costs for different size and type catagories of rice mills are then presented. Finally the economic costs of rice milling are presented. To study the size economies of rice mills, four perspectives were taken. The First is the financial standpoint of the mill owners. This‘ allowed a look at the incentives for the mill entreprenuers. The second is the financial standpoint of the mill user. This enabled to look into the milling cost to the mill user and indicates the degree of trade off between miller's cost reduction and mill user's cost reduction. The third is the economic perspective which has two variants. The first is without the assembly and distribution costs and the second, with the assembly and distribution costs* (see Definition of Terms). * Another perspective is to add the miller's financial cost of milling plus the custom customer's two way transport cost. This has an use in finding the economic milling cost and is used for sensitivity analysis in Chapter 6. 58 59 The following few paragraphs describe the approaches taken to obtain data on annual fixed costs, annual variable costs, and the weights for joint cost allocation between rice milling and other milling operations. Since rice mills involved expenses on capital equipment for milling of foodgrains other than paddy, the method used to assess the cost of rice milling must take this into account. To obtain the annual capital costs, the current value and expected remaining life of each capital item was determined in the following manner. The interviewers discussed the recent purchases and sales of various mill equipment with the respondants. The focus was on the makes and ages of the equipments and their prices. In light of this discussion, their own experiences, and the information they received from their machinery sellers, the millers were asked to assess the current value and the expected remaining life of their machinery. These values were the estimated resale values of the equipment on the mill site of the responding miller on the date of the interview. In case of the mill housing structures a lump sum estimate for constructing similar structures in 1984/85 prices was made by the respondant. Then an allowance for depreciation was roughly estimated and an amount equal to the depreciation was taken out from the lump sum estimate of the housing structures to provide a similar building in the survey year 1984/85. This provided an estimate of the current value of the housing. However, unlike machinery equipment, the millers had no outside information on 60 the expected remaining life of the housing structures. They relied on their own experiences about mill structures and similar other structures. A number of mill operators thought that the mill structures would last for a long time if adequatly repaired and maintaimed. Some of the millers were unable to provide any information on the expected remaining life. Thus information on the expected remaining life of the mill housing structures for each size and type of mill could not be obtained. To solve this problem the average expected remaining life of all diesel run mill structures about which information was obtained was used for the expected remaining life of all size groups of diesel mills. A similar approach was taken for the electric mills. The average expected remaining life of the housing structures were rounded up to the next higher integer. To obtain the value of the land area used by the mill premises the net returns from a piece of land of equal area was used. (A possible approach of standarizing land cost was not taken in this study.) Except for the rice hullers and their repairs, all other cost items were jointly used in rice milling and milling of other grains. Therefore, only a part of the fuel, machine, land. building, permanent workers, and interest costs can be assigned to rice milling. A basis for allocating the joint costs was needed. In this study, the daily average time of rice milling machine use as a proportion of the average time for the power unit use was used as the weight to allocate joint cost. Seasonal- variations in the time share were also taken into account. The following section describes the detailed procedure adopted. 61 5.1 Allocation 9f Joint Costs As indicated earlier, for allocating joint costs, the time share of power unit use in milling paddy, on average, was chosen. Table 5.1 shows the average use of the power unit per day by season for all the size groups of mills by type of energy used. Table 5.1: Extent of Power Unit Use on Rice and Other Grain Milling by Season (hrs./day) Average Hours Power Average Hours Rice Unit Used Mill Used Peak Slak Inter. Inter. Peak Slack Inter. Inter. I II I II Electric 10 HP or less 4.63 1.98 3.33 2.83 3.79 1.02 1.92 2.21 (1.77)(1.17)(1.89)(1.35) (1.53) (.62) (.90) (1.03) 11 — 15 HP 4.50 2.25 3.13 3.13 4.50 .50 2.00 2.00 (.71) (.35) (.18) (.18) (.71) (0) (0) (0) 23 - 35 HP 3.50 1.00 2.80 2.80 3.50 .50 2.00 2.00 (.71) (0) (.35) (.35) (.71) (0) (0) (0) Diesel 10 HPor less 4.98 2.28 3.06 2.77 4.37 1.0 1.87 1.77 (1.92)(1.21)(1.39)(1.62) (1.76) (.51) (.88) (1.25) 11 — 15 HP 5.92 2.60 3.69 3.12 4.96 1.17 1.94 2.35 (1.86) (.69)(1.95)(1.72) (1.66) (.59)(1.14) (1.44) 16-22 HP 4.22 2.19 2.22 1.44 3.28 .75 1.42 .83 (1.50) (.77)(1.73)(1.57) (1.23) (.43)(l.12) (1.00) _—————.———.——_—.———-_————_—————-_—_-————-———_——————_——_.—-————————»~——~ (In parentheses are the standard errors) The above table indicates a tendency that the 11 to 15 horsepower size group of mills operated for longer hours per day than the other size groups, especially for diesel operated mills. 62 Specific reasons for this were not included in the study. But, the field experience during survey suggests that lower average use hours of the smallest size group mills was mainly because of power machine breakdown. Another related tendency was that the largest size group mills were generally used for shorter hours in all of the milling seasons than the other size groups. Possibly it was because the customers consider cost of transportation while making their decisions on where to mill their paddy. The custom customers did not want to take their paddy over a longer distance and the bigger mills do not get paddy to mill from large enough area to enable them to run for longer hours. On the average bigger mills were forced to operate for shorter hours if the market area was not large enough. Also, bigger mills finish the job faster. Entreprenuers or analysts often consider 8 hours per day capacity utilization as a basis to_c0mpute the returns from various enterprises including rice milling (Pradhan, 1984). However, the maximum use of machinery per day as shown in Table 5.1 is less than 6 hours (5.92 hours) during peak season for the most heavily used 11 to 15 horsepower group of diesel mills. To allocate the joint fixed costs as well as joint variable costs between rice milling and milling of other farm products on the basis of time sharing, the duration of each milling season was needed. However, the millers's response indicated that the begining and ending of the milling seasons were not uniform in the study area. The reasons for this could be the differences in cropping mixture from locality to locality (early versus late 63 paddy), a tradition based on storage pest incidence, farmer's other engagements at various times of the year, and average production of the household. Therefore, the duration of each rice milling season is judged on the basis of frequencies immediately before and after the modal time. This is clear from Table 5.2. Table 5.2: Frequency Distribution on the Beginings and Endings of Various Milling Seasons Begining Ending Season ———————————————————————————————————————————————— No No No Total No No No Total Peak 46 101 35 182 12 98 65 175 Nepali month 7 8 9 9 10 11 Slack 7 110 69 176 87 96 10 193 Nepali month 1 2 3 4 5 6 The above table indicates that 101 mill operators reported mid—Mansir (Nov.-Dec.) as the beginning of the peak rice milling season and 81 reported otherwise, e.g. a month before mid-Mansir (46) and a month after mid—Mansir (35). Therefore the begining of the peak rice milling season was identified as Mansir. During the four weeks in Mansir, the beginning date for the peak season was obtained in the following manner. 0f the 182 responses on peak season an excess of 11 1.9. (46—35) millers reported the peak rice milling season to start before mid—Mansir. Personal discussion with some of the mill 64 operators suggested that the begining of the peak rice milling season is a couple of days or so before the middle of Mansir. Therefore, the date on which the peak rice milling season begins was decided to be 2 days before mid-Mansir i.e. Mansir 13 was determined to be the begining date for the peak rice milling season. Similarly, the begining and ending dates of the slack rice milling season were specified. This allowed for the specification of the dates and durations of the two intermediate rice milling seasons as shown in Table 5.3. Table 5.3: Dates and Duration of Various Rice Milling Seasons Season Begining Date Ending Date Duration (days) """"" 13;;12’m’""£19.11;§;"I;""""§1;;£';;m"""""iz'l'm‘" Slack Jestha 25 Bhadra 3 74 Inter. I Magh 25 Jestha 24 121 Inter.II Bhadra 4 Mansir 12 99 TotaI;-365 ——————— .—————_-———-——-————-—————————_—_————._———_-——-—_————_——————_—.—.__.___‘-—_— Of the 365 days in a year, the peak season is only 71 days, the intermediate seasons take up 220 days and the slack season takes up 74 days. Between the peak and slack seasons, two intermediate seasons were identified. The intermedite season that followed the peak season was of a longer duration than the one that followed the slack season. Such a seasonal pattern is consistent with the planting and harvesting seasons for early and late paddy varities. The number of days for each milling season 65 as shown in Table 5.3 and the average number of machine use hours as shown in Table 5.1 were used to obtain weights for allocating the joint (fixed and variable) costs of the mill to rice milling business. The proportion of joint cost to paddy milling in any mill category is given by the following expression. R P- = 2: --i—-xs (1) r 1 P1 i=1....4 Where, Pr: weight to allocate joint cost to rice milling in any mill category R = Average number of hours the rice machine is run per day in season i P.= Average number of hours the power source is run per day in season i, and S = Proportion of the number of days in season i to the total days in the year From the above expression and Table 5.1 the proportion of joint cost allocatd to rice milling in case or the smallest size group electric mills is 0.67= (3.79/4.63)x(71/365) + (1.02/1.98) x(74/365) + (1.92/3.33)x(14/365) + (2.21/2.83)x(99/365). Table 5.4 specifies the weight obtained for allocating joints costs of the mill business to rice milling. The highest weight for rice milling was obtained for the largest size group electric mills. For all the mills the weight for milling paddy outweighed the milling of all other grains taken together because 66 the weights obtained are more than .5. In general, the bigger size diesel mills showed slightly less weight for paddy milling. This appears consistent because the bigger size mills are likely to use plate mills and oil extractors more than the smaller ones. Table 5.4: Derived Weights for Allocating Joint Costs to Rice Milling Size group 10 HP or less 11-15 HP 16—22 HP 23—35 HP Electric .67 .62 -— .73 Diesel .64 .63 .59 ~— §42 Egg; 9; Resources gggg lg Rigs Milling The joint fixed costs involved in rice milling comprise of the cost of land used by the mill premises, the building costs, cost of power unit, interest on capital items, salaries. and taxes. Variable joint costs comprise of interest on working capital, repairs and mentenance, wages to casual laborers, fuel. and miscellenous costs. Except for hullers all the fixed costs were adjusted by relevant weights to obtain fixed costs for paddy milling. Among the variable cost items, repair and mentenance for power unit and buildings, wages, energy cost, and interest on running capital except for the maintenance of the huller are also joint costs. They were adjusted by relevant weights. The cost of hullers, their repair and maintenance, and accompanying interest cost are not joint costs and were fully charged to paddy milling. In the following few subsections these adjusted costs are shown. 67 2.21;. em a Law 9329. Ex :22 ELI; .____Pre-ises Table 5.5 indicates the average land area occupied by the mill premises for various size groups of electricity and diesel run mills. The land area occupied was not proportional to the size of the mill. A small area was enough simply to house the engine and the milling machines. The land area occupied may have depended primarily on the nature of the business, long term plans of the miller, and the maket price of land. If milling on the miller's account or, drying floor or, storage were present more area was occupied. Except for a few cases, the mills of the two districts provided only custom services. Hence, variations in land area were probably an indicator of long term factors such as plans, future business expectation or lack of managerial skills, in general. Table 5.5: Land Occupied by the Mills in Dhur (600 dhurs = 1 ha.) ———_~——-—-—-.—————_-~——--—_——————————————--—_-—_————-———-.——-_——_-—--—_ 10 HP or less 11-15 HP 16—22 HP 23—35 HP ————————————-——————-—._——-_——————-———————-———_—————-——-——————_——__*‘—_ Electric 6.1 22.0 - 6.5 (1.37) (25.5) ( 71) Dlesel 6.9 15.0 11 7 - (3 17) (25.9) (6 5) ——_———-————-- ____-—-——._———_—-———_———-———.—~—_—-.—__..._—.—_—————————-—_.——_—, (In parentheses are the standard errors) Since the market prices of land differ from one locality to another and these markets are not transparent, it was difficult to accurately assess the cost of land occupied by the mills. The procedure employed‘in this study was to assess the annual profit 68 foregone if the land were used for agricultural purposes. Table 5.6 shows the value of crop production forgone by an area equal to that used by the mill premises. Two crops namely paddy, and wheat were included because double cropping was widely practiced in the Tarai. (national average retail prices of paddy and wheat for 1983/84 and the five year average yields were used in this computation). Table 5.6: Gross Value of Farm Production Forgone by Land Area Equal to that Used by Average Mill (Rs.) 10HP or less 11-15 HP 16-22HP 23-35 HP Electric 87.0 314.0 — 92.9 Diesel 89.6 214.6 167.1 — Sources: 1. Nepal Rastra Bank; Some Important Statistics in Agriculture, 1985 2. FAMSD; Agricultural Stattistics of Nepal, 1983. The value of crops foregone from the land used by the mills was not proportional to the mill size because the average land area occupied by the mill was also not proportional to the mill size as measured by the engine horsepower. To obtain the net profit, the costs involved in crop production are presented in Table 5.7. Since five year average costs were not available, two year averages for 1981/83 were taken as base values and were adjusted by the fertilizer price change to make them comparable with the value of production. Also, the national average costs of production were not available. Thus, the averages from the Dhanusa district were 69 used. The prices of only two kinds of fertilizers changed between 1981 and 1983. Therefore, an unweighted average increase in fertilizer price of 13.5 per cent was used for cost adjustment. Table 5.7: Total Cost of Producing Paddy and Wheat on an Area Equal to that Occupied by the Mills in a Year. (Rs.) 10 HP or less 11—15 HP 16-22 HP 23-35 HP Electric 54.6 196.9 - 58.2 Diesel 61.8 134.3 104.7 Source: Based on FAMSD, Farm Management Study, 1981/82 ; and FAMSD, 1983. By deducting the production cost (Table 5.7) from the value of crop production foregone (Table 5.6) the net profit foregone as shown in Table 5.8 was obtained. Table 5.8: Net Profit Foregone from the Land Area Used by the Mills in One Year (Rs ) 10HP or less 11—15 HP 16—22 HP 23«35 HP Electric 32.4 .117 1 — 34.7 (23.7) (85.6) (25.3) Diesel 36.8 80.3 62.4 — (26.8) (58.4) (45.5) (In brakets are the land rents foregone @ 828 kg.of paddy / ha.) The opportunity cost of land used by the mill premises in 1983/84 ranged from Rs. 32.4 to Rs. 117.1. The foregone rental value of land area equal to that occupied by the mill premises as specified by law for A grade land was lower. Compared to other cost items (to be discussed) the land cost was negligible. 70 §;§;2 Building gpggg lg Milling Buildings and structures are important cost items in milling business. Table 5.9 indicates the average current value of buildings used for engine and equipment housing. The average expected remaining life of the buildings is included. Table 5.9: Average Current Value of Engine and Equipment Housing and Expected Remaining Life* (Rs. and yrs.) 10HP or less 11-15 HP 16-22 HP 23—35 HP Value Life Value Life Value Life Value Life Electric 11430 28 12000 28 - - 15500 28 (7840.2) (8243.5) (11094.7) Diesel 8726 25 10750 25 11000 25 ~ — (5781.3) (4371.2) (4263.2) (In parentheses are the standard errors) On the basis of the figures presented in Table 5.9 the annualized building cost for milling are presented in Table 5.10. Table 5.10: Annual Average Cost on Engine and Equipment Housing (Rs.) 10HP or less 11—15HP 16-22 HP 23—35 HP Electric 408.2 428.6 - 553.6 Diesel 349.0 430.0 440.0 - * The expected remaining lives of the housing structures are the averages for all the mills under each power source category. Every respondant did not provide information on expected remaining life. Therefore, the averages of the responses were taken and rounded up to the next higher integer. 71 The annual cost of engine and equipment housing shows a general increase with the mill size. These costs were more in line with the size than those incurred on land which were based on the area occupied by the mill premises. 5.2.3 mammal The power unit is another cost item shared by various equipments such as rice huller, plate mill, and oil extractor. Therefore, cost of the power unit is separated from other mill equipments. Table 5.11 displays the current value and expected remaining life of the power unit for all the mill categories. Table 5.11: Average Current Value and Expected Remaining Life of Power Unit by Horsepower Group (Rs. and Yrs.) ———_————————————_———-———————————_———————-———-——_——_—.———_..——-————_——__— -—_——_—-———---——---—-———-—————._———.—n_———om——————u—_—.-——-————_ Value Life Value Life Value Life Value Life __—_—_—-—~————.————-———_——_—~———-—————————_—.——.~n—_—-—“--—mn—-———fl——m_ Electric 7200 26 23500 30 - - 8500 20 (4893.4) (14709.8) (5697.6) Diesel 12441.8 18 15306.3 23 21600 25 - - (4371.9) (5673.8) (8376.7) (In parentheses are the standard errors) The current values and expected remaining lives do not necessarily go together in every instance. This may be because the current market for existing machines were not established and also expected remaining lives were by definition simply expected. They were based on individual judgements and on information from the sellers. More importantly these figures reflect the mix of the old and new power units currently being used. 72 5.2.499_s.t.2:m§29_u22 The electricity operated engines do not need a water pump for cooling whereas the diesel operated ones need it. Table 5.12 below shows the current price and expected remaining life of the water pump unit for the diesel operated engines. Table 5.12: Average Current Price and Expected Remaining Life of Water Pumps (Rs. and Yrs.) *-—--m—_——_-_———————————————-——————-——-—————-——. 10HP or less 11-15 HP 16-22 HP Value Life Value Life Value Life 231.6 8 235.7 4 470.0 3 (253.4) (278.2) (374.7) (In parentheses are the standard errors) On a per year basis the cost of a water pump was not a significant item. This could be seen if the current values were divided by the corresponding expected remaining live of the water pumps. Before proceeding to the financial or economic analyses the figures from Table 5.11 and Table 5.12 were annualized to obtain the annual straight line depreciation. Also. for the engine and equipment housing the same method was followed. 5.2.5 Salaries ggg flgggg Salary expenses for permanent mill workers was another fixed joint cost item to be shared by other grains handled by the mill. The most common practice found was that the owner worked as manager and accountant. In many cases, the owner also worked as 73 skilled labor in his mill. In a few cases, the mill owner also worked as unskilled laborer. Working as labor was made possible because the custom customers provided helping hands while milling their grains. Table 5.13 has the salary expenses averaged from the mills that hired managers, accountants, skilled workers and laborers on a permanent basis. This cost was assumed to be the salary and wage expenses amount for the mills that did not hire a special person for each job. This implies that the profits from milling were pure economic profits and not the returns to the management. A feature of hiring skilled mechanical help was that some millers individually paid a small salary to a mechanic and called for his service when needed. Others obtained the services of a mechanic as and when needed and paid a lump sum amount for each service. Since such lump sum payments were reported in repair and maintenance cost, the average fixed salary payment to the mechanic was included in Table 5.13. While considering repair and maintenance, only the cost of spareparts was included. This amounted to have assumed that the lump sum payments and monthly payments to the mechanic were equal in an entire year. Table 5.13: Salary Expenses by Mill Category During 1984/85 (Rs.) —-_fl-——_—_——-—-———————————-————-_—————————_——_———.———_—————————————— 10HP or less 11-15 HP 16-22 HP 23-35 HP Electric 20125.4 21614.3 ~ 25314.3 (9872.3) (8776.9) (11264.7) Diesel 18508.1 16974.3 17671.4 - (7523.2) (8662.4) (9103.2) ——._—_———————~———.——-——.—_-—-——-.-—————__——..————————————.———_—_.._——__ (In parentheses are the standard errors) 74 The salary expenses increased as the size of the electrical mill increased . This was not the case with the diesel mills. A possible explanation for this may be that generally the smallest size diesel mills were scattered in the interior areas where the salaries and wages for the skilled workers are likely to be higher. Another aspect of the salaries and wages of the skilled workers in the rural areas can be their immobility which may have been reinforced by the lack of information on job availability elsewhere. Most of the electrical transmission lines ran by the road side where mobility of the workers is greater. This may have helped to smooth the use of skilled workers by the electrical mills. These mills showed an increasing expenditure on salaries and wages with increased mill size. Also, the amount of paddy milled increased as the size of the electrical mill increased. This factor, too, contributed towards a higher salary cost. 5.2.6 Igggg Two types of mill taxes prevailled in the study area. One was a lump sum annual tax according to the horsepower size. The other type of tax was based on production. Though the tax rates were specified by law there were discrepancies in tax expenses incurred by the mill owners. Besides the actual tax amount there were other dues such as donation for sports council, district development tax, and education taxes. Also, there were other expenses incurred while paying the taxes. Such expenses could be transport, hotel bill, and so on. Underreporting of the mill horsepower by some millers is another source of variation in tax 75 payments. Table 5.14 has summed up the average amount paid on taxes, involuntary donations, and expenses incurred while paying taxes. Table 5.14: Taxes, Compulsory Donations, and Other Tax Related Expenses on Average for 1984/85 (Rs.) ————-———-—-————-———————-———-—-—-—--——_—————-——-—————————.——~————————— 10HP or less 11—15 HP 16—22 HP 23—35 HP Electric 1085 2085 --— 1850 (360.6) (827.3) (1202.1) Diesel 890.4 1348.9 3041.4 ——— (331.0) (609.9) (173.2) (In parentheses are the standard errors) Except for the 23 to 35 horsepower electricity operated mills, the taxes increased as the mill size increased. Even though the plate mills were not taxed but the oil extractors and rice mills were, the tax expenses were treated as joint cost in this study. 5.2.7 0 ost 9f Hullers All of the costs for rice hullers and their spareparts shown in the next two tables were not joint costs. Because of the current mix of new and old rice hullers and the lack of an established used machinery market, the current values and expected remaining life of the hullers seemed irrigular (Table 5.15). 76 Table 5.15: Current Value and Expected Remaining life of Hullers (Rs. and yrs.) 10HP or less 11-15 HP 16-22 HP 23—35 HP Value Life Value Life Value Life Value Life Electric 1416.7 8 1600.0 10 ——- —-- 750.0 5 (231.7) (848.5) (70.7) Diesel 1039.1 8 1121.9 10 1112.5 7 ——— —~— (580.1) (682.6) (742.0) (In parentheses are the standard errors) To keep the hullers working spareparts such as blades. strainers, bearings, etc. were needed. While milling the rice, milling machines get rubbed against fine silt that is present naturally in rice husk. So parts must be replaced very often. Table 5.16 indicates the expenses on spareparts for the rice milling machines. Table 5.16: Spareparts Bill for Hullers in 1984/85 (Rs.) 10HP or less 11-15 HP 16—22 HP 23—35 HP Electric 1516.7 907.5 ——— 1250 (1164.5) (120.8) (353.6) Diesel 1190.9 794.6 1378.9 ——- (698.1) (500.8) (1077.7) (In parentheses are the standard errors) A comparision of Table 5.15 and Table 5.16 tells that the spareparts bills were more than the cost of the huller in a number of cells. This is because when the machines run the quick wear and tear of some of the parts was to be expected. Replacing 77 the whole machine was obviously not a practical solution. Also, expenses on spareparts depended in part on the presence of foreign material such as sand, pebbles and pieces of iron that was sometimes found in paddy. None of the mills studied in the second stage had any devices to separate these foreign materials from paddy before milling. 5.2.8 Cost 2; Power Unit Sparepgrts The cost of spareparts for power units were joint costs. Table 5.17 has the average cost of spareparts for the power units by mill catagory incurred in the year 1984/85. Table 5.17: Expenses on Power Unit Spareparts During 1984/85 (Rs.) 10HP or less 11—15 HP 16~22 HP 23—35 HP Electric 825.0 100.0 — — (778.3) (141.4) — — Diesel 2031.1 3403.8 3422.2 - (1502.5) (3094.7) (2324.7) — ~-m—u___—~—————————————————~—--o¢u——-m—q———_—n—_--—_-_—__-————-—————_-—-~ (Standard errors are in parentheses) The spareparts expenses on power units were substantially smaller for the electricity operated mills than for the diesel operated mills. The diesel engines needed reconditioning about every 6 months which involves taking the piston down and changing the rings and gaskets. The spareparts bills for the diesel mills showed an increase with the size of the mill. 78 5.2.9 Cost 9; Buildings Repair Table 5.18 shows the repair and mentenance cost for mill structures during the year 1984/85 and are joint costs. Table 5.18: Cost of Buildings Repair During 1984/85 (Rs.) ———————-——-__-——-—---_——_----——--—--—-—_—-—-—-----—--_-—_-——‘-——— 10HP or less 11-15 HP 16—22 HP 23—35 HP Electric 491.7 350.0 — 1100 (464.1) (217.1) - (565.7) Diesel 293.9 226.9 633.3 — (299.8) (105.3) (935.8) - —._—————————-——- -———_—-———--_-—o—————_—_—————- (In parentheses are the standard errors) The repair cost for building was the highest for the 23 to 35 horsepower size group of the electrical mills. The 16 to 22 horsepower size group diesel mills followed. In general, the electricity operated mills spent more on building repairs than the diesel mills. Specific reasons for this were not known. But to avoid electrical short circuit, the buildings for electrical mills need to be maintained better. 5.2.10 Fuel 9; Energy Bill Table 5.19 displays the fuel or energy bill for the year 1984/85 for each category mill. This is also a joint cost item. 79 Table 5.19: Fuel or Energy Cost by Mill Catagory for 1984/85 (Rs.) 10HP or less 11-15 HP 16-22 HP 23—35 HP Electric 7226.3 7087.5 - 11700 (3242.8) (2952.2) - (8909.5) Diesel 16030.1 14207.7 18333.3 - (9931.9) (5021.7) (10843.1) - -———-—-—-_———-————-—_———————--——_---—_—c--—-——_--————_———_——.——--—_—_—— (In parentheses are the standard errors) Among the electrical mills energy costs were the highest for the 23 to 35 horsepower size group. The fuel expenses were related to the average number of hours per day the power units were in operation. The acquisition cost also was included in the fuel cost. 5.2.11 Miscelleneous ggggg Some mills incur costs other than those listed in this chapter. Aims for the beggars, voluntary donations to religious works were involved. Table 5.20 below rcords the miscelleneous expenses incurred by each mill category for the year 1984/85. Table 5.20: Miscelleneous Expenditure by Mill Category for 1984/85 (Rs.) _m—_—_-—__._——-___—n_———_—n_~—_—_—_~—-——»—~—————————_.—~__.———-—.——-.—.._—___-—_*~—— Electric 0 O — ' 0 Diesel 140.6 230.8 0 - (240.8) (317.2) (In parentheses sre the standard errors) 80 Only two mill catagories reported miscelleneous expenses for 1984/85. Also, the standard errors were much bigger than the corresponding means which. This implies that the miscellenous expenses were not proportional to the individual mill size. 5.2.12 Miller's Financial 92g; Incurred by Different Mills So far, a basis for allocating joint costs (fixed as well as variable) of milling all grains to the rice milling enterprise, and various costs involved in running an average mill of each catagory were developed. This section has them together. The cost figures were derived by using the following expression. Ci=FiXPr +Vi Where, Ci = total annual cost for an average mill by catagory Pi = average annual total joint cost for each mill class Pr = corresponding wt. for paddy milling from Table 5.4 Vi = average annual separate cost for rice milling by mill catagory Table 5.21 was prepared by using the above simple accouting expression and shows the miller’s cost for 1984/85. -: +— 81 Table 5.21: Miller's Financial Total Annual Rice Milling Cost by Cost Catagory for Various Size Electric Mills (Rs.) - ———— —- -_—--_—————10HP or Less 11-15 HP 23—35—HP-—-- 25-331323; """""""""" 32.4 1.7.1 "”22? """" (b) Eng. & Eqp.Hse. 408.2 428.6 553.6 (0) Power unit 276.9 783.3 425.0 (d) Salary and wage 20125.4 21614.3 25314.0 (e) Taxes & donation 1085.0 2085.0 1850.0 (f) Eng. spareparts 825.0 100.0 — (g) Building Rep. 491.7 350.0 1100.0 (h) Energy 7226.3 7087.5 11700.0 (1) Misc. — _ _ Sub Total 30470.9 32565.8 40977.3 (j) proportion of cost for paddy .67 .62 .73 (k) Adjusted cost for milling paddy 20415.5 20190.8 29913.4 (1) Annual Cost of huller 177.1 160.0 150.0 (m) Spareparts (huller) 1516.7 907.5 1250.0 Sub—total 22109.3 21258.3 31313.4 (n) Int. on total of Inv. items b+c+l @ 13.5% 1876.3 3187.4 2385.5 (0) Int. on other items a+d+e+f+g+h+i+m @ 13.5% 1449.4 1273.4 2055.5 $3251117;;“HIIEQQESQTZQQQQTS """ £9§I§’i“‘“’§é§§£§ """""" 82 All of the cost items from (a) through (i) in Table 5.21 were joint costs for the average electrical mill of each size group. Similar was the case for diesel mills in Table 5.22 to be shown later. These costs were adjusted by the weights derived in Table 5.4. In both Table 5.21 and Table 5.22 cost items (1) and (m) were applied only for rice milling. Therefore they were fully alloted to rice milling. While obtaining the interest charges first, total value of engine and equipment housing and power unit were added. This was then multiplied by the weight for rice milling. The figure thus obtained was added to the total value of the huller and a 13.5 per cent interest was charged for the whole year. For the other items, the interest was charged at 13.5 per cent for a period of six months. This may have raised the amount of interest cost on fuel and energy expenses because these items were purchased more frequently in smaller quantities. The actual frequencies were not studied in the survey. Hence, this method was adopted. The miller's, financial, total annual costs of rice miling were the smallest for the 11 to 15 horsepower group of the electrical mills. However, at this stage the corresponding amounts of paddy milled by the electric mills are not considered. So, the miller's financial size economies would be discussed later. Table 5.22 below has the itemized average cost, relevant weight for joint cost allocation'and total cost_ incurred in running the diesel mills by size group for the year 1984/85. 83 Table 5.22 Miller's Financial Total Annual Rice Milling Cost by Cost Catagory for Various Size Diesel Mills (Rs.) 11-15 HP 16~22 HP ——_——————-————————————————-———————.-————-——c.——_-———————————-—————_-. J') k) l) m) n) Land cost Eng. and Eqp. Hse. Power unit and pump Salary & Wage Taxes & donation Eng. spareparts Building repairs Fuel Misc. Sub-total Proportion of cost for paddy milling Adjusted cost to paddy milling 349.0 720.5 18508.1 890.4 2031.1 293.9 16030.1 140.6 39000.5 .64 24960.3 129.9 1190.0 26280.2 1989.2 430.0 724.4 16974.3 1348.9 3403.8 226.9 14207.7 230.8 37627.1 .63 23705.1 112.2 794.6 24611.9 2387.6 440.0 1020.7 17671.4 3041.4 3422.2 633.3 18333.3 44624.7 .59 26328.6 158.9 1378.9 27866.4 2746.8 *~-*—-“—_c—__-——-¢-_—m—-—-——n————--——-o——~—-——c.—-.--_——_-_—_————--—-fl-—— Annual cost of hullers Huller spareparts Sub—total Int. on capital items (b+c+l) @ 13.5% Interest on other items (a+d+e+f+g+h+i+m) @ 13.5% Total milling was the lowest for the 11 to 15 horsepower The above table indicates that the total annual cost of rice diesel mills. 84 However, the financial size economies would be known only after considering the corresponding amounts of paddy milled by each size catagory. 5.2.13 Quantity 9; Paddy Milled Table 5.23 below shows the quantity of paddy milled and the revenue obtained by different sizes and types of mills. Table 5.23 Quantity of Paddy Milled and Revenue Received by Size and Type of Mills (MT and Rs.) 10HP or less 11-15 HP 16-22 HP 23—35 HP ‘BE§’"§;;"" Qty— Rem—"32y Rev" Qty 11;?" E12.62;};"153373715532;8328383""Tm?"3233233313 Milling — 23800.0 — 28625.0 — — — 43687.5 Lappy - 4998.0 - 6011.3 - — - 9174.4 Diesel 220.2 33305.3 210.6 31853.3 223.9 33864.9 Milling - 27525.0 - 26325.0 - 27987.5 -—_—_—-—‘-—--————_-—--_------—-—--—_---——--——-_-——_----—-_—--—*— — Note: Average milling charge in cash is Rs. 125 per ton and lappy (charge in kind) is equivalent to Rs. 26.3 per ton. Two cells are not included because the cost data are not obtained to asses the size economies. The above table shows that the average quantity of paddy milled in 1984/85 increased as the mill size increased for the electrical powered. However, the case with the diesel powered mills was that the quantity of paddy milled did not go with the size of the mill. The difference between the highest amount milled and the smallest amount milled was only 13.3 metric tons 85 in the study year. There are two possible explanations. First, to a limited extent, a few of the electricity operated mills also milled paddy on the miller's account. The diesel operated mills exclusively provided custom milling services. Second, the size difference between the largest and the second largest size groups of electrical mills included in the study is bigger than the size difference for the diesel mills. In Table 5.23 the revenue obtained is divided into two categories. One is the straight milling charge at the rate of Rs. 12.5 per per quintal. Another is the lappy, a certain amount of grain just taken from the customer's bag after milling. At the time of the field survey the milling was in slack season (months of June through August). A number of mills were not milling paddy right at the time of interview. However, many mills were found milling paddy when the survey team members took the interviews. The mill operators invariably collectd some milled grain from the customers in addition to the cash milling charge. This was locally called lappy and amounted to about 250 grams per 40 kilograms of paddy. This lappy has been included in the returns side by assuming 60 per cent rice recovery and a price of Rs. 7.0 for one kilogram of rice. However,the size of lappy collected could be more than that shown in Table 5.23 because even if the lot size were smaller, the lappy amount taken was probably not smaller by the same proportion. 86 5.3 Miller's Financial Milling Qgggg Based on the last two sections in this chapter Table 5.24 shows the miller's financial costs, returns, and net profit together. On the net profit per ton criterion, the electrical mills were more profitable than the diesel ones. Among the diesel mills the 11 to 15 horsepower group was the most profitable. However, compared to the electrical mills, the diesel mills did not show a strong pattern of profitability that increased as the mill size increased. 87 Table 5.24: Miller's Financial Cost and Total Returns and Net Profit from Rice Milling on Average for 1984/85 (Rs.) ———————-._———.———-———-—.u—co—-———--—--—_.——-——¢.——-_—-———~———6————.————————" 10HP or less 11-15 HP 16-22 HP 23-35 HP £31.32}; """"""""""""""""""""""""""""""""""""""""""" a) Total cost 25435. 25719.1 —— 35754. b) Total Rev. 28798. 34636.3 —— 52861. 0) Net return 3363. 8917.2 —- 17107. d) Qty. milled (tons) 190. 229.0 349. e) Rev. per ton 151. 151.3 —— 151. f) Cost per ton 133. 112.3 —- 102. g) Net return per ten 17. 39.0 -— 49. Diesel a) Total cost 29988. 28604.1 32425.3 b) Total Rev. 33305. 31853.3 33864.9 C) Net return 3316. 3249.2 1439.6 d) Qty. milled (tons) 220. 210.6 223.9 e) Rev. per ton 151. 151.3 151.3 f) Cost per ton 136. 135.8 144.8 g) Net return per ton 15. 15.5 6.5 The above figures show that the electricity operated mills have to some extent financial size economies for the miller. The diesel operated mills showed that the miller's financial cost was the lowest for cost the 11 to 15 horsepower group. Yet the difference between any two size groups of diesel mills was not as large as that for the electric mills (see Figure 2). 88 5.4 Assembly gag Distribuion Egg; Since, all but six mills in the study area to a limited extent, provided exclussively custom miling services the assembly and distribution cost did not enter into the miller's caculations of profitability. Even though the assembly and distribution cost was not borne by the custom miller this might have played a determining role before the miller chose the mill location. However, once the location is chosen the custom milers do not have to deal with the assembly and distribution cost. The custom customers bore the transportation cost. Almost all the grain that was transported for processing was transported by human packload by the family members or servants of the custom customers. They sometimes use bullock carts, horses or mules and bicycle. Trucks were not used. (Trucks were used by the 2 steam powered mills not included in this study). The method used to assess the transport cost was to determine the average market area for each mill category then determine the total transport cost on the basis of average distance and the total paddy that was transported to and from the mill. However, the transport cost differed with the mode used. On the assumption that any individual customer chose the mode of transport on the basis of the cost per unit weight of paddy per unit distance, it is necessary to determine the average distance, the average proportion of paddy transported by each mode and the cost of each mode. This section deals with the transport cost for each size and type class of mill. 89 5.4.1 Average Haulalge Distance :9; Each Category Mill If the market area were a circle and the customers were evenly distributed in the market area, the average distance for transporting paddy to the mill is 0.7r where, r is the radius of the market area*. The settlement pattern in Nepal's Tarai villages is concentrated in small groups of houses. However, the groups of houses are distributed almost evenly to allow work to be done on the on the entire cultivable land. This situation is equivalent to an even distribution of the mill customers. Therefore, 0.7 radius of the market area was assumed to be the average one way haulage distance for determining the the transport cost. Since the use of trucks or similar other modes was almost nil and the rates for other modes included loading and unloading, there is no fixed cost involved in transportation. The transport cost (assembly and distribution) for each catagory of mill was obtained by using the following expression. *To see that it is so. suppose the radius of the market area r is 2 unity, the area of the circle m r = square units where m is a mathematical constant equal lto 3.1416. Half of this area is 1.5708 square units. Therefore, when m r: =1.5708, rl=.707 where r1 is the radius of the inner circle that divides the market area represented by the circle in two equal halves. 90 B. = Z R, x V, x V, x r, 1 1 1 J J assembly and distribution cost for i th category mill Where, B, 1 V = total paddy miled by the i th category mill in quintal Hi: proportion of paddy transported by mode j r = rate per quintal by mode j per kilometer R = total distance for transport i.e. 2 x.7 x ri where, ri stands for the radius of the market area for the i th mill category The operational procedure used to find out the average market area for each category mill was by finding the average distance of the nearest mills to the North, South, East and West. The average distance of the nearest mill in the North and in the South were added together and halved to obtain the North-South diameter of the market area of a mill. A similar procedure in the East—West direction was used to define the East-West diameter of the market area of the same mill. These diameters for each mill belonging to any size and type catagory were averaged to obtain the average North—South and East—West diameters of an average mill of any cell. Spencer et. al. (1976) used a circle to estimate the market area whereas market area theories suggest a regular hexagon to be the market area for each mill under perfectly competitive equilibrium conditions. This study found that the market area for each mill is elliptical in shape because of imperfect competition, and geographic barriers to obtain a hexagonal or a circular shape of the market area. Therefore, the 91 North~South and East—West diameters of the elliptial market area were added together and divided by 2 in order to get an average circular diameter. The average diameter was again divided by 2 to obtain the average radius. Then 0.7 radius which represents the average distance for assembling unmilled paddy to the mill was calculated. Thus the elliptical market area was approximated by a circle to find out the assembly and distribution cost. Under the predominantly custom milling practices in the study area the distribution cost is considered to be equal to the assembly cost. Table 5.25 below shows the North-South and East—West diameters of the market area for each mill category. Also, the average distances for assembly and distribution derived by the procedure outlined above are shown. For the electricity operated mills the average haulage distance was the shortest for the smallest size groups. The haulage distance for the 11 to 15 horsepower size group was the greatest. Such a situation has probably arisen because of the fact that the electricity operated mills are established only in places where there is a transmission line. Mainly the district towns and places along the highways in the study area had electric transmission lines. Another possible factor may be that such mills are located near forest or uninhabited regions in one or more directions of the market area. But the land use around any mill was not included in this study. Hence, in this study a oneway haulage distance of 0.75 kilometer was asshmed for the 11 to 15 horsepower group of electrical mills. Such an assumption 92 was made by considering the difference in haulage distance for the largest and second largest size groups of diesel mills. Table 5.25: Market Area Determination for the Mills by Catagory (Km) 10HP or less 11-15 HP 16-22 HP 23-35 HP __———_—_——-—————————_——_——_—-———__._____—_———_—_——____————_——__—__—_ Electric a) East-West diameter 1.13 5.25 2.80 b) North—South diameter .90 5.00 1.60 c) Av.dist to haul grain oneway .36 1.79* .77 Diesel a) East-West diameter .82 1.16 1.17 b) North-South diameter .64 .73 .75 c) Av. Dist. to haul grain oneway .26 .33 .34 With the diesel operated mills the haulage distance increased slightly as the mill size increased. On an overall basis the haulage distance for the diesel mills was shorter than for the electric mills. For all the mills, in general, the diesel operated mills. and the smallest size category of the * The average market area for the 11 to 15 horsepower group of electric mills was the biggest and stands way out of line. This may be because of much larger uninhabited land around these mills. Since, the land use betwen the nearest mills was not included in the survey, these mills were observed to have a market area that appears out of proportions. Therefore, subssequent analysis in this study is based on an assumed oneway average haulage distance of 0.75 kilometers for the 11 to 15 horsepower group of electrical mills. 93 electrical mills in particular, the oneway haulage distance was very short. One of the reasons is that the cost of transporting grains from the farmer's field to his houses was not included in this research. Another reason may be a relatively even distribution of the diesel mills throughout the study area. Human packload was the predominant mode of transport used. Bullockart, thela (man driven cart), bicycle, and bus also were used occasionally. Table 5.26 below shows the extent of use of various transportation means by the custom customers of each mill category. Table 5.26: Share of Paddy and Rice Transported by Various Modes To and From the Mill (per cent) _——-———_—__—_——————-—.—-—————-———_————_—-——_——_—————-—~——————_———_ _——-—— Electric Diesel é?“$l)$£?§§§”lfil ‘‘‘‘‘ EEEEZEETREmEQQ"El 16113;; """""""""""""""""""""""""""""""""""" less 4.58 .42 — 95 7.71 — 0.49 91.80 — 11—15 HP 7.5 — 5 87.5 12.15 .77 — 86.54 .54 16-22 HP — - m - 5.78 — a 94.22 — 23-35 HP 5 0 - — 95 - - - — — —_——.—_—————————~—-——.——-—-————-——————— ———_—~————_.—.———————_————————_ Note: BK= Bullockcart, Bi/Tri= Bicycle/Tricycle, TRB= Truck/Bus Hum= Human Packload and H/M= Horse/Mule Only a few customers useed hired hands to transport their paddy to and from the mill. The rates charged per quintal of paddy per kilometer as reported by the customers who hired transport to the mills are shown in Table 5.27. 94 Table 5.27 Average Financial Transport Cost Per Quintal Per Kilometer by Mode (Rs.) ———————————————._—-_—-—--———————————_———-——_———————o—————-—————_———— Bullockcart Bi/Tricycle Truck/Bus Human Packload Horse/Mule -_-—————--——-——“_-———--—————-——-———————--——_——---<——-_———-—-——-”~— 1.13 2.25 3.00 2.00 3.00 (1.01) (3.23) (4.14) (0.81) (1.72) (In parentheses are the standard errors) Trucks, buses, horses and mules were the most expensive modes of transport. The main reason behind such high truck or bus rate was that a typical custom customer takes a small lot to the mill and has to pay the fare for himself as well. When a mule is used a mule driver is also required. Compiling Tables 5.23, 5.25, 5.26 and 5.27 the average assembly and distribution cost for each catagory mill as shown in Table 5.28 was obtained. Table 5.28: Total Financial Assembly and Distribution Cost —-———_————-——.———--—-———-—————--—-————— ———-————-——-——.——————-—_—_.- Qty(mt) Av.Dist. Trans. Qty(mt) Av.Dist. Trans. km. cost km. cost (Rs.) (Rs.) JESS-1;;—IQQTI’WTIQ """" £566."; Eééflmféé‘mééléfé"'" 11—15 HP 229.0 1.50 6817.6 210.6 .66 2620.6 16-22 HP -- -- ~— 223.9 .68 2968.4 23-35 HP 349.5 0 1.54 10530.5 -~ —— -— —-—.—._—_—..—_.——_—_————-———_—_ ——.o-———-—_———.———————————————-———-————_———.—————.— The total assembly and distribution cost was more for the electric mills than for the diesel ones. 95 To obtain the financial milling cost for the customers by size and type of mill the milling charges and the respective average transport cost were added. Table 5.29 shows the financial milling costs for the customers. Table 5.29: Customer's Financial Milling Costs with Transportation (Rs.) 10HP or less 11—15 HP 16—22 HP 23-35 HP Electric Total cost 31603.1 41453.9 — 63392.4 Cost / ton 166.0 181.0 — 181.4 Diesel Total cost 35524.2 34473.9 36833.3 — Cost /ton 161.3 163.7 164.5 — The consumer's financial milling costs were the highest for the 23 to 35 horsepower group electrical mills. Also, the electrical mills were more expensive for the consumers than the diesel mills. For both the electrical and diesel mills, the custom user's financial milling cost per ton increased as the mill size increased. The range of cost difference among diesel mills was much less than that among the electrical mills. 96 5.5 Miller's Financial Milling Qppgp Elpp Transportation For this the financial assembly and distribution costs shown in Table 5.28 were added to the financial milling cost of the millers as shown in Table 5.21 and Table 5.22. Table 5.30 presents the miller's financial cost of rice milling plus the financial transportation cost. Table 5.30: Miller's Financial Milling Costs Plus Financial Transportation Cost (Rs.) 10 HP or less 11—15 HP 16-22 HP 23-35 HP Electric: Total cost 28240.1 32536.7 ~ 46284.9 Cost/ton 148.3 142.1 — 132.4 Diesel: Total cost 32207.3 31224.7 35393.7 — Cost/ton 146.3 148.3 158.1 — The miller's financial cost plus transportation per ton of paddy milled was the lowest for the biggest size electrical mills, and it was the highest for the up to 10 horsepower group. Among the diesel mills the up to 10 horsepower group was found to be the cheapest when the miller's financial milling costs and transportation were considered. The relative per unit cost position of all the size groups of electrical mills did not change between the miller's financial standpoints with and without transportation. The miller's financial cost with 97 transportation increased as the size of the diesel mill increased. (This finding contradicts the recommendation in favour of larger mills). Also, the relative cost position of the diesel mills changed with the inclusion of transportation cost. (This analysis is used in Chapter 6 while considering the financial milling costs on the miller's account.) 5.6 Economic Analysis pf Milling Costs The idea of economic analysis stems from distortions in various markets, through public sector influence in prices or quantity or both. Some of the distortions may be rooted in taxes, subsides, information bottlenecks, thin markets custom duties, exchange rate overvaluation, monopolies and oligopolies. "Market prices, particularly those of the factors of production. form a very imperfect guide to resource allocation in under developed economics, because there exist fundamental disequilibria which are reflected in the existence of massive underemployment at present levels of wages, the difficiency of funds at prevailing interest rates and shortage of foreign exchange at current rate of exchange” [Meier (Ed.), 1976]. Although a large number of distorted markets may be linked with government policies, there are natural forces responsible for distortions. Ideally, all these factors need to be accounted for while assessing the distortions and adjustments need to be made in each cost catagory relevant to the rice milling industry. Only then an ”economic analysis" can be made. However, the difficulties in obtaining relevant data limit such analyses. 98 Before getting into the economic costs and returns for rice milling, a discussion on relevant aspects of Nepal's general economic environment is needed. Also, the role of relevant formal institutions need to be reviewed. 5.6.1 General Economic Environment f2; gipg Milling Nepal has a large number of unemployed or underemployed unskilled labor force as in many other less developed countries. However, skilled workers are scarce. Bulk of the industrial products are imported, mainly, from India. Specially the machinery and equipments used in rice milling are almost totally imported from India. (Recently some Chinese and Japanese shellers have been imported.) In the study area only one mill had machinery imported from a country other than India. All others had Indian machines. Hence the exchange rate between the Nepali and the Indian currencies is an important consideration while making the economic assessment. The Indian currency is readily available in the Nepalese banks and as such ~there is no underground market for the Indian currency. However, often the Nepal government borrows money from India to meet its Indian currency requirements. This accumulates devaluation pressure on the Nepali currency. Once substantial pressure accumulates Nepal is forced to devalue its currency. For example, about 3 months after the fieldwork of this study was completed the Nepali currency was devalued with respect to all other important currencies. Against Indian currency the devaluation was 17.24 per cent. Prior to devaluation Indian Rs. 100.00 was exchanged 99 for Nepali Rs. 145.00 and after devaluation Indian Rs. 100.00 exchanged for Nepali Rs. 170.00. This amounted to paying Rs. 25.00 more for the same Rs. 100.00 Indian rupees. [Therefore, (25/145) x 100 = 17.24 per cent is obtained.) Hence, on the assumption that this was the accumulated pressure on the Nepali currency even at the time period included in this study, the imports from India are adjusted accordingly for purposes of this economic analysis.* For the energy used in milling, both the elecricity and diesel oil are sold by monopolies established by the government. Electricity is both domestically produced and imported whereas diesel oil is totally imported by the government run institution. Both of the study districts had one office each of Cottage Industry Development which looks after the matter of the small industries including many of the rice mills. Besides their advisory roles, this office can recommend for exmepting the millers from import duties to be paid while buying fuel, machines and spareparts. However, very few mill operators made use of ' this facility. Perhaps using this facility was more expensive for the mill owners. Therefore, this institutional support has been ignored in this study. The following few paragraphs clearly indicate the ways in ———--———.—-—-——-—-————-—--——--- * A few months after devaluation Nepal adopted a floating exchange system with respect to a currency basket that includes the Indian currency as well. The opening exchange rate for the Indian currency at the beginning of the floating system was slightly lower than that after the devaluation. This means that adjusting the Indian imports used in rice milling by 17.24 per cent is quite reasonable. 100 which the itemized financial costs and returns were adjusted while presenting the economic analyses. The itemized economic costs of milling are shown subsequently. 5.6.2 Cost pf Land The cost of land is an extremely difficult item to determine for economic analysis. The difficulties stem from numerous uses of land, thin market, lack of organizations that bring the buyers and sellers of land together. Also, pschyological value of land is important especially, under the Nepalese conditions of heavy dependence on agriculture, high rate of popolation growth and limited scope to expand cultivable land base. In section 5.2.1 the land cost was estimated by the amount of estimated average profit foregone in an area equal to that occupied by the mill premises. Table 5.8 showed that the net profit forgone (assuming that the returns to management were zero) when the land was used by the mill premises amounted to only Rs. 117.1 to the maximum. Hence, land cost were not further adjusted for economic analysis. If the complexity involvled in adjustment are weighed against the likely change in result it is not worth the effort. 5.6.3 Engine and Eguipment Housing In economic analysis the engine and equipment housing were segregated into material and labour contents.* * The proportions of labor and material would vary by the type of structures (concrete or wood or mud mortar bricks), roofing material (reinforced cement concrete, brick concrete, corrugated zinc sheets, straw or khapda) and flooring material. No uniform type of houses were there even for the mills of any one cell. I. 101 The average proportion of cost for acquisition was assumed on the basis of discussions with the mill operators and the other broad catagories of building material cost were obtained from a construction engineer's manual. The actual average building costs reported by the mill operators were broken proportionately into component parts including the acquisition cost. Then the components were adjusted for custom duties as if all of these materials were imported. Half of the labor cost was reported to be the share of unskilled laborer so it was adjusted for shadow wage rate. The acquisition cost, half of the total labor cost and management and supervisoin costs were not adjusted for anything to obtain economic cost of engine and equipment housing. Since all the construction materials are domestically produced they are not adjusted for foreign exchange overvaluation. The total economic cost was then annualised by dividing it by the corresponding expected remaining life in years. (Appendix III and Appendix IV specify the proportions and custom duties used for adjustment). 5.6.4 Cost pf Machinery gpg Spareparts The current value of all machinery and the cost of all spareparts were adjusted by the shadew exchange rate between the Nepali and the Indian currencies. Since, the current values of all the capital items in financial terms were the expected resale values on the mill premises, the respondants were required to include the cost of acquisition while assessing the expected resale values of the machineries. The acquisition cost was not adjusted for any distortion while proceeding to the economic analysis. The main reason for not adjusting the acquisition cost for distortions was that the proportion of expenses incurred in the Indian currency and the Nepalese currency was not included in the survey. The other reason is, there was no direct custom duty on transport service and other cost involved in the process of acquisition. First, the acquisition cost was taken out and then custom and sales taxes were deducted. The remaining part was adjusted for the shadow exchange rate. The acquisition cost was then added to make up the economic cost of machinery and spareparts. Pumps were assumed to be charged 16 per cent custom duty after taking out 10 per cent for acquisition. The foreign exchange cost before custom duty was adjusted for exchange overvaluation. (see Appendix V.) 5.6.5 Salary gpg Wage The usual process in economic analysis is to shadow price the unskilled labor. However, the millers as mentioned earlier did not employ unskilled labor in custom milling services because the customers supply such labors. The expenses on the wages of the unskilled labor was included in the transportation cost. Therefore, the economic salary and wage costs of rice milling excluding the tranaport cost are the same as the financial costs and, therefore, were not further adjusted. (I. 5.6.6 Building Repairs The building repair costs were broken into material cost and labor cost. After allowing 10 per cent for acquisition, half of the remaining cost was assumed to be labor cost as suggested by a construction engineer. Another half of the remaining cost was broken into various material components in the same praportion as in case of mill and equipment housing. Custom duties were first deducted from each of the material cost item and then all costs were added (see Appendix VI). 5.6.7 Energy gpg Egg; 993$ The electricity charges contain both domestic and foreign contents, but the exact breakdown was not available. Therefore, the proportion of machinery and miscelleneous manufactures import out of total import of the country in the recent past for which information was available was used to estimate the import content for accounting the foreign exchange overvaluation on electricity. Relevant custom duties and sales taxes were deducted from the import content then the currency overvaluation was adjusted. For diesel oil (based on discussions with a few millers) 20 per cent cost was assumed to be the acquisition cost. Actual diesel cost was adjusted for custom duties, sales tax and then the foreign exchange overvaluation. ( Appendix VII has the custom structure.) 104 5.6.8 Interest pp Capital Both for investment capital and recurrent capital, the economic interest rate was the alternative use of these funds. Nearly all of the capital used in the rice milling enterprises was financed by the millers themselves. Most of them were in the rural areas and the relavant alternative use is lending money to the farmers in the villages. Such private loans carry a much higher interest rate than the institutional loans. Jha (1978) has estimated that the average interest rate charged by the money lenders was 24.79 per cent per year. Hence, this rate was used in this analysis. Alternative rates based on the planning practices of the country were used in sensitivity tests in Chapter 6. The total current economic value of the capital items at the time of survey was the amount for the yearly interest calculation. 5.6.9 Economic Cost 9; Rice Milling Table 5.31 derived from Table 5.21 on the basis of adjustments outlined in sections 5.6.1 through 5.6.8, specifies the economic costs of milling by the electricity operated mills. 105 Table 5.31: Annual Economic Cost of Rice Milling by Electric Mills (excludes assembly and distribution; Rs.) h) i) 3') k) Land cost Engine & equip hse. Power unit Salary & wage Eng. spareparts Building repairs Energy Sub—total Proportion of cost for paddy Adjusted cost of paddy milling Annual cost of hullers Huller spareparts Sub-total Int. on total of Inv. items b+c+l @ 24.79% Int. on other items a+d+e+f+g+j @ 24.79% 10 HP or less -———-_———-————~-———.——————_——————_————-s—--————_—— 333. 232. 20125. 900. 400. 6703. 28726. 19247. 116. 1640. 21004. 2782. —-——-—-————---—————-——___——__.—_._———-—-—_—.——_._—-__——__—.—___._—-—u__——_— 11-15 HP 23-35 HP 117.1 34.7 349.6 451.5 656.9 356.4 21614.3 25314.0 99.7 —- 284.7 894.7 6574.3 10852.7 29696.6 37904.0 .62 .73 18411.9 27669.9 105.5 98.9 981.5 1352.1 19498.9 29120 9 4794.8 3683.6 2326.5 3524 0 26620 2 36328 5 excluding the operated mills. of adjustments Similarly assembly and distribution Table 5.32 indicates the economic COSt, It is also derived from Table 5. Cost of milling by the diesel 22 on the basis outlined in sections 5.6.1 through 5.6.8. 106 Table 5.32: Annual Economic Cost of Milling by Diesel Mills (excludes assembly and distribution; Rs.) 10 HP or less 11-15 HP 23—35 HP a) Land cost 36.8 80.3 62.4 b) Eng. & eqp. Hse. 284.7 350.7 358.9 c) Power unit & pump 710.3 714.5 867.7 d) Salary and wage 18508.1 16974.3 17671.4 e) Eng. spareparts 2217.6 3716.4 3736.5 f) Building repairs 239.1 184.6 515.0 g) Fuel 16106.0 14275.0 18420.1 h) Misc. 140.6 230.8 —— Sub-total 38243.2 36526.6 41632.0 Proportion of cost for paddy milling .64 .63 59 1) Adjusted cost of paddy milling 24475.6 23011.8 24562.9 j) Annual cost of hullers 85.6 74.0 104.8 k) Huller spareparts 1287.2 810.8 1491.5 Sub—total 25848.4 24398.6 26452.9 1) Int. on total Inv. items b+c+j @ 24.79% 3282.3 3983.0 4677.9 m) Int. on other items a+d+e+f+g+h+k @ 24.79% 3114.4 2869.6 3139.7 Total 32245.1 31251.2 34270.5 The costs obtained in the preceeding 2 tables, total quantity of paddy milled. and total revenue were compiled in Table 5.33 for assessing the economic cost of rice milling. Table 5.33: Economic Cost Per Ton for Rice Milling on Average for 1984/85 (excludes transfer cost; Rs.) 10 HP or less 11-15 HP 16-22 HP 23-35 HP Electric a) Total cost 26329.3 26620.2 — 36328.5 b) Total Qty. 190.4 229.0 - 349.5 d) Total cost per ton 138.3 116.2 - 103.9 Diesel a) Total cost 32245.1 31251.2 34274.5 - b) Total Qty. 220.2 210 6 223.9 — d) Total cost per ton 146.4 148.4 153.1 - The economic milling cost per ton decreased as the size of the electricity operated mill increased. Such a clear pattern was not present in case of the diesel operated mills. However, the economic assembly and distribution costs have to be added before getting into any conclusion on the size economies from the economic standpoint with transportation. 5.6.10 Economic Transfer gpgg The economic assembly and distribution cost was derived from Table 5.26, Table 5 27, and Table 5.28. Total financial transfer costs were adjusted according to the extent of human labor used to transport paddy to and from the mill of each catagory. Transfer costs incurred by using other modes were simply accounted as in financial analyses. 108 The economic transfer cost was the highest for the 23 to 35 horsepower group of electrical mills. This was because of the size of the market area and larger volume of paddy handled by this group of mills. However, due to the predominance of human packload as the mode of transport there was no reversal in the relative cost position of various size groups of mills between the finacial and economic transfer cost. This can be easily seen by comparing Table 5.28 and Table 5.34. Table 5.34: Economic Transfer Cost (Rs.) Electric Diesel Qty Dist. Total T.cost Qty Dist. Total T.Cost 10HP or 190.4 .72 2023.7 220.2 .52 1588.2 less 11-15 HP 229.0 1.50 5014.2 210.6 .66 1898.9 16-22 HP — — — 223.9 .68 2107.7 23—35 HP 349.5 1.54 7462.6 — — — The electrical mills of 11 to 15 horsepower size had the biggest market area on average (Table 5.25) and showed the largest transport cost. However, as footnoted earlier an assumed average distance of 1.50 kilometers for both assembly and distribution by the 11 to 15 horsepower group of electrical mills was used in Table 5.34. 1()9 5.6.11 Economic Cost 9: Milling with Transportation Costs Addition of transfer cost shown in Table 5.34 to the economic cost shown in Table 5.33 and simple calculations allow a comparison of the economic rice milling cost with transportation per ton for all mill catagories. Table 5.35 has this information. Table 5.35: Economic Cost of Rice Milling with Transportation for a Ton of Paddy by Mill Catagory (Rs.) 10HP or less 11—15HP 16-22HP 23-35HP Electric a) Total cost per ton 148.9 138.1 - 125.3 Diesel a) Total cost per ton 153.6 157.4 162.5 The economic cost of milling one ton of paddy with transportation was the lowest for the biggest size electrical mills. The cost was the highest for the largest size group of diesel mills. The 10 horsepower or smaller size group of electrical mills also were the most expensive among the electric mills. The range of cost difference across various sizes of electric mills was Rs. 23.6 per ton. The range of cost difference among the diesel mills was Rs. 8.9 per ton. Among diesel operated mills, the economic cost of milling with transportation was the lowest for the 10 horsepower or 110 smaller size group. However. the size economy pattern indicated by the diesel mills seemed very weak. The analyses indicated that the bigger electrical mills within the range included in this study the more economic they were. However, caution for not being strong on this finding is in order. The bigger size electrical mills were represented by only two mills. Also, the market area for the 11 to 15 size group of electrical mills was based on assumption. Findings for the diesel mills were different. There was no clear economic size economy with transportation for the diesel mills. Instead, the smaller diesel mills showed a slight tendency to be less expenssive. This assessment is contrary to the existing feelings on size economy in the national literature. Sun-ary In this chapter all the itemized annual costs of milling paddy by an average mill of each size and type were presented. The joint costs were allocated on the basis of time sharing of the power unit. The size economies of milling from the miller's financial viewpoint, from the consumer's financial viewpoint. and from the economic viewpoint with and without the assembly and distribition costs were examined. Table 5.36 has summarized the cost per ton for all the size and type catagories of mills from various perspectives. This was compiled from Tables 5.24, 5.29, 5.33. and 5.34. Figure 2 and Figure 3 at the end of this chapter present this information graphically by separating the plant costs, assembly 'and distribution costs, and total plant cost plus transportation. Table 5.36: Milling Cost Per Ton by Mill Catagory and Perspective (Rs.) Fin. Fin. Bo. Bo. (miller's (con. (without (with View) view) trans.) trans.) Electric: 10 HP or less a) Cost/ton 133.6 166.0 - 138.3 148.9 (17.7) 11—15 HP a) Cost/ton 112.3 181.0 116.2 138.1 (39.0) 23—35 HP a) Cost/ton 102.3 181.4 103.9 125.3 (49.0) Diesel: 10HP or less a) Cost/ton 136.2 161.3 146.4 153.6 (15.1) 11-15 HP a) Cost/ton 135.8 163.7 148.4 157.4 (15.5) 16—22 HP a) Cost/ton 144.8 164.5 153.1 162.5 (6.5) (Figures in parentheses are the corresponding miller's profits) From Table 5.36 and also from Figure 2 it is clear that the miller's financial cost of milling a ton of paddy declined as the 112 size of electrical mill increased. However, the difference between the middle size group and the biggest size group was not as big as the difference between the smallest size group and the middle size group. The millers enjoyed size economy in milling by the electrical mills. The diesel mills did not show any clear size economy for the millers. The range of cost difference per ton among all the size groups of diesel mills from the miller's financial standpoint was Rs. 9.0. Among the electrical mills corresponding range of cost difference was Rs. 31.3 per ton. For the consumers, milling cost per ton increased as the mill size increased because of the transport cost. The range of cost difference for the consumers was Rs. 15.4 and Rs. 3.2 per ton respectively for the electrical and diesel mills. Economic cost of milling per ton was lower for the electrical mills than for the diesel mills. Also, the electrical mills indicated size economies but the diesel mills indicated size diseconomies from the economic standpoint irrespective of the inclusion or exclusion of the economic transportation cost. This finding for the electrical mills supported the views of other authors on the size issue. For the diesel mills encouraging bigger size did not seem to be the most cost effective way of milling paddy. The cost of milling by the diesel mills seemed to be neutral to the mill size if all the economic costs were accounted. Miller's Cost Per Ton (Rs.) 180* 160'- 140 <~ 120* 100 .. 80 .. so « 40 ~— 20 4D ,.—¢Diesel Mills Electric Mills 7°.5 13'15 18‘.5 26'? 5 Horsepower Size Figure 2: Miller's Financial Milling Cost Per Ton by Hill Catagories 113 Cost Per Ton (Rs.) Cost Per Ton (Rs.) Panel (a): Electric Mills 160 ’ 140.. Total Cost 120 ” Milling Cost 100 e 80 “ 60 I. 40 « ii, Transportation Cost 20 a). / a 7.5 13.5 28.5 ) Horsepower Size Panel (b): Diesel Mills 160 _____,__..—————""“—~‘ Total Cost __________....—’——-—*"‘" Milling Cost 140" 120« 100 ’ 80 A. 60 lb 40 0 20« gr iTiansportation Cost 735 13 5 18:5 Horsepower Size Figure 3: Economic Milling Cost Per Ton by Mill Catagories 114 CHAPTER SIX SENSITIVITY OF SIZE ECONOMIES T0 CHANGES IN IMPORTANT FACTORS The milling cost analyses from various perspectives discussed in Chapter 5 were based on a set of values of the economic parameters. Specific values of shadow wage, shadow interest, and shadow exchange rates that were chosen in Chapter 5 may not be accurate. Also, these economic parameters change over time. It is difficult to pick up accurate values and predict correctly the extent of change in each economic parameter. Nevertheless, some changes are more likely than others. For instance, population increase without a matching increase in job opportunities lowers the shadow wage rate. The shadow interest rate goes higher if capital becomes more scarce. Owing to production increase the amount of paddy that needs milling might increase. The extent of custom milling might decrease over time. Or, a few things could change simultaneously at some point in time. Obtaining an insight on the effect of new economic parameters on the economic size economies was an important aspect of this study. Such an insight is needed for policy purposes if they were to be based on the findings of this study. This chapter therefore, examines the sensitivity of the economic size economies to changes in important economic factors. Partial 115 as well as enterprise budgets were used for this purpose. Some factors chosen for sensitivity test_were based on their importance in the budgets presented in the last chapter. Other factors chosen were based on potential changes in important economic parameters that might affect size economies in the long run. From an economic standpoint, the shadow wage rates were important because labor was the main transport cost item. Alternative values of the shadow wage rate were considered. The effect of a change in shadow interest rate was also considered for sensitivity test. The exchange rate between the Indian and the Nepalese currencies did not change by more than 2 per cent when the country switched from a pegged exchange system to a floating one. So, examining the effect of alternative shadow exchange rates was not considered important. From the miller's or trader's financial point of View, the effect of a reduced extent of custom milling (with and without a reduction in the demand for husk and bran, and an elimination of lappy) were considered separately. The effect of an increased level of paddy production with the assumption that the currently established mills would mill the additional paddy was also examined. Implicitly, this was the case of a higher rate of plant capacity utilization. A combination of an increased level of paddy productivity, reduced extent of custom milling, a 60 per cent rate of rice recovery, and the elimination of lappy was analysed from the miller's financial standpoint. Important reasons for including these other factors are briefly described as follows. As the economy develops, the subsistence orientation of the farmers declines thus leading to a reduced extent of custom milling. The grain producers would be more likely to produce more grains than they would need for home consumption. The excess grain would have to be channeled to the internal non— producers as well as to the export markets. Therefore, examining the size economies in rice milling with a reduced extent of custom milling stands to be important. The current paddy productivity of Nepal ranges from 1.45 to 1.97 metric tons per hectare and it is low compared to other rice producing countries of the world [MOF, 1986]. An increased agricultural productivity has been emphasized by all the deveopment plans of Nepal and a possible upward shift in the paddy production trend was indicated earlier in Chapter 2. Therefore, sensitivity of the size economies in rice milling to increased level of paddy productivity was carried on. The milling technology currently in use has been supported by the custom customers (farmers) who use the milling byproduct (husk and bran) as animal feed. If alternative animal feeds were to become cheaper the farmers would not use the byproducts. The emphasis on rice recovery rate from milling would increase. Therefore, sensitivity of size economies to a reduction in demand for the byproducts was examined. As mentioned in Chapter 5, the millers charged a lappy to each customer on the top of cash milling charge. Market analysts 118 often suggest this to be an exploitation. Therefore, elimination of lappy was included. After a sufficiently long time, a number of factors change. For instance, the extent of custom milling may decline, the productivity of paddy may increase, the demand for byproducts may decrease, and the lappy may be eliminated. What happens with the size economies when all of these factors change, became worth an investigation. 6.1 Shadow Egg; Egg; The shadow wage factor of 0.7 recommended by the Asian Development Bank considered the mobility of labor within Nepal and of Indian labor to Nepal because of the past experience along the open border. Within Nepal, the economically active population has been reported to increase by 2.71 per cent per year. Every year 176,000 people are being added to the labor force. This number was more than 3 times higher than the total Nepalese industrial labor force (A08, 1982). The shadow wage factor would likely fall in future if serious efforts to increase labor employment were not made. Again, if there were no other restrictions, labor migration from one place to another would be affected by job opportunities, wage differences, and cost of translocation (Todaro, 1981). The inflow of the Indian workers has always been an important aspect of the employment situation in Nepal. Specially skilled and semi— skilled workers come from India to Nepal (National Planning Commission, 1985). Both the internal growth in labor force and 119 the inflow and outflow of labor affect the shadow price of labor in Nepal. Therefore, it is difficult to specify an appropriate level of shadow wage factor to value unskilled labor. Examining the effect of alternative values of shadow wage factor allows one to see the stability of the economic size economies. If the alternative shadow wage factors did not alter the findings on economic size economies, the policies based on this analysis would likely help the rice milling sector to remain consistent with Nepal’s long run comparative advantage. Hence, the effect of a 10 per cent higher and also a 10 per cent lower shadow wage factor was considered. (Notably, the use of unskilled labor in rice milling was found only in assembly and distribution). Table 6.1 indicates the economic size economies of the electrical mills with a shadow wage factor of 0.6 (10 per cent lower than 0.7 used in Chapter 5). Table 6.1: Economic Cost of Rice Milling with Transportation for Electric Mills With a Shadow Wage Factor of .6 Item 10. HP or less 11~15 HP 23—35 HP 1. Economic cost of rice milling (Rs.) 26326.6 26611.2 36325.5 2. Assembly and dist. cost (Rs.) 1646.7 4413.0 6439.9 3. Total cost 27973.3 31024.2 42765.4 4. Cost per ton (Rs.) 146.9 135.5 122.4 Sources: The figures on item 1 are obtained from the totals of Table 5.31 and assembly and distribution costs are calculated with the new shadow wage factor. Table 5.26, 5.27, and 5.28 are other relevant sources. 120 The above table shows that the per ton economic cost of milling with transportation decreased as the size of the electrical mill increased. This result was not different from the one in Table 5.36 where unskilled labor was valued by using a shadow wage factor of 0.7. Table 6.2 shows the per ton economic cost of rice milling with transportation for the diesel mills with a shadow wage factor of 0.6 (10 per cent lower than 0.7 used in Chapter 5). Table 6.2: Economic Cost of Rice Milling with Transportation for Diesel Mills With a Shadow Wage Factor of 0.6 Item 10 HP or less 11-15 HP 16—22 HP 1. Economic cost (Rs.) 32245.9 31251.1 34270.5 2. Assembly and dist. cost (Rs.) 1378.0 1680.8 1820.9 3. Total 33623.1 32931.9 36101.4 4. Cost per ton (Rs.) 152.7 156.4 161.2 Source: Table 5.26, 5.27, 5.28 and 5.32 Table 6.2 shows that even if the shadow wage factor is lowered to .6, the 10 horsepower or smaller group of diesel mills were the cheapest from the economic viewpoint with transportation. This result also was not different from the one obtained with a shadow wage factor of 0.7 shown in Table 5.36. To explore the stability of the economic cost of rice milling with transportation further, a shadow wage factor of 0.8 (10 per cent higher than in Chapter 5) was used in Table 6.3. "LA 1 121 Table 6.3: Economic Cost of Rice Milling with Transportation With a Shadow Wage Factor of 0.8 Electric Diesel 10HP or 11~15HP 23-35HP 10HP or 11—15HP 16—22HP less less 1. Economic cost (Rs.) 26329.6 26620.2 36328.5 32245.1 31251.1 34270.5 2. Ass. & dist. cost (Rs.) 2167.6 5615.4 8485.2 1798.4 2162.0 2394.7 3.Total 28497.2 32235.6 44813.7 34043.5 33413.1 36665.2 4. Cost /ton (Rs.) 149.7 140.8 128.2 154.6 158.7 163.8 Sources: Table 5.26, 5.27,5.28,5.31, and 5.32 Even when the shadow wage factor was 0.8, the electrical mills were less costly than the diesel mills from the economic standpoint with transportation. For the electrical mills per unit economic cost of rice milling with transportation decreased as the mill size increased. This finding was not different from the those with the shadow wage factor of 0.7 or of 0.6. For the diesel mills as well the results from using alternative values of the shadow wage factor did not change the relative economic cost position of milling a ton of paddy. The 10 horsepower or smaller group of diesel mills showed the smallest economic cost of rice milling with transportation. The cost differeneces among all the three size groups of diesel operated mills were as before very small. 6.2 Shadow Interest 523$ The economic costs of rice milling with transportation presented in Chapter 5 were based on a shadow interest rate of 24.79 per cent per annumn. Recently, Nepal allowed the interest rates to slide above a floor limit specified by the Rastra Bank (central bank). As a result, the lending rates have slightly fallen from where they were just before the introduction of the flexible rate. It indicates the relative abundance of funds. Therefore, the shadow interest rate has also to fall. Personal contact with a member of the National Planning Commission revealed that the internal rate of returns of various projects approved by the Planning organ ranged from 8 to 18 per cent per year. So, sensitivity analysis needs to be carried out with the lower limit on shadow interest rate. If the relative costs of milling do not change with 8 per cent interest rate, the case with a 18 per cent interest would not be needed. Table 6.4 shows the economic cost of rice milling with transportation with a shadow interest rate of 8.0 per cent per year. Table 6.4: Economic Cost of Rice Milling with Transportation with a Shadow Interest Rate of 8 Per Cent Per Year Electric Diesel 10HP or 11-15HP 23-35HP 10HP or 11-15HP 16—22HP less less 1. Economic cost 21004.3 19498.9 29120.9 25848.4 24398.6 26452.9 2. Int. on Inv. items 898.1 1547.3 1194.2 1059.2 1273.7 1509.6 3. Interest on other items 820.4 750.8 1137.3 1005.0 926.1 1013.2 4. Transport cost 2023.7 5014.2 7462.6 1588.2 1898.9 2107.7 5. Total 24746.5 26811.2 38915.0 29500.8 28497.2 31083. .b 6. Cost /t0n (Rs.) 130.0 117.1 111.3 134.0 135.3 138.8 Sources: Table 5.31, 5.32, and 5.34. When the shadow interest rate charged was reduced from 24.79 per cent to 8 per cent, the relative economic cost position with transportation of various mill sizes on a per ton basis did not change. The electrical mills continued to show the lowest cost. Among the diesel mills, the 10 horsepower or smaller group continued to show the least cost per ton. The results of an eight per cent and a 24.79 per cent per year shadow interest rate imply that the relative cost of milling from the economic cost with transportation point of view were not different even if a shadow interest rate of 18 per cent per year was used. 124 6.3 Shadow Exchange Rat; Analysis of the economic size economies presented in Chapter 5 were based on a shadow exchange rate of 17.24 per cent higher than that existed between the Nepalese and the Indian currencies during the study period. The Nepalese currency was subsequently devalued against the Indian currency by 17.24 per cent. Again. later when the Nepalese currency was floated, its exchange rate with the Indian currency changed only very slightly. Therefore, examining the effect of alternative shadow exchange rate with respect to the Indian currency was not important. As industrialization proceeds more and more consumers rely on markets for their necessities including rice. Some people have to supply increasingly more rice to the buyers. The most likely suppliers are the rice traders or the millers. A reduction in the extent of custom milling results. The millers or the traders are likely to mill paddy without any consideration for the byproducts as animal feed. The byproducts sell for less and the millers end up with lower profits if they did not receive as much rice recovery as possible. Also, the custom customers would likely want higher recovery rate if they could buy the byproducts cheaper. The mill owners would then be forced to adopt milling technology that improves the rice recovery rate to ensure higher profitability. Even for those millers who provided milling services to the rice traders technological improvement‘ would become necessary to receive patronage. Therefore, the effect of a reduced extent of custom milling (or some milling on the miller's or trader's account) on miller's financial size economies was included. Also, in the previous analyses the assembly cost and the distribution costs were taken to be equal. If the extent of custom milling decreased the assembly and the distribution costs would not be equal. All the paddy for milling would be assembled but only the rice would be distributed. The livestock farmers who use the byproducts for feed and fuel are assumed to buy them from the millers or traders from the mill premises. A 25 per cent reduction in the extent of custom milling is equivalent to milling 25 per cent of paddy on the miller's or trader's account. Therefore, this analysis considered 25 per cent of paddy milling on the miller's or trader's account as a separate business. A partial budget analysis was applied. The following additional assumptions were necessary before proceeding to a financial analysis of milling on own account by the miller or trader. 1. The millers or traders treated their milling enterprise separate from buying and selling of rice and paddy. Milling was simply carried out for earning the milling wages. 2. The milling recovery rate was 55 per cent based on the assumption made in one of the references (APROSC/IDRC, 1984). It means only 55 per cent of the paddy milled on own account by the miller is bought back by the farm households in the form of milled rice. 6. 126 The byproduct distribution cost was nil from the standpoint of the miller or trader. The people who bought the byproducts bore the acquisition cost. All the milled rice and byproducts were sold at the going market prices. The national average prices of paddy and rice based on 9 months during 1984/85 were valid for the study area as well. The millers financed the operations from own resources. Table 6.5 is a partial financial budget for milling 25 per cent paddy on the miller's account by using the electrical mills. Table 6.5: Financial Partial Budget for Milling 25 Per Cent of Paddy on Miller's or Trader's Account Item 10HP or less 11—15HP 23—35HP Total Costs 22364.6 26899.3 41053.6 1. Financing 25% of paddy for six months at 13.5% 8128.9 9776.9 14921.5 2. Storage cost @ Rs.120/ ton/6 months 5712.0 6870.0 10485.0 3. Milling charge (eash+1appy) 7199.0 8659.1 13215.5 4. Storage loss @ 1.1% 1324.7 1593.3 2431.6 Total Returns 35300.7 42457.3 64798.4 1. Sale of rice - cost of paddy 18353.2 22074.0 33689.4 2. Byproduct sale @Rs.800 per ton 16947.5 20383.3 31109.0 Net profit 12936.5 15558.0 23744.8 Per cent profit 58 58 58 Net profit if byproduct is not sold —4011.4 —4825.3 -7364.2 Note: Storage loss estimates of 1.1 per cent are obtained from APROSC, (1984). Prices of coarse paddy and coarse rice are respectively Rs. 2530 and Rs. 5360 per metric ton (MOF, 1986). Because of the partial budget framework, the profits for each size group were equal to 58 per cent. Net profits were directly proportional to the volume of paddy milled by each size group. However, if the byproduct was not sold, the miller or trader lost by milling on his own account. The profitability of milling on own account critically depended on the byproduct market, not included in this study. The byproduct price used was obtained from one of the weekly rural markets. There were only two sellers. Nothing was sold for about two hours. Personal judgement suggests that the price was too high because of a thin market. Since the milling charges were the same for both the electrical and the diesel mills an analogy would show that similar results would be obtained if the diesel mills were used to mill paddy by the rice trader. Two questions arose from the above partial financial budgets. One, what happened if the milling charge was equal to the miller's cost of milling ( milling and trading considered as one unit). Another was the effect of a higher rice recovery rate. Table 6.6 shows the partial financial budgets for electrical mills for milling 25 per cent paddy on the miller's account when milling and trading were considered as one enterprise and the rice recovery rate was 55 per cent. All other assumptions were the same as outlined earlier in this section. 129 Table 6.6: Partial Financial Budget for Electric Mills with Milling and Trading Together Item 10HP or less 11-15HP 23-35HP Total Cost 21530.0 24669.4 36776.6 1. Financing 25% of paddy for six months at 13.5% 8128.9 9776.9 14921.5 2. Storage cost @ Rs.120/ ton/6 months 5712.0 6870.0 10485.0 3. Milling charge at cost 6359.4 6429.2 8938.5 4. Storage loss @ 1.1% 1329.7 1593.3 2431.6 Total Returns 35300.7 42457.3 64798.4 1. Sale of rice cost of paddy 18353.2 22074.0 33689.4 2. By product sale @Rs.800 per ton 16947.5 20383.3 31109.0 Net profit 13770.7 17787.9 28021.8 Per cent profit 64 72 76 Net profit if byproduct is not sold -3176.8 —2595.4 —3087.2 Even if milling and trading were considered as one enterprise, the profit from milling on miller's or trader's account depended on the market for the byproduct. If the byproduct were sold at Rs. 800.0 per metric ton, a profit ranging from 64 to 76 per cent was obtained. If the byproduct were not sold the electrical mills of all size groups lost. Milling and trading as one enterprise also did not change the crucial role of the byproduct market on the profitability of milling on the miller's or trader's account. Since the milling costs of diesel mills were higher than those of electrical mills, the miller or trader would incur greater losses by using the diesel mills. If the milling recovery rate of 55 per cent were increased to 60 per cent the result was different. Such a recovery rate was possible because in the laboratory, steel hullers gave a recovery rate of 62.5 per cent (APROSC, 1984). Table 6.7 takes up the case with a 60 per cent milling recovery rate of rice when 25 per cent of paddy was milled on the miller's account. Table 6.7: Partial Financial Budget for Electric Mills With 60 Per Cent Recovery and Milling and Trading Together Item 10HP or less 11—15 HP 23—35 HP Total cost 21530.0 24669.4 36776.6 Total return 46034.1 55366.7 84500.7 1. Sale of rice - cost of paddy 30969.7 37248.2 56848.3 2. Byproduct sale 15064.4 18118.5 27652.4 Net profit 24504.1 30697.3 47724.1 Per cent profit 113.8 124.4 129.8 Net profit if byproduct is not sold 9439.7 12578.8 20071.7 Per cent profit if byproduct is not sold 43.8 51.0 54.6 (Cost figures are obtained from Table 6.6) With a 60 per cent rice recovery rate all sizes of electrical mills would make a profit ranging from 113.8 to 129.8 per cent provided all of the byproduct was sold. If no byproduct were sold, the rice trader makes a profit ranging from 43.8 to 54.6 per cent. Similar results but with smalles profits would be received if the miller or trader used the diesel mills. The preceeding analysis has shown that milling by the miller on own account was profitable at a 55 per cent rice recovery rate if all of the byproduct were sold. If no byproduct were sold. milling on own account even with the less costly electrical mills was unprofitable because of the low rice recovery rate. This assessment was confirmed by Table 6.7. which indicates a high profit on milling on own account with a 60 per cent rice recovery rate even if the byproduct were not sold. 6.5 Elimination 9f Lappy One of the earning sources for the millers as shown in Table 5.23 was lappy. If lappy were removed, the miller's financial size economies were different. Table 6.8 displays the effect of eliminating lappy from the milling charge. Table 6.8: Effect of the Elimination of Lappy on Custom Miller's Financial Size Economies (Rs ) Electric Diesel 10HP or 11—15HP 23—35HP 10HP or 11—15HP 16—22HP less . less Miller's fin. cost 25435.0 25719.1 35754.4 29988.4 28604.1 32425.3 Milling Charge 23800.0 28625.0 43687.5 27525.0 26325.0 27987.5 Total Profit Rs. -1635.0 2905.9 7933.1 «2463.4 -2279.1 —4437.8 Sources: Tables 5.21 and Table 5.22 132 The two larger size groups of electrical mills made some positive profit if lappy were eliminated. But, all size groups of the diesel mills and the smallest size group of the electrical mills would make a loss if lappy were eliminated. This means a strict elimination of lappy would not be possible unless the milling charges were raised. Also, if elimination of lappy were chosen by the government it would need a legal institution for enforcing it. A policing system would also needed for which the people must incur costs. 6.6 Increase lg Egggy Production An increased production can be milled both by new and old establishments. It was hard to predict the share of increased production that would be milled by the new mills and the existing ones. Therefore, the analysis had to be based on the assumption that increased production would be milled by the existing mills. The average market area for each mill catagory would remain the same. Additional production would be milled by higher rate of capacity utilization. This implies that additional fixed costs would not incurred and other cost figures would be increased proportionately. Revenue also would increase proportionately. A 10 per cent and a 20 per cent increase in production that would come to both the electricity and diesel operated mills would be explored. Table 6.9 indicates the effect of an increased productivity on economic cost of rice milling with transportation for the electrical mills. The joint fixed costs were the same as before. 133 The variable joint costs and costs of huller spareparts were raised in proportion to the increases in paddy productivity. A comparison between Table 5.36 and Table 6.9 indicates that a 10 per cent higher amount of paddy milling decreased the economic cost of rice milling with transportation by Rs. 8.8 per ton in case of the smallest size group of electrical mills. If the amount of paddy milled was increased by 20 per cent the economic milling cost with transportation decreased by Rs. 16.7 per ton. The economic milling cost with transportation were substantially lower for all size groups of electrical mills if more paddy were milled by using them for longer hours. This finding agreed with the existing recommendations made by other authors on the issue. 134 Table 6.9: Economic Cost of Rice Milling with Transportation for Electric Mills With 10 and 20 Per Cent Higher Amount of Paddy Milled 10 HP or less 11—15 HP 23—35 HP Increase by——> 10% 20% 10% 20% 10% 20% a) Land cost 32.4 32.4 117.1 117.1 34.7 34.7 b) Eng+equ hs. 333.0 333.0 349.6 349.6 451.5 451.5 C) Power unit 232.2 232.2 656.9 656.9 356.9 356.9 d) Sal. wage 20125.4 20125.4 21614.3 21614.3 25314.0 25314.0 e) Eng. rep. 990.9 1081.0 109.7 119.6 —— —— f) Build. rep. 440.9 480.0 313.2 341.6 984.2 1073.6 g) Energy 7373.4 8043.7 7231.7 7889.2 11938.0 13023.2 Sub-total 29528.2 30127.7 29268.9 31088.3 39079.3 40253.9 Wt. for paddy .67 .67 .62 .62 .73 .73 h) Adj. cost to paddy 19783.9 20185.6 18146.7 19274.7 28527.9 29385.3 1) Huller cost 116.8 116.8 105.5 105.5 98.9 98.9 j) Hull. pts. 1804.6 1968.6 1079.7 1177.8 1487.3 1622.5 Sub-total 21705.3 22271.0 19331.9 20558.0 30114.1 31106.7 k) Int. on Inv. cap. @ 24.79% 2782.9 2782.9 4794.8 4794.8 3683.6 3683.6 1) Int. on other items @24.79% 2629.0 2715.7 2392.1 2457.7 3647.2 3770.3 m) Ass.& dist. cost 2226.1 2428.4 5515.6 6017.0 8208.9 8955.1 Total 29343.3 30198.0 32034.4 33827.5 45653.8 47515.7 n) Qty. ton 209.4 228.5 251.9 274.8 384.5 419.4 0) Cost/ton 140.1 132.2 127.2 123.1 118.7 113.3 Sources: Based on Table 5.31 and 5.34 Table 6.10 shows the economic cost of rice milling with transportation for the diesel operated mills when the amount milled by individual size group was increased by 10 per cent and also by 20 per cent. An increase of 10 per cent and 20 per cent in the quantity of paddy milled by the diesel mills made some difference in the per ton economic cost of milling with transportation. A comparison between Table 5.36 and Table 6.10 shows this. Also, just as common sense dictated a 20 per cent increase in the amount milled further reduces the per ton cost of milling with transportation. 136 Table 6.10: Economic Cost of Rice Milling with Transportation for Diesel Mills With 10 and 20 Per Cent Higher Amount of Paddy Milled 10HP or less 11—15HP 23-35HP 10% 20% 10% 20% 10% 20% a) Land cost 36.8 36.8 80.3 80.3 62.4 62.4 b) Eng+eq.hse 284.7 284.7 350.7 350.7 358.9 358.9 c) Power unit and pump 710.3 710.3 714.5 714.5 867.7 867.7 d) Sal. wage 18508.1 18508.1 16974.3 16974.3 17671.4 17671.4 e) Eng. rep. 2439.4 2661.1 4088.0 4459.7 4110.2 4483.8 f) Build. rep. 263.0 286.9 203.1 221.5 566.5 618.0 g) Fuel 17716.6 19327.2 15702.5 17130.0 20262.1 22104.1 Sub-total 39958.9 41815.1 38113.4 39931.0 43899.2 46166.3 Wt. for paddy .64 .64 .63 .63 59 59 h) Adj. cost to paddy 25573.7 26761.7 24011.4 25156.5 25900.5 27238.1 1) Hul. Cost 85.6 85.6 74.0 74.0 104.8 104.8 j) Hul. pts 1415.9 1544.6 891.9 1005.4 1640.7 1789.8 Sub—total 27075.2 28391.9 24977.3 26235.9 27646.0 29132.7 k) Int. on Inv. Cap. @24.79% 3282.3 3282.3 3983.0 3983.0 4677.9 4677.9 1) Int. on others @24.79% 3266.4 3429.6 3003.6 3159.6 3324.0 3508.3 m) Ass.& dist. Cost 1747.0 1905.8 2088.8 2278.7 2318.5 2529.2 Total 35370.9 37009.6 34052.7 35657.2 37966.4 39848.1 n) Qty. ton 242.2 264.2 231.7 252.7 246.3 268.7 0) Cost/ton 146.0 140.1 147.0 141.1 154.1 148.3 Sources: Based on Table 5.32 and 5.34 137 6.7 Combinations 9: Factors Each of the factors affecting the economies of size would not change in isolation. A simulataneous change in a number of factors overtime is a rule rather than an exception. 0f the many factors that would change over time Table 6.11 indicates the effect of a simultaneous reduction in the extent of custom milling, increase in the rice recovery rate, and elimination of lappy on the miller's financial size economies*. A 25 per cent reduction in custom milling and a 60 per cent rate of rice recovery were assumed. Milling and trading were considered together and an enterprise budget technique was used. Since, the diesel mills incurred losses if the lappy were removed and also showed a higher milling cost per ton, they were considered in Table 6.11. If diesel mills turned out to be profitable, the electric mills also would be profitable. *'A reduced extent of custom milling with unsold byproduct is the same as a reduction in the demand for byproducts. Therefore, this factor was not mentioned separately. Table 6.11: Miller's Financial Size Economies of Diesel Mills with 25 Per Cent Milling on Own Account, 60 Per Cent Cent Rice Recovery and Elimination of Lappy (Rs.) Item 10 HP or less 11—15 HP 16—22 HP Total cost 47527.6 45378.6 50259.2 1. Cost of milling 29988.4 28604.1 32425.3 2. Financing 25% paddy @ 13.5% for 6 months 9401.2 8991.3 9559.1 3. Storage cost @ Rs. 120/ton for 6 months 6606.0 6318.0 6717.0 4. Storage loss @ 1.1% 1532.0 1465.2 1557. at Total returns 63341. 60580.4 64406.2 (0 1. Sale of rice ~ cost of paddy 35816.9 34255.4 36418.7 2. Milling charge excluding lappy 27525.0 26325.0 27987.5 Net profit 15814.3 1520118 14147.0 Per cent profit 33.3 33.5 . 28.1 Snucces+—Table~5.22‘and—5\23. Table 6.11 indicates that the millers received a profit ranging from 28.1 to 33.5 per cent if they milled 25 per cent paddy on their account and used the diesel mills. with hullers gave a rice recovery rate of 60 per cent. To get such returns, lappy was not needed and byproduct sale was not critical. Since. the electrical mills were less costly than the diesel mills the combined effect of 60 per cent rice recovery, elimination of 139 lappy and 25 per cent milling on the miller's account by the electrical mills would turn out to be even more profitable for the miller. Summary This chapter covered the sensitivity of the economic cost of rice milling with transportation to alternative values of shadow wage factor, shadow interest rate, and milling a larger amount of paddy. The financial partial budgets for milling 25 per cent of paddy on miller's or trader's account for alternative values of rice recovery rates, elimination of lappy, and a combination of changes in all of these three factors were considered. Both a lower and a higher shadow wage factor did not have any marked effect on the relative economic cost of milling with transportation for the different catagories of mills. Alternative shadow interest rate had a greater effect on economic cost with transportation than did alternative shadow wage factor. Higher level of capacity utilization would reduce the milling costs by a greater amount than a lower shadow interest rate. Since, the relative cost position of different size groups of mills was not changed by alternative values for the economic parameters the policy directions given by the basic analysis of Chapter 5 appeared stable. When milling 25 per cent of paddy on miller’s or trader's financial account was counsidered, the sale of byproduct was found critical for profitability if a rice recovery rate of only 55 per cent were obtained. With a 60 per cent rice recovery rate milling on miller's account was profitable even if the byproduct were not sold. Elimination of lappy was seen to push all sizes of diesel mills and the smallest size group of electric mills into loss if only custom milling services were provided. However, with a 60 per cent rice recovery rate the millers or traders would make a substantial profit from milling 25 per cent paddy on their account even if lappy were abolished and the byproduct were not sold. CHAPTER SEVEN SUMMARY AND CONCLUSION This chapter summarizes the main findings of the study and draws implications for policy and future research. Important limitations of this study are also indicated. 7.1 Igtggduction Paddy contributes about 25 per cent of Nepal's GDP and earned between 24 and 55 per cent of the export earnings between 1962/63 and 1977/78. Improved agricultural technology has been emphasized for the last 30 years of Nepal's planned development efforts. Marketing has been relatively neglected. Rice milling has been very neglected even though it produced 78 per cent of the total manufacturing output in 1976/77. Better performance in rice milling would help improve the economy. Available studies on rice milling recommended replacement of current steel hullers by rubber roller sheller machines and emphasised the use of bigger mills. However, there has been no adequate study of the economics of the existing rice mills either from a financial or from an economic point of view. Therefore, this study attempted: (1) to obtain descriptive information on the place of rice milling in the miller's milling operations, (2) to estimate the financial and economic costs of rice milling by size and type of mills both from the miller's and the country's 142 perspectives which includes the assembly and distribution costs. and (3) to identify policies for improving the performance of rice milling. This study was not able to examine the adoption of new rice milling technology as little was occuring. It examined the milling practices in 1984/85 and the conditions as they existed at one point in time. The findings for the larger size groups of electrical mills are based on very small sample as there were not many in the study area. 7.2 Rice Marketing i the Tarai In 1981/82 machine milling was common in the Tarai but the Hills and Mountains were estimated to mill about 95 per cent foodgrain by traditional methods. Excess capacity and uneven distribution of the mills in the Tarai were often reported. Generally, the big mills served the internal urban and export markets and the small mills largely provided custom milling services. Custom milling was estimated to handle about 57 per cent paddy in the Tarai in 1981/82. The government collected a flat tax from the small mills. In 1986/87 it introduced taxes on new machinery that would discourage the addition of husker or polisher to the huller machines. 7.3 Research Methods gpg §gflplipg The data for this study were collected through a two stage field survey and from secondary sources. The field surveys were conducted in two Tarai districts of the Central region of Nepal as these districts were judged representive of the Tarai. A list of mills in each district was obtained from the Excise Tax Offices and a 50 per cent random sample was selected in the first stage. The selected mill operators were administered a brief interview schedule. Completed records were obtained from 218 mills. The mills were then categorized according to power source, horsepower size, and the share of gross income obtained from rice miulling. From each cell of this 3—way classification, a random sample of 20 per cent or 6 mills whichever was higher, was taken for the second stage survey. If any cell had less than 6 mills all were selected for the study. In all, 79 millers completed the second stage interviews of which 63 mills were diesel run and 16 were operated by electricity. The field survey was closely supervised by the author and the data was managed and analysed mainly by using the MSTAT micro computer program. This was the only software available in the field. A majority of mills studied in the first stage ( 143 out of 218 ) generated less than 26 per cent of the owner's income. Only 11.6 per cent of the millers earned more than 50 per cent of their income from milling. Two operators milled paddy exclusively on their account and reported losses during the survey year. The commonly used physical resources of the rice mills were as follows. A 10 horsepower, or smaller engine was most common (179 out of 218). Temporary type of mill structures (khapda roofing, mud floor with concrete machine foundation, and thatched walls) were the most common. Plate mills that shared power with 144 rice mills but used mostly to mill wheat and maize were very common (212 out of 218). The terms upon which milling was carried out were dominated by custom purchase. Of the 218 mills, only two milled on own account, four milled on own account and on custom basis. The rest provided custom milling services only. None of the sample mills of Rautahat district milled paddy on own account. Of the 218 respondants only 6 thought that the extent of the total volume of their milling was growing and 78 thought that it was decreasing. The main reason they gave for the decrease was excessive number of mills (59 respondants). No miller reported any recent change in his machinary. 7.5 Financial and Economic Analyses of Rice Mills Four accounting perspectives were taken in the analysis. These were the miller's financial standpoint, consumer's or mill user's financial standpoint, and economic standpoint with and without transportation costs. The electrical mills consistently showed size economies irrespective of the analytical perspective chosen with the exception of the consumer's financial perspective. As noted earlier the sample size for the larger electrical mills was very small so this conclusion is made with caution. In case of the diesel mills, the middle size class appeared to be slightly less costly from the miller's financial perspective. However, the differences between any two size catagories of diesel mills was much narrower than that of the 145 electrical mills. Essentially no.size economies for the diesel mills was found. For the consumers, the financial cost of milling increased as the mill size increased irrespective of the type of mill primarily due to their assembly and distribution costs. 7.6 Sensitivity g; Milling gggt £9 ghgggg§ 13 Important Eggtggg The introduction of a lower, and a higher shadow wage rate had little influence on relative economic cost of rice milling by different sizes of rice mills. Also, a lower shadow interest rate, or a higher level of capacity utilization did not change the relative cost position of different sizes of mills. However, a lower shadow interest or a highge capacity use would reduce the absolute cost rice milling in all sizes of mills. When estimates were made for milling 25 per cent paddy on miller's or trader's account at the current 55 per cent rice recovery rate, it was profitable only if the byproduct could be sold. With a rice recovery rate of 60 per cent, byproduct sale was not critical for a profitable outcome. 7.7 Bgligy lgplications The lower rice milling costs of the electrical mills compared to the diesel mills from all accounting perspectives confirmed a common finding that the use of electrical power in rural industries such as rice milling is less costly than the use of diesel power. Hence, increased rural electrification would be important for the development of Nepal's rural small industries. 146 Economies of size in electrical mills were indicated by this study. However, encouraging bigger electrical mills for custom milling would involve a trade off between a lower miller's financial and economic milling cost against a higher consumer's financial and economic cost due to higher transportation costs. In areas where electric power is not available, smaller diesel mills need to be encouraged for custom milling for no size economies were found in the diesel mills. Therefore, the smaller the mill, the closer it would likely be to the farmer who uses custom services. Adding husk and bran separators and polishing machines would improve the rate of rice recovery. Currently, in addition to custom duties and the sales tax, the husk separaters and polishers are taxed annually by the Government. Such a tax policy discourages technological change in custom rice milling and helps reinforce technological stagnation in rural rice mills. The present machines were estimated to give a low rice recovery rate of 55 per cent rice and a mixed byproduct of husk and bran. Up to 7.5 per cent rice for human consumption could be added if the present rice recovery rate were raised to 62.5 per cent by the addition of better machines. However, it should be recognized that such a change in rice milling would reduce the availability of animal feed from the byproducts. This study found very little technological change in small rice mills. To improve the performance of Nepal's rice mills, better rice milling technology is needed. To accomplish this 147 Nepal needs increased public and private activities to import and test new rice milling machines that are available in the international market. Greater effort in agricultural engineering and agricultural economic research on rice mills could aid millers in choosing better machines. Policies that encourage better milling performance need to be designed. The components of such a policy may include testing new rice milling technology, making finance more accessible to small mills and providing incentives for the small mill entreprenuers to adopt economically better technology. 7.8 Implications £95 Future Research To aid in improving the performance of rice milling in Nepal future research is needed in the following five areas. 1. A study is needed on the linkage between the rice traders and custom millers. The preference of rice traders for specific mills, if any, could reveal the type of milling technology prefered by the market. Once the prefered types of mills were identified they could be studied from an economic point of view to encourage the most economic sizes and types of mills. 2. The dynamics of preferance articulation through the market can be expected to influence technological changes in the mills used by the traders as development proceeds. Therefore, changes in market preference for rice should be studied to know the direction of desirable changes in the technology of small mills. This is more important than it first looks because as custom milling declines the economy gets increasingly market oriented. 148 3. The technological possibilities of new milling machines for small mills need to be studied from various accounting perspectives and compared with the findings for the existing mills before any policy on mill replacement is formulated. 4. The profitability of milling on the miller's account appears to depend largely upon the byproduct market and the rice recovery rate. Therefore, the byproduct markets and rice recovery rates need to be studied more carefully before recommending for other facilities for milling on miller's or trader's account. 5. A study focussed on mills that are doing a significant amount of milling on miller's account needs to be carried out to learn more about the market oriented technological changes and the conditions for profitability of rice milling on the miller's account. B I BL I OGRAPHY BIBLIOGRAPHY Acharya, M.; A Study of Rural Labor Markets in Nepal, Ph. D. Thesis, University of Wisconsin—Madison, 1987. Adhikary, G.;The Nepalese Rice Subsector; An Unpublished Paper Circulated to Faculty Members of the Department of Agricultural Economics, Michigan State University, East Lansing, MI. 1981. Agricultural Projects Services Center (APROSC); Nepal: Foodgrain Marketing and Price Policy Study (final report); Vol. I, II. and III; 1982. --— Nepal: Post Harvest Foodgrain Sector Study (final report); Vol. I and II; 1983. Antle, John M., The Structure of U. S. Agriculture Technology; American Journal of Agricultural Economics; V0. 66, No. 4, 1984. 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HMO/Nepal; Agricultural Statistics of Nepal; 1977 and 1983. ——— Agricultural Statistics of Nepal; Suplementary Issue, 1985 ——— Determining Variation in Rice Samples for Improved Proposed Grade Standard; 1974. ——— Food Statistics of Nepal, 1981. -—— Farm Management Study, Central Development Region, 1983. Food and Agriculture Organization; Trade Year Book, 1975 to 1986. ——— Production Year Book. 1975 to 1986. French, Ben C.; Some Considerations in Estimating Assembly Cost Functions for Agricultural Processing Operations; Journal of Farm Economics; Vol. 42; 1960. Gautam, K.R.; Minimum Support Price Policy: A Nepalese Scenario Support Paper for the Second National Agricultural Marketing Conference, 1984. Giri, P.; Marketing and Export of Foodgrains; Compiled in Agricultural Marketing Conference Proceedings; Organized by Economic Analysis and Planning Division, MOA/Nepal; 1972. Gittinger, J. P.; Economic Analysis of Agricultural Projects; Johns Hopkins Press; 1977. Hajek, Jaroslav; Sampling from a Finite Population; John Wiley and Sons, New Work; 1981. Harrison, K., Hanley, D., Riley, 0., Riley, H., and Shaffer, J.; Improving Food Marketing Systems in Developing Countries: Experiences from Latin America; Latin American Studies Center, Michigan State University; Research Report No. 6. 1974. Harsh. S.. Conner, L., Schwab, 6.; Managing the Farm Business; Prentice—Hall, Inc.; 1981. Hayami, Yujiro and Ruttan, Vernon; Agricultural Development: An International Perspective; The Johns Hopkins University Press; Baltimore and London; 1980. 151 International Labor Organization; Appropriate Technology for Employment Creation in the Food Processing and Drink Industries of Developing Countries; Second Meeting, Geneva; 1978. Karkee, M. K. and Munankami, R. B.; Nepalese Agricultural Marketing System: Problems, Prospects and Required Improvement, Paper Presented At Second National Agricultural Marketing Conference, 1984. Karki, T. B.; Processing Methods: Nepal, Rice Post—Harvest Technology; Arauilo, Padua, and Graham (editors); IDRC, 1976. Lohani, P. C.; Budget Speech, 1985; Ministry of Financia, HMG/N Lynch, Frank; How to Make a Social—Survey Interview schedule — Introduction for Beginers (Papers on Survey Research Methodology ); Bangkok; The Agricultural Development Council, Inc; 1979. Manandhar, G. P. and Gautam, J. C.; Food Supply Situation in Nepal; Food Problem and Solutions in Nepal (special issue); World Food Day Committee, the Third, 1984. Markland, Robert E.; Topics in Management Science; John Wiley and Sons; 1983. McDiarmid, John 0.; Unskilled Labor for Development: Its Economic Cost; a World Bank Research Publication; Johns Hopkins Press; 1977. Meier, Gerald M.; Leading Issues in Economic Development; Oxford University Press; 1976. Ministry of Finance; HMG/ Nepal; Economic Survey, Fiscal Year 1984/85; 1985. ————— HMG/ Nepal; Economic Survey, Fiscal Year 1985/86; 1986. Ministry of Law and Justice; Nepal Rajpatra, Part 35,Additional Issue No. 53 and No. 47; 1985. Michigan State University ( M S.U.); MSTAT Microcomputer Software Mannual; 1983. Mudbhary, P. K.; Impact of Rice Pricing Policy on Production. Consumption, and Trade in Nepal; Report Preared for FAO, 1983. National Planning Commission; The Seventh Plan, 1985. 152 Nepal Rastra Bank;Some Important Statitics in Agriculture, 1985. ——— Economic Report 1983/84 (in Nepali). Paudel, S. R.; Private Sector in Nepal;s Commerce and Industry (in Nepali); Nepal Chamber of Committee, 1977. ——— Planned Development in Nepal: A Study; Educational Enterprise (Pvt) Ltd; Kathmandu, 1983. Pradhan, R. 8.; Industrialization in Nepal: A Macro and Micro Perspective, NBO Publishers, 1984. Shaffer, James D.; On the Concept of Subsector Studies; Paper presented to Technical Seminar on subsector Modeling of Food and Agricultural Industries; Department of Agricultural Economics, University of Florida, 1970. Sharma, S.P. and Niraula, B.B.; Foodgrain Storage and Processing in Nepal; Food Policy Issues in Nepal; Proceedings of Food Policy Seminar, Agricultural Projects Services Center; Nepal, 1984. Sharma, 8. and Niraula B.; Foodgrain Storage and Processing in Nepal; Food Policy Issues in Nepal, APROSC/IDRC: Seminal Proceedings, 1984. Shrestha, G. R.; Foodgrain Distribution System in Nepal; Nepal Food Corporation; 1978. Shrestha, R. L.; Private Sector in Nepal's Industrial Development (in Nepali); Nepal Chamber of Commerce; 1978. Shrestha, T.B. and Serestha K.K.; An Integrated Approach to National Agricultural Marketing Development, Proceedings of Marketing Conference, Food and Agricultural Marketing Services Department, HMG/ Nepal, 1984. Siamwala, A. and Haykin. S.; The World Rice Market: Structure, Conduct, and Performance; International Food Policy Research Institute; 1983. Spencer, Dunstan S. C., May~Parker 1.1., and Rose. Frank 8.; Employement, Efficiency, and Income in the Rice Processing Industry of Sierra Leone; Department of Agricultural Economics, Michigan State Univerity; 1976. Svejnar, J. and Thorbecke, B.; Macro—Economic Policies and Agricultural Performance in Nepal: OECD Development Center. Paris; 1984. 153 The World Bank; Nepal: Development Performance and Prospects, 1979. ~-— World Development Report 1983; Oxford University Press; 1983 --— World Development Report 1984; Osford University Press; 1984 Timmer, C. Peter; Rice Marketing in Indonnesia; Food Research Institute Studies in Agricultural Economics, Trade, and Development; Vol. XI, No.1, 1972. Todaro, Michael P. ; Internal Migration in Developing Countries: A Survey; In Population and Economic Change in Developing Countries, edited by Richard Easterlin, New York, National Bureau of Economic Research, 1981. Tulachan, P. M.; Demand and Production of Rice in Nepal: The Past Situation and Future Prospect; M.S. Thesis, University of Illinois; 1979. United Nations; International Trade Stastistics Yearbook; Vol. I, 1984 and Vol. II, 1984; 1986. Van Ruiten, H.T.L.; Rice Milling; Grain Post—Harvest Processing Technology; SEARCA; Los Banos, The Philippines; 1981. Weber, Michael; An Analysis of Rural Food Distribution in Costa Rica; Ph.D. Thesis; Department of Agricultural Economics, Michigan State University, 1976. Yates, Frank; Sampling Methods for Censuses and Surveys; Hafner Publishing Company, New York; 1949. APPENDI CES APPENDIX I Economics of the Nepalese Rice Mills Mills Enumeration Questionnaire Name of Enterprise —————————————————————————————————————————— Name of the owner ——————————————————————————————————————————— . Location ( indicate panchayat, ward number, and village in order) ——————————————————————————————————————————————————— Year when the milling operation was started ——————————— Type of operation (tick one): private / partnership / company Have you rented this mill on contract from someone else? yes/no Description of the housing structure: wall ____________________ floor ---------------- roofing ------------------- with or WithOUt residential section ———————————————————— How would you describe your milling business? (whether it is growing or decreasing over the recent years, you may include anything about your business such as problems, prospects,needs, new laws, organizations, and so on) Power source for your mill: ( ) Electric motor Number ————————— - Total horsepower —————— ( ) 081881 engine Number —————————— Total horsepower ————— ( ) Others (SPeCifV) --------------- Total horsepower —————— 154 155 10 Rated capacity of rice milling unit or units in tons of paddy input per hour (TPH): Unit 1 (qtl per hour) ________ Unit 2 (qtl per hour) ________ Unit 3 (qtl per hour) ———————— 11 Type of milling equipment at present ( ) Huller without husk separator No. ——————— ( ) Huller with husk separator No. ——————— ( ) Sheller without jet polisher No. _______ ( ) Sheller with jet polisher No. ——————— ( ) Speller No. ________ ( ) Plate mill No. ________ ( ) Any other type ( please specify) ————————— No. _______ 12 Scope of rice milling in the milling business (timewise) a) Average daily number of hours the rice milling machine is used during 1) peak rice milling season ......... ii) slack rice milling season ........ from ........... to ................ iii) intermediate season ( frist) ............. from ........... to ................ 1V) intermediate season ( second) ————————————— (If more than one machine is used enumerators should record the total number of hours on an average the milling machines are used ) b) Average daily number of hours the power source is operated in 1) peak rice milling season ........... hours ii) slack season in rice milling ........ hours 13 14 156 iii) intermediate rice milling season (first) ....... hours iv) intermediate rice milling season (second) ...... hours Do you mill paddy on your own account ? yes/no ————— If yes, Share of rice milling on custom bassis in terms of amount milled i) peak rice milling season ———————————— per cent ii) slack rice milling season ------------ per cent iii) intermediate rice milling season ( first) ———-% iv) intermediate rice milling season (second) —-- % 15 Scope of rice milling in the milling business of the miller a) Yearly average share of income from rice milling on custom basis ------- X b) Yearly average share of income for millig rice on your own account ————— % c) Yearly average share of income from milling other foodgrains -------- % d) Yearly average share of income from making beaten rice -~% 16 Scope of milling business in the total business of the miller's family in terms of average share of total family income for last year. a) share of family income from milling ( all grains) ——————— %. b) share of family income from supplying agricultural inputs if any —————— % 0) share of family income from farming ———————— % d) share of family income from running grocery shop —————— % e) share of family income from other sources such as interests, dividends, remittances,etc ——————— % f) share of family income from service ----- % g) share of income received by contracting out anything—-~—% h) approximate annual family income from mill Rs. --------- 157 17 Estimates of the share of paddy, rice, and byproducts transported by various means while making use of the milling services (please note these proportions only for custom milled paddy) Means of transport Assembly (%) Distribution % —_—————--————————————.———.——————-—————————_—————————..——_-——.————_——— bullock cart bicycle/tricycle truck/bus human packload horse/mule ——_——-——_‘—_—_———_-—_—_-——-~—_—-—-—-————-—_____-_—_e_-—-_n-o———__———~__—_ —-—————-———-—_——————-——————-———-——--——————-—_—————————————_—_——-« ( Assembly refers to the transportation of paddy to the mill even if it is done by the party using custom services) 17 Any suggestion for the researcher, policy makers, other mill operators, transporters, financers, administrators, educators, etc. about improving the prospects of rice milling? r APPENDIX II MSU/ADC/IAAS Economics of the Nepalese Rice Mills In-depth Survey Questionnaire Name of Interviewer: ........ Date of Interview: Time of Interview: Cell No. Sample No: 159 Economics of the Nepalese Rice Mills In-depth Survey Questionnaire (Questions 1—3 are to be filled in advance) 1. Name of the Enterprise 2. Name of the owner. 3. Location (indicate panchayat, ward number, and village in order). 4. Please help prepare a sketch of the market area to show the distances various points from where paddy is drawn into your mill for milling 5) Does any customer have to return home without milling his Paddy because of time shortage? yes/No ————— If yes, in which months ? from —————————— to ________ How many customers on an average return in a day ? ——————— 6) How do you describe rice milling business in this community? Is it growing/declining (in volume terms; ) ------ what are the major reasons for its growth or decline? 7. How is in general, milling technology changing? (indicate if parboiling is increasing or sheller mills are increasing or the method of parboiling is changing or husk/bran separators are being added,etc.) Why are the above changes taking place? 8) Is more and more paddy being machined milled if you think 160 of last few years? Yes/No ---------- If yes, what is the per cent increase in volume terms in this year over the last year -~—-% What are the reasons for milling more paddy over the years ? Production increases ———- / avoiding hand or leg pounding ——-~ 9) by month Amount of foodgrain your lill Iilled over the last one year Foodgrainz>>> PADDY Wheat Maize Millet Pulse }SEQI'_“”_E;;E;;’ month basis é;3;£;£'7;£ """""""""""""""""""""""""""""""" 3;;2;;'722 """""""""""""""""""""""""""""""""""""""" QQEQE‘TZI """"""""""""""""""""""""""""""""""""""""""""""" ;;;;;;"T;I """""""""""""""""""""""""""""""""""""""""" EBQQEQ‘TQI """"""""""""""""""""""""""""""""""""""""" IQQSQ'TZI """"""""""""""""""""""""""""""""""""""" §;21;"721 """""""""""""""""""""""""""""""""""""""""""""""""" IQQQEETZI """""""""""""""""""""""""""""""""""" E33;’721 """"""""""""""""""""""""""""""""""""""""" l;;B;—7;I """""""""""""""""""""""""""""""""""""""""""""""" E;;;;"T;I """"""""""""""""""""""""""""""""""""""""" EEQEI'TZI """"""""""""""""""""""""""""""""""""" };E;I """""""""""""""""""""""""""""""""""""""""""" 10. What is the average lot size of paddy brought for custom milling per customer Does the lot size vary by season ? yes.... ? ———————— kgs/mds ———————— No.... 11. 12. 161 If yes, between which months the lot size is the biggest? from. . . . . to . . . .. . . ; and what is the average lot size during this period -------- kgs. / mds. What is happening to the extent of custom milling, generally, if you consider last few years ? Is it increasing / decreasing / not changing? --------- If increasing/decreasing what is the estimated percentage change in your mill from last year to this year (between the begining of Ashad 2041 and end of Jestha 2042) —————— What is this percentage change between the begining of Ashad 2040 and end of Jestha 2041 ——————— If there is a change in the extent of custom millng, in your mill over the recent years what are the main possible reasons a) ——————————————————————————————————————————————————————————— b) ——————————————————————————————————————————————————————————— c) ——————————————————————————————————————————————————————————— d) ________________________________________________________________ Employment in your mill by month over the last year (record the number of employees). 162 Employee category Mangager Accountant Mechanic Unskilled Labor Month Male Female Baishak '42 Jestha '42 Ashad '41 Srawan '41 Bhadra '41 Ashoj '41 Kartik '41 Mansir '41 Pausa '41 Magha '41 Falgun '41 Chaitra '41 Total Man M. Average 13. How the employment of last year differ from that of previous years? Please give the total man months by category: (the enumerator may have to use separate sheet for adding; each period includes the time between the begining of Ashad and end of Jestha) Year 2040/41 2039/40 2088/39 2037/38 catagory Manager Accountant Mechanic Unskilled labor 163 14. Money paid as wage, salary, and taxes for last five years. ( every period below includes Ashad and Jestha as before ) ———————————-——————-————-.—————————————_—-——————————————————-—————-.— Year>>>> 2041/42 2040/41 2039/40 2038/39 2037/38 Catagory -—————-——-———————.———————————————-—————-———————_—_————————“——“__ ———-———--——————————_—-———_—_——_—————_——_———_——————————_——_——- —-————————————————————_————————————————————————_———_———————-_—— ——-——————-———-—.--———————————-—_-——————_———-——-———~————.——_-———-fi Unskilled worker _——-————-——————————_—-———————_———————.——-—_.—~——_——————_————-—————_— _—-————-—-—_—————_——__-——_———_-—-——_———-—_——-—”—_———--~—-”.——- ——-——————.—-—-_——~—__—-———————-—————-_——————__———_—_——_—*———‘. 15. Wages paid for unskilled workers by season over the last year (From Ashad 2041 to Jestha 042; to assess labor availability) Peak Season Slack Season Intermediate Season Unskilled ----------------------------------------------- Labor from...to... from....to... from ..... to ......... Male Female 16. Please indicate the addition or scrapping of machinery in your mill over the years. _————-—_—_——————_—.———————_——————-—-—.—_-——_~——_——————_————————_——— Name of Year added Year scrapped Brief reason for machinery (if applicable) (if applicable) adding or scrapping —_——-———-—_———-————_—————_————————-—-—_—_————-_——_———__————-——--———— ’———-——_———_——————————_—————————__—___—~————————————.———————_“—-——w u———n————_—-———————_——————————_—__-.._..————_—--_———_—_—-.-—_————..—_—--——“—hfi 17. Current milling charges Rs ..... /qtl. or md. Are they same for the entire year? (Yes, /No) ——————— If no, plase indicate the charges by season i) peak season from ........ to ....... @ Rs ..... /qtl. or md. ii) slack season from ........ to .......... @ Rs..../qtl. or md 164 iii) first intermediate season from (month) ...... to ...... @ Rs..../qtl. or md. iv) second intermediate season @ Rs ......... / qtl. or md. 18. Please name the regular mill holidays (e.g. weekly, monthly, and yearly, etc.) Weekly -------------- Monthly ----------- Yearly —————————— 19. Mill closure days for reasons other than in 18 by month ( Please read the footnotes) Month 1 2 3 4 5 6 7 8 $5557.}; ____________________________________________________ 32.311172; """"""""""""""""""""""""""""""""""""""""""""""""""" Isl—.5721 ______________________________________________________ Srawan '41 Bhadra '41 Aswin '41 Kartik '41 ———-———-—————.————————————————————-—.———_———————-———————-—————————— ——_—————-————.————_——————.-——_——————___-__—-———————__—_———___———__—_~ ——————--———————_————————————._—————————————————————————-——-———---————u ————_—————_—_—————————————_._———_—_—————-——————————.——————--————*——- ~—_—_—_————__————.——_—_____—__—_——_——_-_—__—___—__--————_—_.———_—————— —————————.__——_——-—-—_———_____————————————._——_—_———_—————._————~—-——-. n*———-—-——-———-_—-—————-——-—.—n————_—_————_-_———————-__—_——————_—__— Footnote: 1 = Fuel/Electricity shortage, 2 = Lack of skilled worker. 3 = Lack of spare parts, 4 = Lack of unskilled Labor, 5 = Industrial dispute, 6 = Lack of custom customers, 7 = Lack of own paddy,8 = Other (please sp.) 165 20. Equipments in the Mill Name and Year of Purchase Price Exp. tech. Info. —————————————————————— rem. Installation Source New/Old Pur. Curr life a) Diesel eng. b) Electric motor HP ..... c) Huller No 1 TPH.... d) Huller No 2 TPH.... e) Huller No 3 TPH.... f) Sheller No 1 TPH.... g) Sheller No 2 TPH ..... h) Water pump HP. Husk separator p.“ v TPH.... j) Polisher TPH.... k) Bran separator l) Precleaner TPH.... m) Oil extractor 1 TPH.... n) Oil extractor 2 TPH.... 0) Plate mill 2 TPH.... p) Plate mill 2 TPH.... q) Saw mill r) Others (specify) 1) Weighing equip. ii) Drying floor cover iii) ............ 21. Do you know if any other miller brought or sold any machinery over the last year? Yes ..... /No ....... 166 If yes, what is the machine .......... ; how much was paid for ......... ; who sold it..............; and name and place of the buyer .................... 22. Are you considering addition or scrapping of any machinery unit over the next few years? —————————— If yes, what you are planning to do and why you want to do it? ———————————— - 23. Can you sell any of your older machinery in the market if you wanted to? Yes..../No ...... If yes, please specify: a) name of machinery ............. market .................... b) name of machinery ............. market .................... c) name of machinery ............. market .................... d) name of machinery ............. market .................... 24. Can you buy any new or used maghigggy in the market if you wanted to? Yes ........ /No ............... If yes, please specify: a) name of machinery (New/Used) ............ market .......... b) name of machinery (New/Used) ............ market .......... C) name of machinery (New/Used) ............ market .......... 25. Buildings and other structures- Total land area occupied by your mill complex ................ 167 Name of Construction Floor Year Current Expected struc- Material area constru— value remaining ture ted life a) Engine housing b) Mill equi- ments hous— ing(include indoor weigh ~ing area) c) Paddy drying area ——_-_——————-———————————.———————-—————————————————_————_———————————_— d) Other struc- ture (if any please sp.) ———-—_——-—————————--———-———————————-—_—————_——_———————————~———— ———————————_—————————————————————————-‘-—————————_—————-—————-————— ——_—~———.———_—————————_—_—..——_——_———_——————_——————u———_———-———~_——-w —-.—.— u_—~~u——_—~—————*u—n———-—-.n—.--————_——-_————-—-—————-——-——_~——-~¢~—-———a—-~~n-—~-*fl 26. Are you planning on adding some structure for improving the housing of the existing equipments? Yes ...... /No .......... If yes, when you plan to do it ————————— and please indicate: a) Kind of structure ............. estimated cost ............ and reason for cousidering addition ..................... b) Kind of structure ......... estimated cost .............. and reason for cosidering addition.. ................... c) Kind of structure ................... estimated cost ........ and reason for considering addition ...................... 27. Do you plan to hire any salaried worker within the next couple of years even if you did not expand your business? 168 Yes .......... /No ................ If yes, please indicate a) Kind of worker .............. estimated salary per year ........... and reason for planning to hire ......... b) kind of worker .......... , estimated salary per year ....... ,and reason for planning to hire .............. 28. Are there any difficulties in getting any kind of skilled worker for your purpose? Yes .......... /No ................. If yes, please indicate,in order,the kind of workers you find difficult to get: 1) ............. 2) .......... 3) ....... 29. Total variable costs for last one year(please use separate sheet for calculations if necessary) """"""""""""""" SSEQJQ?"""$32;I"£EII""""$55; if ava— Source ilable Item on need S’EQQIJQQQQ """""""""""""""""""""""""""""" £3'&;E;I~';Q;E;;; """"""""""""""""""""""""""""""""""""" 233.2355; """"""""""""""""""""""""""""""""""""""""""" 30. for huller or sheller ——————_—-—--——g———————————————.-—-—_——-————————_——————.——_—-—————————-— Spareparts for engine,Trans., or water pump Building Repairs (annual) —*“—---_-—-———_‘~-——-———~-—no.“——--‘.-~——‘————————‘———‘—————_fl-u——*———wfl*~ ——————-——————_—-—_—_—_—-———————_—_———_————-———__—~___-_—_—__—_ Name the spareparts you have to buy most often in order of priority 31. 32. 33. 34) 169 a) Name of part . . . . . .buying source. frequency ——————————————— b) Name of part . . . . . . procurement source frequency ——————————————— Please indicate the nearest place where you sell the rice you milled on your own account . . . . . . . . . , distance . and average transport cost per unit Rs. On milling paddy on your own account, please indicate the proportions of different milling products you obtain. a) rice b) brewer's rice c) bran d) husk e) unmilled paddy. Talking about only the milled rice, on an average, what will be the percentage broken on milling on your own account ..... Please indicate the markets for the milling byproducts that you obtain. a) brewers' rice . . . . . . . ., average selling price b) bran . . . . . . . , average selling price c) husk . . . . . . . , average selling price. d) unmilled paddy . . . . . , average selling price Do you provide custom milling services if the milling Charges are paid in kind ? Yes. . . .No. If yes, please indicate: a) name of kind payment . . . . . . and charge per maund of paddy milled. 170 35. Of the total amount of custom milled paddy what proportion, 36. 37. 38. 39. 40. on average, is milled on cash charges Do you prefer to mill paddy on payment in kind ? Yes ..... Please ./No ..... and why ? tell us about the current structure of custom duties on the following items if you have to import them (in %). a) diesel or electric engine b) huller or sheller c) fuel d) spareparts e) water pump f) transformer g) preclearer h) husk separator Do you always get any of the items listed just above when you go to the procurement source ? yes. .. ./No. If no, please indicate in order which items are harder to find: a) item average waiting time in days b) item average waiting time in days 0) item .average waiting time in days d) item average waiting time in days.. Please describe .the availability and feasibility of different new methods of paddy milling and new machinery. How did you get the information as described just above? 41. 42. 43. 44. 171 Please indicate in order of priority what you need to do to improve your milling business and how it would improve your business ? Is any part of your present oeration financed by sources outside your own? Yes. . . ./No. If yes, please indicate: a) source . . . . . . . . . , approx. amount interest rate . . . . .. . and purpose ............. b) source . . . . . . . ., approx. amount interest rate . . . . . . and purpose.. Please indicate the type of training background you had before getting into this milling business. ——————— experience on mills run by others including family members and number of years. —————— had college degree in running commercial ventures ——————— had general education for a period of . . . . years —————— had training in milling operations ——————— any other specify Do you feel any need of further training for you in order to do even better in your business ? yes . . . . /No. If yes, please specify the nature of training and duration you feel would be helpful. APPENDIX III Table A.III below has the proportions of various broad cost items required in ordinary new building construction. Table A.III: Cost Breakdown for Building Construction on Average (per cent) Initial Construction Item Acquisition Acq.20% Acq. 10% included excluded excluded Brick 20 16 18 Cement 12 9.6 10.8 Steel 10 8 9 Timber 10 8 9 Other materials 14 11.2 12.6 Labor 30 24 27 Management 4 3.2 3.6 and superivison Total 100.0 80.0 90.0 Note: The figures in column 2 are obtained from B.N. Dutta, 1977 and those in column 3 and 4 are respectively 80% and 90% of the figures in column 2. The millers estimated that about 20 per cent of the building cost was spent on acquisition. Hence the remaining proportions of various items are shown in the third column. Labor is shown to take 24 per cent of the total expenses. As reported half of this would be paid for the unskilled labor, half of the total labor expenses was shadow priced by the factor 0.7. 172 APPENDIX IV The construction materials were domestically produced, by public sector monopolies and by private producers. It was impossible to obtain the economic cost of producing all of these materials within the time and resource limits of this research. Also there would be problems related with efficiencies. The approach chosen to determine the economic cost of these materials was to assume that all of these materials were imported. The custom duties and sales tax (charged at the entry point) were accounted. Table A.IV has the custom and sales tax on these materials (charged at the custom check post) effective for 'the study period. Table A.IV: Custom and Sales Tax Effective During the Study Period on Various Construction Items (per cent ad valorem) ——————_——————-——————-———-————————————_—_——_—_—_————————_———_——_-—— Item Custom Sales tax Remarks Brick 19 15 Custom rates on roofing clay tiles called Khapda Cement 11.7 10 Steel 4 10 Timber 19 15 Others 21 10 Same rate for A/C generators and motors __—_——————-—-—_.————_————-—_—__———-———_—_———_—__—————————_—_————-_—m_—_ Source: Nepal Rajpatra, Part 35, Additional Issue No. 53, HMG. - Nepal. ' 173 174 Another adjustement needed was to shadow price unskilled labor by a factor of .7 on the basis of the norm recommended by the Asian Development (1980). In fact all unskilled labor cost has been shadow priced in this manner. 175 APPENDIX V The power units (both electrical and diesel engines) used in the study area were almost all imported from India. According to the millers, they would go very far into India to buy such items. They indicated that 10 per cent of the item's cost would be spent on acquisition. From the current value, acquisition cost was first taken out. The remaining part was adjusted for custom duties, sales tax, and shadow exchange rate between the Nepalese and Indian currencies. A similar adjustment was made to the cost of the hullers. In case of spareparts, the acquisition cost was assumed to be 20 per cent of the total expenditure reported because these items needed to be bought more often. After first deducting the acquisition cost first, the remaining amount spent on the spareparts was adjusted for custom duties, sales tax. and exchange rates. Table A.V has the custom and sales taxes rates for power units. hullers and the spareparts. Table A.V: Custom Duty and Sales Tax on Power Units, Huller, and Spareparts Item Custom Sales tax Remarks giggzgg‘;;;;;;“‘;;“"“"‘13 """"""""""""""""""""""""" Diesel engine 11 5 Hullers 32 15 Separate rates for hullers are not available Spareparts 1 5 —_————__———————“-———_————_—.——-————-——————————.—_--————_——..-_——_w———_—H— 175 176 APPENDIX VI A construction engineer suggested that in building repair, labor cost would be half of the total. Also, 50 per cent of the labor cost would be paid to unskilled labor. Hence, the adjustments on material cost were to allow for custom duties and sales taxes assumed to have been included in the cost of various materials used for financial analyses. For unskilled labor, the shadow wage factor was used. Assuming that the acquisition costs were 10 per cent of the material and labor costs, the following would be the percentage weights to which the remaining material cost was adjusted for custom and sale tax. These weights were derived from Table A.V.l. Table A.VI: Percentage Cost Breakdown for Building Repairs by Major Cost Catagories _——_—————————————————————-—-—-————_—_——————————_—_._——_————————#——“—— Item Labor Remarks 45% §;§;;’"“""""MM’IZ; ””” JQ‘QQIQQFQE‘EQZEQEQI1.2;}; Cement 7.7 cost is left for making up the Steel 6.4 proportion of materrials, Timber 6.4 becauuse 10 per cent in allowed Other material 9.0 for acquisition and 45% (50% of Labor 45.0 the remaining) is for labor Management and 2.6 supervision $32;I"“"""'“""MCB‘B """""""""""""""""""""""""" —————_———_————_———_————-———_———___—_.—————c—-_-_.___—_——_—_————_-—_———-—_-. 176 177 APPENDIX VII Table A.VII: Import Content, Custom Duty and Sales Tax on Electricity and Diesel (per cent ad valorem) Acquisition Import Domestic Custom Sales Item cost content % content charges tax Electricity — 37.9 62.1 21.0 10.0 Diesel 20 80 - 7.2 7.0 Sources: 1. Nepal Rajpatra, Part 35, Additional issue No. 53, HMG, Nepal 2. Nepal Rastra Bank, Additional Issue No. 47, Quarterly Economic Bulletin, Vol. XIX, No. 2 & 3 3. Personal contact with a Gas Station owner