Agriculture in National Accounts: Value added in current and constant prices 1

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1 Agriculture in National Accounts: Value added in current and constant prices 1 Introduction This paper continues the series dedicated to extending the contents of the Handbook Essential SNA: Building the Basics 2. The aim of this paper is to provide some background to understand the compilation for agriculture of two tables included in the Minimum Requirement Data Set (MRDS), the first data set that a country must have before it can claim to have implemented SNA: Value added and GDP by industry at current prices; Value added and GDP by industry at constant prices. To understand how these tables are compiled for agriculture and what data sources are required to do so, much of the paper is used to outline the production approach to GDP compilation as applied to the case of agriculture. A previous paper in this series has examined the compilation of the two MRDS tables in general terms 3. In the current paper we will apply these general observations to the particular case of agriculture. Accounting for Agriculture In most developing countries, agriculture accounts for between 20-60% of GDP, and employs up to 65% of the labour force, providing a livelihood for approximately 2.6 billion people globally 4. The need for a coherent system of economic accounts to support the creation of reliable data on food and agriculture was recognized by the Food and Agriculture Organization of the United Nations (FAO) in the early fifties of the last century when food balance sheets were being compiled to assess the food availability in the world. The System of Economic Accounts for Food and Agriculture (SEAFA) that grew out of this can be viewed as a specific application of SNA to meet the requirements of analysts and policy-makers dealing with various economic activities relating to food and agriculture 5. In Europe the Economic Accounts for Agriculture (EAA) have been developed as a satellite account of the European System of Integrated Economic Accounts (ESA) and have been published by the Statistical Office of the European Communities (Eurostat) since A satellite account provides an accounting framework for a particular subject matter linked to the central accounts of SNA, allowing attention to be focused on a certain aspect of economic and social life in the context of national accounts. Examples are satellite accounts for the environment, for 1 This paper has been prepared with the technical assistance of DevStat Servicios de Consultoría Estadística in consortium with ICON Institute. 2 Henceforth called the Handbook ; it can be found at the following link: 3 Annual GDP by production approach in current and constant prices: main issues 4 Agriculture at the Crossroads: Guaranteeing Food Security in a Changing Global Climate, UNCTAD Policy Briefs, nr. 18, December A system of economic accounts for food and agriculture, 6 for EAA references should be made to Regulation (EC) 138/2004 as this includes the last updates as regards the EAA methodology. 1

2 tourism and for unpaid household work. In the case of the Economic Accounts for Agriculture the accounts are adapted to the particular nature of the agricultural production. For example, the SEAFA include not only the production of grapes and olives but also the production of wine and olive oil by agricultural producers, as well as information on intra-unit consumption of crop products used in animal feed, output accounted for own-account production of fixed capital goods and own final consumption of agricultural units 7. Also SEAFA data can be used to calculate income indicators for the agricultural sector. Recognizing the need for detailed analysis of the population dependent on agriculture the system traditionally has put special emphasis on agricultural households. SEAFA provides an accounting framework as does SNA. However, it does so in a somewhat shorter form, singling out the accounts and their transactions that are most suited for the subject matter at hand 8 : The production account The generation of income account The allocation of primary income account Other (income) accounts Capital account The production account in SEAFA shows the breakdown of total agriculture production by detailed level of products. This additional product detail is missing from the SNA production account. The following calculation shows an example of how some of the main accounting transactions of SEAFA can be combined: + The value of crop output + The value of livestock production + Income from agricultural services = Total output - Intermediate consumption = Gross value added - Consumption of fixed capital = Net value added + Other subsidies on production = Factor income - Compensation of employees = Net operating surplus - Rent - Interest = Net entrepreneurial income Table 1 Some of the transactions included in SEAFA In the remainder of this paper we will focus on the first part of this calculation, up to gross value added, since this is needed for the MRDS tables. Units and classifications In this section we will explore the main units and their classifications, as needed for the compilation of value added in agriculture: activities, institutional units and products. 7 OECD s Economic Accounts for Agriculture, explanatory notes. 8 A background to the SNA accounts can be found in the following papers in this series: Introduction to the SNA 2008 Accounts, part 1: Basics; Introduction to the SNA 2008 Accounts, part 2: Current Accounts; Introduction to the SNA 2008 Accounts, part 3: Accumulation Accounts. 2

3 ISIC activities For agriculture we are concerned with the following ISIC 4 economic activities: A - Agriculture, forestry and fishing 01 - Crop and animal production, hunting and related service activities; 02 - Forestry and logging; 03 - Fishing and aquaculture. In the framework of SEAFA also some other activities related to agriculture are included, such as: Food production: the manufacture of food products and beverages; Environmental protection activities such as desertification control, water resource protection etc.; Other activities such as research and development relating to agriculture.; veterinary activities; technical, vocational and higher education relating to agriculture; etc. The following three tables present some details for each of the three main divisions included in ISIC section A. Group Description Includes (list is not exhaustive) 011 Growing of nonperennial Plants that do not last for more than two growing seasons. Examples: cereals crops (0111), rice (0112), vegetables (0113), sugarcane (0114), tobacco (0115), fiber 012 Growing of perennial crops crops (0116). Plants that lasts for more than two growing seasons, either dying back after each season or growing continuously. Examples: grapes (0121), tropical and subtropical fruits (0122), citrus fruits (0123), pome fruits and stone fruits, (0124) other tree and bush fruits and nuts (0125), oleaginous fruits (0126), beverage crops (0127), spices, aromatic, drug and pharmaceutical crops (0128). 013 Plant propagation Production of all vegetative planting materials including cuttings, suckers and seedlings for direct plant propagation. 014 Animal production Raising (farming) and breeding of all animals, except aquatic animals. Examples: Cattle and buffaloes (0141), Horses and other equines (0142), Camels and camelids (0143), Sheep and goats (0144), Swine/pigs (0145), Poultry (0146). 015 Mixed farming Combined production of crops and animals without a specialized production of crops or animals. If either production of crops or animals in a given unit exceeds 66 per cent or more of standard gross margins, the combined activity should not be included here, but allocated to crop or animal farming. 016 Support activities to agriculture and post-harvest crop activities 017 Hunting, trapping and related service activities Table 2 Groups included in division 01, Crops and Livestock Support activities for crop production (0161), Support activities for animal production (0162), Post-harvest crop activities (0163), Seed processing for propagation (0164). Hunting and trapping on a commercial basis; taking of animals (dead or alive) for food, fur, skin, or for use in research, in zoos or as pets; production of fur skins, reptile or bird skins from hunting or trapping activities. Group Description Includes (list is not exhaustive) 021 Silviculture and other forestry Growing of standing timber; growing of coppice, pulpwood and fire wood; operation of forest tree nurseries. activities 022 Logging Gathering and production of fire wood; production of charcoal in the forest 023 Gathering of nonwood forest products (using traditional methods) gathering of wild growing materials such as mushrooms, truffles, berries, nuts, cork, acorns, mosses and lichens. 3

4 024 Support services to forestry Table 3 Groups included in division 02, Forestry forestry service activities such as forestry inventories, forest management consulting services, forest fire fighting and protection, forest pest control; logging service activities, such as transport of logs within the forest Group Description Includes (list is not exhaustive) 031 Fishing Marine fishing (0311); Freshwater fishing (0312) 032 Aquaculture Marine aquaculture (0321), Freshwater aquaculture (0322) Table 4 Groups included in division 03, Fishing Institutional sectors The agricultural sector in SEAFA consists of three sub-sectors each of which is, in turn, a sub-sector of a standard SNA sector: agricultural households; agricultural corporate or quasi-corporate enterprises; government-owned Non-Profit Institutions (NPIs) by whose principal activity is agricultural production or research. Within the agricultural sector, SEAFA's primary interest is in agricultural households. In the framework of an agricultural census the main unit is often the holding, which consists of the land area and the buildings, machinery and livestock which go with it and are considered by the holders as belonging to the same farm. Areas which are rented and leased are included with the holding but those which are let or leased out are not considered to belong to the holding. Holdings can usually be equated to establishments in the SNA sense. An agricultural establishment is one whose principal activity is agricultural. However, an agricultural establishment may have one or more secondary activities which in practice are not separable from the principal activity. For example, an establishment engaged mainly in growing cereals or other crops may raise domesticated animals as a secondary agricultural activity. Alternatively, the secondary activity may not even be agricultural; for example, grain milling or slaughtering which are classified as food manufacturing in ISIC. Thus, the total output of a set of agricultural establishments will in practice tend to include some nonagricultural products produced as outputs from secondary activities within those establishments. Products The third type of unit used in SEAFA is the product, i.e. the good or service produced as output by a process of production. Goods and services accounts are compiled for individual products or groups of products. These accounts may also be described as balances of supplies and uses. The general classification of products corresponding to ISIC is the Central Product Classification (CPC). Concepts: output, intermediate consumption The agricultural industry's output equals the sum of the output of agricultural products plus goods and services produced in non-agricultural secondary activities. Total agricultural output represents the total value of all agricultural products (goods and services) and includes production used in a further agricultural process by the unit itself or by another agricultural unit. Total output includes: output sold (including trade in agricultural goods and services between agricultural units); changes in stocks; output for own final consumption and own-account gross-fixed capital formation; output produced for further processing by other agricultural producers; 4

5 intra-unit consumption of livestock feed products. Output is normally calculated using the price times volume method. For example, for cereals, the harvest yield of the individual kinds of cereal is calculated first, and this is then multiplied by the average selling prices, e.g. as collected from all the larger cereal merchants. For animal products, the sales value is calculated in a similar way by multiplying the quantities sold by the average selling prices obtained by producers. The value of changes in inventories and livestock numbers, as well as output for own use, is then added. Intermediate consumption includes such items as seeds, irrigation, pesticides and fertilizers. In accordance with the accounting rules in the SNA, expenditure on ordinary repair and maintenance of the production apparatus and on hand tools and the like is considered to be current expenditure on production and is therefore included in intermediate consumption. Output is regarded as being produced continuously over the entire period of production, not just when the crops are harvested or animals slaughtered. Growing crops and slaughter animals are treated as inventories of work-in-progress. They are then turned into inventories of finished stocks when the process is complete. Livestock of animals used for more than one year are classified as fixed assets. The vast majority of crops are harvested in the year in which the crop grows. The exception is winter crops, which are sown the year before the harvest. However, plant growth up to the year end is usually so minimal that for practical purposes it can be ignored. In the annual accounts, there is therefore no need to correct stocks as estimated after the harvest. Output in Forestry is also regarded as being produced continuously over the entire period of production, not just when the timber is felled. Growing trees are treated as inventories of work-in-progress. They are transformed into inventories of finished stocks when they are mature. Data sources The main sources of data for the compilation of agricultural value added are: Censuses of agriculture and livestock; Crop estimation surveys; Farm management and cost of cultivation studies; Household surveys; Administrative data from agencies concerned with prices and production relating to agriculture; Quantity and value data of imports and exports; Reports available from specialized agencies or boards dealing with marketing of specific crops, fertilizer or pesticides, finances for agricultural activities, cooperative (agricultural) societies, etc. Many countries do not have satisfactory data on agricultural inputs and prices received by the farmers. In cases where data on inputs are scares or unavailable, certain ratios based on special studies or other related factors can be applied to the value of output to arrive at value added. 5

6 Compilation procedures in current values Compilation in current values proceeds according to the definition of value added, as is illustrated by the following example for crops 9 : Crops Output of Crops Intermediate consumption of crops 696 Value added of crops Table 5 Value added for crops (arbitrary currency units) For both output and intermediate consumption the products involved should be enumerated, and for each product data on quantities and prices collected. These can then be multiplied to obtain values, as shown in the following tables. Crops output Cereals 459 Pulses 124 Industrial crops 327 Oil seeds 144 Tuber crops 79 Total of Cereals and Other Field Products Citrus 370 Nuts 156 Grape-like fruits 89 Total of Fruits 615 Leafy or stem edible vegetables 92 Leguminous vegetables 134 Root, bulb and tuberous vegetables 86 Other vegetables 31 Total of Vegetables 343 Total Cereals, Fruits and Vegetables Secondary crop production + Production of 59 fruit seeds Straw 185 Flower production 12 Total Crop Production Table 6 Compilation of output and intermediate consumption for crops Crops intermediate consumption Seeds 53 Irrigation 9 Pesticides 15 Repair, parts and maintenance 87 Petroleum and petroleum products 224 Secondary production inputs 11 Fertilizers 61 Natural fertilizers 25 Miscellaneous expenditures 211 Total Expenditures 696 For most items the calculation is straightforward if quantity and price data can be found. In some cases indirect methods can be applied. For example, for straw production values can be obtained indirectly, e.g. by multiplying pulses and cereal products by pre-determined coefficients. The calculation of intermediate consumption can be based on direct methods (survey value data) or on indirect methods. Some examples of indirect methods now follow. The total quantity of seed can be 9 Data are fictitious, and given in values of arbitrary currency units 6

7 calculated by multiplying area sown obtained from agricultural statistics with technical ratios of the amount of seed necessary per hectare of area sown. Natural fertilizer output figures of the livestock sector can provide an estimate of the amount of natural fertilizer used in the agricultural sector as input. For petroleum and petroleum products the calculation of inputs can be based on data on the number of tractors, combines, and motorized pumps in combination with estimates of these vehicles average petroleum use per year. The lubricating oil expenditures can be calculated on the assumption that it is equal to a certain percentage of fuel expenditures. The repair and maintenance expenditures for tractors and combines can be calculated by multiplying the number of these vehicles with their annual average repair expenditures as determined by a special study. This value can be extrapolated with a wholesale price index every year. The following table gives an example of the compilation for livestock. Livestock Animals slaughtered 489 Milk 329 Hides 2 Wool 67 Hair 4 Honey 38 Wax 17 Hen eggs 134 Chicken meat 147 Fertilizers used in the field 31 Fertilizers used as fuel 21 Other products 1 Total Output of Livestock Agricultural Crafts 173 Agricultural Services and Hunting 56 Output of Livestock Intermediate consumption of Livestock 578 Gross Value Added of Livestock 931 Table 7 Compilation of value added for livestock Technical coefficients are especially useful in the calculations of livestock; examples are animal fecundity rate, birth rate, death rate, annual milk production, average carcass weights, annual wool production, hair production etc. These coefficients may come from the agriculture Census or from special studies. For meat production the number of livestock is essential. As an example, the number of butchered livestock can be obtained by applying the previous year s number of livestock with butchering rates. Meat production is then calculated by multiplying the number of butchered livestock with the average carcass weights. Total meat production value is obtained by multiplying the total quantity of meat production with appropriate prices. For raw hide output, the number of animals can be multiplied with death rates to calculate the number of animals died and by multiplying this amount with an average price. Chicken eggs production can be calculated by multiplying the number of eggs taken from agricultural statistics with average prices. Agriculture crafts cover products obtained through processing crop and livestock products by farmers. 7

8 To complete the example, the following table gives an example of the compilation for forestry and fishing. Forestry Logs 135 Industrial wood 21 Wood for paper 32 Fiber chips 25 Fire wood 79 Illegal Production of Firewood 62 Saplings 25 Other secondary products 32 Revenues from the sales of ornamental 3 plants Total output 414 Intermediate Consumption 84 Gross Value Added 330 Fishing Sea Fish 354 Fresh water fish 65 Aquaculture 32 Total Output 451 Intermediate Consumption 112 Gross Value Added 624 Table 8 Compilation of value added for forestry and fishing Note the inclusion of an imputation for the illegal production of firewood in the compilation for Forestry. This is typically based on information coming out of exhaustivity studies. Compilation procedures in constant values If output is calculated using the price times volume method, the estimation in constant values proceeds along similar lines as in the previous section, but now using the previous year prices. An example is the following calculation for nuts: Product Quantity Price(T) Price(T-1) CUR CON Nuts Table 9 Compilation of value added in constant values for nuts In this example Con stands for constant values (prices previous year) and Cur for current values (this years prices). If only values are known appropriate deflators must be found to deflate these values. This is especially relevant for the various components of intermediate consumption. Recall from an earlier paper that intermediate consumption should be deflated separately from output (according to the double deflation methodology). 8

9 Agriculture in the informal sector As is explained in the Handbook 10 the concept of Informal Sector covers units that are engaged in the economic production of goods or services but operate at low level of organization. The informal sector is important in agriculture as well. The informal agriculture sector typically consists of: agricultural activities of small and marginal cultivators as well as those cultivators/rural households who grow a few trees or maintain a few livestock to meet their own needs; gathering of forest produce (including collection of fuel wood) or fishing in local ponds/rivers; agricultural activity of tribal/ nomadic population, such as shifting cultivation; agricultural activity of households living in urban or semi-urban areas. These households have a system of maintaining a small kitchen garden to produce vegetables, or have a small pond to grow fish, or to raise domesticated for getting a regular supply of livestock products. These activities are known as urban agriculture. The products of such activities are either consumed within the household or sold in the neighborhood for supplementary income. Estimation for such informal sector agriculture is difficult. In many countries no reliable data are available and output of such activities is often imputed. Concluding remarks This paper set out to provide some background on the methodology of compiling for agriculture the MRDS tables on value added and GDP by industry in current and constant prices. This sector provides a nice illustration for some of the concepts and methods used in the production approach to GDP. Output values often are estimated with the price times volume method for many of the products involved, which makes the constant value compilation relatively easy. For the estimation of intermediate consumption survey data sources are often available for crops and livestock, supplemented with technical ratio s based on special studies. This enables the compilation of value added according to the method of double deflation. To find out more, Essential SNA: Building the Basics (2010 edition), Section IV.4, V.2, VI.2 Manual for the Economic Accounts for Agriculture and Forestry, Rev. 1.1, EC 2000 The 2008 SNA, European Commission, IMF, OECD, UN, World Bank, 2009, Chapter XV: Price and volume measure. Handbook on price and volume measures in national accounts, Eurostat, Chapter 6, section 2 9