equilibrium.

Fostering cashew processing would also create value in this segment: 18 thousand tons would become profitable at an approximately 374 USD/ton conversion rate (428.56 – 54.37 USD/ton).<sup>13</sup>

# **4.2.5. Simulation: FUNPI contribution and subsidies to farmer inputs**

Our last simulation involves the interaction between the FUNPI contribution and a complementary policy that reduce farmers’ costs, such as subsidies to finance seeds, fertilizers, or other inputs by 10 percent. Such policy represents 2 percent of revenues.<sup>14</sup> Scenario XVI in Table 12 shows the results.

**Table 12. Base Scenario – FUNPI contribution and subsidy to farmer inputs**

|**Policy**<br>|**(I) Base**<br>**Scenario -**<br>**no FUNPI**<br>|**(II) = (I) +**<br>**FUNPI**<br>|% change<br>(vs I)<br>|**(XVI) = (I) + FUNPI**<br>**+ 10% reduction**<br>**in cost of farmer**<br>**services**<br>|<br>% change<br>(vs I)|
|---|---|---|---|---|---|
|_International Price (USD/ton)_|799.88|799.88||799.88||
|_Trade taxes (USD/ton)_|93.50|199.88||199.88||
|_International Price net of taxes (USD/ton)_|706.38|600.00|-15.1%|600.00|-15.1%|
|_Intermediate Price (USD/ton)_|519.54|426.66|-17.9%|424.72|-18.3%|
|_Farm-gate Price (USD/ton)_|435.95|351.00|-19.5%|348.42|-20.1%|
|_Exporters + cashew processors profit (USD/ton)_|73.80|67.20|-8.9%|68.10|-7.7%|
|_of which, exporters (USD/ton)_|70.23|61.78|-12.0%|62.81|-10.6%|
|_of which, cashew processors (USD/ton)_|348.26|441.14|26.7%|443.08|27.2%|
|_HHI exporters and cashew processors_|487|510||512||
|_Traders profit (USD/ton)_|40.94|34.66|-15.3%|34.92|-14.7%|
|_HHI traders_|256|256||256||
|_Quantity (tons)_|156024|140000|-10.3%|143668|-7.9%|

We assume that inputs or services subject to the subsidy (of 10 percent of cost) represent 60 percent of total farmer inputs. Other assumptions that are necessary to convert the subsidy in a change in parameter _A_ are subsumed in the value of price elasticity ( _ε_ ).

Lower input costs (or instruments that raise farmers’ productivity) would translate in equilibrium to a lower decrease in quantity (vs the scenario with FUNPI contribution) and also an additional reduction in farmer and trader prices. Facing higher farmers’ supply, profitability of both exporters and traders increase, but not enough to compensate the reduced oportunities created by the tax.

Differently from previous simulations, complementary policies that affect farmers costs induce a positive supply response. Given the conditions in the trade and export segments, the subsidy would induce additional reduction in farm-gate prices. However, this reduction in price should be balanced with reductions in farmers’ costs to assess whether the complementary policy compensates farmers’ utility or not (this point is analyzed in Section 5).

13 In this simulation, the most efficient exporters get a per-ton profit of approximately USD 80.

14 We assume a subsidy equivalent to a 10 percent reduction in the costs of subsidized inputs, which account for around 60 percent of the total cost of cashew production. The cost-price margin implied by our supply function specification is 1/3. Therefore, the subsidy to inputs represents 2 percent of revenues.

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