**Farm production** Farm gate product **Assembly** Assembled raw material **Processing** Processed raw material **International logistics** Traded commodity (Product 1, 2, 3)

21. Finally, the value chain analysis is also interested in the private costs and returns that accrue to individual participants. Agriculture production, processing, and marketing begins with the decisions private investors make and it is important to have a sense of the underlying financial costs and profitability of competing enterprises first to determine if the system is viable and second to identify opportunities for poverty reduction. Because the methodology is constructed around enterprise budgets, these measurements are easy to make. At the farm level, private costs and returns are measured in per hectare and per ton terms; at later stages, values are measured in per MT terms only. From these indicators, calculations showing the rate of return to variable and fixed expenditure, total investment requirements, demand for labor, and other components of private and social importance can be made.

# **B. Procedures and Assumptions**

22. In preparing the analysis of Malawi’s agriculture competitiveness, the approach was to provide an indicative picture of value chain costs and returns. All value chain participants naturally produce according to their own objectives and resource limitations. The analysis therefore cannot identify optimal cropping patterns or investment strategies for individuals, and is instead structured around a broad spectrum of management possibilities. This approach is most useful for understanding major trade-offs associated with different production decisions needed at the early stage of planning an agriculture investment program. The main procedures and assumptions used for this analysis are briefly described below.

23. **Data collection.** Data collection was carried out in Malawi from April to May 2008 and involved a brief literature review, key informant interviews, and sourcing of production information from crop research institutes, statistical abstracts and farmers’ groups. Subsequent to the data collection and preliminary analysis, industry experts were consulted to validate the draft results and seek feedback on major bottlenecks and recommendations for improvement. The preliminary templates were then revised based on the feedback received to produce the final models whose results are discussed in this report.

24. **Farm management.** The analysis covers two levels of progressively intensive smallholder management. At the FAM-low level, farmers follow a fairly basic management regime and use only the most essential farm inputs. Some fertilizer is included at the FAM-low level, but producers otherwise make little use of purchased inputs and rely mainly on family labor. The FAM-high level, on the other hand, represents the type of improvements a small farmer could realistically make with improved access to inputs and marginally better management skill. Compared with FAM-low, therefore, FAM-high management is based on a modest increment in fertilizer, more intensive and better use of pesticides and/or agrichemicals as required for each crop, more timely planting, and better attention to weed control. It is further assumed that FAM-high producers make more intensive use of hired labor due to the additional management requirements and better timing of key tasks.

25. **Commodity coverage.** The analysis covers four important smallholder commodities selected because of their importance to poverty reduction, food security, and/or export growth. The full list of crops and farm systems covered is set out in the Table 2. Each farm variation 10