Agroforestry-economics MAKRAND GUJAR

7/31/2019 Agroforestry-economics MAKRAND GUJAR

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Agroforestry concept,economic and social aspects

GUJAR MAKRAND PRAKASH11-661-403

ADVANCED AGROFORESTRY

MANAGEMENT ANALYSES
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What Is Agro Forestry ?

Agro forestry is a collective name for landuse system in which woody perennials aregrown with herbaceous crops and or

animals on the same land by spatialarrangement (or) temporal sequence.

(Lundgren and Raintree,1992)


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Objectives of agro forestry

To utilize the available farm resource properly.

To maximize per unit production of food, fodder,fuel.

To optimizing-biological and physiologicalresources

To maintain the ecological balance

To check soil erosion, conserve soil moistureand increase the soil fertility


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Why agroforestry?

Produces saleable products

Provides value-added opportunities

Diversifies risk

Increases property values

Increases crop yields & livestockproduction

Eligible for cost-share & land rentalpayments

GOOD INCOME


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Socioeconomic aspects ofagroforestry

Biological

Physical

Naturalfactors

Social

Economic

Political

Legal

Institutionalfactors


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Socioeconomic characteristics

Total land area in the LUS (km2 or ha)Total population in the LUS,

Population density: persons/km2,

Ethnic groups: religion, culture, etc.,Tenure system: ownership or user rights for

crops pastures, land, trees,

Farm income: levels and sources, and Infrastructure: roads, electricity, commercial

centers, etc.


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Financial measures

are typically used for providing complete picture of variousalternatives

NPVNet Present Value

B/C ratio

AEVAnnual equivalent value

IRR (internalrate of return)


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NPV

Net present value is simply all future net income streams fromthe practice discounted to reflect their current or present value.

This indicator is useful only as a basis for comparison.

The net present value of the agroforestry practice can becompared to the net present value of other alternatives, such asa soybean monoculture, to see which practice is the mosteconomically profitable.

Assuming each practice is discounted using the same period oftime and the same discount rate, the highest NPV wouldindicate the best alternative.


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NPV= (Bt-Ct)/(1+r)t

Where

B is benefits in year t

C is costs in year t

r is selected discount rate


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INTERNAL RATE OF RETURN

The internal rate of return is the rate at which aninvestment is expected to grow.

For example, a savings account pays 3 percent per

year; therefore, an investor who puts money in asavings account is expecting to earn 3 percent on thatinvestment.

If an agroforestry practice has an IRR of 6 percent,then a rational investor would choose the agroforestrypractice over the savings account earning 3 percent.


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IRR contd..

However, the internal rate of return does notalways capture the uncertainty of return overtime.

Using the savings account example, aninvestor is assured that the money put into asaving account is relatively risk free;

however, investment in agroforestrypractices may face uncertainties that werenot predicted or planned.


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Annual Equivalent Value(AEV)

The annual equivalent value is an estimate of a level incomestream that would have the same net present value as theactual income streams.

Actual income streams for agroforestry practices may bepositive one year an negative another; however, with theannual equivalent value, a level income estimate is established.

The annual equivalent value can be used to comparealternative practices with the agroforestry practice to determinewhich practice has the highest expected income potential.


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Benefit cost ratio

It is defined as the present value of benefitstream is divided by the present value ofcost stream

B/C ratio= Total Discounted Benefits

Total Discounted Costs


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Agroforestry Enterprise Budgeting

Step 1: Define the Enterprise

1. What practice is it? (alley cropping,silvopasture, riparian forest buffer, windbreak,

forest farming)2. What species? (common or scientific name)

3. What spacing? (30 x 30, 20 x 40, etc.)

4. What is the price basis? ($/acre, $/tree, $/year,etc.)


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Step 2: Estimate Revenues1

1. What are all of the possible sources ofrevenue? (incentives, nuts)

2. When are these revenues going to beearned? (years 1-10, after 10, after 60,etc.)


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Step 3: Estimate Variable Costs (Operating Costs)

1. What are the costs to establish the practice?(site preparation, planting, etc.)

2. What are the costs to maintain the practice?

(chemicals, grafting, thinning, etc.)3. What will it cost to harvest? (nuts, timber, etc.)

4. What will it cost to market the products?

(advertising, transportation, spoilage, etc.)


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Step 4: Estimate Fixed Costs (Ownership Costs)

1. What proportion of the property taxes can be attributed to the tree portion?(10 percent per acre in trees = 10 percent of per acre property tax)

2. Interest being paid on capital? (interest on machinery debt, building debt,etc.)

4. What does it cost to own the land? (current rental rates, interest paymentson land, etc.)

5. Is there any capital that must be depreciated? (machinery, buildings,roads, etc.)

6. When and how often will these costs occur?


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Yield from agricultural crop, intermediate yield of thinning,

Timber, fuelwood, fodder output


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Project Appraisal and Evaluation

Project appraisal andevaluation are oftenreferred to together asproject assessment.

Project appraisal isconcerned with assessing,in advance, whether a

project is worthwhile andtherefore if it should beproceeded with.


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What is a Project?

..an investment activity upon whichresources costs are expended to createcapital assets that will produce benefits over

an extended period of time and whichlogically lends itself to planning, financing,and implementing as a Unit.

The whole complex of activities for whichmoney will be spent in expectation of returns


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ex ante means before;

ex post means after;

the terms are taken from Latin


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Ex ante analysis

"If you don't know where you're going, howwill you ever know if you getthere?

Ex ante evaluation is a process that supportsthe preparation of proposals for new orrenewed Community actions.

Its purpose is to gather information and carryout analyses that help to define objectives, to ensure that these objectives can be met, that the instruments used are cost-effective and that reliable later evaluation will be possible.


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Ex ante analysis

Ex ante studies in agroforestry primarilyrely on

social and financial analyses of on-farmtrials of agroforestry innovations

to assess the adoption potential of and

to improve the effectiveness and efficiency of

developing, modifying and disseminating newagroforestry practices.


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Ex ante studies provides information anddata on

financial and non financial benefits,

What works and where and why

Differential adoption behavior

Intra-household distribution of benefits and

how and why farmers are using and modifyingthe technologies

(Franzel and Scherr,2002)


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Ex ante analysis looks at benefits and conflicts orproblems likely to arise at the levels of:

farming system, with respect to householddivision of tasks and benefits, on-and off-farmactivities, and resource use schedules;

community or-village, with respect toobligations, organizations, management, andregional or catchment-level systems; and

region or catchment area, with respect toland tenure, market incentives, credit andextension agencies.


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There are four essential types of analysis involved in ex-ante evaluation, namely:

Economic viability: benefit/cost ratio; net returns toland/labor/cash; risk and sensitivity analysis.

Sustainability: analysis of the technology's capacityto meet objectives in short -and long-terms; also,analysis of expected changes and requirements

related to soils, water, vegetation, management, andcommercial input/output streams. (Macro D&D alsoplays a key role here.)


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Farmer acceptability: comparability analysis withrespect to resources and management; also, socialanalysis with respect to defined rules and

responsibilities within household obligations, tenurialconditions, etc.

Adoption potential: analysis of technology impactsin terms of number of farmers, regional development

priorities, tenure rights, institutional andinfrastructural support systems, etc.


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Ex post evaluation

An evaluation of a completed projectOnce the project is completed (and possibly also

several times during its implementation), it needs to beevaluated so as to enable analysts (borrowers or lenders)

to assess its performance and outcome. It seeks to answer such questions as:

has the project been successful in attaining itsobjectives?

if not, in what respect has it failed?how might its design and/or implementation have been

improved?


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Agroforestry system assessment

Three useful indicators of performance for a system are:

Management intensity, which is measured as an input/inputratio.

For example, amount of fertilizer/ha, or labor input/ha.

Productivity, which is measured as an output/input ratio, For example, yield/ha, or yield/livestock unit.

Profitability, which is measured as output value/input. For example, net benefit invested or net benefit/ha.


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Steps in systems analysis

Systems analysis means an explicitconsideration of system objectives,interplay of endogenous components and

factors, and interaction/linkages withexogenous systems; the analysis uses thetime factor as an important variable.

Present Performance of the System Future Improvements


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Future Improvements

What are the objectives of the system manager(s) (e.g.,farmer and household).

What are the positive and negative effects on the system ofthe present component structures and/or functions?

How could they be modified or replaced to achieve higher levels ofperformance? Any proposed interventions must to be appropriate andacceptable to the manager(s).

What are the positive and negative effects on the system of

exogenous factors, and What should be done about these factors to move the system in

the desired direction?


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h B i b fi i


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where B is benefits in year tC is costs in year t

r is selected discount rate

Where:

NPV = Net Present Value

cashflown= net income or net loss for the year n, for example cashflow1 is

the net income from the first full yearof production.

i = discount rate, or the opportunity cost of investing. For example, the dollars

could have been invested in thestock market with an expected return of 14 percent instead of being invested inan agroforestry practice, therefore, the opportunity cost of the agroforestrypractice would be 14 percent.

n = number of years included in the budget.


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Structural classification of systems

Classification of agroforestery based on components

Agrisilviculture- crops (including shrubs / vines & tress

Silvipastoral pasture / animals & tree

agrosilvipastoral crops, pasture, animals & tree

(Nair, 1999)


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Internal Rate of Return (IRR)

Internal Rate of Return (IRR) uses the sameequation as net present value; however,instead of solving for the NPV,

an arbitrary NPV of Rs. 0 is assumed. Thediscount rate becomes the unknown variable inthe equation. The i nowrepresentsthe rate at

which all discounted cashflow will equal zero.Or, in other words, the rate at which futureincomes will return the initial investment(cashflow0).

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Agroforestry-economics MAKRAND GUJAR