Agroforestry concept, economic and social aspects

ADVANCED AGROFORESTRY MANAGEMENT ANALYSES

GUJAR MAKRAND PRAKASH 11-661-403

What Is Agro Forestry ?

Agro forestry is a collective name for land use system in which woody perennials are grown with herbaceous crops and or animals on the same land by spatial arrangement (or) temporal sequence.
(Lundgren and Raintree,1992)

Objectives of agro forestry

To utilize the available farm resource properly. To maximize per unit production of food, fodder, fuel. To optimizing-biological and physiological resources To maintain the ecological balance To check soil erosion, conserve soil moisture and increase the soil fertility

Why agroforestry?
GOOD INCOME
Produces saleable products Provides value-added opportunities Diversifies risk Increases property values Increases crop yields & livestock production Eligible for cost-share & land rental payments

Socioeconomic aspects of agroforestry

Natural factors

Biological

Institutional factors

Social

Economic Physical Political

Legal

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.

Economic analysis of Agroforestry

Hoestra (1990) indicated 5 major points which agroforestry economic analyses should address;
Does the system under evaluation make the best use of available resources? In the event of commencement, would available funds permit project completion? Is the system technically feasible under the prevalent labour constraints? Is the system economically viable under the given capital constraints of participants? What are the risks involved in technology introduction?

Financial measures
NPV Net Present Value IRR (internal rate of return)

AEV Annual equivalent value

B/C ratio

are typically used for providing complete picture of various alternatives

NPV
Net present value is simply all future net income streams from the 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 be compared to the net present value of other alternatives, such as a soybean monoculture, to see which practice is the most economically profitable. Assuming each practice is discounted using the same period of time and the same discount rate, the highest NPV would indicate the best alternative.

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

B is benefits in year t C is costs in year t r is selected discount rate

INTERNAL RATE OF RETURN

The internal rate of return is the rate at which an investment is expected to grow. For example, a savings account pays 3 percent per year; therefore, an investor who puts money in a savings account is expecting to earn 3 percent on that investment. If an agroforestry practice has an IRR of 6 percent, then a rational investor would choose the agroforestry practice over the savings account earning 3 percent.

IRR contd..
However, the internal rate of return does not always capture the uncertainty of return over time. Using the savings account example, an investor is assured that the money put into a saving account is relatively risk free; however, investment in agroforestry practices may face uncertainties that were not predicted or planned.

Annual Equivalent Value (AEV)

The annual equivalent value is an estimate of a level income stream that would have the same net present value as the actual income streams. Actual income streams for agroforestry practices may be positive one year an negative another; however, with the annual equivalent value, a level income estimate is established. The annual equivalent value can be used to compare alternative practices with the agroforestry practice to determine which practice has the highest expected income potential.

Benefit cost ratio

It is defined as the present value of benefit stream is divided by the present value of cost stream B/C ratio= Total Discounted Benefits Total Discounted Costs

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.)

Step 2: Estimate Revenues1

1. What are all of the possible sources of revenue? (incentives, nuts) 2. When are these revenues going to be earned? (years 1-10, after 10, after 60, etc.)

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.)

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 payments on land, etc.)
Is there any capital that must be depreciated? (machinery, buildings, roads, etc.) When and how often will these costs occur?

5.

6.

Yield from agricultural crop, intermediate yield of thinning, Timber, fuelwood, fodder output

Project Appraisal and Evaluation

Project appraisal and evaluation are often referred to together as project assessment.

Project appraisal is concerned with assessing, in advance, whether a project is worthwhile and therefore if it should be proceeded with.

What is a Project?
..an investment activity upon which resources costs are expended to create capital assets that will produce benefits over an extended period of time and which logically lends itself to planning, financing, and implementing as a Unit.

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

The Project Cycle

The process begins with project identification and ends with project evaluation. To ensure that projects meet their original objectives, it is usual to set up an evaluation framework, which allows project finance agencies, policy makers and other stakeholders to assess the success of the project through the monitoring and evaluation process.

ex ante means before; ex post means after; the terms are taken from Latin

Ex ante analysis
"If you don't know where you're going, how will you ever know if you get there? Ex ante evaluation is a process that supports the preparation of proposals for new or renewed Community actions. Its purpose is to gather information and carry out 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.

Ex ante analysis
Ex ante studies in agroforestry primarily rely on social and financial analyses of on-farm trials of agroforestry innovations
to assess the adoption potential of and to improve the effectiveness and efficiency of developing, modifying and disseminating new agroforestry practices.

 Ex ante studies provides information and data 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 modifying the technologies

(Franzel and Scherr,2002)

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

farming system, with respect to household division of tasks and benefits, on-and off-farm activities, and resource use schedules; community or-village, with respect to obligations, organizations, management, and regional or catchment-level systems; and region or catchment area, with respect to land tenure, market incentives, credit and extension agencies.

There are four essential types of analysis involved in exante evaluation, namely:

Economic viability: benefit/cost ratio; net returns to land/labor/cash; risk and sensitivity analysis. Sustainability: analysis of the technology's capacity to meet objectives in short -and long-terms; also, analysis of expected changes and requirements related to soils, water, vegetation, management, and commercial input/output streams. (Macro D&D also plays a key role here.)

 Farmer acceptability: comparability analysis with respect to resources and management; also, social analysis with respect to defined rules and responsibilities within household obligations, tenurial conditions, etc. Adoption potential: analysis of technology impacts in terms of number of farmers, regional development priorities, tenure rights, institutional and infrastructural support systems, etc.

Ex post evaluation
An evaluation of a completed project Once the project is completed (and possibly also several times during its implementation), it needs to be evaluated 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 its objectives? if not, in what respect has it failed? how might its design and/or implementation have been improved?

 It allows a reworking of the estimates of the economic rate of return on the basis of actual implementation costs and updated information on operating costs and expected benefits. Evaluation thus helps to identify elements of strength and weakness, success or failure. The results are valuable in planning future projects and in attempts to avoid repeating or committing mistakes.

Agroforestry system assessment

Three useful indicators of performance for a system are: Management intensity, which is measured as an input/input ratio.
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.

Steps in systems analysis

Systems analysis means an explicit consideration of system objectives, interplay of endogenous components and factors, and interaction/linkages with exogenous systems; the analysis uses the time factor as an important variable. Present Performance of the System Future Improvements

Present Performance of the System

What is the structure of the system(s)? The structural components refer to basic resources such as edaphic, biotic, abiotic, or economic resources. Structural assessment involves a specification of boundary and spatial, as well as temporal arrangements of physical components; this is Usually done on a qualitative and/or quantitative basis. What is the function of the system(s)? The functional components refer to management resources, viz, input levels used, technological and economic input, and output levels achieved, both in physical and/or economic terms. Functional assessment involves a description of inputs (use of labor, cash inputs, information), outputs (food, feed, materials) and their disposal (home consumption, sale), and the timing of when these events occur.

 What is the state of the system? Answering this requires analysis of trends with respect to changes in the basic structure and/or functions of the system. Stability and sustainability are important considerations in this step.

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 of the present component structures and/or functions?
How could they be modified or replaced to achieve higher levels of performance? Any proposed interventions must to be appropriate and acceptable 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?

THANK YOU

NPV= (Bt-Ct)/(1+r) where B is benefits in year t C 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 year of production. i = discount rate, or the opportunity cost of investing. For example, the dollars could have been invested in the stock market with an expected return of 14 percent instead of being invested in an agroforestry practice, therefore, the opportunity cost of the agroforestry practice would be 14 percent. n = number of years included in the budget.

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)

Internal Rate of Return (IRR)

Internal Rate of Return (IRR) uses the same equation as net present value; however, instead of solving for the NPV, an arbitrary NPV of Rs. 0 is assumed. The discount rate becomes the unknown variable in the equation. The i now represents the rate at which all discounted cashflow will equal zero. Or, in other words, the rate at which future incomes will return the initial investment (cashflow0).