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by Marcia Bauer, Adrian Kirchner, John Humphreys, Martin van Bueren and Jenny Gordon

May 2003

RIRDC Publication No 03/042

Executive Summary

Agroforestry and Farm Forestry is the largest sub-program in the Emerging Industries program, with an annual budget exceeding $3 million. The investment in agroforestry R&D is made as part of the Joint Venture on Agroforestry Program (JVAP) which was formed in 1993. This report is the fifth in a series of annual evaluations and is the first report to look specifically at a sub-program. It is also the first to explicitly consider the triple bottom line outcomes of the R&D — the economic, environmental and social outcomes and the benefits they bring to Australia.

This report focuses on the benefits of the R&D outcomes that can be estimated based on market values. These estimates include the flow-on benefits of environmental outcomes such as reduced water treatment costs as well as direct economic impacts such as higher wood volumes from improvements in the growth rates of trees. It also includes the value of protecting biodiversity, and the benefits of improved aesthetics where such benefits can be identified and willingness to pay has been estimated. These market based value estimates capture a lot, but not all, of the benefits. They are unable to reflect some benefits that can flow from R&D such as the value to individuals from greater confidence in their future or greater contentment. A companion report by AgKnowledge/AgInsight considers this part of the triple bottom line.

The evaluations

In order to develop an indicative estimate of the returns to investment generated by the Farm Forestry Program, a sample of projects were selected for ‘ex post’ benefit-cost analysis. Projects contributing to a common outcome were identified in stage 1 of the evaluation process. In stage 2 four topics were selected for detailed analysis. Individual projects that addressed each topic were identified and grouped together such that the joint outcomes of the cluster of projects were analysed as a whole. In total, 25 individual projects were evaluated. The topics covered by the evaluations, and a brief summary of their benefits, are as follows: ! Agroforestry and catchment hydrology — 4 projects that developed fundamental principles and provided advice on where in a catchment trees should be planted to maximise the cost-effectiveness of salinity mitigation.

This advice can substantially improve the return to public investment in trees for salinity mitigation by raising the probability that the trees planted will be effective in reducing the water tables. The research reflects the current uncertainty that exists in the research community about the effectiveness in many areas and plays an important role in shaping the direction of R&D to improve information for decision making.
 

• Cabinet timbers — 9 projects that looked at different aspects of the fledgling cabinet timber industry in the sub-tropics of Australia. The work in production aspects of this new sub-industry is already supporting industry growth through improved productivity and has been critical in raising the expected commercial returns.
• The Master Tree Growers (MTG) courses — 2 cycles of funding for a project that has trained almost 800 agroforesters on various aspects from establishment to management and marketing. The courses resulted in an increase in the average area planted to trees and productivity improvements.


Although difficult to estimate there is evidence that the MTG pass on some of their knowledge to other farmers creating an echo effect, improving the outcomes for other tree growers. In addition to the environmental benefits of an expansion in the area of trees planted are a number of intangible benefits reflected in improvements in confidence and the knowledge of MTG.
 

• Site and species selection — 10 projects researched a range of factors influencing tree growth under different site conditions and selected species for particular purposes. The productivity improvements and cost savings in establishment that could be gained are considerable. The impact is highly dependent on adoption rates, which will vary with location and applicability of the research. A conservative estimate of impact is made based on the knowledge improving outcomes for existing and planned plantings. Some of the projects could also form the basis for expansion of farm forestry in low rainfall and saline areas, bringing considerable environmental benefits.


Each of the benefit cost evaluations follow a systematic approach to identifying the collective project outputs and mapping these outputs to measurable outcomes. Given the long time lags involved in many forestry enterprises — and the delays between research and realising the outcomes — it is necessary to build futures scenarios to evaluate the impacts of R&D. Whilst the projects in question have all been completed or in the process of being finalised, in some cases it will take time before the benefits begin to flow through. Thus, the scenarios take explicit account of adoption rates and time lags before new innovations are taken up by industry. Information on expected adoption profiles is sourced from researchers and industry stakeholders. The scenarios also incorporate the uncertainty associated with biophysical systems (for example, salinity projections) and other key parameters using sensitivity analysis.

The aim of the evaluations is to estimate the most likely R&D payoff under a given set of assumptions. Where environmental and social impacts are not fully captured in the analysis, the benefit-cost results provide a ‘first pass’ measure of the pay-off. If this return is less than returns on other investment alternatives the estimates can be used to assess what the intangible benefits would need to be ‘worth’ to make the R&D project competitive.

The benefit-cost results are summarised in table 1. The range of results suggest that there is a fair degree of clustering in terms of the projects selected for evaluation. The range of net benefit investment ratios (NBIR) — the return for each R&D dollar invested — is from 2.4 to 26. The net present value of the four projects sets ranges from $4 million to $71 million and the internal rate of return from 11 to 24 per cent.

Table 1 Results of the evaluations (at 5 per cent discount rate)

^a The mean estimate is reported from the sensitivity analysis as the assumptions given in the base case are thought to reflect the best case outcomes.
Source: Chapters 2-5

Chart 1 summarises the present value of the cost of the R&D and the present value of the benefits that result.

^a The mean estimate is reported from the sensitivity analysis as the assumptions given in the base case are thought to reflect the best case outcomes.
 Source: Chapters 2-5

The internal rate of return (IRR) on most of the project sets evaluated is low when compared to previous cost-benefit analyses conducted on RIRDC programs. This is due to the considerable time lag before many of the benefits from planting trees are realised. It is also due to the embryonic nature of the industry and the technical challenges associated with some areas of research. Indeed, agroforestry R&D is dealing with complex systems where many of the biophysical relationships are still unknown.

The baseline expansion of agroforestry is taken to be that set out in Vision 2020, with agroforestry remaining a constant share of the plantation estate (currently 6 per cent) into the future. While this projection may not be entirely appropriate for agroforestry, it is to be expected that the adoption of trees on farms will be influenced to a large extent by the commercial attractiveness of forestry and the availability of processing facilities in regional areas. Thus, there is good reason to believe that the adoption of farm forestry will mirror what is happening in the industrial plantation estate. To the extent that agroforestry grows faster than the growth predicted for plantations the results presented here will underestimate the benefits.

The sensitivity of the estimates

Agroforestry is an emerging industry. The National Farm Forestry Inventory provides estimates of the current size of the industry, but little is known about its long term growth prospects. Agroforesters are highly diverse, as are their reasons for planting farm trees. This makes it difficult to assess the relevance of and access to information and the likely adoption rates of the R&D. The diversity of locations, planting purpose and species selection make modelling the benefit flows a challenge. While we can fairly safely assume that planting for a specific purpose will deliver that benefit, many plantings have multiple purposes. To test the sensitivity of the estimates to these types of uncertainties sensitivity analyses were undertaken on all the benefit cost analysis (BCAs). The results are given in table 2.

Table 2 Sensitivity of the estimates


Return on R&D and return on investment in the industry

The NBIR estimates provide a measure of the return on the R&D investment.

This return is often contingent on an additional investment being made — in this case in the establishment and management of farm forestry. This investment is reflected in the additional area that is likely to be planted as a result of the improvements in the outcomes from farm forestry due to the R&D. There was an additional investment in all the evaluations except the catchment hydrology projects, as this looked at more effective allocation of existing committed resources. The results of the other three BCAs depend on the viability of these additional investments.
 

• The cabinet timber BCA found that farmers would get a return of 12.6 per cent on their investment in cabinet timbers, allowing for the opportunity cost of land. This is considerably higher than the return on investments in many other agricultural products, making cabinet timbers an attractive option.
• The evaluation of the Master Tree Growers Course uses survey information from AgKnowledge/AgInsight (2002) to assess the area of tree plantings undertaken by course participants before and after the course. The benefit cost ratio estimated when implementation costs are taken into account is 3.2, reflecting a solid return to the MTG and those who follow their lead.
• The site and species selection BCA did not consider an increase in the area in the base line R&D scenario. However, several scenarios where expansion in area occurred were examined.
• An expansion in the high rainfall zone resulted in a benefit cost ratio (BCR) on the additional implementation investment of 1.4. The lower value partly reflects the higher opportunity cost of land in this area.
• An expansion in the low rainfall zone resulted in a BCR on the additional investment of 3.3. This maybe somewhat optimistic as it assumes a high price can be achieved for carbon credits, but there is also a strong element of shade and shelter benefits.
• An expansion in the saline areas resulted in a BCR of 1.9.


The triple bottom line

The source of the benefits — economic, environmental and social outcomes varies between the project sets evaluated. As discussed in detail in appendix B, there are benefits that cannot be measured in dollar terms as they do not have a market value metric. The results presented in this report do not include indicators of this kind of benefit. Some indicators are presented in the companion report AgKnowledge/AgInsight (2002). This report does include estimates of most of the economic and some of the other benefits that flow from the environmental outcomes of the R&D. The other benefits included are a value on biodiversity and on aesthetics or amenity value. These values are derived from the National Land and Water Resources Audit work (NLWRA, 2002). They represent the Australian community’s willingness to trade-off a household environmental levy for particular environmental outcomes.

Commercial benefits from increased revenue from wood sales and carbon credits are the major sources of benefits of all but the hydrology project sets. This should not be surprising as the research has focused on raising the commercial returns to make farm forestry a more attractive option. However, as the section above notes, even with these productivity improvements it is very difficult to raise the return to commercially attractive levels in areas other than high rainfall locations close to existing processing capacity. This finding is consistent with the forthcoming report for JVAP (Buffier and Allen Consulting, 2002). As such, in this evaluation a relatively modest expansion in farm forestry is assumed. This conservative approach explains the comparatively low share of benefits flowing from environmental outcomes.

The distribution of benefits are as follows:
 

• Agroforestry and catchment hydrology — the benefits all come in terms of having a greater impact on salinity levels and hence lowering the costs associated with salinity including yield losses, infrastructure repair costs and water treatment costs. The potential impact on biodiversity and the value this might generate was not taken into account.
• Cabinet timbers — wood benefits made up 96 per cent of the estimated benefits. Of the remaining non-wood benefits carbon trading made up 2 per cent. The share of the value of other environmental outcomes was very small, with the benefits to biodiversity, fodder and aesthetics being the largest of the remainder.
• Master Tree Growers Course — the main source of gains due to the MTG course (57 per cent) was from the expansion in area and the carbon sink value this delivers. Higher revenues from wood accounted for 32 per cent of the benefits, while the non-carbon environmental outcomes made up less than 1 per cent of the benefits. The echo effect — adoption of new technology by other growers — accounted for 10 per cent of the benefit. This component was all in higher productivity of wood production as the area planted by non- MTG growers was not expected to increase as a result of the MTG. In addition to these largely economic benefits the MTG has had social benefits. These are reflected in the reported increased confidence in the future of agroforestry and agriculture in general (AgKnowledge/AgInsight, 2002). These impacts were not given a dollar value in the analysis.
• Site and species selection — in the base line R&D case the benefits are almost entirely due to productivity improvements in wood production. In the high rain fall expansion scenario 65 per cent of the benefits came from wood, 26 per cent from carbon credits, 3.7 per cent from cost savings in establishment, 2 per cent from shade and shelter, and around 1 per cent each for amenity values, soil erosion control and reduced water tables. As an example, chart 2 shows the distribution of gross benefits from an expansion in the area of farm forestry in the high rainfall zone.




Comparisons with previous RIRDC evaluations

The estimates of the returns on agroforestry are similar to the returns in other emerging industries, without the big winners. This is in part due to bundling of the research into larger sets, which incorporates both very good and poorer projects. Chart 1 summarises the results from the past five years of RIRDC evaluations.

Returns agroforestry R&D is noticeably smaller than some other RIRDC programs such as ‘Established Industries’. However, this result must be viewed in its proper context. Agroforestry is still at an embryonic stage of development and the research undertaken by JVAP is dealing with complex systems where many of the biophysical relationships are still unknown. The benefits of R&D are contingent on the growth in the industry — which in turn will depend on the ability for farm forestry to be a commercially attractive option in low rainfall areas.

Lessons from the evaluations

These evaluations have presented considerable challenges due to the lack of hard data on adoption rates and the diversity of the industry. A wide range of opinions was sought in trying to estimate the outcomes of the research and adoption rates that might not be apparent in the text. Most people contacted could only report with any confidence on their specific locality, which explains has been necessary to make a number of simplifying assumptions and use broad zone averages in the estimation of outcomes and impacts. As the evaluations focus on the changes brought about by the R&D, the base matters less than when making estimates of the total value of agroforestry, hence we have some confidence in the results presented here.

As always, the most useful part of doing evaluations is the lessons we learn from them. It is hoped that the process of the evaluation will assist researchers in better understanding the likely impacts of their research. Key lessons are:
 

• The long lag before trees provide a commercial return means that the return on R&D will always be comparatively low, compared with products with annual production cycles.
• It is the commercial returns on agroforestry — in wood and in carbon credits that provide the greatest return, and the main motivation for investment in agroforestry. The research evaluated has focused largely on improving the commercial outcomes.
• There are situations where agroforestry looks like a good complement to other agriculture as with cabinet timber production. However, in many cases the return may be more marginal, and individual values on the outcomes that are not reflected in the market based values used here may need to be high to get the investment over the line.
• While there are environmental outcomes that are valuable, these are not large relative to the commercial returns on the R&D.
• Initial research in new industries can deliver enormous productivity gains.


 Once this ground breaking research is done it will be harder to deliver such big gains in the future. This means that greater attention to project selection will be needed to identify where the greatest gains are in the future.


Agroforestry is an unusual industry in that it has significant spillover effects on the environment and potentially on social outcomes. The concern of industry supporters is that the commercial benefits are not sufficient to grow the industry and bring about subsequent environmental gains. Hence the focus of much of the R&D evaluated here is on raising the commercial returns. The results suggest that significant progress has been made, but the commercial hoop is still out of reach in some areas. The future challenge is to target R&D to make the jump and get the industry onto a widespread commercial footing. And, the environmental outcomes and their value need to be quantified in order for policy makers to determine the appropriate level of public support. JVAP R&D projects are also tackling these issues.
 

 


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