|| Home || SEARCH|| Contact || Free Research Publications  ||  Eshop || Privacy Statement ||

Download full report (300k - HINT: right click and save the file to your hard disk before opening)

Evaluation of the Fodder Crops and Pasture Seeds Programs Benefit
– cost evaluations – Stage 2

by Dr Jenny Gordon, Dr Yuan Chou, Sarina Fisher, Naomi Standing, Teresa Hearne and Rebecca Gough, Centre for International Economics

December 2005

RIRDC Publication No 05/169

Executive Summary
Fodder crops and pasture seeds are both long established agricultural industries in Australia that have grown in importance over the last ten years. Both have seen growth in the domestic market and have targeted higher value export markets. RIRDC has supported R&D in fodder crops since 1990 and pasture seeds since 1989, investing $7.48 million in fodder crops and $10.43 million in pasture seeds from 1990 to 2005. Priorities in R&D as set out in the five-year plans for the industries reflect greater export orientation and toward higher quality and quality assurance, although agronomic issues such as weed and pest control remain important. Environmental concerns centre around access to water for the irrigated areas and minimising use of chemicals (especially pesticides) that have the potential for detrimental environmental impacts.

This report provides the results of four benefit-cost evaluations in the fodder crop sub-program and four in the pasture seeds program (8 projects). It is the eighth report in a series of annual evaluations of RIRDC projects. A comparison of the results of all RIRDC project evaluations is provided in chapter 1 of this report.

FODDER CROPS

Evaluation results
The evaluation results reflect the wide range of returns that can be expected from R&D. Many of the projects evaluated have or are expected to generate high returns for industry.

Testing for annual ryegrass toxicity (ARGT) (SAR-2A and CSA-3A) was timely work to ensure continued access to the Japanese market for hay. ARGT is a toxin that can result from bacterium that is found on mature ryegrass and in high quantities is lethal to ruminants. An unfortunate incidence of poisoning of dairy cows in Japan led to suspension of trade and threatened to close the market unless Australian product could be certified as ARGT free. SAR-2A supported the implementation of a test that was acceptable to the Japanese and hence made a major contribution to maintaining market access. While initially voluntary, the test has been made compulsory due to concern about a small number of exporters so adoption rose to 100 per cent as the test is now required to export hay to Japan. The work also identified harvest timing as critical for ARGT loads and led to the widespread adoption of practices that have reduced the potential for toxin development in cut hay. CSA-3A has developed a more sophisticated test that identifies the presence of the toxin, but this has not been implemented due to the adoption of management practices that have reduced the problem. The evaluation of SAR-2A estimated an internal rate of return (IRR) of 237 per cent with benefits to the industry of $78.4 million over the 30-year period.

The benefit-cost ratio (BCR) (which includes the implementation costs as part of the investment) was estimated as 8.9.

Testing and simulation of hay-bale loading on semi-trailers (ROA-1A and ROA-2A) documented safe loads and load format for road transport of hay bales. The studies demonstrated that loads could be safety increased by on average 30 per cent using the loading formats on semi-trailers.

The reports are being used by transporters as evidence of safe loading when questioned, however state regulations on hay loads remain diverse. The benefits of the studies have yet to be realised as they are contingent on state governments adopting common standards based on the study recommendations. If they do so the benefits from the research for the industry in reduced costs of transporting hay over 30 years are estimated at $61.9 million. There is an additional benefit of reduced greenhouse gas and other pollutants due to lower fuel consumption. Using estimates of the real cost imposed by these pollutants to human health and greenhouse gas, the benefit is estimated at $1.1 million over a 30 year period. The estimate of a return on the R&D of 484 per cent is high as it does not include the costs of achieving change in state regulations, but these costs could be very low if states are willing to cooperate in this area. If states adopted common regulation this will allow adoption to be 100 per cent.

Microbial inoculant for hay production (UQ-25A and UQ-82A) addressed the problem of fungal spoilage in hay. It developed an inoculant that when applied to hay reduces spoilage due to mould and leaf shatter and hence increases the yield (reduced losses) and quality of hay which can command a price premium. The product has yet to be produced in large commercial quantities due to a take-over of the firm that undertook the commercial development, so the evaluation is based on domestic sales projections. The benefits would be greater if the product is also sold abroad, but plans for marketing abroad are not known. Based on domestic sales projections, adoption of the product reaches a maximum of 20 per cent for production for off-farm sales and 4 per cent of production for on-farm use. At this relatively modest level of adoption the net benefits to the industry are estimated at $33.3 million, a return of 22 per cent on the total investment. The BCR is 8.0 while the NBIR is 31 due to the additional costs of commercialisation beyond the research costs.

New oaten hay varieties (SAR-8A, SAR-30A, and SAR-50A) research developed three new varieties two of which have been recently been released commercially. The varieties have a higher yield than previous varieties and produce higher quality hay that can be sold on the export market.

The net benefits of the project are estimated at $119 million, a BCR of 105 and IRR of 81 per cent.



Adoption
There are ranges of approaches taken to adoption in the projects evaluated. The adoption rates used are summarised in table 2.

Adoption by regulation ensures 100 per cent adoption in the relevant production. The ARGT testing has been made compulsory for export hay to Japan. Very high voluntary rates of adoption were encouraged by the fact that the Japanese would close the market for exports. The transport loading project changed loading where it is consistent with state regulations. Full adoption is contingent on changes in regulation in each state. The evaluation assumes regulations are changed by 2006–07 and the benefits are applicable to around 80 per cent of hay transported.

Commercialisation as the pathway to adoption was followed in the microbial inoculants for hay production. The adoption rates are reflected in the sales of the commercial product. The oaten hay varieties adoption rates have been determined by production projections that are based on sales of seed projections. These new varieties are expected to largely replace the more export oriented varieties. It should be noted that while these varieties will in turn be replaced the benefits are sustained as future varieties must outperform these ones to be adopted. For the microbial inoculant sales estimates are used as the company that developed the product was taken over and the new firm has yet to focus on the commercial production of the inoculant. The adoption rates can be backed out of the projected sales data based the on volume of hay production and application rates. Adoption is expected to peak at 20 per cent for hay sold off-farm and 2 per cent for hay used on-farm.



Social and environmental outcomes
There is only one environmental and social benefit included in the benefit measurements in this report.

This does not mean that the research has been without social and environmental benefits, rather that the benefit is indirect or has not been measured, and cannot easily be estimated.

The hay bale loading has potential environmental outcomes in reduced fuel use. These environmental outcomes deliver economic, social and environmental benefits in the form of reduced health costs, reduced accident and injury, and green house gas benefits. These benefits are estimated at $1.1 million over the 30-year period.

Sensitivity
There is considerable uncertainty in some of the estimated due to several features of the evaluations.

Use of commercial sales projections has inherent uncertainties. This affects the new varieties of oaten hay as well as the microbial inoculant. There is also some uncertainty about the long term production projections for hay that influence the returns to the ARGT, and hay bale loading estimates. Other important parameters that are uncertain are prices, as these will be affected by events such as drought and world demand and competitor supply. Table 3 provides the results of the sensitivity analysis for the fodder crop projects.



PASTURE SEEDS

Evaluation results
The results of the evaluations are summarised in table 4. Lower returns than fodder crops is largely a result of unexpected changes in the size of the potential market. An unanswered question is the extent to which these changes could have been foreseen and helped to better guide allocation of scarce R&D funds. Without a detailed assessment at the time the investment decision was made it difficult to assess whether these trends had been considered.
 

• New varieties of pasture seeds (SED-3A and SED-8A) had been evaluated in 2000, and were reevaluated as an additional five years of performance data was now available. The major change between the evaluations is due to three of the seven varieties being discontinued in 2004. This was due to the difficulty of competing in the European market on cost grounds, as there was no significant product quality advantage for the discontinued seeds. The revised results estimated the return to the R&D as $1.6 million, down from the original estimate of $2.8 million (in 2005 dollars). The estimated IRR fell from 28 per cent to 19 per cent and the BCR from 4.5 to 3. More re-evaluations of this type need to be undertaken to assess whether the optimism apparent in sales projections in this BCA is a common problem.
• Water balance for lucerne seed production (DEB-3A and DEB-5A) measured the water usage of the crop as an input into a review of the water allocation system and shift from area-based to volumetric-based licences in the five Prescribed Wells Areas in the upper south-east region of South Australia. The area accounts for around 85 per cent of lucerne seed production in Australia.
• The research provided actual data and proven methodologies to measure water use. The review has resulted in water allocations that allow continued production of lucerne seed. While the alternative outcome (without the research) is not known the best guess is that in the absence of the research the conversion of licences could have been delayed by three years and resulted in a 10 per cent reduction in allocation. Based on this counterfactual the benefits are $4.9 million in higher value production than would otherwise have been the case. This implies an NBIR of 21 and an internal rate of return of 31 per cent. The work also produced recommendations for improving water use efficiency, however, these have substantial implementation costs and it is not clear that they will be adopted.
• Managing lucerne seed wasp (DEB-1A) developed a management protocol that allowed a major reduction in the use of pesticide resulting in a substantial saving for producers and a reduced risk to the environment from spray drift and collateral damage to non-target insects. Once the management protocol had been demonstrated adoption rates were 90 per cent. This rapid adoption resulted in benefits estimated over a 30-year period to be $10.3 million. With no implementation costs the BCR and NBIR are estimated at a very high 214, and IRR of 118 per cent.
• Improving subterranean clover seed production (DAN-76A, DAV-144A and DAV-169A) is a set of projects that aimed to develop best practice management and disseminate this to growers to improve production of quality sub-clover seed. The main management changes are higher levels of fertilizer, and lower needs for herbicide due to better weed management practice. The result was significantly higher yields but adoption has been fairly low due in part to the reduced interest in sub-clover as a pasture and the changing relationship between seed growers and seed companies.
• The returns are estimated to be low with benefits of $0.15 million, NBIR of 1.3 and an IRR of 7 per cent.




Adoption profiles
A range of approaches were taken to adoption in the projects evaluated. These are summarised in table 5.

Adoption by regulation ensures 100 per cent adoption in the relevant production area. The water balance research had 100 per cent adoption in the region as it was embodied in the changes in the water allocation system.

Commercialisation as the pathway to adoption was followed in the pasture seeds new varieties.

The adoption rates are reflected in the sales of the commercial product but cannot be estimated, as the market share of these seeds is commercially sensitive. For pasture seeds the sales profiles depended on the performance of the varieties. The longevity of the benefits depends, however, on whether the new variety builds on the value of the old variety in which case the value of the old variety is sustained with the new variety only delivering the marginal benefits. If the variety is replaced by another crop or a variety developed independently then the adoption profile declines to reflect the replacement.

Knowledge transfer through involvement in the research and through a close industry-researcher relationship was central to the very rapid (2 years) and high adoption (90 per cent) of the management protocols for lucerne seed wasp. This protocol had all the features to result in high adoption as it did not require additional capital expenditure, reduced the need for purchased inputs, and the benefits were readily observable (those who had adopted in the first year did not suffer crop loss due to the wasp). Just as importantly, the industry is cohesive, the researcher is a respected adviser to many of the producers, and the protocol resulted in reduced use of pesticides which is a general concern of most agricultural producers due to the health and environmental implications of pesticide use. The sub-clover research had a lower adoption rate (25 per cent), but again involvement in research played a strong role in adoption. The overall lower adoption rate is in part due to structural change in the industry with an increasing share of production being grown under contract to seed companies who provide variety based best management practices to growers.



Social and environmental outcomes
There are no environmental and social benefits included in the benefit measurements in this set of evaluations. This does not mean that the research has been without social and environmental benefits, rather that the benefit is indirect or has not been measured.
 

• The water balance work has identified options to improve water use efficiency. However, there is no evidence that these will be adopted, and if so it is difficult to assess the benefit to the environment that will arise, as this depends on the alternative uses of the water saved.
• The lucerne seed wasp research has led to a major reduction in the use of pesticides in the crop.


Without a measure of the environmental and health risk posed by pesticide use it is difficult to attribute a benefit to the clear reduction in risk that the project must have delivered.

The other projects deliver indirect social benefits through improving the returns to agricultural activities. This said, the trend toward the private ownership of seeds and contract growing that the R&D has indirectly promoted has mixed benefits from a social perspective. Quantifying the impact of this trend is beyond the scope of this evaluation exercise due to cost constraints.

Sensitivity
There is considerable uncertainty in some of the estimates due to several features of the evaluations.

The main feature is the use of commercial sales projections which as the new varieties of pasture seed BCA demonstrates, can turn out to be quite different to expectations. The uncertainty in the water balance R&D estimates is more difficult as it is uncertainty about what would have happened to regulation in the absence of the R&D. Other important parameters that are uncertain are prices as these will be affected by external events such as drought, world demand and competitor supply. These uncertainties impact on the range of values that could arise for the outcomes achieved. To assess dependency on these values a sensitivity analysis is provided. Table 6 provides the results of the sensitivity analysis.



Comparison of BCA results with previous years
The evaluation results suggest that fodder crops R&D and pasture seeds R&D both perform well when compared to all other programs and is on-par with many of the performance of other established industries. Chart 7 shows the internal rates of return on all evaluations undertaken over the last 8 years. The results demonstrate the more consistent good performance of R&D in the longer established industries that have a larger production base. The importance of industry involvement in the R&D and industry cohesiveness in promoting uptake of the outputs of the projects cannot be understated.

Lessons
As in any series of evaluations the value comes not just in the accountability, it comes in improved understanding of what investments are most likely to generate high returns and why. The following outlines the main lessons from this round of evaluations.
 

• One valuable exercise undertaken in this round of evaluations was to repeat a previous evaluation.
• This allowed updating of the sales projections of new seed varieties. One concern with many evaluations is that as the evaluation is undertaken not long after the completion of the research, projections of adoption have to be used. Often the only sources for these projections are enthusiasts for the project and hence may be optimistic in their projections. At issue is the difficulty of assessing which varieties will be commercially successful over the longer term. One role of this evaluation is to challenge the projections and to put potential achievements in the context of benchmarks (what has historically been achieved) and uncertainty about external events. In this evaluation series, where the benefit stream has yet to be well established, we have not imposed a probability of impact being achieved. However, judgement on ‘benchmarks’ can only be developed by building evidence of the likelihood of achieving projected sales (or adoption).
• The evaluations included several projects where adoption was (or will be) through regulation. In these evaluations the challenge is to define the counterfactual — what would have happened if the research had not been done. It is possible that the regulation imposed would have been the same, but after the event it is difficult for people to make this assessment. It would assist the assessment if baseline estimates about likely regulation were reported as part of the proposal or in the initial stages of the research. In any case, this information is critical for an ex-ante assessment of a project if the proposed adoption is to be via regulation.
• The evaluations of R&D that resulted in commercial products estimate the benefits to the industry of the new varieties. These go well beyond the commercial returns to the product. In fact the royalties, unless the product is sold abroad, are a transfer from growers who buy the product (a new cost) to the researchers (a new benefit). As such they are not a net benefit but simply a distribution from growers to research organisations. The royalty streams are estimated for these products and reported in each evaluation chapter. What is very clear in all cases is that based on the royalty stream alone it would not be economic to have undertaken the research. That is the benefit-cost ratios are less than 1. This might reflect royalties being only a token payment when producers should have been willing to pay more for the research. It could also reflect the difficulty for the producers of the commercial products to capture a larger share of the returns that accrue to the product users.
• The hay bale loading evaluation is very interesting, as what it measures is, to a large extent, the cost of inconsistent and overly cautious regulation. Where regulations are made to protect the public the benefits are usually the main focus. While new regulations should be subject to a regulatory impact assessment that takes account of costs as well as benefits, existing regulations are not subject to this test. This evaluation demonstrates that the diversity of regulations across states has a high compliance cost and restricts interstate trade. The evaluation highlights the value of research in providing definitive information to policy makers. All that has to happen now is for the states to act on this information.



 
 

Site map Contact us Feedback Links Disclaimer Privacy Statement

Last updated: December 2005
Copyright RIRDC
http://www.rirdc.gov.au/reports/FCR/05-169sum.html