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Evaluations
The benefit cost evaluations presented in this report provide some insight into the various roles that R&D and RIRDC plays in developing new plant industries. It should be noted that with new industries there is often a big difference between the net benefit investment ratio (NBIR) and the benefit cost ratio (BCR).

This is due to the often high implementation costs in new industries. Note that the internal rate of return (IRR) is not affected by this differentiation between the costs of the R&D and the costs of implementation. Five sets of research are evaluated, representing about 10 per cent of the total R&D expenditure by the new plants program to date. The results are summarised in table 1.
 

• Black truffles – RIRDC has contributed around 22 per cent of the $1.6 million invested over four projects in industry development and more recently addressing production problems. While the future of the industry is still uncertain, the expansion in the number of farmers investing in inoculated trees suggests high expected future returns. The returns are highly sensitive to the average yield assumptions. Under a conservative assumption about yield the net present value (NPV) of the R&D is estimated to be $58.4 million, with an IRR of 16 per cent. The NBIR is 38 while the BCR is 2.1. The return on investment in production capacity for contracted farmers is estimated as 13 per cent, while the contracting company rate of return is estimated at 24 per cent. Any favourable taxation treatment that might alter the private return was not taken into account in the return estimates.
• Olives – RIRDC has funded 17 projects on olives over the last 15 years. This evaluation focuses on seven projects that relate to the development of the industry for the production of olive oil. The high level of planting over the past decade will see large volumes of olives come onto the market and unless growers can ensure a share of the high value end of the market returns will be very low. The research is aimed at raising the quality of oil to ensure that it can be sold into the premium end of the market. The total investment in this R&D has been $2.6 million, of which RIRDC has contributed 51 per cent. The R&D is still underway and there is uncertainty about the final impact on quality. Two scenarios are developed based on the impact of the R&D on quality and hence on access to high value niche markets abroad. The scenario where high quality outcomes are key to market access estimates the NPV of the R&D as $264 million, with an IRR of 45 per cent. The NBIR is 103. Under the scenario in which the quality outcomes are not sufficient to access these markets scenario the NPV of the research is estimated as $58.6 million, with a highly respectable IRR of 30 per cent and NBIR of 12.
• Jojoba – Six projects have been undertaken for jojoba costing $0.734 million of which RIRDC contributed 27 per cent. The industry was initially developed to take advantage of the value of perennials in reducing recharge to the water table in salt affected areas. As plantations were not all well managed the industry struggled and production declined dramatically. The area planted has been growing in the last decade based on research showing that jojoba can be viable given the improvements in productivity arising from the research. At current yields it is unlikely that the industry will expand further as the rate of return on investment is around 13 per cent. This forms scenario 1 which keeps the area of production constant at current levels. However, if yields rise further as a result of the current research then it is likely that the industry will expand (scenario 2).
• Under scenario 1 the NPV of the R&D is estimated to be $3.5 million, with an IRR of 12.8 per cent and NBIR of 5.9. Under scenario 2 the NPV is $33.3 million, the IRR is 38 per cent and the NBIR is 46.3. The most likely outcome is somewhere between these two scenarios.
• Coriander – Production of coriander seed is relatively long established in Australia. As a small industry it turned to RIRDC for assistance when disease problems led to substantial declines in yields in the past decade The two projects costing $0.288 million (69 per cent funded by RIRDC) are highly focused on overcoming these disease problems. There are several discrete results of the R&D that have impacted on the industry. The major impact has been in improved yields, but other findings have lead to lower costs of production by reducing use of ineffective treatments. The NPV of the R&D is estimated to be $4.2 million, with an IRR of 35.7 per cent. The NBIR is 15.7.
• Coffee – The coffee industry in Australia is developing well in the Atherton Tablelands, some coastal areas in Queensland and in northern coastal regions of NSW. It produces a high end product aimed largely at the top end of the freshly roasted domestic coffee market. While RIRDC has supported a range of research, this evaluation looks at the issue of irrigation which is relevant for the northern coastal regions of NSW. The availability of suitable land for coffee production is limited mainly by the availability of frost-free, low to moderate sloping land for machine harvesting, with sufficient water. Rainfall variability and distribution in the subtropics have implications for maintaining the health of coffee trees and producing consistent yields. The R&D project developed a drip irrigation management system for coffee that provides optimal water requirements for coffee, results in lower water use than alternative irrigation systems and higher more consistent yields compared to not irrigating. The R&D cost $0.26 million of which 51 per cent was contributed by RIRDC. The NPV of the R&D is estimated to be $4.99 million, with an IRR of 19 per cent. The NBIR is 19.2 while the BCR is 2.9, reflecting the relatively high implementation costs as it is considered that without the research most large producers would not have irrigated their trees.

^a the NPV results are discounted at a social rate of 5 per cent. Benefit cost ratios are only relevant when there is a substantial implementation cost in addition to the R&D costs.
Data source: Chapters 3-7.

Adoption profiles
There are two approaches to adoption used in the evaluations. The first approach, used for jojoba and truffles stems from the fact that without the R&D being undertaken (regardless of the source of funding) neither of these industries would have established, or expanded in the case of jojoba, in Australia. The adoption profile is given by the increase in area planted. Both truffles and jojoba production will continue to grow even if no further investment arises as they take some years to reach full production.

Further expansion of the area of truffles can be stated with some confidence, but this is less true for jojoba. The use of scenarios for jojoba reflects the considerable uncertainty about the growth in the area planted and hence the adoption profile.

 The adoption profiles for coffee and coriander reflect the industry structures. There are a relatively small number of producers in each industry and the R&D is highly targeted to an identifiable subset of producers. For coffee this is the large producers in a specific region, while for coriander it is growers who produce under contract and hence have access to the seeds to which the research applies.

The olive oil industry has a wide diversity of producers including many smaller ‘lifestyle’ producers.

Adoption of some of the technologies is more likely with larger producers, while adoption of other R&D findings is constrained by overall growth in the industry (for example with varieties). Adoption rates were estimated by industry researchers based on applicability and potential willingness to adopt.

Table 2 summarises the adoption profiles. They are provided in more detail in each individual evaluation.

Social and environmental outcomes
The benefits estimated in the results focus on the economic benefits flowing from the R&D. There may well be social benefits flowing from improved economic outcomes for growers and others who made investments in new plant industries that without the research could have failed. There is also social value in increasing the options available to farmers for diversifying sources of farm income. Taken as a whole, new plant industries can have important social benefits to the extent that they encourage additional investment and job creation in rural areas. These benefits are hypothetical and were not able to be identified without detailed surveys of producers and examination of their options. The R&D projects evaluated had little in the way of identifiable environmental outcomes despite the environmental significance being emphasized in some of the R&D proposals. Jojoba and olives, as relatively salt tolerant deep-rooted perennials, may offer alternatives for land that has rising saline water tables. However, the small areas planted and the location of plantings mean that any off-farm impacts would be negligible and the benefits would be included in higher returns on saline affected land if they proved to be sustainable under such environments. The coriander R&D resulted in lower applications of chemicals with the objective of reducing production costs, but this also lowers the risk of run-off and consequent environmental impacts. The area affected is, however, very small and there is no evidence of adverse environmental impacts prior to the R&D.

Sensitivity
Most of the results are highly sensitive to particular parameters and show fairly large ranges of possible returns. All the results are sensitive to the world price of the product. In the case of truffles, there is potential for the growth in Australian supply to have a negative impact on price despite selling into the off season Northern Hemisphere market. For truffles and jojoba there is considerable uncertainty over the future yields. This uncertainty drives most of the variation in the potential benefits given in table 3. For olives and jojoba R&D there are ongoing projects for which the results have yet to be proven. In both these cases two scenarios are presented, but these too need to be seen in the context of the range of probable returns.

Comparison of BCA results
The internal rates of return for the R&D evaluated range from 12 per cent to 40 per cent, which were perhaps surprisingly high given that several of the industries still require a significant improvement in yields, prices and/or reduction in costs to be considered commercially viable. The results demonstrate the contribution that R&D can make to improve the prospects of new plant industries and the importance to the industries of having a problem-solving capacity available. Chart 4 provides a comparison with other evaluation results.

Lessons
The evaluations highlight some of the challenges facing the development of new plant industries in Australia. For truffles and jojoba the reported IRR reflects closely the rate of return for all investment in these industries, as the R&D costs are only a small proportion of the total investment. This is a result of the approach taken to the evaluations for jojoba and truffles which without the R&D would be unlikely to have developed as an industry. The coriander and coffee evaluations focused on specific R&D outputs and the impact these have had on the unit costs of production. The olive evaluation focused on the price premium that could be achieved through improving the quality of oil.
 

• Jojoba, coffee and olives all rely on access to the high value end of the market for the product to be profitable alternatives for growers. The significant investment required for tree crops that take a number of years before production comes on line, combined with the relatively high cost of labour and processing, make it difficult for Australian producers to compete unless they can achieve quality premiums. The clean and green reputation of Australia and the absence of some of the natural pests and diseases contribute to achieving this premium. But marketing will play an increasingly important role as production volumes expand. The olive evaluation did not include marketing costs as it was suggested by the industry that this investment must be made regardless of the quality of the oil. The additional volumes of jojoba and coffee are very small in relation to the market size and should be able to be sold without significant additional investment in marketing.
• There can be a significant advantage for Australian producers where they can sell fresh product into an off-season market. Truffles form an excellent example of this approach. Key elements for success apart from being able to produce sufficient quantities is high value relative to volume to make air freight viable and capacity to market the product as the same as the local product in season. That said, the market size may still be limited due to the luxury nature of the product and high levels of production will impact negatively on price. The impact on price of Australian production was considered in undertaking the truffles evaluation. The industry was of the opinion that there was considerable opportunity to sell the future production without significantly impacting on price and this was reflected in the evaluation.
• The size of the domestic market for premium end products is limited. Most new plant industries will remain very small unless they can sell into international markets. This makes marketing a critical factor in the success of an industry. In some cases individual producers will develop access to markets, and in some such as truffles, are likely to dominate the trading. In others the industry association or other cooperative approaches are important to penetrate the foreign markets. Although not evaluated in this study the work done by RIRDC in assisting the jojoba and olive industries contributes to the institutional development required for such approaches.
• All the new plant products evaluated in this study, with the exception of coriander seed, have a significant lag before production comes on line. There is a danger of considerable over investment based on niche market prices that are unsustainable once reasonable amounts of production come on line. In addition, processing capacity of extractive products is a major issue for producers. Based on the reported costs and projected revenue the investment returns in jojoba, truffles and olives are currently below a benchmark of 15 per cent. This could change for jojoba and truffles if yields can be significantly improved.
• New plant products can attract investment through Managed Investment Schemes (MIS). The commercial viability of some of the industries discussed in this report could be conditional on the tax treatment of the initial investment.
• The small size of the industries and the tendency for a few players to dominate (for example coffee, truffles and jojoba) raises questions about whether the R&D would have occurred in the absence of the RIRDC involvement. This issue was not addressed in the evaluations as these focus on the returns to the R&D investment regardless of the source of funding.

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Last updated: September 2005
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