Presentation Transcript

1. Economic Tools to Evaluate Farm Alternatives
2. The Goal: An Economical Conservation Plan
3. Human Element in Natural Resources Soil Water Air Plant Animal Human Energy
4. Rubik’s Cube Solving natural resource problems is much like solving a “Rubik’s Cube”…
5. Why Farm or Ranch? Lifestyle Income Business Real Estate Market
6. Farming Philosophy

7. Scoping

8. The Planning Environment SCHOOL Fertilizer Costs Seed Costs 4H CLUB Taxes Stores The Social Environment $ $ The Business Environment Markets FFA CLUB Money forHome Pesticide Costs Church Grandfather'sLog Cabin Banker Equipment Neighbors Taxes Clubs (HomemakersFarm Bureau) Hired Labor Landlord Neighbors Farm Loan SPOUSE Commodity ProgramPayments $ Kids In-Laws Money for College Equipment FamilyLabor Electric Power Line Money for Retirement Animal Habitat Plant Management Death Loss Conservation Compliance Recreation Livestock Management Pasture management Seed Costs Water Quality Kids NutrientManagement The Resource Environment Soil Condition Fishing - Hunting Soil Erosion Predator Management Water Quantity
9. CulturalResources Soil Erosion Farm Income Flooding Wildlife Fish Habitat Government Irrigation Livestock Air Quality Recreation WaterQuality Pests Crop Yields Income SCOPING: Identify all problems & opportunities and focus on those to be considered in the planning process. Farm Income Fish Habitat Water Quality
10. Scoping Identify significant issues to address Provide a record of issues considered, but found not to be significant Provide a record of NEPA compliance Reduces the number of alternatives
11. Production Possibility Curve
12. Economic Effects What Changes? Land Capital Labor Management Profitability Risk Social Well-Being
13. Land Use Is the present land use suitable for the proposed alternative? Will land use change after practice installation? How will a change affect the operation? Will the action affect resources on which people depend for subsistence, employment or recreation? Will land be taken in or out of production?
14. Capital Does the Producer have the funds or ability to obtain the funds needed to implement the proposed alternative? What are the impacts of the cost of the initial investment for this alternative? What are the impacts of an additional annual cost for Operation and Maintenance (O&M)? What possible impact does implementing this alternative have on the client’s future eligibility for farm programs?
15. Labor The “Ability to Work” or Hire “Workers” Measured in Units of Time (Hours, Years) Includes the Landowner, Family, Hired Help or Other Trained Workers
16. Management Level Does the client understand the inputs needed to manage the practice (s) and the client’s responsibility in obtaining these inputs? Does the client understand their responsibility to maintain practice (s) as planned and implemented? Is it necessary for the client to hire a technical consultant to operate and/or maintain the practice (s)? Does the client have the knowledge to install and maintain the conservation plan?
17. Profitability The Benefits and Costs of the Operation Often Measured in Dollars Profitable if Benefits Exceed Costs
18. Risk Will the proposed alternative aid/risk client participation in USDA programs? How about regulatory action? What are the possible impacts due to a change in yield? Is there flexibility in modifying the conservation plan at a future date? What issues are involved with the timing of installation and maintenance? What are the cash flow requirements of this alternative? What, if any, are the hazards involved? Rather, will the conservation plan contribute to the minimization of cash flow disruptions or debt?
19. Social Well-Being Represents the current social, cultural and economic situation of both the client and local community A combination of the previous categories of Client and Community Well Being
20. Developing Alternatives
21. Cause and Effect Why? __________ Cause Why? __________ Why? __________ Why? __________ Why? __________ Resource Problem _____________ So What? _________ So What? __________ So What? __________ So What __________ So What? __________ Effect
22. Cause and Effect Most resource problems are caused by Humans Farm Labor Shortage Too busy managing cows, feeding/milking Don’t have time to redesign and move manure Easy access, no gates, always been there Dairy manure stack near the stream Nutrients & organics in surface water Algae Bloom in Lake Neighbors upset Less fish in lake, no swimming State Fish & Game stocked fish in lake Violate local water quality ordinance County fines/regulation, less tourist dollars Loss of income
23. Future With and Future Without
24. Planning Concepts “Historical” Condition Historical Condition Condition with little or no influence by humans. Desired Future Condition Desired Future Condition The ecological, economic, or social condition one is attempting to achieve. “Health” “Benchmark” Condition Alternative 3 Alternative 2 Benchmark Condition The present condition or situation that is used as a point of reference to measure change in resource conditions resulting from conservation treatment. Future Without Alternative 1
25. Evaluating Multiple Alternatives Benchmark or present condition Alternative 3 Desired Future Condition Alternative 2 Alternative 1 Condition Future Without Alternative Time Future Without: Alternative – No Action, Projection of Benchmark Future With: Alternative 1 – Management/Vegetative Solution Alternative 2 – Structural Solution Alternative 3– Combination Structural/Vegetative
26. ConservationEffects forDecision Making
27. Conservation Effects for Decision Making Conservation Treatment (Future Condition) Benchmark Condition (Present Condition) Decision Maker’s Values “T” Chart T Impacts (Things that Change)
28. Benefit-Cost Analysis
29. Benefit-Cost Analysis Estimate Costs Estimate Benefits Convert to “Like Terms” Compare Costs and Benefits
30. Estimate Costs, Sprinkler System Additional Costs Reduced Revenue Lost Corners in Field .10 Ton Hay/Acre 1. Side Roll Sprinkler Equipment - $600/Acre Operation & Maintenance $100/Acre/Year
31. Estimate Benefits, Sprinkler System Reduced Costs Additional Revenue Alfalfa Hay Yield 2 Tons/Acre/Year Water Quantity 2 AcFt/Acre/Year Lower Labor Costs 3 Hours/Acre/Year Financial Assistance $300/Acre, Cost-Share
32. Sprinkler System Costs Additional Costs Equipment, Layout - $600/Acre, 10 Years, 9% $93/Acre/Year Operation & Maintenance - $100/Acre/Year Reduced Revenue Lost Corners in Field - .10 Ton/Acre, $70/Ton $7/Acre/Year $200/Acre/Year Benefits Additional Revenue Alfalfa Hay Yield - 2 Ton/Acre, $70/Ton $140/Acre/Year Water Quantity - 2 AcFt/Acre/Year Reduced Costs Labor Costs - 3 Hours, $10/Hour $30/Acre/Year Cost-Share Payment - $300, 10 Year, 9% $47/Acre/Year Net Benefit: $17/Acre/Year $217/Acre/Year
33. Partial Budgeting
34. Partial Budgeting Systematically displays the Benefits and Costs Only “things that change” are considered Simplifies data collection Use a “T” chart to display the “effects”
35. “T” CHART Level I Qualitative Statements Level II Units of Measurements, Dollars Level III Economic and Financial Analysis
36. “T” Chart Example Pasture Improvement Brush Control $50/Acre Reseed Pasture $65/Acre Discount Rate 7% Time Period 10 Years Weed Control $15/Acre/Year Forage Increase 3 AUMs/Acre/Year Forage Value $12/AUM Forage Quality Improvement Migratory Spring Goose Habitat/Grazing Reduced Erosion (2 Tons) Water Quality Improvement PROBLEMS Plant Productivity, Erosion, Profitability SOLUTION Pasture Seeding, Brush & Weed Control
37. Level I
38. Level II
39. Level III
40. Marginality “The rate of change in one variable when a small change is made in another variable”
41. Economics of Pasture Fertilization Max Yield = 70 Lbs Fertilizer Max Profit = 50 Lbs Fertilizer
42. Economics of Pasture Fertilization
43. More Tomorrow?
44. Investment Analysis (Time Value of Money)
45. Time Value of Money Farmers and ranchers want to know: Total installation cost Annual benefits The loan payments Years to “break-even” Change in yield Rate of return on investment Etc…
46. Time Value of Money “Value” depends on when you receive something “A bird in the hand is worth two in the bush” We prefer $100 today over $100 next year Invest and receive “interest” May not get $100 next year
47. Time Value of Money The same is true for natural resources We prefer 10 ducks today, rather than 10 next year: - We may not be around next year - Ducks may be gone because of drought, flood or someone else shot them - Ducks could reproduce and we would have more than 10 ducks next year
48. Time Value of Money Time Period (Years) Discount Rate (%) Present Value ($) Future Value ($) Payment ($)
49. Time Value of Money Money has a time value attached to it $1 today = $1 + interest tomorrow Comparison of $ today vs. $ future Useful to compare $ in different time periods Use amortization and discounting
50. $ $ $ Years Years Years Present Value One-time value Today Installation Cost Annuity Average annual values Annual costs Annual benefits O&M costs Future Value One-time value In the Future Replacement cost
51. Amortization The payment to pay off a loan Spread the cost of an investment over it’s life “Periodic” can be in years, quarters, months
52. Amortization Example No-Till Drill Time Period 15 Years Discount Rate 8 Percent Present Value $20,000 Payment ?
53. Amortization Example No-Till Drill Time Period 15 Years Discount Rate 8 Percent Present Value $20,000 Payment $2,340/Year (.117 X $20,000) Present X Amortization = Payment Value Factor (i, Yrs.)
54. One-Time Cost and Annual Benefits How do you compare costs and benefits over different time periods? $5,000 farm improvement creates $750/Year income benefit
55. Amortize the One-Time Cost $5,000 One Time Cost = $648 Annual Cost (10-Year, 5% Interest)
56. Compare Annual Benefits to Annual Costs The Annual Benefits are Greater than the Annual Costs $750 Benefit - $648 Cost = +$102/Year
57. Discounting Converts future values to a one-time present value Present value is the value today, here and now Net Present Value Analysis
58. Compared One Time Cost to One Time Benefit Discount $750 Annual Benefit to $5,791 Present Value (10-Year, 5% Interest) $5,791 Benefit > $5,000 Cost
59. Compare “One Time” and “Future One-Time” Costs to One Time Benefit Discount $2,500 Cost to $1,959 Present Value (5-Year, 5% Interest) $5,000 + $1,959 = $6,959
60. Benefit Cost Ratios Measures the benefit of some activity per dollar cost Identify benefits and costs Convert to like terms Divide the benefits by the costs If the B/C is greater than 1.00, the project is economically worth doing
61. Benefit Cost Ratios For example: The forage benefits are $13/Acre/Year Spend $10/Acre/Year on a pasture improvement The B/C ratio is $13 / $10 = 1.3 What if the benefits are not in "dollar" units ? Improvement costs $100/year Receive 120 additional ducks/year B/C ratio is 120 Ducks / $100 = 1.20 ducks / $1
62. Cost Effectiveness
63. Cost Effectiveness “Least cost” installing 1,000 feet of terrace? Tillage equipment $3.00/Foot Dozer $2.50/Foot Road grader $2.00/Foot The road grader is the most cost effective
64. Break Even Analysis
65. Break-Even Analysis Solve for: “How much can I afford” “How long to get my money back” “Return on the investment” “What net gain to pay expenses”
66. Break-Even Example – Forage Value Value of Forage, Pasture Seeding Total Treatment Cost: $60.00/Acre Annual Treatment Cost: $6.11/Ac/Yr ($60/Ac, 20 Years, 8% Interest) CostDivide byForage Increase = Breakeven Value $6.11 1.00 AUM/Ac $6.11 AUM/Ac $6.11 .75 AUM/Ac $8.15 AUM/Ac $6.11 .50 AUM/Ac $12.20 AUM/Ac
67. Break-Even Example – Forage Cost Breakeven Cost to Improve Pasture Value MultiplyForage Increase = Breakeven Cost $12/AUM 1.00 AUM/Ac $12.00 /Ac $12/AUM .75 AUM/Ac $9.00 /Ac $12/AUM .50 AUM/Ac $6.00 /Ac
68. Financial Analysis versus Economic Analysis
69. Financial Analysis vs. Economic Analysis Economic analysis: Is it Profitable? Compare benefits & costs over the project's life Financial analysis: Is it Affordable? Compare benefits & costs over the loan period
70. Economic Analysis:PV $5,000 = $648 Annual Cost (10-Year, 5%) Financial Analysis: PV $5,000 = $1,155 Annual Cost (5-Year, 5%)
71. Tax Considerations
72. Tax Considerations Do Not Give Tax Advice! Refer your client to a tax preparer or Internal Revenue Service (IRS)
73. Economic Data Only use economic data that is useful to farmers or ranchers It is more important to know “where” to get economic data, than to “have” economic data Economic data is only good “today” Landowner Field Office Technical Guide Payment Schedules NRCS State Economist Crop/Livestock Budgets University/Extension Service Other Agencies, Conservation Partners, Etc
74. Class Exercise
75. The End
76. Class Exercise
77. Class Exercise: “T” Chart Wheat Residue Management Columbia Plateau, Oregon No-Till Drill/2,000 Acres $15,000 Discount Rate 7% Time Period 10 Years Increased Herbicide Use $25/Acre Crop Yield Increase 8 Bushels/Acre Crop Value $4/Bushel Crop Quality Improvement Pheasant/Quail Habitat Improvement Reduced Erosion (2 Tons) Water Quality Improvement
78. Class Exercise: “T” Chart