Who gains from Australian generic wine promotion and R&D?

The present paper estimates the distributions of aggregate returns from different types of research and promotion investments by the Australian grape and wine industry among grapegrowers, winemakers, domestic and foreign consumers, and the tax office. The results show that most of the gains from cost-reducing R&D in grape and wine production go to producers and that producers get a far larger share of the benefit from export promotion than that from domestic promotion. Foreign consumers of Australian wine also enjoy a significant share of the benefits from Australian R&D. Sensitivity analysis shows that the key results hold for a wide range of parameter values.     

OPTIMAL WOOL FLOWS FOR MINIMIZATION OF TRANSPORT COSTS*

Movements of wool from grower to wool store in Queensland, N.S.W., Victoria, and South Australia are affected by differing State legislation and Section 92 of the Australian Constitution. Taking various arrangements within each State into account, average wool transport costs from wool production areas to selling centres are found. A linear programming technique is then applied to produce an optimal pattern of wool flows minimizing transport costs for all growers.     

MEASURING RESEARCH BENEFITS FROM A REDUCTION OF PALE,SOFT AND EXUDATIVE PORK IN AUSTRALIA

In this paper, a closed-economy model is developed for evaluating the size and the distribution of benefits from research that lowers the mean incidence of pork with pale, soft and exudative (PSE) syndrome. The major finding is that the Australian pig industry has the potential to derive gross research benefits of about A$7 million per year from a one percentage point reduction in the incidence of pork with PSE conditions. About 85 per cent of the total research benefits accrue to pork producers. The implication is that it is profitable for pork producers to invest large sums in order to reduce PSE syndrome in pork.     

The economic benefits of rabbit control in Australian temperate pastures by the introduction of rabbit haemorrhagic disease

The European rabbit is present in most Australian environments and causes economic loss in agricultural systems by reducing production and imposing control costs on producers and governments. Research into rabbit control has recognised the need for reliable benefit‐cost analysis to justify inputs into rabbit management. This paper provides estimates of the costs of rabbits in Australian temperate pasture systems and of the long‐term benefits of reducing rabbits by the introduction of rabbit haemorrhagic disease (RHD). Rabbits impose annual costs on wool producers in the temperate pasture areas of between 7.1 and 38.7 million Australian dollars (mA$) depending on their density. Controlling rabbits by RHD has the potential to generate substantial long‐term economic benefits by reducing grazing competition with sheep. Reducing rabbit costs by 25% generated 15‐year net present values (NPVs) between 18.4 and 97.3 mA$ at various pre‐RHD rabbit densities. A 50% reduction in rabbit costs increased the total NPVs between 36.9 and 202.4 mA$, virtually all of which was captured by temperate area wool producers. The corresponding benefit‐cost ratios were between 2.9:1 and 16.2:1 for a 25% rabbit reduction and 5.9:1 and32.4:l for a 50% reduction, where the total costs of the RHD program in the temperate pasture areas were incurred by the wool industry. The analysis provides guidelines for the economic evaluation of other pest problems in agricultural production systems.     

THE IMPACT OF FARM AND PROCESSING RESEARCH ON THE AUSTRALIAN WOOL INDUSTRY*

An equilibrium displacement model of the world wool top industry is used to estimate the returns to the Australian wool industry from productivity improvements in farm production, in top making and in textile manufacturing. The returns to the industry from these different types of research and development are sensitive to the extent of substitution possibilities between Australian wool and other inputs used by the wool processing and textile industries but it appears that research resources have to be much more efficient in off-farm activities for the Australian wool industry to receive benefits similar to those from farm research activities.     

THE RETURNS TO INVESTMENT IN RESEARCH ON AUSTRALIAN WOOL PRODUCTION*

A production function approach is used to estimate growth in farm productivity in the Australian wool industry from an estimated level of expenditure on wool production R & D. A market equilibrium model of the wool industry is then used to measure the share of total benefits from this productivity growth accruing to Australia and its wool growers. A net return is estimated after allowing for lags in the development and adoption of technology.     

Productivity growth and the returns from public investment in R&D in Australian broadacre agriculture

Investment in R&D has long been regarded as an important source of productivity growth in Australian agriculture. Perhaps because research lags are long, current investment in R&D is monitored closely. Investment in R&D has been flat while productivity growth has remained strong, relative both to other sectors of the Australian economy and to the agricultural sectors of other countries. Such productivity growth, at a time when the decline in terms of trade facing Australian farmers has slowed, may have enhanced the competitiveness of Australian agriculture. The econometric results presented here suggest no evidence of a decline in the returns from research from the 15 to 40 per cent per annum range estimated by Mullen and Cox. In fact the marginal impact of research increases with research over the range of investment levels experienced from 1953 to 2000, a finding which lends support to the view that there is underinvestment in agricultural research. These results were obtained from econometric models which maintain strong assumptions about how investments in research and extension translate into changes in TFP. Hence some caution in interpreting the results is warranted.     

ON THE HIDDEN REVENUE EFFECTS OF WOOL PRICE STABILISATION IN AUSTRALIA: INITIAL RESULTS

A preliminary analysis of demand in eight major OECD wool-consuming countries is used to provide up-to-date estimates of price elasticities of demand for wool. Those elasticities are employed to calculate ex ante market prices, assuming no wool price stabilisation in Australia. The computed ex ante prices are used in a dynamic simulation to estimate demand and, hence, revenue from wool sales to the eight countries in the absence of reserve price operations in Australia. Based on the preferred semi-log demand curve, the variability of wool prices is estimated to have been reduced by 44 per cent, due to Australian intervention in the market up to 1977/78. However, price stabilisation is estimated to have lowered the revenue from Australian wool sales to the eight countries by S139m, or by 2 per cent, in the period up to 1977/78.     

Counting the cost: the reserve price scheme for wool 1970‐2001

This paper provides a policy commentary on the collapse in 1991 of the Australian Reserve Price Scheme for wool. A key cause of the collapse in the Scheme was a change in the RPS's governance arrangements, which led to increased political pressures to raise prices to unsustainable levels. In addition, in this paper an estimation has been made of the direct, upfront costs of the operation of the scheme, drawing on the financial accounts of the various agencies operating the RPS and subsequent wool stockpile. This was undertaken to determine the scale of the policy failure.     

Payoffs from research and development along the Australian food value chain: a general equilibrium analysis

The payoffs and distribution of payoffs from research and development (R&D) along the food value chain depend on many interacting economic factors. To quantify these, we have developed a general equilibrium model of the Australian economy with detailed farming, processing and marketing information. We use the model to assess potential payoffs and distributions from various R&D scenarios that lead to demand expansion and productivity improvement. We find that productivity improvement caused by R&D is unambiguously beneficial to the whole economy while the benefits of export or domestic market demand expansion mainly accrue to the primary producers and processing industry, when the economy is at full employment. Also, productivity improvement from R&D on‐farm may benefit processors while improvements postfarm may benefit farmers.     

RESEARCH PAYOFF FROM QUALITY IMPROVEMENT: THE CASE OF BACKFAT DEPTH IN PIGS

Closed-market models embodying alternative specifications of supply, demand and substitutability conditions are developed to measure the economic benefits from a research-caused improvement in quality. The models are applied to the estimation of the economic benefits from reducing backfat depth in Australian pork. A major finding is that the Australian pig industry has the potential to derive a gross research benefit of about $7 million per annum from a 10% reduction in backfat thickness in pigs. Under each of the chosen specifications, the larger share of this gain accrues to pig producers. There could be additional social gains as a result of health benefits not incorporated in consumers' valuations.     

International and Institutional R&D Spillovers: Attribution of Benefits among Sources for Brazil's New Crop Varieties

Reported rates of return to agricultural R&D are generally high, but they are likely to be biased, particularly because of attribution problems—mismatching research benefits with costs. The importance of attribution biases is illustrated here with new evidence for Brazil. During 1981–2003, varietal improvements in upland rice, edible beans, and soybeans yielded benefits of $14.8 billion in present value (1999 prices) terms. Attributing all of the benefits to Embrapa, a public research corporation accounting for more than half of Brazil's agricultural R&D spending, the benefit-cost ratio would be 78:1. Under alternative attribution rules, the ratio drops to 16:1.     

SOME ASPECTS OF INCOME STABILIZATION FOR PRIMARY PRODUCERS

The objectives of this paper are two-fold. The first is to discuss the basic economics of an aggregate industry income stabilization policy for primary producers. The second is to examine post-World War II income instability in Australian wool, wheat, and beef and to apportion it into its price and output components. This analysis provides a basis for discussing income stabilization in the Australian context.     

Editorial - Decision rules, government rules, and the costs of vegetation protection in New South Wales

Governments regularly spend public funds to purchase environmental amenities. They might purchase land to add to the public estate, pay to fence stock out of endangered native forest, or offer stewardship payments as incentives to conservation. Governments also regularly introduce policies to achieve environmental goals, even though these policies impose costs on firms, households or farms. The basic decision rule, to maximise environmental benefits from a given budget, in all these cases is received wisdom within the economics profession. In the case of purchase of land to add to the public estate:Maximise environmental benefits by purchasing land in descending order of the ratio of benefit to cost until the budget is exhausted.More generally, funds should be allocated to individual activities within a programme in order of the decreasing ratio of benefits to costs until the budget is exhausted. This rule can be applied when benefits can be measured in any monetary or non-monetary quantitative index. In the case of conservation of vegetation, it can be applied relatively simply in the field when vegetation types and land values can be mapped jointly through GIS techniques.This simple decision rule is not always followed by government agencies that manage environmental programmes. Consider the protection of native vegetation, which is defined to include native forest, native woodland and native grassland. To meet international obligations to protect this kind of environment, most countries must involve private landholders in conservation because there are insufficient government reserves to meet the international commitments. Indeed, most countries have already introduced many policies to encourage private landholders to protect native vegetation on their forests and farms.The New South Wales state government, in Australia, has introduced the Native Vegetation Conservation Act (1998) to ensure that private landholders protect vegetation. The Act constrains farmers to retain all the native forest, native woodland, and native grassland, on their land irrespective of the costs to them. Farmers can then apply for consent to clear and crop this land, but consent is rarely granted in full and often not at all. The Act is consistent with a decision rule of “maximise-benefits-only” - protect all vegetation irrespective of the costs to those who have to conserve it.Constraints of this kind will inevitably lead to a loss of income and land value when they restrict the farm enterprises, and so will impose opportunity costs on the farmer. There is already ample published evidence on the sizes of these costs - from publications of the relevant state agency itself, consultants' reports, farmer submissions and independent research. For example, in a large region in the northwest of New South Wales, where land could be cropped very productively:- some farmers bear only small losses (a quarter lose less than five per cent of their potential income),- some farmers bear very large losses (another quarter lose more than half of their potential income),- the overall losses of income per farm are high (an average loss of almost 30 per cent of potential income across the region), and- the losses are highest for those who have already conserved most woodland.Consider now the problem of reducing these costs by applying the benefit-cost rule as opposed to the maximise-benefits-only rule that has led to this position. There are three economic decision rules that might be used to rank projects or activities.The benefit-cost rule: Impose the constraint on the farm with the highest ratio of environmental benefit per dollar of opportunity cost first, then on the farm with the next highest ratio, etc., until the environmental goal is met. And so maximise the ratio of benefits to opportunity costs.The benefit-only rule: Impose the constraint on the farm with the highest environmental benefits first, then on the farm with the next highest benefits, etc., until the environmental goal is met. And so maximise benefits.The cost-only rule: Impose the constraint on the farm with the lowest opportunity costs first, then the next lowest cost, etc, until the environmental goal is met. And so minimise opportunity costs.But do these rules normally lead to different outcomes? If the “budget” or willingness to impose opportunity costs were large enough, all three would lead to the same outcome because constraints would be imposed on all suitable land. Otherwise the outcomes differ - that is the different rules lead to different levels of environmental benefit from the imposition of a given level of opportunity cost (or from the expenditure of a given budget).Both the benefit-only and cost-only rules lead to inefficiencies (see Babcock et al (1997) and Wu et al (2000) for a discussion of the associated statistical issues). Benefit-only targeting leads to the retirement of highly-productive land from agricultural uses - which is a major reason why opportunity costs are often high when native vegetation is conserved under the Act in New South Wales. The cost-only rule can lead to the reservation or purchase of land with few environmental benefits, even though expenditure or opportunity cost is minimised.A comparison of the benefit-cost rule and the benefit-only rule in the northwest of New South Wales illustrates the problem. The region is potentially highly-productive crop land but large areas of it are presently covered by native forest and woodland which cannot now be cleared. Much of this vegetation is under various degrees of threat even though it is not rare or endangered. The farm is the unit of assessment under the Act, so is used in the example. Benefits are measured as the percentages of species that are saved on each farm when its vegetation is protected rather than cleared to crops. The total benefit is the aggregate of percentage species saved across the farms - again following the present administration of the Act. The opportunity costs are measured as the losses in land value because land cannot now be cleared due to the Act.The comparison of the two rules indicates substantial savings with the benefit-cost rule. For example, 90 per cent of the total benefits can be obtained by imposing 93 per cent of the total opportunity costs with the benefit-only rule, and by imposing only 54 per cent of the total opportunity costs with the benefit-cost rule. The benefit-cost rule saves 39 per cent of the total costs at this level of benefits. Again, 80 cent of the total benefits can be obtained by imposing 86 per cent of the total opportunity costs with the benefit-only rule, but by imposing only 46 per cent of the total opportunity costs with the benefit-cost rule. The benefit-cost rule saves 40 per cent of costs at this level of benefits.While such results can only be indicative of the magnitudes, they do serve to highlight the inefficiencies of decision rules used by government agencies. In New South Wales, the Native Vegetation Conservation Act imposes high opportunity costs on farmers, partly because it is implemented through a high-cost decision rule. Now that suitable GIS technology, vegetation maps, and spatial land value data, are becoming available, these costs can be lowered with a more rational decision rule to guide choices in the field.The environmental goal is not at issue, but the cost of achieving it is. We can identify who bears the opportunity costs of environmental conservation, and often value the magnitude of these costs. Now we can also reduce the levels of these costs with the use of the benefit-cost decision rule.Jack SindenAgricultural and Resource EconomicsUniversity of New EnglandArmidale, New South WalesReferencesBabcock Bruce A, Lackshminarayan PG, Wu JunJie and Silberman D (1997) “Targeting Tools for the Purchase of Environmental Amenities”, Land Economics, 73, 325-339.Wu JunJie, Adams Richard M., Zilberman David, and Bruce Babcock (2000) “Targeting Resource Conservation Expenditures”, Choices, Second Quarter, 2000, 3-8.     

Recalibrating the reported returns to agricultural R&D: what if we all heeded Griliches?*

Zvi Griliches’ seminal analysis of hybrid corn spawned a large literature seeking to quantify and demonstrate the value of agricultural research and development (R&D) investments. The most important metric for quantifying the rate of return to R&D emerging from this literature is the internal rate of return (IRR), even though Griliches was sceptical of its usefulness as a metric in this context. An alternative metric, also reported by Griliches but not as commonly used in the subsequent returns‐to‐research literature, is the benefit–cost ratio (BCR). We assess how the implications of the returns to agricultural R&D literature may have differed if the BCR had become the standard rather than the IRR. We reveal that the IRR and BCR produce substantially different rankings of agricultural R&D projects, differences that persist even under various commodity and geographical aggregations of the BCR and IRR estimates. The median across 2,627 reported IRRs is 37.5 per cent per year. Using data gleaned from 492 research evaluation studies, we developed and deployed a methodology to impute 2,126 BCRs (median of 5.4) and modified internal rates of returns (MIRRs, median of 16.4 per cent per year) assuming a uniform 10 per cent per year discount rate and a 30 year research timeline.     

Research returns redux: a meta-analysis of the returns to agricultural R&D

A total of 289 studies of returns to agricultural R&D were compiled and these provide 1821 estimates of rates of return. After removing statistical outliers and incomplete observations, across the remaining 1128 observations the estimated annual rates of return averaged 65 per cent overall — 80 per cent for research only, 80 per cent for extension only, and 47 per cent for research and extension combined. These averages reveal little meaningful information from a large body of literature, which provides rate-of-return estimates that are often not directly comparable. This study was aimed at trying to account for the differences. Several features of the methods used by research evaluators matter, in particular assumptions about lag lengths and the nature of the research-induced supply shift.     

OPERATIONS AND COSTS OF EGG PACKING STATIONS

The egg industry accounts for some 9 per cent of the total output of British agriculture and about 60 per cent of this production is marketed through the British Egg Marketing Board registered packing stations. This inquiry examines the costs and methods employed in packing station operations (up to the point of wholesale distribution) relating them to the needs of producers and consumers. Due to the lack of published data a series of case studies was made.     

Cost-benefit analysis of the Dutch nature policy: Transaction costs and land market impacts

This paper analyses the financial and economic costs and benefits of the large scale National Ecological Network (NEN) nature conservation project in the Netherlands, taking into account transaction costs and land market impacts of different institutional arrangements. The net financial costs associated with achieving the current plan are equivalent with an annual amount €876 per hectare. Of the costs, transaction costs amount about 16% or €140 per hectare. The substantive land purchases involved in the plan will lead to land price increase of 20%. Nature management by agriculture turns out to be a relatively cheap option.     

SUPPLY RESPONSE WITH STOCHASTIC TECHNOLOGY AND PRICES IN AUSTRALIA'S RURAL EXPORT INDUSTRIES

Risky output prices and production characterise Australian agriculture. Exports are vitally important, sometimes relying heavily on a particular market. In this study a model is developed to include explicitly both output price and technological risks as well as multiple output relationships. It is used to show that changes in US beef import policy generating a 10 per cent beef price fall could reduce Australian beef supply by 3.5 per cent and grazing industry net revenue by 8.4 per cent, despite some switching from beef production to other enterprises.     

Cost‐effective strategies to mitigate multiple pollutants in an agricultural catchment in North Central Victoria,Australia

Strategies to reduce phosphorus and sediment yields are identified for two Australian catchments using a nonlinear optimisation model. This provides novel insight into the cost‐effective management of dual pollutants of water courses in Australia. A strong degree of complementarity between the two pollutants is highlighted, given the adsorption of phosphorus to sediment that augments the value of gully and streambank management for mitigation. However, the relationship between the two pollutants is asymmetric. A 30 per cent reduction in phosphorus yield achieves a 75 per cent reduction in sediment yield in one catchment, while a 30 per cent reduction in sediment yield achieves only a 12 per cent reduction in phosphorus yield. Sediment abatement costs are low given the efficiency of gully and streambank management. A 30 per cent phosphorus reduction lowers profit by 3–7 per cent, while a 30 per cent sediment reduction lowers profit by around 1 per cent. Land‐use optimisation requires spatial heterogeneity in land‐use and gully/streambank management responses. Overall, this research demonstrates the need to determine whether one pollutant is more important than another, while recognising the potential that mitigation practices possess for the reduction of multiple emissions during their evaluation.