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ECONOMIC FACTORS FOR
CONSIDERATION IN CONVERTING
ANNUAL GRASSLANDS TO IMPROVED
RANGELANDS
Neil R. Rimbey
same context, range improvement costs amounted to
$1.13 and $0.79 per AUM for BLM and FS, respectively.
An issue related to deficit spending that also bears
mentioning is the inflation of improvement costs and the
impact on improvement projects. We have seen substantial increases in improvement material and machinery
costs over the past 20 years. The shortages of petroleum
products, which first became apparent in the crises of the
mid-1970's, dramatically increased petroleum and petrochemical costs. This created a "double-whammy" for traditional rangeland improvement practices. First, input
costs for herbicides, fertilizers, and other direct inputs for
projects such as brush control were extremely high. Second, "support" inputs such as labor and tractor and airplane fuel increased the operation costs of equipment
used in these types of projects.
Over the same period of time, appropriations for range
improvements within the Federal agencies' budgets have
shown some increases. However, actual declines in these
appropriations have taken place since the early 1980's
(fig. 1).
The ultimate impact of these factors has been a dramatic decline in rangeland improvement practices. Figure 2 depicts acres of rangeland seeding projects undertaken by Idaho BLM, by year, since 1960. Recognizing
that these projects fluctuate with funding and need, it is
still readily apparent from this graph that the general
trend is downward.
With limited budgets and concerns about spending and
subsidization, the role of economics has become more important in the analysis of range improvements. The issue
has thus become, "How can we get the biggest bang for
our limited range improvement dollars?" Economics can
provide range managers with answers to these types of
questions, should they decide to use the tools.
ABSTRACT
Economic feasibility analysis has become a critical element in most land treatment projects. This paper details
and compares three methods of economic effu:iency analysis applicable to annual grasslands situations. In addition, comparisons of results of the analyses are made with
recommendations on uses of the techniques. Factors besides livestock forage and wildlife habitat influence improvement decisions. Several of these are detailed, with
suggestions made for integrating these into economic efficiency analysis.
INTRODUCTION
The purposes of this paper are to provide range management professionals with a discussion of the theory of
economic analysis of range improvement, detail why economic analysis is necessary, and provide an explanation
of three methods of analysis. The paper also presents
some of the other factors (amenities, nonmarket goods,
and risk) that must be considered in any analysis of range
improvements.
WHY ECONOMIC ANALYSIS?
Several factors have resulted in range professionals becoming involved in the mundane task of economic analysis of rangeland improvements. The mounting Federal
deficit and resulting concerns about government spending
have raised the issue of deficit spending throughout most
units of government. Concerns about the costs and returns of the Federal grazing programs have emerged as
part of this national debate. In fact, the recent update of
the 1986 Grazing Fee Review and Evaluation (USDA and
USDI 1992) reports that 1990 range management costs
amount to $3.21 per animal unit month (AUM) for grazing administered by the Bureau of Land Management
(BLM), U.S. Department of the Interior, and $3.24 per
AUM for areas operated under Forest Service (FS), U.S.
Department of Agriculture, jurisdiction. From these figures, one can infer that BLM is spending $2.41 per AUM
for each $1 received from grazing, while the FS is spending $3.38 per AUM for each $1 received. Within this
HOW TO DO ECONOMIC ANALYSIS?
Most rangeland improvement projects involve some
upfront investments oflabor and capital with benefits accruing over a period of years. The usual question posed
by range managers is: "Will this pay?"
To answer this critical question, it is necessary to quantify the benefits and costs associated with specific practices and bring all dollar costs and returns into the same
timeframe for analysis. It is imperative that the analyst
discount future benefits and costs back into today's dollars. Dollars received or spent 20 years from now are not
equal to today's dollars. If one wants to have $5 for a
party that will occur 6 years down the road, he or she only
Paper presented at the Symposium on Ecology, Management, and ResU>ration oflntermountain Annual Rangelands, Boise, ID, May 18-22, 1992.
Neil R. Rimbey is Professor and Extension Range Economist, Department of Agricultural Economics and Rural Sociology, University of Idaho,
Moscow, ID 83843. Stationed at Coldwell Research and Extension Center.
408
1962
1965
1968
1971
1974
19n
1983
1980
1986
1989
Year
Figure 1-BLM range Improvement appropriation, 1962-1990.
Source: Public land Statistics.
120
.,
c
100
80
I:I
0
.c
e
60
I
::l
40
20
0
1960
1963
1966
1969
1972
1975
1978
1981
1987
1984
Year
1990
Figure 2-Rangeland seecfings,
Idaho BLM 196o-1990 (aclyr).
Source: Public land Statistics.
are all discounted back to today's dollars. This is done
using the following equation:
needs to put $3.52 in the bank today at 6 percent annual
interest. In other words, the present value of $5 that we
will receive 6 years from now is only $3.52 in today's dollars. This concept is known as the time value of money
(Nielsen 1984; Workman 1986). Time is a critical component in analysis of range improvements. Benefits coming
back from range improvements 20 years from now are
heavily discounted. A dollar's worth of benefits received
in the year 2012 are only worth about 31 cents in today's
terms (again, discounted at 6 percent).
All of the economic efficiency measures covered in the
following section are derived using the concept of present
value. In other words, the streams of benefits and costs
Vn
PV=
where:
(1
+ i) 11
PV =present value
Vn = dollar value in year n
i = interest or discount rate
n =year.
The present value of $3.52 was calculated for the $5 that
one receives six years from now at a 6 percent discount
rate using the formula.
409
~URESOFECONONUC
some of the other factors impacted by rangeland improvements has created some analysis problems for the range
professional. There has also been ~ ~ppar~nt shift ~
agency priorities away from the traditional commodity"
programs to factors such as recreation, amenity values,
biodiversity, and others.
Options for valuing benefits from market commodities such as livestock forage are fairly straightforward
(Wagstaff and Pope 1987; Workman 1986) and should
pose very few problems for the analyst. However, attempting to value some of the other factors raises some
new issues and problems.
Wildlife numbers have increased dramatically in Idaho
and other Intermountain States (Nielsen and McBride
1989· Rimbey and others 1991). With this we are also
seem'g increased recreational opportunities and associated
consumer spending. Opportunities to include wildlife
benefits in economic analysis of range improvements are
present in most range improvement projects. Research
in Idaho (Donnelly and Nelson 1986; Donnelly and others
1985; Sorg and Nelson 1986; Sorg and others 1985) .has
derived willingness to pay and contingent value estunates
of wildlife-based economic values for inclusion in range
improvement analysis. These estimates were derived on
a species basis and provide an estimate of hunters' and
other recreational users' willingness to pay for access to
increased numbers of these species. However, one should
realize some of the issues and problems in including these
in range improvement analysis. There is no direct tie
to a market system for use in validating these values of
wildlife resources. Questions to ponder include: "What's
an additional antelope worth?" "What's an inch of topsoil
on this site worth?" "What's this view worth?" They must
be answered before including amenity values in the economic analysis of rangeland improvement. In terms of
competition for limited forage or habitat (for example,
livestock versus wildlife), there are some issues of "apples
and oranges" of livestock and wildlife values that need
resolution before informed policy decisions can be made.
Similar issues are present in attempting to value other
resource values such as erosion control, water quality enhancement, biodiversity, and others. Some peoples' perspective of biodiversity is to add forbs to a seeding mix.
From one economist's perspective, the value ofbiodiversity
must more than cover the increased costs of short-lived
forbs included in the seeding mix. How do you place an
economic value on biodiversity?
Opportunities do exist for valuing some of these other
factors in the annual grassland areas of the Intermountain region. Fire danger is an excellent example of one
of these. BLM records for Idaho (USDI/BLM) reveal some
interesting facts relative to fire rehabilitation costs. Over
the last 6 years, there have been 149 fire rehabilitation
projects in Idaho. Funding for these projects has amounted
to $9.4 million since 1985. Average annual expenditures
amounted to $1.5 million, or $63,000 per project. It would
appear that there is an excellent opportunity to use these
types of figures in conjunction with some fire frequency
and probability work to derive estimates of the "cost of
doing nothing" to slow the invasion of annual grasses.
Risk is inherent in most activities of our lives. Risk also
impacts range improvement decisions through factors such
EFFICIENCY
The following discussion of measures of economic efficiency is all seated in the discounting process and formula
just discussed. Each measure relies on the concept of discounting, with variations in the final calculation of efficiency measures.
The range improvement analyst must first develop estimates of the annual benefits and costs over the life of the
project. The annual values are then discounted to derive
present value. The streams of discounted benefits and
costs are summed. Efficiency measures are then calculated using the following methods.
Benefit/Cost Ratio
A common investment analysis tool is the Benefit/Cost
Ratio (B/C). This efficiency measure is calculated by taking the ratio of the sum of discounted benefits to the sum
of the discounted costs. In other words, discounted benefits are divided by discounted costs. The investment opportunity is deemed efficient if the ratio is greater than 1.
Net Present Value
Net Present Value (NPV) is the difference between discounted benefits and discounted costs, or discounted benefits minus discounted costs. The investment is efficient
if the difference is greater than zero.
Internal Rate of Return
Internal Rate of Return (IRR) is the discount rate that
equates the sum of discounted benefits to the sum of the
discounted costs. IRR indicates the annual rate of return
on an investment in rangeland improvement. In efficiency terms, the higher the calculated IRR, the better the
investment opportunity. Uses of this efficiency measure
may be most applicable in private investment decisions.
For example, comparisons can be made between IRR and
the interest rate on borrowed capital. An IRR of 15 percent may look quite favorable in relation to current interest rates of 7 percent.
Workman (1984) provides a discussion of the uses and
misuses of these efficiency measures and some of the inconsistencies of the different measures. He concludes that
NPV should be used as the "exclusive criterion" when
choosing between two alternatives. B/C should be used
to rank alternatives in attempting to select the optimum
combination of projects, with NPV "side calculations"
performed to verify the accuracy of the combinations.
Workman also suggests that IRR has more application
in private land range improvement analysis, where comparisons between the IRR and interest rates on borrowed
capital are critical factors.
OTHER FACTORS
Traditionally, rangeland improvement projects have included the value of increased livestock forage as the only
quantifiable benefit in the analysis. Recent concern for
410
as weather, seeding or improvement technology, and market changes. Bernardo and Engle (1990) provide an assessment of the impacts of private land manager attitudes toward risk on range improvement decisions. In other work,
Bernardo and others (1988) concluded that a range improvement practice (prescribed fire) was a risk-reducing
practice. From the range practitioner's perspective, consistency in the analysis should be the goal. If risk considerations are included as a cost in the analysis, do not also reduce the benefit side of the analysis by the same risk factor.
Bernardo, D. J.; Engle, D. M. 1990. The effect of manager
risk attitudes on range improvement decisions. Journal
of Range Management. 43(3): 242-249.
Donnelly, Dennis M.; Loomis, John B.; Sorg, Cindy F.;
Nelson, Louis J. 1985. Net economic value ofrecreationalsteelhead fishing in Idaho. Resour. Bull. RM-9.
Fort Collins, CO: U.S. Department of Agriculture, Forest
Service, Rocky Mountain Forest and Range Experiment
Station. 23 p.
Donnelly, Dennis M.; Nelson, Louis J. 1986. Net economic
value of deer hunting in Idaho. Resour. Bull. RM-13.
Fort Collins, CO: U.S. Department of Agriculture, Forest
Service, Rocky Mountain Forest and Range Experiment
Station. 27 p.
Loomis, John B.; Donnelly, Dennis M.; Sorg, Cindy F.;
Oldenburg, Lloyd. 1985. Net economic value of hunting
unique species in Idaho: bighorn sheep, mountain goat,
moose and antelope. Resour. Bull. RM-10. Fort Collins,
CO: U.S. Department of Agriculture, Forest Service,Rocky
Mountain Forest and Range Experiment Station. 16 p.
Nielsen, Darwin B. 1984. Economic factors to be considered in Sagebrush/Grassland management. In: Developing strategies for rangeland management: a report by
the committee on developing strategies for rangeland
management. NRC/NAS. Boulder, CO: Westview Press:
1373-1386.
Nielsen, D. B.; McBride, K. 1989. Losses on private land
due to big-game animals. Utah Science. Summer 1989:
78-87.
Rimbey, N. R.; Gardner, R. L.; Patterson, P. E. 1991. Wildlife depredation policy development. Rangelands. 13(6):
272-275.
Sorg, Cindy F.; Loomis, John B.; Donnelly, Dennis M.;
Peterson, George L.; Nelson, Louis J. 1985. Net economic
value of cold and warm water fishing in Idaho. Resour.
Bull. RM-11. Fort Collins, CO: U.S. Department of Agriculture, Forest Service, Rocky Mountain Forest and
Range Experiment Station. 23 p.
Sorg, Cindy F.; Nelson, Louis J. 1986. Net economic value
of elk hunting in Idaho. Resour. Bull. RM-12. Fort Collins,
CO: U.S. Department of Agriculture, Forest Service,
Rocky Mountain Forest and Range Experiment Station.
21p.
USDA and USDI. 1992. Grazing fee review and evaluation
update of the 1986 final report. Report of the Secretaries
of Agriculture and the Interior; April 30, 1992.
USDIIBLM. [Various issues.] Public Land Statistics.
Washington, DC.
Wagstaff, Fred J .; Arden, Pope C., III. 1987. Finding the
appropriate forage value for analyzing the feasibility of
public range improvements. Res. Pap. INT-378. Ogden,
UT: U.S. Department of Agriculture, Forest Service, Intermountain Research Station. 5 p.
Workman, John P. 1984. Criteria for investment feasibility
and selection. In: Developing strategies for rangeland
management: a report by the committee on developing
strategies for rangeland management. NRC/NAS.
Boulder, CO: Westview Press: 1475-1507.
Workman, John P. 1986. Range economics. New York:
Macmillan. 217 p.
SUMMARY AND CONCLUSIONS
This presentation has detailed some of the basis for
economic analysis for range improvements, some of the
methods available to range managers, and some of the
other factors to consider in the analysis. In addition,
there are several suggestions that will help with these
analyses on annual grasslands. Conflicts in goals of the
actors in the management process were fairly obvious
during the course of the conference. Are annual grasslands a problem or a solution? Presentations relating
to the positive value of cheatgrass as livestock forage conflicted with presentations relating the danger associated
with annual grass invasions.
These conflicts must be resolved before consideration
of rangeland improvements is undertaken. Seedings may
be a benefit in some peoples' eyes and a cost to others.
The era of throwing money at problems in hopes that they
will fix themselves appears to be over. Limited funding
should be spent only on projects where a broad spectrum
of support and commitment is present. This implies some
type of cooperative management process to determine
group goals and objectives for an allotment, to which economic analysis of range improvements is one piece of the
puzzle.
Economic analysis of range improvements must be done
BEFORE the projecis are undertaken. Use the analysis
as a tool in making management decisions, not as justification for what was done. Allocation of scarce range improvement funding can only be done efficiently with the
use of economic analysis. The goal of range managers
should be to achieve the biggest bang for the limited funds
available.
Economic analysis must be consistent. Do not reduce
benefits to account for nonuse or risk of failure and also
include these factors as a cost.
Finally, in terms of conversions of native vegetation
to annual grasslands, there appears to be an opportunity
for estimating a site-specific "cost of doing nothing" factor
for inclusion in economic analysis. Probability theory and
fire frequency and danger may form the basis for some future work in this area that will hopefully provide range
managers with another tool for use in improvement
analysis.
REFERENCES
Bernardo, D. J.; Engle, D. M.; McCollum, E. T.1988.
An economic asseSBment of risk and returns from
prescribed burning on tallgrass prairie. Journal of
Range Management. 41(2): 178-183.
411