Benefit Cost Analysis
a) What are farmers' benefits and earnings from farming and non-farming
activities?
For current farming, we will estimate financial net benefits by first calculating the
gross margin of producing each farm product. This will be done by surveying a
sample of farmers in each MAC who produce a particular product. Gross margins
will be standardised in three ways: per ha, per $100 invested in the farm, and per
labour day. Thus it will be possible to compare gross margins in different formats for
each product across the four MACs.
A general form for calculating gross margin for a product is:
Gross margin = gross revenues – variable costs
(i) gross revenues = farm gate price times the yield
(ii) variable costs =
(a) pre-harvest costs = land preparation, planting cost (including seeds) fertiliser,
water, weed control, insect control
(b) harvest cost = picking cost, on-farm delivery to farm gate
(c) post - harvest costs = cleaning, grading, packaging, handling, shipping cost (if
any)
A similar form exists for animal products (chickens, pigs, cows, fish).
The sum of gross margins by product = gross margin for the farm. This can be
standardised by calculating the farm gross margin for a small number of
representative farms. A representative farm produces the same products.
Second, we will estimate the financial net benefits of each type of representative
farm by turning the farm gross margins into a benefit-cost analysis,
(i) fixed costs will be subtracted from the farm gross margin – electricity, diesel,
interest payments, any other costs for the entire farm that cannot be allocated to a
product’s variable costs. This is the farm earnings before interest and taxes
(EBITDA)
(ii) Non-cash costs – depreciation on buildings, and a nominal rental cost for land will also be subtracted from the EBITDA. This is the farm earnings before interest
and taxes (EBIT).
(iii) Interest costs (from borrowing to buy seeds, fertiliser, etc. and also for bank
mortgage, if any) will then be subtracted from the EBIT. This is the farm earnings
before tax (EBT).
(iv) Taxes, if any, are then subtracted from EBT to give the on-farm earnings after
taxes, or net profit after taxes (NPAT).
Third, we will calculate any off-farm income for each type of representative farm, and
subtract from that any costs incurred in earning that income. We will then add any
net off-farm income to the NPAT from the farm enterprise. The result is the net
income (or NPAT) for the entire household enterprise – farm and off-farm.
Fourth, we will take the NPAT for the farm and the NPAT for the off-farm and extend
that for 25 years. We will discount the figures for each year back to the present,
using the cost of capital for each farm (cost of capital = weighted average of the cost
of borrowing plus the cost of equity).
(b) What will be the net benefits to the smallholder farmers from joining a MAC?
We will repeat the above exercise in (a) for smallholder farmers who join a MAC. In
this case, we will adjust figures in the product gross margins according to the
proposed business plan for the MAC. This might involve changing the farm
products, changing the yield, farm-gate prices, and variable costs. Similarly, farm
fixed costs might be different under a MAC. Off-farm income might be different,
depending on how the farmer contributes to the MAC.
(c) How do the net benefits differ, from the with-MAC case to the without-MAC case?
We will do the comparison by product gross margin (per ha, per $100 invested, and
per labour day), by representative farm NPAT, by off-farm income NPAT, and by total
NPAT for the household enterprise.
(d) What specific problems are being addressed through the current and with-MAC
operational models?
For both the current case and the with-MAC case, we will identify these and quantify
in $ terms wherever possible. These may include labour issues, family issues. We
will also identify nonmarket issues, such as any change in soil productivity, water
quality, broader environmental quality on farm, and household migration issues
(leaving the rural community for the city, due to less or no available work).