Cost benefit and investment analysis of agricultural enterprises
Water Resource Development
A capital intensive project. To reap the benefit of irrigation the farmer should not ignore the supporting services as extension, marketing, credit and transportation both for handling crop produced and supply of inputs needed. The economic analysis must take full account of all the attributes costs and benefits streams.
Agricultural Credit
It makes the viable commercial operation. To enable a larger number of farmers to make needed investment to improve their income and level of living.
Agricultural Industries and Commercial Development
These projects help improve the adequacy and timeliness of input supplies and specialised services to farming, forestry and fisheries or else help improve the storage, processing and marketing systems.
Economic Analysis of an Agricultural Project
- The main aim or interest is total returns or productivity or profitability to the whole society or economy. Regardless of who invests and who gets the benefit.
- Capital resources should be invested where there are maximum economic growth and yields higher social or economic returns. The project which gives maximum return to capital is given high priority.
The economic analysis basically allows for remuneration to labour and other inputs at market prices or shadow prices which are intended to approximate true opportunity costs. Everything leftover is then compared to the capital needs necessary for the project.
Financial Analysis of an Agricultural Project
Those who participate in the project such as farmers, business men, entrepreneurs, private corporations, public agencies are concerned returns to equity capital contributed by them it is called either financial or private return.
In financial analysis we are much concerned about the income distribution and capital ownership. Here we measure returns to the equity capital contributed to the project by each of its various participants public or private. Financial analysis may be applied to the cost and returns of the various public entities which participate in the project.
Financial analysis is important when we return to a consideration of the incentives structure associated with the proposed project investment. A project in this light should be profitable to farmers although it is profitable to the entire economy.
Costs in Agricultural Projects
The following are the cost items in the cost-benefit analysis :
- Goods and service, although they are difficult to identify.
- Labour—it is not difficult to identify.
- Cost of land (net value of production foregone). The identification would be with or without. What we calculate is the difference between what the enterprise was with which the land is presently occupied than what was produced under the enterprise earlier.
This is what is called incremental output. By this the economic cost of land under agricultural project grows out of this concept of what net value of production or opportunity cost.
Benefits of an Agricultural Project
Greater Physical Production For example, irrigation project will increase production. In case of credit the farmers are enabled to buy inputs which would boost output. This will increase additional food intake by the farmers’ family or sold in the market.
Quality Improvement
For example, a dairy project helps in the processing of milk into milk products which has higher value (value addition), but estimate of benefit should be done cautiously.
Change in Location and Time of Sale
In marketing for example, the storage facilities as a public undertaking will create time utility and when the price increases the sale could be undertaken again, as the road construction will trans-ship the products to distance market which will add place utility.
Gains from Mechanization
Use of tractor or other machinery may increase or may not increase output but reduce the cost per unit of the products. Mechanisation may replace human labour reducing cost but human labour should find alternative source of employment.
Reduced Transportation Cost
Better transportation facilities in transferring agricultural produces from the point of production to the point of sale may reduce cost which may be shared by the farmer, transporters, and consumers.
Secondary Costs and Benefits
These arise outside the project and this should be used in economic analysis not in financial analysis. For example, some projects like building of dams increases the employment opportunity which increases income and has a multiplier effect.
Intangible Benefits
Intangible benefits comprises of better income distribution, national integration, a better life for rural people and better national defense