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close this bookThe Improvement of Tropical and Subtropical Rangelands (BOSTID)
close this folderPart I
close this folderThe economic context
View the document(introduction...)
View the documentRange systems
View the documentThe basis of range economics
View the documentProject analysis
View the documentDetermining costs and benefits
View the documentResource evaluation
View the documentMarket price determination
View the documentReferences


The previous chapter dealt with the behavioral characteristics of groups of people living on, or using, arid and semiarid lands. This chapter focuses on the economic behavior of the individual or the individual household.

Economic analysis of pastoral management practices has proved difficult for several reasons. First, many analysts have a tendency to consider the household as one homogeneous decision-making unit, with the "head" of the household as the decision-making director. In fact, households are heterogeneous and not always clearly defined, and decision-making is generally delegated to a large number of individual household members who may not share the same interests. Surveys that used the (male) family head as the sampling or observation unit have therefore yielded incomplete or biased data, leading to biased conclusions.

Second, many studies have limited the focus of the analysis to one aspect of household activities - only land management or only animal performance, for example. These single-commodity approaches fail to incorporate interactions among various household enterprises. Therefore, the predictive value of the analysis for household behavior is low.

Third, any economic analysis is based upon the identification of determinants and their impact. Even when successful in identifying important factors, allocating values ("impact") to these factors has proved extremely difficult. In resource-poor environments such as arid rangelands, the assessment of values is highly time- and location specific. Not only do values vary over time and space, but also among individuals, households, tribes, and generations. The cost (negative value) of soil degradation will be felt more by future generations than by present ones (who might be causing the degradation).

Fourth, and related to the third point, is the difficulty in assessing the social costs and benefits (as opposed to the private values). Communal grazing is believed to occur with virtually no cost to the herders, but with possible social costs (in the case of overgrazing) to the society as a whole. In the same vein, the long-term costs are not necessarily the same as the short-term costs. This problem is aggravated by the fact that the life span of range management projects is generally limited to 10 years or less, even in projects that attempt to deal with long-term problems, such as desertification and erosion. Another example of social costs is the negative effect that a project might have on resources or persons outside the project are a . For example , the development of a pocket of highly productive rangeland for crop cultivation might have a negative impact on the usefulness of the surrounding low-quality rangeland because during a drought period cattle would not have access to a highly productive forage source (Sanford, 1983). Other social costs or benefits include the impact of interventions on employment and equity.

Finally, we cannot overlook the fact that many projects have failed for reasons other than inadequate economic analysis. For example, biological scientists and technicians have often provided projects with short-term, single-commodity technical input-output relationships that have contributed to illusionary expectations of possible changes in management behavior.

For some time, pastoralists have therefore been labeled "irrational," but this allegation has been refuted by a growing number of case studies. Cattle portfolio models developed in industrial countries have found useful applications in pastoral situations (Jarvis, 1980; Ariza-Nino and Shapiro, 1984), and elements of African and Asian range management systems are finding application in industrialized countries (National Research Council, 1984).

Range systems

A range system is the arrangement of soils, water, crops, livestock, labor, and other resources that the manager works according to personal preferences, capabilities, and available technologies. The major factors that influence productivity are determined by the characteristics and interactions of (1) the physical environment, (2) the economic environment, and (3) the social environment. Subsystems can be recognized within range systems. Interdependencies and interactions among resources (land, labor, crops, livestock, capital, water, wood), environment (climate, topography, soil, market), and humans (family members, relatives, friends, enemies) are essential components of the analysis.

The tools for the economic analysis of range systems are essentially the same as those for conventional farm management studies: budget analysis by gross margins or partial budgeting, linear programming, and discount procedures. However, when these methods are applied to a range system, the results have become more reliable, essentially because previously unidentified factors (inputs as well as outputs) are taken into account.

Little (1984), however, recommending the systems approach, also points to two major limitations: the assumption that the household is the proper unit of analysis, and the lack of focus on macro and micro linkages in problem solving. He therefore recommends a combination of household production and regional analysis.

Rangeland management systems have been divided into two major systems: nomadic and transhumant. Another distinction is based on land ownership - that is, pastoral nomadic, open-range ranching, and fenced ranching (Behke, 1984; Lawry et al., 1984). This distinction is addressed in a later section of this chapter.

Rangeland Farming Systems

Within the framework of range systems analysis, relatively little work has been done on livestock-related issues. Several reasons account for this neglect:

· Most of the research is done by crop-oriented agronomists and social scientists, neither of whom are familiar with livestock and therefore tend to overlook their role.
· Most of the livestock have multiple outputs (such as draft power, meat, milk, manure, hides, status) and non-cash inputs (especially for ruminants).
· A substantial part of these outputs is used within the household (for example, draft, manure), and therefore only indirectly contributes to the cash income of the pastoralist.
· The cash income from livestock activities often occurs at irregular intervals and on special occasions; it is easily if not intentionally overlooked during household surveys (Sabrani and Knipscheer, 1982). Even if scientists have explicitly focused on the livestock component of the range system, they have encountered a number of additional problems. Table 3-1 compares livestock-oriented farming systems research with crop-oriented farming systems. Factors such as genetic variability, differences in age and productivity, and problems with farmer cooperation, measurement of effects of input and output, and representativeness of prices have constrained the researcher in conducting on-farm trials (Amir et al., 1985). Consequently, rangeland research has proved to be time-consuming, logistically difficult, and expensive.

Major Features of Nomadic Systems

Nomadic systems are based on livestock, and the main source of income is derived from meat and animal by-products. Typical for nomadic systems is the annual migration of livestock and managers, for example, from highlands in the summer to plains in the winter, as in the arid and semiarid region of Asia. The influence of climate as well as culture is large, as families or tribes or both travel together, following the opportunities that the climate offers. In this kind of culture, crop farming is held in low regard. The crop component in nomadic production systems is virtually nonexistent. The linkages between livestock and other household activities are found in household processing (for example, wool and weaving) and fuel supply. Land use is characterized by grazing and collection of fuelwood, while the manure of the animals returns some of the nutrients to the soil. Although nomads generally are believed to be unconcerned with improvement of feed resources, it is also known that they are aware of the importance of future pasture availability and, therefore, are careful in their grazing practices (Camoens et al., 1985).

Major Features of Transhumant Systems

The critical difference between nomads and transhumants is the existence of a substantial crop-producing activity in the household system. Transhumants migrate seasonally with their flocks but have a permanent residence area. The crop enterprise is generally for subsistence, while the livestock component is geared for the market.

TABLE 3-1 Comparison of Characteristics of Crops and Livestock and Implications for On-Farm Testing

TABLE 3-1 Comparison of Characteristics of Crops and Livestock and Implications for On-Farm Testing

Situation with respect to:








Difficult to measure and control non experimental factors

Life cycle

Generally less than 4 months

Generally over one year

Increases costs likelihood of losing experi mental units

Life cycle

All units synchronized

Units seldom synchronized

Difficult to find comparable units


Only grain and/or tuber and residue

Multiple ouputs, mest, hides, milk manure, power

Difficult to measure or evaluate treatment effect




Difficult to evaluate input or outputs

Experimental unit size

Small divisible

Large nondivisible

Increases cost risk to cooperate

Producer attitude

Impersonal taboos

Personal cull, castrate towards

Difficult to product

Management variability



Difficult to isolate treatment effect

Observation units



Large statistical variability

SOURCE: Bernsten et al., 1983.

Climate and culture play dominant roles in transhumant systems, comparable to those of the nomadic systems. Because of the crop activities, some of the land is privately owned (or rented). Some of the large ruminants are used for draft purposes, but the application of manure provides a linkage between the livestock and the crop component of this farming system.

The common feature of both the nomadic and the transhumant farming systems is the mobility of the households. This strategy to meet the variability in the physical environment is associated with unstable control of resources, notably land and water, and difficulties of planning herd size and herd movements.


The three types of land ownership are communal, modified communal, and exclusive (Lawry et al., 1984). Exclusive land tenure (private ownership or lease) has been seen by some as a solution to overgrazing. Overgrazing in turn is believed to find its economic rationale in the "tragedy of the commons": the individual herdsman has no economic incentive to reduce the number of animals as long as there is free access to communal land and water. Although assignment of grazing rights is advocated as a solution (Doran et al., 1974; Jarvis, 1980), experience has not yet shown that tenure reform is an effective policy instrument (Lawry et al., 1984, p. 247). One of the problems is that stock limitations specified in leases are almost never enforced. There is also growing evidence that pastoralists are very aware of the need for rangeland conservation and will act accordingly (National Research Council, 1986).

Narrowly related to the issue of land ownership is that of access to water. Because moisture is the overriding limiting factor in pastoral management, access to water is crucial. In many cases, control of water supply implies de facto control of land use. Water sources can be classified according to ownership in a similar way. Other classifications are made according to the technical operations (including boreholes, dams, wells) or size.

The basis of range economics

Economics may be defined as the science dealing with the allocation of scarce resources among various competing uses, with the objective of maximizing utility or maximizing satisfaction of human wants. For range projects, scarce resources include:

· Land. In the broadest sense, land includes all natural resources such as air, minerals, soils, natural vegetation, and water.
· Labor and management. These are the resources furnished directly by humans.
· Capital. This refers to the intermediate products (inputs) created from land, labor, and funds used in further production. Capital is both the money used to pay for inputs, and the buildings, machinery, livestock, and purchased inputs that can be valued in dollars or local currency.

Organizations must conscientiously attempt to guide the allocation of their physical, financial, and administrative resources among sectors and competing programs to further national objectives (figure 3-1). This is true whether the resources committed are being invested by the government directly or by individuals within the economy.

The concept of economic rationality is a central consideration of economic theory and the definition given above. A rational economic person, or consumer, is one who seeks to maximize utility or satisfaction. There is often a close identification between farmers' or pastoralists' consumption and their production decisions.

Personal preferences also affect decisions within the agricultural or natural resource development sphere. Some decisions may be made to enhance prestige or status with a peer group. Some may reflect consumption rather than production expenditures.

As mentioned previously, however, nonrational behavior may be difficult to judge, in particular by those outside the culture. What seems nonrational to an urban dweller from the industrilized world may be quite rational when examined in the correct cultural context. Therefore, in determining proper economic behavior, what outsiders consider maximum utility may not be in the best long-term interest of pastoralists. Clearly, before a rational economic strategy can be formulated, the culture and traditional economic behavior must be understood.

Project analysis

Agricultural or natural resource developments might best be defined, explained, analyzed, and understood as “projects.” Projected cash flows over a period of time are required for comparisons among alternative development projects or other investment decisions.

In defining a project, Gittinger (1982) said:

FIGURE 3-1 Pastoral Economies.

We generally think of an agricultural project as an investment activity in which financial resources are expended to create capital assets that produce benefits over an extended period of time. In some projects, however, costs are incurred for production expenses or maintenance from which benefits can normally be expected quickly, usually within about a year.

Range or marginal land development projects (such as seeding) can be viewed in the same terms as an agricultural project, although the investments, costs, and returns may be substantially different in substance and in timing of flows. For example, the returns on a rehabilitation project may take several years to realize depending on the starting conditions and project management. These returns, however, may be in the form of higher stocking rates, which may have caused the problem in the first place.

An alternative approach is to examine potential losses that are avoided through rehabilitation. This approach is similar to determining the benefits of flood control projects. If degradation is not halted, then adjacent agricultural land may be placed at risk.

Gittinger also distinguishes between a project that may be relatively small, or perhaps quite large, but is of a nature that it can be analyzed, evaluated, developed, and administered as a unit. A "program" would typically be larger than a single project, and encompass multiple projects or aspects of development that are beyond the project definition and boundaries.

A project should contain relatively homogeneous resources so that investment requirements, costs, and returns from different parts within the project can be accurately represented. If a project becomes large enough to become heterogeneous, then a part of the project - which may in fact be uneconomical or unfeasible - may be hidden or masked and carried by other parts of the project that are worthy of development. When dealing with scarce resources, the concept of homogeneity within a project is important. Past experience has shown that in many instances projects have failed because of lack of social homogeneity; that is, within the target group of pastoralists, subgroups with contrary interests existed (see, for example, Sanford, 1983).

Economic and Financial Analyses

By definition, the economic analysis compares all returns and costs associated with a project during its useful life. Costs include initial and recurring annual expenditures, whereas the revenues include returns as a result of the project over and above what they would have been without it.

Financial or cash flow analysis is the determination of the project's cash flow positions over the period of the project. This shows whether the project is self-supporting or whether deficits are likely to develop. It is simply to compare revenues and expenditures, including debt service on an annual cash basis. The objective of financial analysis is to consider and make estimates of the effects the flow of project costs and returns will have on people participating directly in the project, including families or community groups that make direct use of the project and the primary users. Financial analyses also must consider administration, management, and taxes of the project and costs to the government and donors for those activities.

In financial analyses, market prices, if available, are used to reflect the value of production. Project returns may also include a very significant contribution in the form of food or fuel consumed directly in the household. If subsidies are paid by the government in association with the development of a project, then that also becomes part of the income to the direct beneficiaries from the standpoint of financial analysis. Financial analysis also considers revenue to the goveronment (taxes) for project administration, which have been considered in the costs of the primary beneficiaries (users).

The "economic" aspects of project analyses and evaluation, in contrast to financial aspects, considers the project from the standpoint of the affected society and economy as a whole. Financial and economic analyses differ in three significant ways:

1. Taxes that are treated as costs to primary project participants in financial analyses are viewed by government and society as revenues, not costs.
2. In economic analysis, market prices may be adjusted and become "shadow" or "accounting" prices or “social costs/benefits" to reflect more accurately the economic values to society.
3. In economic analysis, interest on capital and repayment of borrowed capital are not treated as project costs. Although interest is a cost to the project, it is a return to society and the economy as a whole, if actually earned, and hence becomes a "wash" item in economic analysis and accounting for the project. Similarly, the repayment of borrowed capital, although a requirement for the project, neither increases nor decreases net national product.

Comparison Without and With a Project

The purpose of project analysis is to identify and estimate benefits and costs that will arise "without" the project and compare them with benefits and costs "with" the proposed project. The difference between them is the incremental or marginal net benefit arising from the project.

The results of the without-with comparisons may be the same as comparing a particular project situation "before" and "after." Often, however, the comparisons are not the same and may be greatly different because productivity may improve (increase) even without a project. Hence, the projection of the without situation would reflect higher productivity and returns than the current or before project situation. The benefits from a project designed to improve productivity at a more rapid rate than would occur without the project would be overstated by a before and after comparison, because improvements without the project are ignored.

Conversely, a different, perhaps more common, and certainly more serious situation could be one of rapid deterioration in productivity and resource or environmental conditions without a project. A project could be designed with the aim of ameliorating or reversing the deterioration; improved productivity could be a distinct bonus. It may therefore be difficult to compare or economically justify such a project when it may only retard the rate of degradation and keep the returns constant. Intangible benefits must then be considered such as the quality of the environment and the costs associated with people moving to urban centers to escape declining land productivity.

Decision Making

A decision needs to be taken that leads to implementation, modification, or cancellation of the project. Certain costs and benefits (payoffs) are associated with any of these decisions. The decision may be to endorse the project and proceed with implementation based on a degree of uncertainty.

Problems and sources of uncertainty are classified in five categories:

1. Price structures and changes (values)
2. Production methods and responses, including weather effects and other natural phenomena (technical input/output coefficients)
3. Prospective technological developments
4. The behavior and capacities of people associated with the project
5. The economic, political, and social contexts in which a range improvement project exists.

All these sources of uncertainty affect the analysis of projects and are factors to be reckoned with in implementation and evaluation of results.

The basic principle for carrying out an economic analysis is to compare alternatives on an equivalent basis, such as a fixed output, time frame, and constant dollar values. In the analysis, the quantifiable assumptions must first be established as follows:

· All baseline project assumptions, such as the period of analysis, discount rate, cost of capital, and other economic and financial variables must be determined.
· Estimates must be made of project costs including capital costs, onetime costs such as permits, annual operating and maintenance costs, and provisions for renewals and replacements. Estimates of fees, construction, labor and materials, and legal fees must all be determined and placed within the desired schedule.
· Project benefits, principally the increased production, must be ascertained.
· The source of financing and the specific terms of the loan must be defined.
· An appropriate economic analysis methodology must be chosen, and economic and financial feasibility must be established.
· A sensitivity analysis must be performed to determine how costs and benefits react to variations in such factors as discount rate, financing, and productivity.
· The persons or groups of persons who gain and who lose by the introduction of the project must be identified; there are always some losers.

The common approach to economic analyses has been to compare costs and revenues over a consistent time period on a ratio basis or net positive benefit basis. Several measures using discounted cash flow techniques can be employed: internal rate of return, benefit-cost ratio, net present value, and life-cycle costs. Each technique has its advantages, disadvantages, and appropriate applications.

Discount Rate

The discount rate is used for determining economic feasibility, whereas the interest rate is used to ascertain financial feasibility. The proper rate to use for testing economic feasibility is the opportunity cost of capital to society. This is the rate of return that could be earned by investing the capital cost of the project in a venture of similar risk or an alternative marginal project.

Discounted Cash Flow

One of the basic tools for determining economic feasibility is discounted cash flow. All cash expenditures are tabulated for comparison during the chosen period each year. The total cash expenditure for each year is then discounted to the present and cumulatively added to a single sum. This sum is then compared with similar sums of discounted expenditures for alternatives. The alternative with the smallest sum is clearly the least costly. A similar comparison is made with cash revenues or receipts for the same period. The ratio between the sum of the discounted receipts and the sum of the discounted expenditures yields the benefit-cost ratio.

Certain rules must be followed in making discounted cash flow analyses:

· The same period of years must be used for each alternative set of cash expenditures and each alternative set of cash receipts.
· The alternatives must have the same production and capacity. In some cases, this may require adjustments to the costs of the lowest cost alternative.
· Cash expenditures will include renewals and replacements; however, if the years in which these will be made cannot be accurately predicted, an estimated average annual cash expenditure for renewals and replacements as well as an accelerated depreciation schedule can be used, since those costs will occur far in the future.

Discounting transforms all future costs and revenues into the present time frame so they can be compared on a current monetary basis. These sums are simply called the present worth or present value. All future expenditures and revenues are modified or discounted by a factor that provides escalation arising from opportunity costs and resource depletion.

The benefit-cost ratio technique is perhaps the most commonly applied in analyzing capital projects. The method compares the current worth of costs and benefits on a ratio basis. Projects with a ratio of less than one are generally discarded.

Determining costs and benefits

Computing costs and benefits involves use of simple without with comparisons. Specific allowances are not made for time lags, except for charging interest for use of capital. Budgeting in such a static framework, or without-with project-context comparisons, can give a first indication of feasibility or nonfeasibility of a rangeresource-improvement project. Simple comparisons ignore time lags in phasing different stages into production and can overlook or ignore costs of capital through the developmental stages, exaggerate returns and feasibility, and underestimate problems that can arise. Budgeting year-to-year estimated changes through the transition period, though complicated, will aid in anticipating some of those problems. If the project resources are suitable and the project is successful, changes in physical production responses on a year-to-year basis may be predictable with some degree of certainty. Price changes often are unpredictable. Evaluations can be based on longer term average prices with year-to-year changes in production. Discounting procedures can be used to allow for valid comparisons of alternatives through time.

Benefits that might accrue from and be attributed to range-improvement projects may include increases in both the quality and quantity of outputs, depending on factors previously mentioned. When considering a resource improvement project that produces an intermediate product, such as forage, then improvement in quality of output may still be important but is of a somewhat different form. These are called intrinsic benefits. For example, improvement in forage quality has one or a combination of the following characteristics:

· Higher protein content
· Lower fiber content
· Higher total digestible nutrient (TDN) content
· Greater palatability to some species of animals consuming the forage.

While some of these characteristics are being improved during the periods of active plant growth, and on through the periods of maturity, an added bonus of residual plant biomass during periods of plant dormancy is also useful for soil conservation. A second benefit could be simply an increased quantity of output.

Marketable output is the benefit most commonly expected from range projects. The increased physical production may result from: (1) improving the productivity of the native resource; (2) expanding the land area in production by conversion of native range, woodland, or jungle land to cropland or improved forage; (3) extending complete or supplemental irrigation water to arid or semiarid lands; or, (4) improving seasonal water supplies, even in more humid areas. Production may also be increased without increasing land area when projects use genetically superior seed, hybridization, fertilizers, or pesticides for control of weeds, insects, or disease. Increased production may result in marketing of the larger amount of products for the benefit of society or may allow greater consumption for the family or the social unit directly involved in the project.

When a resource development project involves forage production and livestock, then increases in forage production can be followed by increases in the number of livestock on the land and a greater yield of consumable or marketable livestock and products. This would produce one kind of effect on flow of returns, as the requirement for increased animals requires a savings (or investment) in addition to the resource development costs. It is also important to recognize that benefits in livestock production may be reflected in increased production of calves, lambs, kids, or young camels without larger numbers of the basic breeding herd.

Overstocking of rangeland is detrimental to livestock production. Increased production of livestock, therefore, can only be considered in light of long-term efforts to improve the range resource. Increased forage supply used only to ameliorate overutilization of rangelands can result in improvement in percent age of calf or lamb crops , in increased gains of growing animals, and probably in reduced mortality of both breeding stock and growing animals. Special use pastures or pastures to fill particular seasonal needs may produce these effects also. Benefits of these types may well be associated with very high returns on resource development costs. Output may also be increased by a simple increase in forage production and expansion of livestock output. Increased forage also makes it possible to increase the number of breeding herd animals; even if they are producing at the same level as without the project, output will increase.

Resource evaluation

Evaluating the quality and adequacy of various resources for possible alternative uses is the first step in project planning. The climate and characteristics of land and soils, water supply (whether for irrigation, livestock, or domestic use), and incidence of weedy types of vegetation, insect pests, and plant or animal diseases should all be considered. The objectives of the evaluation process are to determine the forage and livestock enterprises that may be feasible and whether some alternatives can be ruled infeasible without further evaluation. These factors are described in more detail in chapters 4 and 5.

Location of the project and access to markets both for sale of products and for purchase of necessary supplies is another key consideration for determining feasibility. The location, climate, land, and water supply factors are often fixed. It is impossible, or at least difficult and often costly, to modify these factors. Water supply can sometimes be augmented by drilling wells or creating storage; however, the ecological consequences must be considered.

Human resources are the most difficult to assess. Most projects rely on organizations of pastoralists. Important questions to address are the following: Will the existing organizations be used, or will a new organization be established? What should be the size of the organization? How complex will be the functional specialization and what type of membership (inclusive versus exclusive, voluntary versus forced) is expected?

A new organization can only be established at a cost. Because of low population densities associated with arid rangeland, communication between members is difficult. Difficulties in decision making, therefore, increase as group size increases. For the same reason (lack of opportunity to communicate), there are limits to functional specialization.

Sanford (1983) emphasizes that the "costs" of project organization are often underestimated if not overlooked altogether. A first step to the evaluation of human resources is a good understanding of the existing social organization.

Data Needs and Sources

Data required for cost and benefit evaluation, frequently called "input-output" data, include: herbage or animal production or possible alternatives; physical quantities of inputs used, whether a product is produced or purchased; prices for inputs; and prices for output to be sold.

The principal sources of physical input-output data for projects may include well-trained professionals with technical expertise in the area, data from other projects of a similar type and under similar conditions, people from the locality with good knowledge of the area and what might be expected, and data from controlled experiments.

Preliminary experiments are very important sources of data for technical specialists who must make judgments about the productivity of resources in new projects. The preliminary experiments do not yield perfect or reproducible results, particularly when applied to international projects of an agricultural nature where factors such as weather, variability in inputs, and the performance of the field crew typically are incompletely controlled. Situations in developing countries lead to what might be called “the experimental gap" between the yields that are obtained on the experimental plots and those likely to be achieved on projects. The technical specialists must attempt to estimate the extent of experimental gap and the extent of adjustment or correction. Farming systems research is attempting to narrow this gap.

In general, local data are most useful for ascertaining the response to different treatments or the change in output resulting from a change in level of the inputs.

Farmers or pastoralists may be the best source of information on crop or vegetation and animal performance, requirements for labor, materials, machinery use, feed requirements, and so on. Information collected locally by survey procedures can be used to establish benchmarks for current enterprise combinations and production practices, and to obtain crop and livestock labor requirements and machine use levels for operations of different sizes.

Market price determination

A number of problems confound the establishment of prices for use in project planning. Obtaining satisfactory price information is usually not a difficult problem in the United States. Merchants, dealers, and farm operators can usually provide satisfactory information on current levels of prices paid and received and wage rates. In developing countries, however, specific price information may be more difficult to obtain, and short-term price fluctuations are likely.

To the extent that markets exist and market price information is available, market prices should be used, but a few caveats must be considered. First, if market prices are generated from a location remote from the project area, then it would be necessary to make adjustments to account for differences from the project area because of transportation costs, any losses due to waste, spoilage, shrinkage, or death loss, and for transaction costs at the marketplace.

If prices tend to fluctuate in a completely irregular or random fashion or in a cyclical fashion, an average price or expected value may have to be used through a series of years.

Prices are one of the crucial assumptions in planning, and the importance of good price forecasting cannot be overemphasized. However, it is possible to become too fearful and exaggerate the consequences of errors. The effects of different prices can be ascertained quite easily by "sensitivity analysis" after the major budgets have been prepared. This may be desirable, both to test the stability of a particular budgeted solution against variations in prices, and also to ascertain the amount of possible loss if the price assumptions are in error. The probability of different occurrences may also be assessed.

In project planning, the determination of prices is a problem if satisfactory market or price reporting systems do not exist. Often the only valid way to place a value on forage is indirectly, by determining its value through the livestock production process. In that case, the costs of producing the forage as an intermediate product could be used. Placing a price on the forage directly is unnecessary.

As mentioned earlier in the chapter, valuation problems are very difficult for the so-called non market or social considerations involved in improvement and rehabilitation practices. For instance, it is very difficult to place values on such things as enhanced erosion or flood control, dune stabilization, or enhanced wildlife production. However, damage mitigation analysis (as used in water resource projects) can be applied. In such a situation, the before analysis would overstate the without analysis and the before-after comparisons would understate the benefits of the proposed project compared with the without-with comparison.

The analyses based on the without-with approach to projections is generally more complicated because it does require projections of two situations. The current before situation can only be taken as a data base or benchmark and guideline information. A before-after type comparison is based on the current situation as one projection and only one projection is required for the relatively unknown after situation.


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