Economic Principles Introduction March 2004 Maine

OBJECTIVES OF THIS SESSION BROAD CONCEPTS SOME SPECIFIC EXAMPLES PROVIDE SKILLS TO DO SOME ANALYSIS AWARENESS OF RESOURCES REINFORCE IMPORTANT CONCEPTS

Why economics? It’s an impediment to natural resources preservation/conservation “In a perfect world, we wouldn’t have to worry about economics” It’s worth it “at any cost” Economics only looks at “the money” Common perceptions

ECONOMICS IS NOT ABOUT “ WHAT IS THE CHEAPEST” – IT’S ABOUT GETTING THE MOST GIVEN WHAT WE HAVE The most soil saved The most manure managed The most miles of stream protected The most __________________ Given the limited $ we are allocated every year

OPPORTUNITY COST IF YOU TURN LEFT, YOU ARE DENIED THE OPORTUNITY OF TURNING RIGHT THE COST OF THE NEXT BEST ALTERNATIVE WHAT IS YOUR TIME WORTH? “If I have to spend 10 hours per week doing X, that’s 10 hours I can’t spend doing Y”

Economics and Conservation Economics involves allocating scarce resources among several needs Economics is a tool for decision-making Promoting conservation involves helping people make decisions about allocating resources to further conservation Identifying barriers to conservation

General Manual Title Part Economics Policy Policy The policy of the NRCS is that economics is an essential consideration in all agency decision making. Economic principles must be applied in the planning, implementation, and evaluation of agency policies and program activities to provide the most cost effective assistance to customers, cooperators, and partners for the sustained use of natural resources.

“Pursuant to Executive Order 12866, Regulatory Planning and Review, the NRCS has conducted a benefit cost analysis of EQIP as formulated for the final rule. The Department of Agriculture Reorganization Act of 1994 and the Unfunded Mandates Reform Act of 1995 also require analysis of costs, benefits and risks associated with major regulation. These requirements provide decision- makers with the opportunity to develop and implement a program that is beneficial, cost effective and that minimizes negative impacts to health, human safety and the environment.” Source: 7 CFR Part 1466, EQIP Final rule

Economics in the Planning Process Economic analysis

Levels of Analysis $ Terms Include quantities of effects on resources Identify costs - describe necessary maintenance for each alternative - primarily narrative format

Source: Milk Costs and Returns, ERS, USDA.

SWAPA Human Considerations –Economics Cost-effectiveness, financial condition, markets, input level, sustainability –Social Considerations Values, client characteristics, risk tolerance/aversion –Cultural Considerations Absence of presence, significance, effects +H

Sociology Concepts Adoption – Diffusion Model Adopter Categories Reasons for not adopting Strategies to overcome barriers Credibility with public

Adoption – Diffusion Model 1.Awareness Recognizes a need for something new 2.Interest Looks for more information 3.Evaluation Sees it in use 4.Trial Tries it out 5.Adoption Accepts or rejects the new practice Adapts and customizes

Socio-economic Considerations Reasons for non-adoption of conservation –Unable Too expensive Labor requirements too high Managerial skills inadequate Planning horizon too short –Unwilling Information conflicts or inconsistent Poor applicability/relevance of information Belief in traditional practices Increases risk

Reasons for adoption and rejection of new practices and technologies Unable but willingAble & willing Unable & unwillingAble but unwilling

Possible strategies to overcome barriers Unable but willing financial help technical help Able & willing Unable & unwilling (?) Able but unwilling farmer testimonials dispel myths, or “conventional wisdom”

Credibility and Trust with Public The media (of their choice) Friends and family Environmental groups, educators, community leaders Government and industry (5%) Where does the public get their information?

Credibility “Formula” Empathy (50%) Dedication and commitment (15-20%) Honesty and openness (15-20%) Technical expertise (15-20%)

Benefits and Costs of Conservation Helpful to organize them into basic types Benefits thought of in terms of “offsite and offsite”

Benefits of Conservation Onsite benefits  occur at or close to the activity 2 basic types of onsite  maintain, restore, or enhance productivity  decrease production costs

Benefits of Conservation Offsite benefits  Occur away from activity  May occur to different owners  Occur in several different forms Can be much more difficult to quantify\tie to a specific site

Costs of Conservation Expenditures  Up front installation cost  Operation and maintenance cost  Non-Cash costs Lost production  Crop acres  Reduced yields

One Time ValueAnnuities (Average Annual Values) Lagged Values Installation Cost Replacement Cost Conservation Benefits O&M Costs Average Returns Average Costs Replacement Cost Any value not starting this year $ Years $ $ $

Time Value of Money Money has a time value attached to it + interest$1 today = $1 + interest tomorrow Comparison of $ today vs. $ tomorrow (or over a number of periods in the future) Useful to compare $ in different time periods Use amortization and discounting

Amortization Computes the periodic payment to pay off a loan or The periodic charge to spread the cost of an investment over it’s life Can be in years, quarters, months

Time Value Example Practice installation cost $5,000 EQIP will cost-share 75% Should save producer $200 per year over next 10 years Interest rates ~5% IS THIS A GOOD DEAL?

Years

$200/$162 = $1.23 GOOD!

Discounting Converts future periodic or one-time $ amounts to a one-time present value Present value is the upfront value (value today, here and now) NPV analysis

Years

$1,544/$1,250 = $1.23 GOOD!