5 Economic Indicators
5.1 ISSUES
Maintaining an economically viable farm is the motivating factor for most farmers. An economically viable farm supports the farmer and makes a contribution to the wider economy and community, and also provides lifestyle and social options for farmers. The indicators developed in this report measure progress towards the goal of maximising net profit over the long term.
Because the emphasis is on long-term viability, economic indicators must be able to measure the ability of a business to maintain itself over time and should concentrate on long-term financial health (Shadbolt and Morriss, 1997). MAF Policy research by Shadbolt and Morriss will evaluate indicators in terms of their ability to measure the sustainability of farming businesses over time. The economic indicators recommended in this report are a subset of those recommended by Shadbolt and Morriss. However, the emphasis of this report is on irrigation, so there is a need to measure how effectively the water is used and whether farmers are obtaining as much profit from the use of irrigation water as possible (e.g. increased productivity or reduced agrichemical requirements).
5.2 POTENTIAL INDICATORS
The following indicators can potentially be used to identify the effects of irrigation on farm profit. They can all be influenced by production levels, market acceptability (reflected in price) and the expenditure on irrigation. The economic viability of a farm could be described using the following:
- net profit;
- market value of property;
- production costs;
- irrigation costs;
- energy costs;
- market price of product;
- minimum viable farm size;
- effect of natural disasters.
5.3 RATIONALE FOR SELECTING INDICATORS
Economic indicators often attempt to encompass environmental and social sustainability issues into their measures. The approach taken in this report separates the economic, environmental and social indicators.
The model developed by Shadbolt and Morris uses net operating profit after tax as one of the inputs for calculating whether value is created or lost due to the current methods of land management. The net profit measure is combined with measures of the resource base, assets, equity and debt to provide an overall measure of a farm’s financial health. The assessment is made based on figures collected over a five year period.
For this irrigation project, one of the indicators recommended is the annual net operating profit after tax. It meets most of the indicator selection criteria and is consistent with information required for Shadbolt and Morris’s system, and will enable farmers to combine both sets of indicators.
Although the annual profit to the farmer is influenced by irrigation, it is also influenced by other factors such as market price for products, energy and labour costs. By examining the changes in annual profit, fluctuations can be identified and attributed either to irrigation changes or to changes in the other factors. Ideally, the profit from irrigated land should be compared to the profit from non-irrigated land (all other things being equal). Such a comparison would quantify how irrigation is contributing to the profit. However, obtaining information for the non-irrigated situation on a fully irrigated farm may be difficult.
Although irrigation cost has not been recommended as an indicator because irrigation costs are included in net profit after tax, the capital costs of irrigation systems should be recorded to enable the long-term return on irrigation investment to be calculated, if required.
There will be opportunities for farmers to increase profit by optimising the allocation of water among crops. As part of the production indicators, the production per unit of water used for each crop is recommended as an important indicator. However, this will not measure any benefits obtained by reallocating water among crops and concentrating on meeting the water requirements of the more profitable crops. To address this issue, an indicator of profit per unit of irrigation water is recommended.
Other potential indicators are not recommended primarily because they are not directly influenced by irrigation system design and management, or they are not sufficiently controlled by farmers.
5.4 RECOMMENDED INDICATORS
| Annual net operating profit after tax ($) Profit per unit of water used ($/m3) |
5.5 RELATED INFORMATION
The following information may also affect profit, and being aware of these influences may help to identify the cause of changes in annual profit.
- capital cost of irrigation system;
- external changes;
- state of the economy;
- interest rates;
- exchange rates;
- market demand;
- natural disasters.
Contact for Enquiries
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