A Target Motad Analysis of Forestry Development on a Pastoral Hill Country Farm
C.K.G. Daké and J.D. Squire
The views expressed in this paper are those of the authors and do not necessarily reflect the official view of the New Zealand Ministry of Agriculture and Fisheries. The typing assistance of Pekina Gabriel and comments from colleagues are very much appreciated.
This paper builds on a recent study on sustainable land use options for a pastoral hill country farm by providing an analysis of the downside risk on pastoral and forestry enterprise mix. A Target model is developed to determine the risk efficient combination traditional bred cattle, bull beef and forestry enterprises.
The results indicate that the optimum enterprise mix of 250 ha in forestry and 401 ha in bull beef can be fanned with little or no downside risk. The transition from the current pastoral system to a risk efficient enterprise mix increases the downside risk. This is due to the loss of income when significant areas of the farm are in immature forest.
INTRODUCTION
Revenue from the sale of timber from exotic forest plantations in New Zealand has increased significantly over the past 5 years due to a doubling in the real price of export logs. This has resulted in an increased demand for Pinus radiata seedlings for afforestation. Based on a survey of nurseries, the Ministry of Forestry estimates that 70,700 ha of forests was planted in the season ended 31 March 1993. The area planted was made up of 23,100 ha of restocking and 46,600 ha of new planting (MOF 1992). (The area of forest planted in the previous season was 15,440 ha).
During the year to June 1992, the exotic forest plantation on farms increased by about 7% to 113,837 ha, while the area of plantations not on farms declined slightly (0.12%) to about 1.2 million ha. It is believed that a higher proportion of new forest planting would take place on existing farm lands.
It is expected that farmers will increase the rate of farm conversion into plantation forest on the basis of expected good future return from forestry. Also, soil erosion on hill country pastoral farms in New Zealand concerns both policy makers and local communities. Changes to livestock management Systems and accelerated afforestation schemes have been proposed to arrest soil erosion, improve the long term viability of these farms and for the sustainable management of land resources (Keoghan and Cossens 1990; Korte 1990; MAF, Landcare and TRC
The choice of farm diversification options must address not only the sustainable management of the physical resources of a farm, but also farm viability and the reduction of the risk of farm business failure. The objective of this paper is to provide an analysis and a rationale for considering a forestry enterprise option during the diversification of a pastoral farming system. Improvements in the management of the existing pastoral system that could complement forestry development is examined. Increased risk associated with the transition from a current pastoral system to a system that contains a mature crop forest is analysed.
A Previous Study
This study builds on a recent study of sustainable land use options on hill country in the Taranaki region of New Zealand (MAF, Landcare and TRC 1993). A detailed assessment of the sustainable management of seven land classes, based on slope, pasture growth, stock carrying capacity and suitability for forestry was undertaken for a 651 ha farm. The present farming system is pastoral, carrying approximately 5000 stock units of sheep (70%) and cattle (30%). Pinus Radiata is an appropriate forest plantation species for the area, and yields of between 637 m3/ha to 747 m3/ha recoverable volume are possible after 28 years of growth,
An evaluation of the profitability of a number of pastoral and forestry enterprise options was undertaken using deterministic prices and yields (Spall and Meister; 1988; MAF, Landcare and TRC 1993). The exclusion of price and yield variability meant that the riskiness of the proposed farm plans could not be determined. This could limit the applicability of the results from the study to only those farmers who are risk takers (Parton and Cumming 1990).
In the present study, a model that uses the downside risk concept to determine the optimal combination of risky pastoral and forestry enterprises for a hill country pastoral farm in the Taranaki region is developed.
The Risk Model
Management of risk in farming has also been receiving increased attention as a result of the deregulation of the financial sector, and the phasing out of farm input and output subsidies over the last decade (Martin and Lee 1990; Johnson 1992). When considering options for the diversification of an existing farming enterprise, one needs to consider both business risk is (i.e. risk associated with variable yields and prices) and financial risk (i.e. risk associated with not being able to meet a fixed target income, such as debt repayment, using cash generated from the farm).
The combined effects of these risk factors may be measured by the expected net farm income and the distribution of net farm income about the mean or target income The model used in the study is derived from the MOTAD (Minimisation of total absolute deviation) risk programming technique (Hazell 1971). An application of the MOTAD model used in this study is the Target-MOTAD model which is concerned with minimising negative deviation of net revenue from a target income (Zimet and Spreen 1986; Parton and Cumming 1990).
A comparison of Target MOTAD to MOTAD carried out by Watts, Held and Helmers (1984) indicates that Target MOTAD is a more appropriate framework for risk analysis in situations where a high dis-utility is attached to returns from low income years. Such a condition would apply to many pastoral hill farmers with high debt levels, where returns from enterprise combinations unable to cover adequately debt repayments is of concern.
The risk model, in essence, selects enterprise combinations in order to maximise expected net revenue subject to constraints on available land classes, seasonal pasture yield, target income and an acceptable mean negative deviation of revenue from a target income figure 1), The optimum enterprise combination is said to be risk efficient since it yields the highest expected net revenue for a given level of risk.
Figure 1: The Risk Model
The risk model comprises two main components, a simulation model and a linear programming model. These are now briefly described.
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