Agricultural Project Analysis Mrs Abigail Ampomah Adaku Agricultural

Agricultural Project Analysis Mrs. Abigail Ampomah Adaku Agricultural Economics & Agribusiness University of Ghana, Legon

What is an Agricultural Project? • The whole complex of activities in the undertaking that uses resources to gain benefits • An investment activity in which financial resources are expended to create capital assets that provide benefits over an extended period of time.

What is an Agricultural Project • In general, a project is an activity for which money will be spent in expectation of returns and which logically seems to lend itself to planning, financing, and implementation as a unit. • It is a specific activity, with a specific starting point and a specific ending point, intended to accomplish specific objectives.

TYPES OF AGRICULTURAL PROJECTS • • Inputs marketing – seeds, agro-chemicals, etc Production – crops, livestock, fisheries, etc Processing - crops, livestock, fisheries, etc Storage – dry, cold Transportation Irrigation Marketing of produce – agricultural and agrobased products

Advantages of the Project Format • Projects carefully prepared, within the framework of broader development plan, both advance and assess the larger development effort. • It establishes a framework for analyzing information from a wide range of sources. B/s no plan can be better than the data and assumptions about the future on which it is based, the reality of the analysis to a large degree depends on information from various sources and judgments of various specialists in different areas.

Advantages of Project Format • The format facilitates gathering the information and laying it out so that many people can participate in providing information, defining the assumptions on which it is based, and evaluating how accurate it is. • Gives us an idea of costs year by year so that stakeholders can do their own planning. • It helps contain the data problem. • Encourages conscious and systematic examination of alternatives (with and without project)

Limitation of the Project Format • The quality of project analysis depends on the quality of the data used and of the forecasts of costs and benefits made GIGO principle – ’garbage in, garbage out’ works with a vengeance. • How? Unrealistic assumptions about yields, acceptance by farmers, response to incentives by entrepreneurs, the trend of future prices, and the relative effect of inflation upon them, market shares, or the quality of project mgt can make garbage out of the Project analysis.

Limitations cont’d • Sensitivity analyses offer only limited help for risks and uncertainty– test for specific changes that can lead to decision on project design are far superior • The analytical methods in identifying which projects will increase national income does not make the final decision. Many other factors apart for quantitative must be brought to bear.

Aspects of Project Preparation & Analysis • Technical aspects- Inputs(supplies) and Outputs (Prodn. ) • Institutional-Organizational-Managerial aspects • Social aspects • Commercial aspects • Financial aspects • Economic aspects

Technical Aspects • • • Soils Water availability Crops and varieties Livestock species Physical Inputs Mechanization Pest control Yields and production Market and storage facilities

Institutional-Organizational-Managerial aspects • • • Customs and culture of farmers Communication systems Use of local institutions Management ability of farmers Government and agency policies Land tenure and size of land holding

Social Aspects • • • Income distribution Job creation Role of women Improvement of rural living Environmental impact

Commercial Aspects • • • Market and demand forcast Marketing system Inputs Outputs Financing Price policies

Financial Aspects The major objective is to judge how much farm families participating in the project will have to live on. • Market prices • Income • Incentive effects • Financial policies of institutions • Taxes • Subsidies

Economic Aspects Require a determination that the project would contribute to the devt of the economy to warrant using scarce resources. • Exchange rates • Opportunity costs • Transfers – taxes and subsidies

The Project Cycle • There is a natural sequence in the way projects are planned and carried out. This is the project cycle. Stages • Identification • Preparation and analysis • Appraisal • Implementation • Evaluation

Why Agricultural Project Analyses Prove Wrong Problems of project design and implementation 1. Inappropriate technology 2. Inadequate support systems and infrastructure 3. Failure to appreciate the social environment 4. Administrative problems, including those of the project itself and the overall administration within the country, and 5. The policy environment, of which the most important aspect is producer price policy.

• Problems of project analysis 1. Underestimation of costs 2. Excessively optimistic projections – area under cultivation, yields, rates of increase in livestock herds, & total production in project area 3. Too optimistic a calendar for project implementation 4. The rate of return from investment overestimated b/s for example, the analysis failed to account for an adverse effect of the investment on production in project area or elsewhere 5. Errors when translating technical assumptions into projections of project performance.

Identifying Project Costs and Benefits • The objectives of the analysis provide the standard against which costs and benefits are defined. • A Costs is anything that reduces an objective, and • A benefit is anything that contributes to an objective.

Costs of Agricultural Projects Physical goods Labour Land Contingency allowance – physical and price contingencies • Taxes • Debt service • Sunk costs • •

Tangible Benefits of Agric. Projects • • • Increased production Quality improvement Changes in time of sale Changes in location of sale Changes on product form (grading and processing) Cost reduction through mechanization Reduced transport costs Losses avoided Other kinds of benefits – time savings

Intangible Costs and Benefits Almost every agric project has cost and benefits that are intangible. • Include: creation of new job opportunities • Better health • Reduced infant mortality as a result of rural clinic and better nutrition • Reduced incidence if waterborne diseases due to improved rural water supplies

Pricing of Costs and Benefits • Underlying all financial analysis is an assumption that prices reflect value or can be adjusted to do so for economic analysis. • To find prices, the analyst must go into the market and inquire about actual prices in recent transactions and consult many sources- farmers, traders, importers and exporters, extension officers, technical service personnel, gov’t market specialist, statisticians, published and privately held statistics about prices • From these the analyst must come up with figures that adequately reflect the going price for each input or output in the project.

Prices • • Point of first sale and farm-gate price Pricing of intermediate goods Project boundary price Predicting future prices – Changes in relative prices – Inflation • Prices of internationally traded commodities – Financial export and import parity prices

Elements of C. I. F. Price • C. i. f. (Cost Insurance freight)Includes: – F. o. b. cost at point of export – Freight charges to point of import – Insurance charges – Unloading from ship to pier at port – Excludes: – Import duties and subsidies – Port charges at port of entry for taxes, handling, storage, agents’ fees, and the like

Elements of F. O. B. Price • F. O. B. Includes: – All costs to get goods on board – but still in habour of exporting country – Local marketing and transport costs – Local port charges including taxes, storage, loading, fumigation, agents’ fees, etc. – Export taxes and subsidies – Project boundary price – Farm-gate price.

Financial Analysis • Agricultural projects include processing projects like canning plants, oil extraction mills, rice mills and sugar refineries • For these we must project and analyse financial statements to judge efficiency, creditworthiness and liquidity. • For agric. Projects, three financial statements should be prepared.

Financial Analysis • Balance sheet • Income statement • Cash flow statement • Balance sheet: gives a view of the assets and liabilities of the enterprise at the end of the accounting period.

Financial Analysis • Income statement: summarizes the revenues and expenses of the enterprise during each accounting period. • Cash flow statement: summarizes the financial transactions taking place during each accounting period • These financial statements would help the analyst make financial judgements about the project

Balance Sheet • It is a snapshot of an enterprise at point in time • Its shows the assets of the enterprise and its liabilities and equity (net worth) • Asset =liabilities + equity

Income statement • The income statement is the only tool in financial analysis which measures profitability • It shows the results of the operation of the enterprise during the period. • Net profit is what is left after all expenses incurred in the production of goods and services delivered have been deducted from revenues earned from the sale of these goods and services

Cash flow statement • It is a vehicle for measuring the total flow of financial resources into and out of an enterprise during an accounting period and for projecting into the future. • What are the sources and uses of funds? • A typical cash flow has four sections: cash receipts, uses of cash, flow of cash sum and the loan balances

THANK YOU

QUESTIONS • What is an agricultural project? • Outline the project cycle and discuss it briefly. • Discuss the factors that contribute to wrong agricultural project analysis and prescribe remedies • Outline how you will estimate the farm-gate import parity price for a named agricultural product.

• List types and examples of agricultural projects and state the advantages and limitations of the project format. • Every project goes through some aspects of preparation and analysis, state these and discuss them briefly.

• Projects are said to through a cycle, outline this cycle and explain the stages briefly. • Agricultural project analyses go wrong, explain why these happen and how they can be addressed. • What constitutes costs of agricultural projects and what constitutes benefits • How do you determine the farm gate price given the fob price of a commodity?