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  Economics of farm forestry

To make an informed investment decision for a long-term project such as farm forestry, farmers must understand the economic tools used to assess the viability of long-term projects. Understanding these tools allows for:

• a farm forestry project to be evaluated and compared with other investments, such as investing in the stock market or building a new dam;
• assessment of a project’s cash flow;
• analysis of a project’s financial aspects;
• the economic risks to be highlighted from the start of the project.

Some people argue that an economic analysis only reports on a project’s monetary aspects. But it also allows farmers to consider the financial costs and returns against non-economic benefits including aesthetics, providing wildlife habitats, reducing erosion and salinity control. Some farmers might for example accept a lower return from a less profitable option (such as using native species instead of exotics) because of the non-commercial value they place on the biodiversity and aesthetic benefits. In these circumstances an economic analysis can be used to assess the costs associated with providing desired non-commercial benefits.

A farm forestry project’s true worth might be greatly underestimated if only a financial analysis is undertaken. Financial analysis is one of several tools to help in decision-making. Before making any commitment, farmers should also consider the social and environmental benefits, risks and uncertainties associated with the project.

Financial cash flow analysis: the good, the bad and the ugly

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