Economic Budgeting for Agroforestry Practices
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Evaluation of the economic aspects of agroforestry provides a basis for estimating financial needs and feasibility, highlights trade-offs between multiple benefits, and monitors economic efficiency. The main technique used in economic analysis is budgeting.
Economic budgeting is a very flexible process. However, effective application of budgets requires an understanding of the commodity, practice or system to which it is being applied. Agroforestry poses some unique economic budgeting problems because it involves multiple enterprises with varying production cycles, such as trees, row crops, forages and/or livestock.
First, unlike most agricultural commodities, agroforestry has a “planning horizon” of greater than one season due to the tree component. A “planning horizon” is simply a time period in which all costs and revenues for a given practice are realized. For soybeans, a planning horizon may be six months to a year. For agroforestry, a simple planning horizon may be as long as 60-80 years when the timber value of trees are taken into consideration. Second, because of the long planning horizon of agroforestry practices, many of the revenues and costs do not occur at regular or predictable intervals throughout the entire planning horizon, but are irregular in occurrence.
Finally, because agroforestry practices typically incorporate a fixed tree component with a crop or livestock component, the crop or livestock component may change over time. For example, an alley cropping practice may start out as soybeans grown between rows of eastern black walnut trees, but by the time the trees are producing nuts, hay may be the crop grown between the rows of trees because a smoother surface is required to mechanically harvest the nuts.
These three characteristics of agroforestry practices require a specific type of budgeting method that will be flexible enough to allow for variable crop and/or livestock components, as well as comprehensive enough to show annual cashflows for the entire planning horizon.
- Develop enterprise budgets
- Combine the enterprise budgets into a cash flow plan
- Common indicators of economic performance
- Supplemental economic indicators