The value of investing in R&D for the WA sheep industry

The Issue

The WA sheep industry is currently facing a range of challenges which will call for a concerted level of R&D effort to overcome. Key issues confronting the industry are:

• maintaining access to existing markets and developing new markets through traceability systems that support premium products
• adapting production systems in response to a variable and drying climate
• reducing carbon emissions through abatement and mitigation; and
• meeting community expectations for an ethical and sustainable production system.

Balanced against these issues are a number of very positive opportunities for the industry, such as increasing global demand for ‘clean and green’ red meat and WA’s comparative advantage in being able to produce high quality feed grains for fattening livestock.

The Solution

Synergies, in partnership with Whitney Consulting, assisted DPIRD to develop a Business Case that identifies seven strategic initiatives for R&D investment:

1. Market development
2. Business management
3. Improved management of the environment, genetics and nutrition
4. Mixed farming systems and feed base research
5. Traceability and feedback systems
6. Adapting to climate change
7. Best practice welfare and social responsibility

The initiatives were prioritised through a workshop, which Synergies convened with the livestock team at DPIRD.  In crafting the initiatives, we advised DPIRD to focus on those areas that currently represent a gap in the ‘market’ that is not being filled by the private sector or other research institutions. The focus was therefore on areas where DPIRD can add the most value by addressing market failures in the form of reducing information costs and transaction costs; catalysing innovation in areas that would otherwise not be undertaken by the private sector; and addressing negative social and environmental externalities associated with the sheep industry.

Synergies quantified the net economic benefits of investing in each of the seven strategic areas, relative to a  base case of productivity being maintained at historic trend. Costs and benefits were analysed over a 20 year period.

We assembled financial performance data from the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) to establish a baseline level of current producer margins for the sheep industry. In consultation with DPIRD, we then identified how each strategic initiative is expected to increase output values, reduce input costs, or lift production per hectare for a specified producer group.

Program benefits were aggregated to ‘whole of industry’ by assuming that 20% of total area under production (ie. 2 million hectares from a total of 10 million hectares under sheep) will benefit from the R&D. This scaling factor accounts for:

• potential increases in production cost that farmers might incur as a result of adopting the initiatives that could not be explicitly taken into account due to limited data availability;
• the uncertainty of success associated with each initiative, which may result in not the entire potential being realised; and
• less than full adoption levels (not all candidate producer will necessarily adopt all aspects of all initiatives; and certain initiatives might not be applicable to certain producers as their individual circumstances are not conducive of the targeted improvements)

The Results

The CBA demonstrates that the proposed R&D program is expected to yield a net present value of $9.13 million over 20 years, and a benefit cost ratio (BCR) of 1.7, implying that for every $1 of public funds invested there will be a $1.70 return, in present value terms. This return is sensitive to the assumed scale of industry expected to benefit from the R&D. If the scaling factor is increased to 30%, the BCR increases to 2.6.

Conclusion

The CBA and accompanying economic impact analysis provided an important piece of supporting evidence for DPIRD’s business case. Furthermore, the process of undertaking a CBA helped to focus DPIRD’s attention on areas where it was most likely to generate the greatest economic returns.