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Cacao Agroforestry Systems – A Cost Benefit Analysis

Dan Barthmaier
Senior Technical Advisor - Market Systeams and Value Chains, Catholic Relief Services
February 26, 2021
Key Insight

The results generated from the analysis of the cases were useful to define the methodology for cost-benefit analysis and to generate preliminary data on the profitability of cacao agroforestry systems, using a profitability calculator (in Spanish) created by Allianza Cacao.

Building on Dan McQuillan’s Coffeelands Blog series on issues surrounding farm profitability, I want to shift a bit to the world of Cacao and highlight some work coming out of CRS’ Allianza Cacao program in El Salvador. Agroforestry approaches, increasingly promoted globally, present a complex set of challenges for evaluation – with so many interrelated variables, what is the optimal recommendation of crop mix for a farmer in a given zone? With different crop lifespans and time periods to maturity, over what time horizon should an Agroforestry System’s income be evaluated?  Questions such as these are overlaid upon those pertinent to single crop, such as which is a more efficient use of limited resources, farm extensification or intensification?

The Allianza Cacao project completed research last year in an attempt to answer some of these questions.

Determining the benefits of agroforestry in cacao production

Cacao producers in El Salvador have established a wide variety of agroforestry systems and manage the systems with different degrees of intensification. Therefore, the systems show a lot of variabilities and require a cost-benefit analysis based on the characteristics of each of the plots, their management, the production of each of the items, and the income from the sale or consumption of the systems’ products.

To meet this challenge, Allianza Cacao developed a tool for the cost-benefit and financial analysis of agroforestry systems. This tool is used to estimate the costs, revenues, and profitability of the systems, based on data on the inventory, management itineraries, and harvest data projected over 25 years. The study, conducted from July – September 2020, carried out a cost-benefit analysis of 110 plots of cacao agroforestry systems, selected from 22 monitoring plots:

Locations of 22 centers of cacao monitoring plots around which all plots of studied were situated (CRS, 2020)

In many financial feasibility studies, the investment appraisal technique has been used to examine the viability of cacao agroforestry systems. With cacao agroforestry systems, benefits and costs linked to the development stages of cacao and the other crops. The early stages of system are associated with high establishment costs, followed then by costs or investments that must be made during the development stages of the crop. The annual benefits begin when the crops begin to produce, and in some cases, they end when the crop is eliminated from the system, such as with basic grains and plantains. For this study, a period of 25 years was used, starting with the establishment of the items (1 year), followed by years of development of the items (1-16 years) and the years of harvest or benefits (1-25 years).

The results generated from the analysis of the cases were useful to define the methodology for cost-benefit analysis and to generate preliminary data on the profitability of cacao agroforestry systems, using a profitability calculator (in Spanish) created by Allianza Cacao. Profitability was calculated both in terms of Internal Rate of Return (IRR) and Net Present Value (NPV).

Online profitability analysis tool for agroforestry systems used for the cost-benefit study

As a first step, the project analyzed their 1633 project participant plots on records, updated them through field verifications, created categories of Agroforestry Systems and assigned farmers to each category, resulting in the following breakdown:

Alongside the question of diversification, the team broke the plots under study consideration in categories based on the size, level of irrigation, diversification, and intensification of management. Using these categorizations, the team developed guiding questions in order to tease out the factors that most impacted profitability of a single plot.

Study Results

Data analysis produced a number of interesting results:

  • It was observed that the sale of cacao, plantains, fruit, and food grains components contributed more to the total income, while the coffee, timber, and service tree components did not contribute much, most likely due to lack of forest product harvesting and low coffee price and productivity.
  • The size of cacao agroforestry plots managed by the project beneficiaries had a clear influence on the profitability of the agroforestry systems. This is possible for the reasons that beneficiaries with larger cacao agroforestry system plots have more resources to invest in the systems, have greater availability of labor, and can organize the work in time. They also have better connections to market their products at better prices.
  • Complementary irrigation also had a strong influence on profitability. This is because of supplemental irrigation guarantees higher productivity, higher harvest volume. Thus, supplemental irrigation is not only profitable but is a critical element in managing the risks of cacao agroforestry systems arising due to climatic variability.
  • The influence of diversification of the systems on profitability was not clear. A revision of the inventories and management itineraries revealed that a beneficiary may have a well-diversified plot, but its inventory may be poor and management of its plots may be non-intensive.
  • The results showed that there was a clear influence of the intensity of management on profitability. This should be due to the increase in productivity resulting from intensive management including irrigation, which reduces plant mortality caused by extreme events such as prolonged drought and prevents the loss of production due to water stress.

It is important to note that the analysis is based on projections of the harvest of cacao and the other crops, since the systems are only 3 to 4 years old, and have not attained their full production capacity yet. The study should be repeated in 3 years’ time when the systems reach maturity and actual harvest data can be used instead of projected data for a more precise estimation of the profitability of the agroforestry systems.

The full report, in Spanish only, provides much more detailed information and can be found here.

For further questions, please contact Chief of Party, Jairo Andrade: jairo.andrade@crs.org