Monthly Archives: August 2004

15 – Can you count land values?

Every so often I get asked about whether it is valid to include improved land values in economic evaluations of land conservation works on farms, or I read an analysis in which it has been done. Both of these happened recently, so it is probably time to draw attention to my notes on this issue again.

The way it is usually done, or proposed to be done by non-economists, amounts to counting the same benefits twice. Your starting point should always be not to do it.

It is possible in some special situations to include some consequences of changes in land value as a benefit in an analysis of a land conservation investment, but you need to be very careful how you do it in order to avoid double counting. For the purposes of this sort of analysis, land value differences would reflect differences in future productivity as a result of the investment in conservation. If you do include changes in land value at a particular date, then you must exclude from the analysis all productivity changes subsequent to that date, because they have already been included in the land value change. (Rationale: to realise the capital gain, you have to sell the land, and then you don’t have access to the land to realise subsequent productivity differences.)

Conceivably, you could include productivity differences for 20 years, and then a difference in land value at year 21 to factor in ongoing effects beyond year 20, provided that you then discounted that difference back to the present. In practice, however, I would ask, how should you determine the change in land value to be included at year 21? The best way would be to do a discounted cash flow analysis of subsequent productivity differences. If so, why not just extend the time frame of the productivity analysis? It amounts to the same thing.

There are some complexities that could be added to this relatively simple story. For example, if land value increases, farmers may be able to access greater debt finance to invest in productivity. Benefits from such investments, if you could anticipate them and quantify them, would be legitimate inclusions in the analysis of the investment in land conservation. However, they are really second-order benefits – almost certainly much smaller than the error margins surrounding the first order benefits – and they could only ever be highly speculative. They are also completely different in nature to the direct inclusion of changes in land value.

Be aware that if you assume that prices, yields and costs are constant over time (which is a common, though dubious, thing to do), there is no justification for even expecting land prices to increase, let alone including these increases in the analysis. Unless …

Conceivably there could be an expectation of speculative increases in land value, not reflecting productive value, and a belief that such increases would occur WITH the land conservation investment but not WITHOUT it. If one has some sound rationale for expecting this, then fine, include it as a benefit, but I wouldn’t like to be investing any of my own money on that basis, and good luck trying to justify it to any reviewers of your analysis. Substantial differences between the value of land for production and the amount people actually pay for it are not sustainable in the long term, due to competitive pressures, unless the land has values other than for production (e.g., it is close to a city).

Putting that aside then, I would note that the analyst should be considering whether the assumption of constant prices, yields and costs is the most reasonable. We know that real prices for agricultural commodities have been falling for at least the past century (the real price of wheat has been falling since the 1700s), and I don’t think it’s time to expect that trend to change. We also know that yields have increased, and will probably continue to. The “constant real everything” assumption is only reasonable if price falls and yield increases are expected to cancel out.

Land prices increases COULD occur if technology is advancing fast enough for productivity growth to more than offset the price falls. This has been happening in Western Australia, though it applies to land generally, not just land that has had a land conservation investment.

If the productivity growth is different in absolute terms with and without the land conservation investment, then you perhaps need to worry about it in the analysis. For example, if degraded and non-degraded land both have the same percentage productivity growth – say 1% per year – this implies a small difference in absolute terms, because 1% of a larger yield is more than 1% of a small yield. You might want to accounted for this, although it smacks of desperation!

If you did include this effect of different absolute productivity improvements, I would strongly suggest doing so in the discounted cash flow analysis of the land conservation investment, rather than as a land value change. Pulling a number like 1% out of the air obscures the implicit assumptions about rates of productivity improvement etc. that are being made. Better to represent these assumptions directly and explicitly. Even if you did want to base the analysis on land values rather than productivity, it certainly wouldn’t be correct to include the full 1% increase as a benefit in the analysis of the land conservation investment, unless you believed there would be no increase at all in the value of land which had not benefited from the land conservation investment.

As always, when you are discounting, be careful in the use of real (inflation excluded) versus nominal (inflation included) rates of change. If the 1% increase in land value is in nominal terns, rather than in real terms, then this would actually be a real price fall (assuming inflation exceeds 1%), presumably implying that yield increases are not fully offsetting real price falls. But this doesn’t change the logic presented above. Including changed land value in the analysis would still depend on whether the absolute fall is different when you do or don’t undertake the land conservation investment. And again, I still wouldn’t represent this by a land value change, but by a set of differences in annual profit depending on changes in yields and prices over time.

Overall, it’s an area where it is easy to go astray unless you know what you are doing. The cases where you can validly include land values are really special cases and would not likely make a big difference anyway, so the safest approach is just to exclude land values completely and make the period of the analysis sufficiently long to capture productivity effects over the long term.

David Pannell, The University of Western Australia

Further reading

Pannell, D.J. (2004). Avoiding simplistic assumptions in discounting cash flows for private decisions, In: D. Pannell and S. Schilizzi (eds.), Discounting and Discount Rates in Theory and Practice, Edward Elgar, (forthcoming). full paper (45K)

14 – Basic tips with Microsoft Word

I’ve been putting together some notes for postgraduate students, covering various aspects of the task of successfully completing a research thesis. It includes some tips for Microsoft Word that might be of broader interest, so here they are. It’s a bit of a random collection, but hopefully contains something you didn’t know about.

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Use the Help facility to learn about any of the following features of Word that you don’t currently know about.

Learn to use “Styles” in Word as one of the first things you do, and use styles for all your formatting, especially for headings. Styles allow you to ensure that all headings at a particular level have the same format, and they allow you to change the formatting of all similar headings at the same time.

NEVER use tabs to indent or undent lines, such as at the start of paragraphs or references. Get into the habit of using Format|Paragraph|Special|Hanging. You can do it easily by marking the required paragraphs, switching on viewing of the ruler and dragging the upper or lower pentagonal (nearly triangular) marker to the desired level of indent. Even better, define a “References” style and use that.

Learn all about the options in Format|Paragraph. Use them.

In a big project, like a thesis, sort out all the formats you are going to use very early on in the project. Create a document for yourself that records them, and define all the formats in appropriate styles in a file before you start writing your first chapter (or as early on as you can). Create a template from that file, and use that template to create all of your chapter files, so that they will all have the same formatting without you having to work at it.

Never use blank lines to position stuff, especially not to move stuff to a new page. Try not to use page breaks either within the body of a document, except say for a table that you want to be on a page by itself. Generally it is best to use “Keep with next” in Format|Paragraph. Be careful not to switch on “Keep with next” except where you really want it. I once saw a thesis that had it switched on in every paragraph!

Switch on “Show” formatting markers (Ctrl-*). Hold down control and shift and hit the 8 key. Always leave this on so you can keep track of paragraphs and special settings like “Keep with next”.

For the formatting of normal paragraphs, don’t alter the formatting directly. Do it by editing the formatting of the Normal style, and applying the style to the paragraph. If this seems a bit strange, have the patience to try it. You’ll appreciate it in the long term.

In my experience, the master document facility in Word is more trouble than it is worth. Just maintain separate files for each chapter, and set the starting page number in each when they are finished.

Setting the starting page number in a file: go into Insert|Page numbers|Format and specify the number to start at. If you already have page numbers in your document, make sure you select “Close” rather than “OK” to preserve any existing formatting or placement of the numbers.

Include a version number in the names of all files.

When you are working on a document, regularly save it to a new version number, and keep the old ones as a form of backup.

For pictures and graphs, switch off “Float over text”. It makes it much easier to control their position. You do this by selecting the picture or graph and editing its properties.

When copying graphs from Excel into Word, do it as a picture, rather than a spreadsheet object. To do this you should hold down the shift key before you select Edit|Copy in Excel. This stops Word from saving an entire copy of the spreadsheet behind every chart.

If you use page headers in your thesis, the header should not appear on the first page of the chapter. Within File|Page setup switch on “Different first page” before you start creating headers and footers. You will then have to use the page number insertion facility within Page setup to insert a page number counter, and you’ll have to do it twice: once for the first page and once for the rest. If you use Insert|Page numbers in some versions of Word it switches off “Different first page” and you have to start the whole process again. Very annoying.

If annotating graphs in any way, do it in Excel before you import it into Word. That avoids having lots of floating objects in Word, which can often be troublesome (e.g., by getting separated from their graph).

David Pannell, The University of Western Australia

Further reading

Some advice for postgraduate research students

13 – Global warming: book reviews

The latest issue of the Australian Journal of Agricultural and Resource Economics contains two reviews I wrote on books about global warming/climate change. Both books are highly critical of aspects of what we are told about global warming by the Intergovernmental Panel on Climate Change (the IPCC).

The less controversial one is Climate Change Policy after Kyoto: Blueprint for a Realistic Approach, by Warwick, J. McKibbin and Peter J. Wilcoxen. McKibbin is a highly credentialed Australian economist. In fact he is a member of the board of the Reserve Bank of Australia, so he has some direct influence over the daily lives of all Australians through their decisions about interest rates. McKibbin and Wilcoxen are highly critical of the Kyoto Protocol, arguing that it “is very strict in theory, but completely ineffective in practice”. They believe that the Kyoto Protocol “is economically flawed and politically unrealistic”. Their proposed alternative is a “hybrid” policy, combining features of pollution taxes and tradable pollution permits in a way designed to capture the advantages of each.

McKibbin and Wilcoxen very effectively portray the uncertainties inherent in making projections about global warming and its impacts and they note that there is no reason to believe that the uncertainties will be reduced very much in the near future.

The compounding uncertainties are daunting. There is uncertainty about economic growth and technological change over the coming century. Even if we could predict them, there would still be considerable uncertainty about carbon emissions. Even if we could predict carbon emissions, there would still be uncertainty about average temperatures. Even if we could predict average temperatures, there would still be uncertainty about adverse climate outcomes and their spatial distribution. Even if we could predict climate outcomes, there would still be considerable uncertainty about their economic, social and environmental significance. Overlying all that is uncertainty about the costs and consequences of proposed policy interventions. The authors make it clear that the best available information is actually rather weak.

Christopher Essex and Ross McKitrick, authors of Taken by Storm: The Troubled Science, Policy and Politics of Global Warming, go much further than that. They set out a “Doctrine of Certainty”, consisting of familiar assertions that are to be accepted without question, because, as the Doctrine’s supporters say, “The time for questioning is over.” The Doctrine is:

  1. The earth is warming.
  2. Warming has already been observed.
  3. Humans are causing it.
  4. All but a handful of scientists on the fringe believe it.
  5. Warming is bad.
  6. Action is required immediately.
  7. Any action is better than none.
  8. [Expressions of] uncertainty [about the science] only cover the ulterior motives of individuals aiming to stop needed action.
  9. Those who defend uncertainty are bad people.

In summary, the message of the book is, “The Doctrine is not true. Each assertion is either manifestly false or the claim to know it is false.”

It’s a wonderfully entertaining book, as well as making the reader doubt everything they thought they knew or believed about climate change.

Essex and McKitrick are highly critical of the IPCC, on a range of fronts. For example, they argue that the IPCC’s estimates of adverse impacts from global warming are based on projections and assumptions of the flimsiest basis, and are biased towards the sensational. Even “low end” scenarios used by the IPCC are high compared to historical and current trends (a point also made by Castles and Henderson in a study highlighted in The Economist of 6 November 2003).

The IPCC, they say, has been cavalier and misleading in exploiting adverse events to promote its agenda (e.g. attributing glacier melt in the Himalayas to global warming, and using this to promote CO2 cutbacks, when in fact the trend of air temperatures in the Himalayas has shown no warming).

Most importantly, the IPCC’s own modelling indicates that the Kyoto protocol, even if fully implemented and effectively enforced, would have a miniscule impact. As an investment in our future welfare, it does not nearly stack up. Given the likelihood that scaling up Kyoto would result in increasing marginal costs and decreasing marginal benefits, a larger response would be even less attractive – indeed, disproportionately so.

To me, this seems to be the key point. I am not in a position to judge whether all of the physical science presented by Essex and McKitrick is sound, but arguments about that seem of secondary importance when the IPCC’s own projections, placed into an economic framework, do not support the policy response being advocated.

David Pannell, The University of Western Australia

Further reading

Pannell, D.J. (2004). Review of ‘Climate Change Policy after Kyoto: Blueprint for a Realistic Approach’, by Warwick, J. McKibbin and Peter J. Wilcoxen, Australian Journal of Agricultural and Resource Economics 48(2): 381-384.

Pannell, D.J. (2004). Review of ‘Taken by Storm: The Troubled Science, Policy and Politics of Global Warming’, by Christopher Essex and Ross McKitrick, Australian Journal of Agricultural and Resource Economics 48(2): 377-381.

12 – W.E. Wood

W.E. Wood was a railway engineer working in the wheatbelt of Western Australia who, in 1924, was the first to publish a correct diagnosis of the causes of water salinisation from dryland salinity. In honour of this achievement, the National Dryland Salinity Program named its national award for salinity research after him. Last Tuesday, August 3, I was lucky enough to receive the W.E. Wood Award for Salinity Research for 2004 at the dinner of the Salinity Solutions Conference in Bendigo. Here is a tidied up version of my brief acceptance speech for the award.

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Thank you to the National Dryland Salinity Program for this award. I am honoured to be associated with W.E. Wood in this way, and honoured to be bracketed with the four previous winners of the award. My research is quite different to theirs, and I am grateful to the NDSP for being willing to broaden their consideration of potential winners into an area that many people would not think of as a core area of salinity research.

I would like to acknowledge the many co-researchers, collaborators and research students who contributed in various ways to my salinity research, and my employers and funders who supported the research: The University of Western Australia, the Cooperative Research Centre for Plant-Based Management of Dryland Salinity, and the Grains Research and Development Corporation. Thanks also to the colleagues who, from an early stage in the research, sat through discussions or write-ups on the apparently wild conclusions I was reaching. Most importantly, thanks to my family for putting up with all the time, energy and absence that has gone into my salinity work.

What I have tried to do in my research is to bring together the latest evidence from all the relevant disciplines into an economic framework to address some of the big questions about dryland salinity. Nobody had previously done this, at least not to the same extent, and I soon realised why. Dryland salinity is such a complex and diverse issue that an attempt to study it comprehensively can overwhelm you. But it is important to make the attempt because you reach conclusions that are different and that really matter.

There are no easy solutions to most of the salinity problems we face. I believe it is important to take a very long-term perspective on thinking about salinity, and when you do that you realise the folly of relying mainly on on-ground works, as we are currently doing in the National Action Plan for Salinity and Water Quality. Doing this, we will fall far short of the potential for policy to make a real difference to salinity.

On the agriculture side, my key conclusions included the crucial role of R&D to develop new, economically attractive methods for managing salinity, the importance of adapting to salinity and making productive use of it, and the importance of localised management in many cases, rather than Integrated Catchment Management.

On the non-agricultural side my analysis highlighted that we should be doing very hard-nosed prioritisation of funding, and tight targeting of funds to only the few most important of the assets under threat, rather than allocating funds thinly to many assets, as we have tended to do. I highlighted the role of on-farm economics as a key element in the catchment-wide economics of salinity management, and again concluded that plant-based R&D was a key response for some of the asset types at risk.

The bottom line from my research is that our salinity policies need a major overhaul. One of the reasons I am most pleased to win the W.E. Wood award is that the prestige that comes with it may help me to more effectively push for such an overhaul.

David Pannell, The University of Western Australia

Further reading

Ridley, A., and Pannell, D.J. (2005). The role of plants and plant-based R&D in managing dryland salinity in Australia, Australian Journal of Experimental Agriculture, 45: 1341-1355. Full journal paper (127K pdf)

Pannell, D.J. (2001). Dryland Salinity: Economic, Scientific, Social and Policy Dimensions, Australian Journal of Agricultural and Resource Economics 45(4): 517-546. Final journal version (212K pdf file) also available via the Journal homepage: http://onlinelibrary.wiley.com/doi/10.1111/1467-8489.00156/abstract  Other publications on salinity

11 – Politics and dryland salinity

This week I am presenting a paper on “Politics and Dryland Salinity” at a conference in Bendigo, Victoria, called Salinity Solutions: Working with Science and Society. The conference organisers released a media release based on the paper. Here it is:

Politics swamp salt action

Australia’s political environment is inhibiting the development of good salinity policy, according to Professor David Pannell, speaking at the Salinity Solutions Conference in Bendigo.

Professor Pannell, from the CRC for Plant-based Management of Dryland Salinity, identified weaknesses in national and state salinity policies that result from a range of political influences.

‘The short time frame of politics makes it very difficult to bring in sound strategies that would only pay off in the longer term,’ said Professor Pannell.

‘For example, research to develop improved plant-based salinity management options will take some years to deliver, but will ultimately have a much greater impact than putting all the resources into on-ground works in the short term.’

Professor Pannell also called for more time and leadership to be provided to allow regional salinity plans to be based on sound science. ‘Currently, planning for the use of public funds from the National Action Plan for Salinity and Water Quality is proceeding rapidly, but in most regions the plans are not sufficiently informed by science or economics,’ he said.

‘The regional salinity plans do account for local opinions on priorities, which is politically sound, but sometimes the resulting actions are not cost-effective,’ Professor Pannell argued.

Professor Pannell noted that politics tends to prefer simple solutions, applied broadly, while salinity is very complex and highly variable from place to place.

‘In New South Wales and Victoria, the main concern is with salinisation of waterways, while in Western Australia it is land salinisation, affecting agriculture, infrastructure and biodiversity, and the required approaches are very different,’ said Professor Pannell.

‘Another concern is political tensions between national and state governments,’ he said. ‘One result is that the national government relies too heavily on Catchment Management Authorities for salinity management, when in many cases it would be more appropriate for state governments to take the lead and the responsibility.’

On the positive side, Professor Pannell noted that policy makers are starting to appreciate that scientific and economic understanding of salinity has advanced greatly in recent years, and as a result substantial improvements in the effectiveness of salinity policy are likely to occur in coming years.

END

David Pannell, The University of Western Australia

Further reading

Pannell, D.J. (2005). Farm, food and resource issues: politics and dryland salinity, Australian Journal of Experimental Agriculture 45: 1471-1480. Full journal paper (103K) Summary version (19K)

Ridley, A.M. and Pannell, D.J.(2004). The role of plants and plant-based R&D in managing dryland salinity in southern Australia. Working paper, School of Agricultural and Resource Economics, University of Western Australia. full paper (109K)

Revised version published as

Ridley, A., and Pannell, D.J. (2005). The role of plants and plant-based R&D in managing dryland salinity in Australia, Australian Journal of Experimental Agriculture, 45: 1341-1355. Full journal paper (127K pdf)