Measuring the Returns to Agricultural and Food Research and Development in Ireland: An Ex Ante Case Study

Abstract

Research provides many of the innovations that are essential to Irish agriculture’s ability to sustain and expand economic growth and maintain competitiveness. The agricultural and food research agenda in Ireland and internationally has broadened beyond seeking to just augment conventional productivity and now seeks to provide the means of enhancing the agri-food sector’s competitiveness by improving the quality of inputs and outputs, the efficiency of production systems and the development of new products. Recently there has been an increased emphasis on developing Ireland as a ‘knowledge based society’ and most recently Ireland and more specifically the Irish agri-food sector’s development as a “knowledge base bio-economy” has been advocated (Teagasc, 2008). With science, technology and innovation now a major focus of Irish public policy, Ireland is committed to increasing research spending to 3 percent of Gross Domestic Product (GDP) per annum by 2011. Accompanying this greater emphasis on the importance of research there has been significant injections of public funds into the public research systems. With increased funding arise questions of accountability, i.e. how to prioritise expenditure and measure and evaluate the outcomes of research projects. This project sets out to address what we identified as a key gap in the Irish literature - the evaluation of returns to agriculture and food research that improves the quality of a product, what we have termed demand lifting research. The project sought to address this by evaluating, as a case study, the impact of agricultural research that improves the quality of Irish lamb. If consumers are willing to pay higher prices for what they believe to be a better quality or healthier product then an evaluation of the returns to demand lifting research should be incorporated into the general assessment of the benefits that flow from investment in agricultural and food research. To date the focus of the evaluation of research benefits in Ireland has been on the returns to supply shifting research (that is to cost reducing research). In general agricultural economists have to date avoided jointly modelling technological improvement and associated changes in product quality. The key features of the comparative static partial equilibrium model developed in this project are linear supply and demand function specifications, parallel shifts of supply and demand schedules, and the use of the economic surplus methodology to evaluate the costs and benefits of innovations. With the model developed, and using the economic surplus methodology, we can allocate costs and benefits of demand lifting research between producers and consumers. We use the comparative static partial equilibrium model developed in this project to provide an assessment of the gains to Irish producers and Irish consumers of research that leads to a quality improvement in lamb. This evaluation has been based on a set of assumptions regarding, functional form, elasticity of demand and supply, and the nature of the demand and supply shift related to the demand lifting research innovation. A series of scenarios were analysed and the results used to assess the impact of demand shifting sheep research. In the first scenario the research based improvement in the quality of Irish lamb was assumed not to be associated with associated any change in the costs of production; in the second scenario the assumed increase in production cost equalled the per kilo premium associated with the improved quality of the lamb produced product. In the third scenario the increase in costs of production were assumed to equal 50% of the premium resulting from the improvement in product quality. For the purpose of this study the first two scenarios analysed set the upper and lower bounds for the change in economic surplus in the Irish lamb market, we consider the third scenario to be a conservative estimate of the returns to research. In this third scenario the innovations leading to higher quality lamb leads to a gain in economic surplus of €6.405 million per annum. Given that a large proportion of the improvements in quality will flow from improved genetics it is sensible to consider the surplus as a permanent addition and thus to consider the discounted present value of the additional economic surplus that is attributable to the research induced improvement in lamb quality. The present value of the total sum of benefits over a period of 20 years was estimated to be €79.8205 million.It was, not possible to estimate the costs involved in research that can be specifically linked to improving the quality of lamb, as this research is not a stand alone project and would have evolved over many years from work at the research centre in Athenry (and earlier work at Belclare). The values for the gains in total economic surplus and the present value of the future stream of benefits from such research can be interpreted as the maximum amount that should be spent in order to achieve the quality improvement.