Lecture 13. Resource valuation

Summary

Calculating the monetary and non-monetary value of agricultural commodities, resources marketed on a regional level, and plants used for subsistence, has become a key issue in ethnobotany. Although economists have traditionally focused on the monetary value of plant resources (and especially global commodities), ethnobotanists, conservationists and people in general are interested in subsistence, recreational, spiritual and environmental services benefits as well.

There are differences in valuation for the various resource pools discussed in lecture 10. The primary pool of approximately 100 species that are the staple plants of the world are typically valued as market commodities affected by international supply, demand and tariffs, as studied by agricultural economists. Among the secondary pool of some 1000 species important on a regional or national scale, there are many cultivated and managed resources that have a fluctuating market value; the price of extractive resources is often affected by phases of expansion, stabilization, decline and eventual cultivation. The tertiary pool composed of an estimated 50,000 species that serve the needs of people in subsistence economies include some locally traded goods valued at marketplace prices, but there are also many subsistence resources with non-monetary value often expressed in terms of nutritional, medicinal or other qualities. The reserve pool of plants not currently used by people have important option values (for example, future values discovered by bioprospecting enterprises), indirect values (in terms of environmental services) and direct, non-monetary values (such as recreational and spiritual returns. Increasingly, these resources are being given monetary values in "environmental marketing" appraisals, such as carbon offset schemes.

Definitions

• Value is typically defined by economists as a fair return or equivalent in goods, services or money for something exchanged. Value is often calculated as monetary worth. However a return is more broadly interpreted as something of direct, indirect or option value, concepts that are not always easy to translate into monetary value. Direct values, the easiest to assess, are derived from the production and use of a good in a commercial or non-commercial (i.e. subsistence) endeavour. Indirect values commonly refer to environmental services delivered by a certain practice – for example maintaining genetic diversity in crops, enhancing a watershed or reducing erosion. Option values are derived from the future use of a resource, typically articulated as the potential of a resource to meet the demands of coming years or generations.

• Discount rate is defined conventionally as the interest on an annual basis deducted in advance on a bank or other type of loan. It is, for example, the amount charged by a central bank for advances.

• Externality is a cost that is generated by producers of a good but not paid for by them. Extracting logs from a hillside may cause increased sedimentation of streams, the cost of which is borne by downstream farmers who use the water but get no benefits from logging. Economists consider an externality to exist when production or consumption of a good or service by one economic unit has a direct effect on the welfare of producers or consumers in another unit, without compensation being paid. Externalities are widespread in the production processes of crops, forest products and fisheries.

• Opportunity costs are the benefits foregone by using a scarce resource for one purpose instead of for its best alternative use. For example, a farmer who maintains a genetically diverse crop that provides a lower return than a genetically uniform high-yielding variety, but who serves a valuable function as the conserver of genetic diversity, is paying an opportunity cost. A key question is how to compensate local farmers, forest product gatherers and other local producers for the opportunity costs they incur while engaging in traditional practices that may be environmentally appropriate.

The last two definitions are taken from IPGRI. 1997. Ethics and Equity in Conservation and Use of Genetic Resources for Sustainable Food Security. Rome, International Plant Genetic Resources Institute.

Examples:

Calculating net present value of non-timber forest products:

One of the most famous attempts to put a dollar value on non-timber forests products was carried out by a multidisciplinary team composed of an ecologist, a botanist and a resource economist. Charles M. Peters, Alwyn H. Gentry and Robert C. Mendelsohn based their findings on an inventory of 1 ha of tropical primary forest near the village of Mishana, Peru. They found 50 botanical families, 275 species and 842 trees with a diameter of l0 cm or greater. Of these, 72 species (26.2%) and 350 individuals (41.6%) yield products that have a market value in the nearby city of Iquitos. Sixty species produce timber, 11 species (including four palms) provide edible fruits and one tree species yields rubber.

These researchers calculated the annual production of the fruit and latex-bearing species and measured the volume of commercial wood in each timber tree. Prices for these products were estimated by visiting local marketplaces, sawmill operators and the governmental office that controls rubber prices.

They discovered that the 1 ha of forest Mishana fruit worth almost $650 each year and that the rubber yield is worth about $ 50 annually. They deducted labor and transportation costs from these totals to arrive at a net annual revenue of $400 from the fruits and $22 from the rubber.

The assessment of total monetary value must take into account not only the current market value of one year's harvest, but also the potential production in future years and alternative opportunities for using the land and investing profits. In the assessment of minor forest products in the tropical forest of Peru, these researchers used a simple equation to estimate the net present value (NPV) of minor forest products:

NPV = V/r,

where V is the net revenue produced each year and r is an inflation-free discount rate of this annual income. For the purpose of this calculation, they set the inflation-free discount rate at 5% and assumed that 25% of the fruit would be left in the forest each year for regeneration.

Using this equation, they arrived at a net present value of $6330 per hectare. They further calculated that timber from the plot, when harvested in a way that does not damage the production from fruit and rubber trees, would have a financial worth of $490. This gives a total NPV of $6820. By contrast, the amount of money that could be earned by cutting all the timber in one operation is estimated at a little over $1000. Based on these calculations, Peters, Gentry and Mendelsohn argue that sustainable management of forest would yield greater long-term financial benefits than clear-cutting.

From the chapter on Economics in Martin, G. 1995. Ethnobotany. London, Chapman and Hall.

Questions for discussion:

• Are recent attempts to ‘put a price’ on biodiversity successful?
• What are the links between valuation, land tenure and access to resources?
• Give some examples of private sector enterprises that seek to externalize environmental costs, thus maximizing profits? How can these costs be internalized?

Readings:

Balick, M.J. and R. Mendelsson. 1992. Assessing the economic value of traditional medicines from tropical rain forests. Conservation Biology 6:128-130.

Ehrlich, P.R. and A.H. Ehrlich. 1992. The Value of Biodiversity. Ambio 21:219-226.

Homma, A.K.O. 1992. The dynamics of extraction in Amazonia: a historical perspective. Advances in Economic Botany 9:23-31.

Kellert, S.R. 1996. The Value of Life: Biological Diversity and Human Society. Washington, Island Press.

Martin, G. 1995. Ethnobotany. London, Chapman and Hall. Chapter on Economics.

Mendelsohn, R. and M.J. Balick. 1995. The value of undiscovered pharmaceuticals in tropical forests. Economic Botany 49:223-228.

Mendelsohn, R. and M.J. Balick. 1997. Valuing undiscovered pharmaceuticals in tropical forests. Economic Botany 51:328.

Peters, C.M., A. Gentry and R.O. Mendelsohn. 1989. Valuation of an Amazonian rainforest. Nature 339:655-656.

Pinedo-Vasquez, M. D. Zarin and P. Jipp. 1992. Economic returns from forest conservation in the Peruvian Amazon.

Perspective for discussion:

In order to understand the difficulty of assessing option values, compare the following excerpts from articles in Economic Botany by Mendelsohn and Balick:

"Experience with large samples of botanical tests over the last two decades suggests that between one in 50,000 and one in a million tests result in viable commercial drugs. We conservatively assume the lower success rate for the full population of plants of one per million. Applying this success rate to the total potential number of tests suggests there are about 375 (375 million tests x one per million success rate) potential drugs in tropical forests. With its limited number of screens, an individual company could probably locate only between 38 to 56 (38 million x one per million to 56 million x one per million) of these drugs if it examined all 125 000 flowering plant species.

Altogether there are 47 drugs which have already been discovered from tropical forests including vincristine, vinblastine, curare, quinine, codeine, and pilocarpine. Given our estimate that there are about 375 total drugs in the forest, scientists have discovered 12.5% or one in eight of these drugs to date. Approximately 328 drugs remain "hidden" in tropical forests at present. Given the assumptions listed above, a private company could expect to find between 33 to 49 of these new drugs if the entire resource was examined...

If a private company were given the rights to develop all the drugs from tropical forests, the gross revenue from each potential drug would be worth approximately $96 million. As discussed in the earlier section, a single company should expect to find between 33 to 49 new drugs if it examined all tropical plants. Multiplying the number of drugs times their individual value, the company should expect gross revenues of $3.2-4.7 billion (33 to 49 x $96 million). Assuming that the desired samples from across the world could be collected at an average cost of $100 each, collection costs would amount to $75 million (750000 samples x $100). Assuming that test screens cost another $ 100 each adds an additional expense of $360 – 530 million ($ 100 year test x 36 million tests to $100 x 53 million). The net revenue from the right to the forest is the gross revenue minus costs, $2.8 to 4.1 billion ($3200 - $75 - $360 million to $4700 - $75 — $530 million)."

From Mendelsohn, R. and M.J. Balick. 1995. The value of undiscovered pharmaceuticals in tropical forests, pages 224 and 225.

"A computational error appears in our manuscript entitled "The Value of Undiscovered Pharmaceuticals in Tropical Forests". Our original calculations indicated that the value of undiscovered drugs is worth about $96 million to a pharmaceutical company and that there are approximately 33 to 49 new drugs that a typical company could discover if it tested all tropical plants. Potential gross revenues would range from $3.2-4.7 bi11ion. Collection costs for the plant material would amount to $75 million. However, testing for active drugs using screens is likely to cost between $3.8-5.6 billion (which we mistakenly calculated as $360-530 million). The cost of finding new drugs from a blanket testing program exceeds the expected benefits for private companies. Although pharmaceuticals have high market values, "undiscovered" drugs have little market value because they are expensive to find."

From Mendelsohn, R. and M.J. Balick. 1997. Valuing undiscovered pharmaceuticals in tropical forests, page 328.

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