Measuring the Economic Impact of Agricultural R&D

Investing in agricultural research and development pays off big time. Just how big is still under debate, but experts agree that investing in farm innovation reaps an amazing variety of rewards—economic, health, and social rewards.

Sometimes the benefits are grossly exaggerated. More often, they can be underestimated.

According to a report at the Australian Agricultural and Resource Economics Society, a late 1990s study on the returns of one agriculture R&D project claimed a 700,000% annual rate of return for that project. The authors of that report called this “extreme and implausible.”

At a 700,000% rate of return on investment, investing one dollar would yield “$2,401 trillion after four years,” they blithely reported in their footnotes. “The GDP of the world in 1997 was $29 trillion.”

Alston et al., the researchers behind this study, used that preposterous example to illustrate how hard it can be to nail down the economic benefits of agricultural research. The gains depend on the type of crop and technology used, and estimates are all over the map. However, a better appreciation of the benefits of ag R&D could help mobilize more support for smallholder farmers.

Imagine the potential

Investors like to know how much benefit can be gained from their investments. This is typically measured in dollar terms—the economic payback. This is not the only way to measure the benefits of ag R&D, but it’s the most common way.

Many diversified retirement and endowment funds aim for roughly a 5% rate of return after inflation. Stocks have returned closer to 10%, but that’s before inflation. Government debt in developed countries typically comes with yields in the low single digits–sometimes even negative in recent years.

Now let’s take a look at the estimated economic rates of return on investing in farming innovation–not just to investors but to society as a whole.

Looking at multiple economic studies of ag investments, the US Department of Agriculture says work on developing hybrid corn in the 1940s and 1950s yielded annual economic returns of 35% to 40%.

USDA reviewed several studies on the impact of ag R&D covering projects from the 1940s to 1980s, and all the studies showed rates of return that would astound any investment banker.

At the low end, one study showed that work on hybrid sorghum from 1940 to 1957 yielded annual returns of 20%. At the high end, USDA cited another study showing a 1977 R&D project focused on soybeans yielded a 118% annual rate of return. As you can see, the range is wide but the numbers are impressive.

No two agricultural R&D projects are the same. Likewise, the rates of return predicted and realized on these projects are never the same. There’s no single precise figure, and many variables are at play, but research into this question has uncovered that the benefits of investing in farmers, including smallholder farmers, are massive.

Thus, our commitment at Grow Further to mobilizing more support for farming R&D in the developing world.

Patience is needed

The study published by the Australian Agricultural and Resource Economics Society (AARES) found the same wide range of estimated economic benefits.

The authors looked at 289 separate studies on ag R&D returns. Most studies they looked at found returns of 20% to 60% for ag research alone in economic terms. The average return from research-only studies (not including returns from spending on ag extension services) was estimated to be 99.6%.

Are these figures impossibly high? Perhaps, but at least sometimes researchers have deliberately lowballed their estimates to make them more believable. An anecdote often brought up by our founder and CEO Peter Kelly is one case in point. Shortly before World War I, the US Secretary of Agriculture directed his team to the economic impact of agricultural R&D spending. When they came back with a figure of $1,000 in benefits for every $1 spent, he ordered them to scale it back to $500—only then would Congress and the American public believe it, he said.

There are other, often far greater societal benefits to be realized: better food security, better nutrition, healthier families, and more stable communities. The one common denominator is that it takes time to see these benefits. An investment in agricultural R&D of a small fraction of 1% of global GDP over roughly the past 150 years has not only freed billions from farm labor, but also made the current world population and modern society possible.

A study published last year in Agribusiness found that public R&D in agriculture helped Chile boost farm productivity by 2.11% every year since 1964. That may seem like a small number, but this means that Chile’s agricultural productivity has more than tripled thanks to R&D spending—a huge improvement, but only seen after a long time period.

As the Agricultural Science and Technology Indicators (ASTI) project said, “Agricultural research investment is positively associated with high returns, but these returns take time—often decades—to accrue.” That’s because these investments must follow growing cycles, and it can take time for innovations to move from one or a handful of farms to thousands and hundreds of thousands of farms.

Grow Further is now putting our partners’ generous donations to work investing in two projects: work in developing a commercial variety of the Bambara groundnut, and R&D to produce a mobile app to help smallholder farmers detect threats to their crops. We’re planning to announce another round of grants soon, and as with the first grantees we’re looking for projects that promise big returns to society.

Ag R&D spending is robust in the developed world but lags in developing regions like Southeast Asia and sub-Saharan Africa, which invest only roughly 1/10 of as high of a share of their agricultural output in R&D. Developing countries don’t invest in their smallholder farmers nearly as much as they should, and in Africa “the involvement of both for-profit and nonprofit private agencies in agricultural R&D remains limited in most countries,” ASTI said.

Grow Further is proud to help fill this gap.

With patience and perseverance, we will achieve remarkable improvements in smallholder farming and food security. We know this because the data is clear: investing in agricultural R&D is one of the best investments anyone can make.

— Grow Further

Photo credit: Farms outside Chainpur, Nepal, part of USAID’s Measuring the Impact of Conservation Enterprise Retrospective program. USAID/Jason Houston (public domain).

Subscribe to Our Newsletter

Categories

Newsletter Signup

Newsletter Sign-up Popup