Land Use Policy 90 (2020) 104331

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Land Use Policy

journal homepage: www.elsevier.com/locate/landusepol

Economic and financial sustainability of an Acacia decurrens-based Taungya T

system for farmers in the Upper Blue Nile Basin, Ethiopia
Zerihun Nigussiea,c,*, Atsushi Tsunekawaa, Nigussie Haregeweynb, Enyew Adgoc, Mitsuru Tsuboa,
Zemen Ayalewc, Steffen Abeled
a
Arid Land Research Center, Tottori University, Tottori, Japan
b
International Platform for Dryland Research and Education, Tottori University, Tottori, Japan
c
College of Agriculture and Environmental Sciences, Bahir Dar University, Bahir Dar, Ethiopia
d
Department of Sustainable Regional Management, University of Applied Forest Sciences, Rottenburg, Germany

A R T I C LE I N FO A B S T R A C T

Keywords: The use of tree-based fallowing as a sustainable land management system may serve as an important develop-
Acacia decurrens mental pathway out of poverty across drought-prone watersheds in the Upper Blue Nile Basin, Ethiopia. This
Drought study employs a financial analysis technique, the computation of net present values, to explore the financial
Sustainable livelihoods approach viability of farmers’ investments in an intercropping farming system known as taungya. The analysis employs
Upper Blue Nile Basin
scenarios that include different farming systems, such as A. decurrens (J.C. Wendl.) Willd. cum teff (Eragrostis tef)
Cost benefit analysis
intercropping, A. decurrens monocropping, and teff monocropping, as well as changes in output (charcoal and
teff) prices and the discount rate. In addition, the time of sale is evaluated in terms of the distribution of profits
between buyers and sellers and between sharecroppers and landowners. The intercropping practice (A. decurrens
cum teff in the first year) tended to be more profitable than the alternative systems. Financially constrained
farmers who have to sell their stands early, however, forego gains. Profits from stand sales later in the 5-year
evaluation period were more equally shared between sellers and buyers. Sharecropping profits for farmers
ranked among the lowest of the computed profits. A sensitivity analysis revealed that an increase in the discount
rate tends to have a more detrimental effect than price fluctuations on the profitability of acacia-based taungya
systems, although sharp price fluctuations could affect profitability and cause a farmer to shift back to an annual
crop system. Despite their higher profitability, tree-based systems impose a risk of liquidity bottlenecks on
farmers throughout the 5-year investment period, which implies that those who are endowed with land or who
are more financially well-off can benefit from the required 5-year investment, but it may be more difficult for
those who lack land or the necessary financial resources. Providing affordable financing for poorer and landless
farmers could increase farmers’ use of the taungya system and allow a more equitable distribution of benefits
among the rural population.

1. Introduction However, small-scale farmers’adoption and sustainable use of the land

Land degradation is among the most important environmental
challenges facing Ethiopia (Adimassu et al., 2016; Ebabu et al., 2019;
Nigussie et al., 2017b). Although the problem is unevenly distributed
and takes various forms across the country, soil erosion and nutrient
depletion present significant threats to agricultural productivity and
food security in the north-western highlands of the Upper Blue Nile
Basin (Adimassu et al., 2016; Bewket, 2007; Ebabu et al., 2019). To
alleviate these problems, the Government of Ethiopia has been perusing
numerous land restoration and afforestation programs for almost a half
century (Bewket, 2007; Ebabu et al., 2019; Nigussie et al., 2017c).
management technologies and practices being promoted by such pro-
grams remain meager (Adimassu et al., 2016; Nigussie et al., 2018,
2017b). In this milieu, a tree-based intercropping land use system could
significantly contribute to the rehabilitation and restoration of de-
graded lands, while also ensuring substantial short-term economic gains
by small-scale farmers’ (Kassie, 2015; Nigussie et al., 2017a; Wondie
and Mekuria, 2018).
The main motivation of small-scale farmers for planting fast
growing A. decurrens (J.C. Wendl.) Willd. (hereafter “acacia”) woodlots
is to generate additional household income, mainly through converting
acacia wood to charcoal (Nigussie et al., 2017a; Teshager Abeje et al.,

⁎
Corresponding author at: Arid Land Research Center, Tottori University, Tottori, Japan.
E-mail address: zeriye@gmail.com (Z. Nigussie).

https://doi.org/10.1016/j.landusepol.2019.104331
Received 31 January 2019; Received in revised form 11 October 2019; Accepted 27 October 2019
Available online 08 November 2019
0264-8377/ © 2019 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/BY-NC-ND/4.0/).
Z. Nigussie, et al.
2019; Wondie and Mekuria, 2018). Farmers consider the cultivation of
acacia woodlot as a livelihood strategy to compensate for the declining
income from annual crops. During the plantation establishment phase,
farmers traditionally tend to intercrop acacia trees with annual crops
(e.g., teff [Eragrostis tef], wheat, or barley) and later grass for hay, a
practice known as taungya farming (Kassie, 2015; Nigussie et al.,
2017a). Taungya farming offsets the income loss in the first couple of
years of plantation development, and it also contributes to the im-
provement of soil fertility conditions of cultivated lands and the re-
habilitation of degraded hillsides(Nigussie et al., 2017a; Wondie and
Mekuria, 2018). The part of the acacia tree not suitable for making
charcoal is usually used by farming households as fuelwood, which
otherwise would have to be collected or purchased elsewhere (Kassie,
2015; Nigussie et al., 2017a).
Recent studies have shown that the acacia-based taungya system
also has several advantages in terms of ecological sustainability. Sultan
et al. (2018) found that acacia woodlots have a lower runoff coefficient
value (25 %) as compared to grazing and cultivated lands (36 % and 26
%, respectively), implying that they help to reduce flooding risks across
watersheds. Kassie (2015) reported that acacia plantations have sig-
nificantly higher soil organic matter and total nitrogen contents as
compared to adjacent crop lands, because acacia are nitrogen-fixing
plants. Kasongo et al. (2009) also found that long-term Acacia aur-
iculiformis fallows (> 10 years) contribute to a significant increase in
the nutrient supply and nutrient-holding capacity of the soil. Therefore,
the acacia-based taungya system helps to improve land resources
through sequestering more carbon and thus also helps to mitigate cli-
mate change.
In this study, we evaluated whether this ecologically preferable
system also is economically preferable for farmers, and if so, under
which conditions. In particular, we examined aspects of financial in-
vestment and profitability, as well as the distributional effects (e.g.,
landless farmers vs land owners). In other contexts in rural areas in
Ethiopia, profitability has proven to be a decisive factor in farmers’
adoption of new technologies, particularly small-scale resource-poor
farmers’ reluctance to make long-term investments that require long
pay-off periods (Gwavuya et al., 2012).
1.1. Conceptual framework: sustainable livelihoods approach
The sustainable livelihoods approach comprises ecological, social,
and economic sustainability. It depicts a process of creating sustainable
outcomes in terms of economic and social well-being, considering the
fact that resources, institutions, processes and strategies are allocated to
create such an outcome under a given political framework (Fig. 1).
In addition to the outcomes and trade-offs (or potential conflicts)
evaluated in the above approach, resources have to be analyzed not
only with respect to their contribution to outcomes, but also with re-
spect to their sustainable utilization and potential trade-offs in resource
allocation and its sustainability dimensions. The dimension of vulner-
ability, namely shocks, short term (e.g., seasonal) volatility, and long
Fig. 1. The analytical framework of the sustainable livelihoods approach (source: Carney, 2003).
2
Land Use Policy 90 (2020) 104331
term sustainability trends or the lack thereof (so-called critical trends),
also plays an important role in the sustainable livelihoods approach.
One component of livelihood resources is economic activity and the
investment of financial capital. Investments (in cash and in kind) in
different economic activities (i.e., diversification) can be made for
various purposes, for example, subsistence or to accumulate wealth
(Baffoe and Matsuda, 2017). In the case of the acacia systems studied,
we assumed that investments into the new system are mainly made to
generate economic wealth rather than for subsistence needs. These in-
vestments consequently have to be assessed with respect to their con-
tribution to livelihood outcomes (e.g., more income or improved well-
being) and their sustainable use. The latter of these must be assessed
with respect to the interaction with other resources and their sustain-
able use, as well as the above mentioned volatility and risk assessment.
Furthermore, the investment has to be assessed with respect to which
social strata of the population would profit from the investment, that is,
whether there are any inequities involved.
1.2. Scope of the study
Three socio-economic aspects are particularly important for the
assessment of the acacia-based taungya systems in the sustainable li-
velihood framework.
The first is the profitability of investing in acacia short rotation
plantations. In economic terms, an investment is both more profitable
and sustainable if it (1) yields higher profits than alternatives and (2)
the capital stock is either enhanced (according to the shareholder
value), is not degraded, or at least is not degraded to a point where
future profitability is jeopardized (for a treatment of capital stocks and
degradation vs aggradation processes (see Dabbert, 1994)).
To assess the financial viability of an investment, the net present
value (NPV) approach is commonly used, and this is particularly the
case with agricultural investments (e.g., Kapp, 1998). This approach is
based on and combined with cash flow and cost benefit analyses (CBA)
(e.g., Page et al., 2010).
In addition to economic sustainability, volatility and risk patterns
need to be considered. We assume that farmers acquire food in one of
two ways. They either use food from their own production or need a
stable cash income from agriculture that enables them to purchase food
on the market, meaning their activities must provide both short term
cash flow and long term sustainable profitability. The cash flow effect
has been neglected in most studies, where only CBA or NPV values are
computed. Although the respective methodology is discussed by
Harrison and Herbohn (2016), little reference has been made to the
conflict between short term cash needs and long term investments
arising for farmers investing in woodlots in developing countries (e.g.,
Duguma, 2013; Maraseni et al., 2018), in smallholder systems of East
Africa (Matthies and Karimov, 2014), or in large agricultural forestry
systems (e.g., Uzunöz and Akcay, 2006).
Some studies have used static variables such as income, assets, or
resource endowment as sustainability indicators, but their development
Z. Nigussie, et al. Land Use Policy 90 (2020) 104331

over shorter and longer periods is not discussed (Quandt, 2018). Only a Table 1
few researchers have included the short term orientation of small-scale Scenario descriptions.
farmers in developing countries in general or the barriers it imposes on Scenario description Production system/interest Values computed
investment adoption (e.g., McCarthy et al., 2011). Specifically, in most rate and analysed
cases forestry systems are more profitable than annual cash crop pro-
Baseline NPV @ 7.5 %: • NPV
• • Cash flow
duction systems, but annual crops provide annual returns and thus
Teff only
steady income, whereas forestry activities have investment costs at the
• Acacia cum teff
beginning and the returns are only obtained after relatively long per- • Acacia only
iods of time (Elevitch and Wilkinson, 2000). Some studies have also Scenario 1: variation of 1a: NPV @ 10 % • NPV
noted that there is a trade-off between food security and investment discount rates • Teff only
• Acacia cum teff
opportunities, particularly in smallholder systems food secure farmers
are more likely to pursue investment opportunities, whereas food in- • Acacia only
1b: NPV @ 11 %
secure farmers are more risk (and investment) averse because of the • Teff only
long payback periods (Jerneck and Olsson, 2013; Ke et al., 2018). • Acacia cum teff
• Acacia only
• NPV
Another risk factor is the potential volatility of output prices. Here,
Scenario 2: variation of 2a: NPV @ 7.5 %, low
we compute the revenues with respect to a potential volatility of prices charcoal revenues charcoal price of 80 ETB/
for charcoal. sack:
In these two respects – profitability and cash flows for subsistence • Teff only
needs, two systems are compared: Acacia plantations – with and • Acacia cum teff

without teff (Eragrostis tef) undercrop in the first year – and teff only as • Acacia only
2b: NPV @ 7.5 %, high
annual crops, the predominant subsistence and cash crops in the study charcoal price of 100 ETB/
area. sack:
The third aspect to be considered is equity in terms of distribution of • Teff only
• Acacia cum teff
•
profits between actors of the value chain, in our case, the farmers and
Acaciaonly
the timber traders. Scenario 3: early stand sales 3a: NPV @ 7.5 %, stand • NPV for farmers
In this study, four scenarios were evaluated (Table 1). We used the sale in year 1: • Cash flow for
NPV approach to evaluate profitability and cash flows for subsistence • Acacia cum teff farmers
needs in two systems: (1) acacia plantations with and without a teff 3b: NPV @ 7.5 %, stand
sale in year 2:
• NPV for traders
(stand buyers)
undercrop in the first year and (2) teff only as an annual crop. Different
sales times (early sales before maturity and sales at maturity) were also • Acacia cum teff
3c: NPV @ 7.5 %, stand sale
• Total NPV for
traders and
assessed in terms of their profitability to farmers and traders, where in year 3: farmers
farmers plant acacia and then sell the entire woodlot to traders who • Acacia cum teff
3d: NPV @ 7.5 %, stand
harvest the trees and make the charcoal. The potential volatility of
sale in year 4:
output prices was also considered by computing revenues with respect
• Acacia cum teff
to different charcoal prices. Scenario 4: sharecropping 4: NPV @ 7.5 %: • NPV for farmers
Finally we examined the distribution of profits between share- • Acacia cum teff • NPV for land
owners/lessors
croppers and land owners, in this case the owner of the factor land.
Here we look at a sharecropping arrangement between landless farmers
Note: ETB = Ethiopian Birr (currency); 1 US$ ≈ ETB 27.5 (at the time of the
(which are often liquidity or land constrained) and land owners, and
analysis).
the respective distribution of profits in two cases: sales of stand at
maturity and convert plantation in to charcoal. The list of scenarios is
tef Zucc.), barley (Hordeum vulgare L.), wheat (Triticum aestivum L.) and
given in Table 1.
potato (Solanum tuberosum L.). Cattle, sheep, donkeys, and horses are
the most common livestock kept by small-scale farmers. Acacia and
2. Materials and methods
Eucalyptus species are the predominant exotic tree species grown in the
watershed (Kassie, 2015). Because of the district’s high population
2.1. Study site
density (224.7 persons per km2) (CSA, 2015), the average landholding
size for smallholder farmers is small (about 1 ha) (Kassie, 2015;
This study was conducted in the Guder watershed, a hotspot for the
Nigussie et al., 2017a).The soil of the watershed is dominated by Ac-
exotic plantation boom in the region, in the north-western highlands of
risols, Luvisols, Leptosols, and Vertisols (Ebabu et al., 2018). According
the Upper Blue Nile Basin of Ethiopia. It is located in Fagita Lekoma
to Berihun et al. (2019) the main land use types in the watershed in
District of the Amhara Regional State, Ethiopia (Fig. 2). The study site
2017 were acacia plantation (35.4 %), cultivated land (32.7 %), grazing
lies between 10°57′ to 11°11′ N, 36°40′ to 37°05′ E. It is located 457 km
land (13.4 %), bushland (6.6 %), forest land (9.5 %) and settlement (2.4
and 107 km from Addis Ababa (the country’s capital city) and Bahir Dar
%) (Fig. 3). Since 2006, when acacia planting sites began to evolve from
(the regional capital city), respectively. The total watershed area is
being around homesteads and along plot boundaries to woodlot plan-
estimated to be 741 ha (Nigussie et al., 2017c; Yibeltal et al., 2019). The
tations (Muluken Tekitikew, personal communication), the area cov-
study site represents a typical watershed in the Ethiopian highlands.
erage of acacia plantations has increased across the watershed at the
The watershed falls within the moist subtropical climate (Berihun
expense of other land use types (Berihun et al., 2019).
et al., 2019; Yibeltal et al., 2019). It has a mean annual rainfall of
The watershed is ideally situated along the Addis Ababa–Bahir Dar
2495 mm, and its mean monthly temperature is 5 to 25 °C. The rainfall
highway, which passes through the watershed. This has made the wa-
pattern is unimodal, with the main rainy season lasting from June to
tershed (1) an important source of acacia seedlings and a distribution
September. Topographically, the watershed is rugged and undulating,
hub for nearby watersheds and districts and (2) more accessible by
within an elevation range of 1800 and 2900 m above sea level (Berihun
charcoal commodity operators that target major urban markets in Addis
et al., 2019; Ebabu et al., 2018; Nigussie et al., 2017a; Teshager Abeje
Ababa, Bahir Dar, Gonder, Dessie, Mekelle, and other Ethiopian cities.
et al., 2019). The farming system is characterized by a subsistence
mixed production system of rain-fed cropping integrated with livestock
production. Major crops grown in the watershed include teff (Eragrostis

3
Z. Nigussie, et al.
Fig. 2. Map of the study area.
2.2. Data types and collection
Prior to the main data collection, a series of informal interviews
were conducted with 10 farmers, three charcoal traders, four charcoal
burners, and three agroforestry experts. This stage served as an im-
portant step to familiarize us with the acacia-based taungya system in
general and to specifically outline cost and benefit streams associated
with its cultivation. Following this step, a data collection format was
developed and the main fieldwork was conducted between June and
August 2018 in six villages (Yisa, Weriwari, Arogew Enjibara, Akusty,
Shareta, and Asera) of the Guder watershed. First, a sampling frame
consisting of all farmers in the watershed who have harvested an acacia
woodlot within the six months prior to data collection was drawn up
based on information obtained from the Fagita Lekoma District office of
the Environmental Protection, Land Administration and Use, which is
responsible for providing plantation harvest and charcoal transport
permits for farmers. The growers were then randomly selected from this
sample. We administered a survey using a structured format to inter-
view 34 growers. The information collected included all quantities of
labor, material inputs used, and costs incurred during plantation es-
tablishment, maintenance, production, transportation, harvesting and
Fig. 3. Area coverage of different land use/land cover types in the Guder watershed (source: Yibeltal et al., 2019).
4
Land Use Policy 90 (2020) 104331
charcoaling; area of woodlots harvested; tree density; outputs obtained
(teff, crop residue, grass hay, charcoal, firewood); and prevailing
market prices of outputs. These data were all drawn up over a 5-year
growth cycle, using data on inputs, outputs and prices from the growers
and other key informants. Table 2 depicts the production parameters of
the teff crop, as well as the parameters of the acacia plantation.
The basic financial data for acacia plantations with teff as an un-
dercrop in the first year are presented in Table 3. Most of the costs are
accounted for the beginning and end of the first year (plantation es-
tablishment and teff inputs) and in the fifth year for harvesting and
processing of the wood into charcoal. Most of the revenues are obtained
at the end of the first year from teff yields and at the end of the fifth
year as returns from the wood products. Minor revenues are noted in
the second year, when some grass hay is harvested. For the teff only
system, the teff input costs, yields, and prices are assumed to be the
same as in the acacia cum teff case. In addition, because we did not
have sufficient data, we assumed that the input costs, yields, and prices
in the second to fifth year were the same as those in the first year.
Z. Nigussie, et al. Land Use Policy 90 (2020) 104331

Table 2 7.5 %, which was the prevailing interest rate for Ethiopian state bonds
Key production parameters of the systems under investigation. at the time of this study.
Parameter Unit Value The NPV was computed for three different investment alternatives:

Tree density Number of trees/ha 17,181 (1) a 5-year investment in acacia with a first year undercrop of teff
Labour wage ETB/Person/Day 80.00
(eragrostis tef),
Price of seedling ETB/Seedling 0.43
Teff yield qt/ha 9.80
(2) 5 years with cultivation of teff only, and
Price of teff ETB/qt 2000 (3) a 5-year investment in acacia without a teff undercrop in the first
Charcoal yield Sack/ha 2,670 year.
Price of charcoal ETB/Sack 92.50

In addition to the NPV, two indicators were computed to conduct an

1 qt = 100 kg.
analysis of profitability and volatility in the system: undiscounted cash
flow and variation (measured by standard deviation, SD) of cash flow
2.3. Data analysis
over the 5-year investment period.
Based on the above basic alternative calculations, two additional
Because establishing acacia plantations is done by individual
sales scenarios are considered.
farmers, a private financial analysis technique (NPV) was adopted to
In addition to the model where mature acacia stands are sold to
determine their incentives for making investment decisions. The NPV is
traders, we also considered scenarios in which the stands are sold be-
the sum of all discounted net cash flows over an investment period,
fore maturity, where we assume that early sales are (or can be) induced
where the discount factor is a common reference discount (interest) rate
by a farmer’s need for immediate cash. These include stand sales after
(e.g. the bond rate of the country where the analysis is being conducted
one, two, three or four years, which imply an earlier, but reduced cash
for the time period under analysis). An NPV of zero implies that the
inflow. In addition to computing the NPV at a stand sale before ma-
investment is equally profitable over time as an investment with the
turity for the farmer, we also computed the NPV for the stand buyer.
reference discount rate would have been. A negative NPV implies that
These NPVs can be compared with those of the farmers in the first
an alternate investment at the given discount rate would have been
round of the assessments to determine equity effects between the stand
more profitable, and a positive one indicates a higher profitability than
buyer and the farmer. Although the aspect of cost/benefit distribution
the reference alternative. By using this analysis, different investment
has been discussed in some value chain analyses (Maraseni et al., 2018),
alternatives can be compared with respect to their financial profitability
the equity effects of such investment sharing systems across value chain
over a given period. NPV is computed with the following formula
actors have, to our knowledge, not been assessed.
(Duguma, 2013; Godsey et al., 2009).
All of the collected data were organized and analyzed using Excel
n
Bt − C t (Microsoft Corporation, 2010).
NPV= ∑ (1 + r)t
t= 1

Where Bt is the cash inflow for year t, Ct is the cash outflow for year t, r
is the discount rate, and n is is the number of years in the period. In our
case, the period was 5 years and the baseline discount rate was set at

Table 3
Basic financial input data of the acacia plantation with a teff undercrop in the first year of the system.
Benefit & cost items for 1 ha woodlot with teff in the first year Beginning of End of

Year 1 Year 1 Year 2 Year 3 Year 4 Year 5

Cash relevant revenues

Value of charcoal – – – – – 247,014
Value of firewood harvested – – – – – 8568
Value of grass hay harvested – – 3328 – – –
Value of crop yield (teff) – 19,596 – – – –
Value of teff straw – 4411 – – – –
Total cash in – 24,007 3328 – – 255,582
Cash relevant costs
Annual land tax – 160 160 160 160 160
Labor cost for planting 2,799 – – – – –
Tree seedlings cost 8,448 – – – – –
Labor cost for fencing 1,180 – – – – –
Labor cost for tree harvesting – – – – – 13,057
Saw blades – – – – – 3480
Straw used for making charcoal – – – – – 3722
Cost of sacks for packing charcoal – – – – – 15,519
Charcoal transportation cost – – – – – 7190
Labor cost for charcoal maker – – – – – 28,305
Land preparation labor cost (teff) 1436 – – – – –
Fertilizer cost (teff) 1313 – – – – –
Sowing labor cost (teff) 1184 – – – – –
Teff seed cost 1,967 – – – – –
Weeding cost (teff) 1585 – – – – –
Harvesting labor cost (teff) 1722 – – – – –
Threshing labor cost (teff) 1057 – – – – –
Total cash out 22,690 160 160 160 160 71,433

Monetary values in ETB. All values are in ETB per ha.

5
Z. Nigussie, et al. Land Use Policy 90 (2020) 104331

Table 4
Cash flows and NPVs for the three different investment alternatives (r = 7.5%).
Production system NPV Net cash flow (undiscounted) Mean annual net cash flow (undiscounted) SD net cash flow (undiscounted)

Acacia cum teff 97,884 188,154 37,631 69,647

Teff only 59,543 67,917 13,583 0
Acacia only 86,207 174,896 34,979 69,499

Monetary values in ETB. All values are in ETB per ha.

3. Results wood products without further involvement of the farmer. In such a

3.1. Comparing financial returns from acacia investment alternatives
3.1.1. Baseline: profitability and net present value
The baseline NPV results are presented in Table 4. The NPV of
acacia cum teff cultivation is much higher than that of the teff mono-
crop, indicating the system is much more profitable. The NPV of the
acacia only system is also high, but between the other two.
The acacia systems, however, have a clear disadvantage in terms of
annual liquidity. There are some cash inflows at the end of the first and
second year with the wood-based systems, but most revenue is obtained
only at the end of the fifth year (Table 3). As an annual monocrop, teff
yields a steadier cash flow. In this case, the flow is completely con-
sistent because they were assumed to be equal. Natural hazards and
other factors could lead to a variation in yields and revenues.
3.1.2. Scenario 1: variation of discount rates
The main findings from the baseline analysis also hold for scenarios
with discount rates of 10 % and 11 % (Table 5). However, at the higher
discount rates, the differences between the systems are smaller. In
particular, the two acacia systems incur losses in NPVs of 20–25 %
(acacia cum teff) and 21–28 % (acacia only), which indicates a sig-
nificant sensitivity to discount rate increases (Table 5). As the un-
discounted parameters remain the same, cash effects remain similar to
the baseline as well.
3.1.3. Scenario 2: variation of charcoal revenues
Table 6 shows the effects of lower and higher charcoal prices (from
the baseline of ETB 92.50) on NPVs and cash flows. Compared to the
baseline values, the acacia cum teff system loses about 18 % of its NPV
if the charcoal price decreases to its observed low of 80 ETB/sack, and
the acacia only system loses about 20 %. If the charcoal price increases
to its observed high of 100 ETB/sack, the acacia cum teff system gains
about 10 % in NPV, and the acacia only system gains more than 12 %.
This shows that the system is less sensitive to the risk factor of lower
charcoal prices than to the risk factor of higher discount rates, as de-
picted in the previous section.
3.1.4. Scenario 3: early stand sales
Farmers could sell the acacia stand before maturity because of un-
expected circumstance and a resulting liquidity need, or it could be out
of general planning. Our computations are based on the assumption
that farmers have the option to sell their acacia stands early to buyers
who then take over the harvesting and processing costs and sell the
scenario, it is of interest how the profits are shared between the farmer
and the buyer, and how the timing of stand sales affects the distribu-
tion. For the buyers, we compare the situation of early buying with the
situation of buying at maturity, taking the “saved” price of stands at
maturity as the cash inflow in the fifth year. Profit margins for the
buyers when selling the processed or unprocessed wood are not con-
sidered in this computation. Table 7 shows the net cash flows for
farmers and traders in the acacia with teff system under different tim-
ings of stand sales.
The implications for NPVs and cash flows in the case of early sales
are depicted in Tables 8 and 9, respectively. The results show that the
earlier the farmers sell their stands, the more they forego in terms of
both actual profits and their share of the profits (i.e., between farmers
and buyers).
Selling stands in the first two years results in farmers’ getting only
about one-third of total NPV and the original NPV after the first year
and roughly half of each in the second. From the third year on, farmers
get a bigger share when selling the stands, particularly in the fourth
year, when they obtain almost the same amount of discounted cash as
when selling after harvest. This is primarily due to the fact that the
stand buyers have to bear the costs of harvesting and charcoaling the
wood.
3.1.5. The profitability-liquidity trade-off for farmers in early stand sales
The trade-off between liquidity and profitability implies that small-
scale farmers are not only interested in returns on investments, but they
also need a relatively stable liquidity to meet their cash needs (e.g., to
purchase goods or pay taxes or school fees). Table 2 shows the trade-off
between liquidity and profitability. The more stable teff only systems is
less profitable, whereas the more profitable acacia system yields cash
flow only at the beginning (if intercropped with teff) and at the end
when the woodlot is harvested. We computed the respective cash flows,
including the SD, assumed that if a farmer sells a stand early, he or she
can keep the cash as savings and distribute it across the remaining years
in the 5-year period.
There is a clear negative relationship between steady cash revenue
and the NPV of the respective systems (Table 9). This means that higher
profits are associated with higher cash flow variability in each system.
The steadiest cash flow is offered by the teff only system and the stand
sales in the first year, but these are the least profitable options. Simi-
larly, the original acacia cum teff system or a late stand sale in year 4
offer greater profitability but imply little or no cash flow in the early
years. Thus, even if we assume that farmers can save the cash they
obtain from early sales and distribute it across the later years, cash flow

Table 5
Cash flows and NPVs for the three investment alternatives at different discount rates over a 5-year period.
Production system Discount rate (%) NPV Net cash flow (undiscounted) Mean annual net cash flow (undiscounted) SD net cash flow (undiscounted)

Acacia cum Teff 10 79,285 188,154 37,631 69,647

Teff only 57,005 67,917 13,583 –
Acacia only 68,089 174,896 34,979 69,499
Acacia cum Teff 11 72,926 188,154 37,631 69,647
Teff only 56,022 67,917 13,583 –
Acacia only 61,917 174,896 34,979 69,499

Monetary values in ETB. All values are in ETB per ha.

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Z. Nigussie, et al. Land Use Policy 90 (2020) 104331

Table 6
Net present value and cash flow at different charcoal prices (r = 7.5 %) over a 5-year period.
Production system Charcoal price (ETB/ Sack) NPV Net cash flow (undiscounted) Mean net cash flow (undiscounted) SD net cash flow (undiscounted)

Acacia cum Teff 80 80,474 154,774 30,955 57,493

Teff only 59,543 67,917 13,583 –
Acacia only 68,796 141,516 28,303 57,098
Acacia cum Teff 100 108,331 208,182 41,636 76,983
Teff only 59,543 67,917 13,583 –
Acacia only 96,653 194,924 38,985 76,946

Monetary values in ETB. All values are in ETB per ha.

Table 7
Net cash flows for farmers and buyers at different times of stand sales (in the acacia cum teff system).
Alternative sales scheme Beginning of End of

Year 1 Year 1 Year 2 Year 3 Year 4 Year 5

Farmers: Sales of stands

Year 1 −22,690 57,846 3,168 −160 −160 −160
Year 2 −22,690 23,846 67,168 −160 −160 −160
Year 3 −22,690 23,846 3,168 91,840 −160 −160
Year 4 −22,690 23,846 3,168 −160 169,840 −160
Traders: Buying stands
Year 1 – −34,000 – – – 184,309
Year 2 – – −64,000 – – 184,309
Year 3 – – – −92,000 – 184,309
Year 4 – – – – −170,000 184,309

Note: In year 5, saved purchasing costs for early buyers are considered as cash inflows. Monetary values in ETB. All values are in ETB per ha.

Table 8 are expected to make a one-time payment (about 7338 ETB/ha) to

NPVs in the case of early sales of stands. lessors as rent at the beginning of the 5-year sharecropping agreement.
Items Discount rate Plantation stand sale The costs, revenues and NPVs for sharecroppers are presented in
(%) Table 10. The larger share of the costs the lessee has to bear is reflected
Year 1 Year 2 Year 3 Year 4 in their smaller share of the net cash flow and lower NPV. In addition,
for the case of sharecropping, the NPV for the lessee is lower than that
NPV farmer 7.5 33,380 53,269 65,835 104,220
NPV buyer 77,093 64,382 56,362 1,451
of teff monocropping in a non-sharecropping system.
NPV total 110,473 117,652 122,197 105,671
NPV baserun farmer 97,884 97,884 97,884 97,884 3.2. Sensitivity analysis
% Farmer of total 30 45 54 99
NPV
% Farmer of baserun 34 54 67 106 To assess the sensitivity of the results with respect to the main
NPV parameters, we conducted sensitivity analyses by varying teff price,
% Buyer of total NPV 70 55 46 1 interest rate (i.e., discount rate), and charcoal price and evaluated these
% Buyer of baserun 66 46 33 −6
changes on the acacia with teff and teff only farming systems. This type
NPV
NPV farmer 10.0 32,029 49,204 58,244 88,357
of sensitivity analysis is done frequently in financial studies (Chemuliti
NPV buyer 60,580 50,442 46,474 −2,446 et al., 2019; Frey et al., 2018).
NPV total 92,609 99,645 104,719 85,911
NPV baserun Farmer 79,285 79,285 79,285 79,285
3.2.1. Sensitivity to change in teff price
% Farmer of total 35 49 56 103
NPV Fig. 4 shows the results of the analysis of teff price. Increasing teff
% Farmer of baserun 40 62 73 111 prices could decrease the attractiveness of acacia systems, but the
NPV acacia with teff system also slightly benefits from teff price increases.
% Buyer of total NPV 65 51 44 −3
The teff only system becomes more profitable with a price increase of
% Buyer of baserun 60 38 27 −11
NPV
greater than 50 % from the current price.

Monetary values in ETB. All values are in ETB per ha.
is highly variable.
3.1.6. Scenario 4 – sharecropping
In sharecropping systems, lessors (land owners) and lessees
(farmers) share the costs as well as the benefits from production.
Whereas the benefits are equally shared, all plantation establishment
and teff input costs are borne by the lessee, except for the cost of fer-
tilizer which is shared equally between the lessor and the lessee. When
the two parties decide to convert their plantations to charcoal, the
harvesting, charcoaling and marketing costs are equally shared. In ad-
dition, under the sharecropping system used in the study area, lessees
3.2.2. Sensitivity to variation in discount rate
Fig. 5 shows the sensitivity analysis results for discount rate, which
we would expect to affect long-term investment in acacia systems, given
the relatively delayed payback. The critical point is a discount rate of
about 15 %, which means that discount rates would have to double to
make the teff only system more financially attractive in terms of NPV.
3.2.3. Sensitivity to change in charcoal price
Fig. 6 shows the sensitivity analysis results for a charcoal price
decline. The critical point at which teff becomes more financially at-
tractive is a decline of about 30 % from the current price.
The above analyses show that the models used are relatively stable,
but relatively large changes in these parameters could alter the results

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Z. Nigussie, et al. Land Use Policy 90 (2020) 104331

Table 9
Annual cash flow and total NPV for farmers.
Net cash flow NPV

Year 1 Year 2 Year 3 Year 4 Year 5 SD

Acacia with teff in first year 1,156 3,168 0 0 184,149 73,236 97,884
Teff only 13,743 13,743 13,743 13,743 13,743 0 59,543
Acacia only −12,587 3,654 −160 −160 184,149 74,786 86,207
Stand sales year 1 (acacia cum teff) 16,107 16,107 16,107 16,107 16,107 0 33,380
Stand sales year 2 (acacia cum teff) 1,156 16,832 16,832 16,832 16,832 6,270 53,269
Stand sales year 3 (acacia cum teff) 1,156 3,168 30,613 30,613 30,613 13,953 65,835
Stand sales year 4 (acacia cum teff) 1,156 3,168 0 84,920 84,920 40,908 104,220

Monetary values in ETB. All values are in ETB per ha.

Table 10
Share of costs, benefits and NPVs between lessees and lessors in sharecropping
agreements.
Items Sale of charcoal at the end Sale of stands at the end

Lessee Lessor Total Lessee Lessor Total

Revenues (cash 141,459 148,797 290,255 107,562 114,900 222,462

in)
Costs (cash out) 65,008 36,773 101,781 29,372 1,137 30,508
Net cash flow 76,451 112,024 188,474 78,191 113,764 191,954
NPV at r = 7.5 47,425 83,080 90,754 48,637 84,292 92,569
%
Fig. 6. Sensitivity analysis for decreasing charcoal prices.
Monetary values in ETB. All values are in ETB per ha.
4. Discussion

We assessed the profitability of various systems of acacia planta-

tions as well as the liquidity and cash stability inherent in these systems
within the framework of the sustainable livelihoods concept. We also
examined the equity effects of early stand sales with respect to profits
distributed among farmers and buyers as well as those between land-
owners and farmers.
Investments in acacia systems, both intercropped and monocropped,
were found to be superior to investing in common state bonds (i.e., the
NPV was positive at the current prevailing interest rate). However, as
Fig. 7 shows, the acacia cum teff system is not always more profitable
than the baseline teff only system. If the farmer sells the stand early
(years 1 or 2) or is a sharecropper, the profits are less than those earned
from the baseline teff only system without sharecropping. As indicated
Fig. 4. Sensitivity analysis for increasing teff price.
in Tables 4 and 5, the acacia-based taungya system is robust to changes
in the discount rate, but a higher discount rate has a greater relative
effect on the profitability of the tree-based system than on annual teff
monocropping, a finding that is consistent with those of Ajayi et al.

Fig. 5. Sensitivity analysis for increasing discount rates.

in terms of the profitability of the compared systems. Price volatility on

the magnitude of 50 % for food crops does occur, often induced by
short-term changes brought about by droughts and other events.
However, if land use shifts from annual crops to the plantation system,
prices for annual crops could also increase, and if a surplus of charcoal
is produced, the price could decrease.
Fig. 7. Profitability (NPV) of the acacia cum teff system under different eco-
nomic conditions compared with the baseline teff only system.
Note that unless otherwise indicated, the discount rate used is 7.5 %.

8
Z. Nigussie, et al.
Fig. 8. Share of profitability in terms of NPV between farmers and stand buyers.
(2009). The greater sensitivity to increased discount rates is linked to
the higher weight given to benefits received in the early years of the
tree-based system (Ajayi et al., 2009). Also of interest is the distribution
of NPVs between the lessee and the lessor in sharecropping systems.
Here we see that the lessors are comparably better off than the lessees
(i.e., they receive a greater share of the profits), which implies that a
liquidity constraint lessor is still in a better economic position than a
land constraint or landless lessee. This could be related to specific
factors related to acacia plantations (e.g., they require limited or no
external inputs), the trees’ fast growth, a favorable charcoal market, or
other factors that might enable lessors to exercise more bargaining
power in informal land-rental contracts than lessees (in terms of bar-
gain at least in a one-off rental payment at the start of the contract) as
compared to that of traditional sharecropping arrangement for annual
crop farming. Existing disparities in land holding also determine the
ability of farmers to gain benefits from acacia plantations, implying the
system’s equity bias towards land owners.
Looking at early stands sales, there seem to be little concerns about
equity in the present “stand sale” trading system. Fig. 8 shows the de-
velopment of the distribution of NPV between the farmer and the stand
buyer over different sales times across the 5-year investment period. In
the first two years, the buyers take the larger share of the profits in
terms of NPV, but in the last two years, the farmers get the major share
of the profits. This implies a functioning market for both timber pro-
ducts and the wood itself.
If we look at cash flow, it is clear that acacia plantations yield cash
flow only at the end of the investment period, whereas farmers are able
to draw cash annually from traditional crops (Fig. 9). It is important to
note that, during the plantation period, land taxes have to be paid each
year, which results in negative cash flows during certain years.
Investing in acacia plantations obviously imposes a risk of liquidity
bottlenecks and cash shortages during the investment period. These can
potentially limit the cultivated area, because farmers still need cash to
Fig. 9. Cash flows in each year of the 5-year period for the different scenarios.
9
Land Use Policy 90 (2020) 104331
meet multiple demands and hence generally rely on annual cash crops
rather than acacia plantations. This also implies that acacia plantations
might be more interesting for farmers with regular cash incomes from
other sources or for farmers that are wealthier or have better resource
endowments (i.e., more land to use for both food subsistence and long
term cash needs). Wealthier farmers have been found to invest more in
such profitable tree-based systems than their poorer counterparts
(Arnold, 1983; Jerneck and Olsson, 2014). This difference may reflect
the effect of capital market imperfections in impeding poor farmers
from investing in woodlots (Mekonnen, 2009; Yesuf and Bluffstone,
2018).
Labour requirements also differ in these systems (Table 3). The
acacia-based system has significantly higher labour costs during
planting and harvesting periods than the teff monocropping system
(about 17,000 ETB vs about 7000 ETB), although there is a long period
in the acacia system where no labour is required. Households endowed
with less available labor, including those with elderly members, could
be disadvantaged in this system.
5. Conclusions
Many watersheds in the Upper Blue Nile Basin are experiencing
substantial land use change driven by farmers’ interest in improving
their economic gains. The acacia-based taungya system significantly
contributes to ecological sustainability and particularly to the restora-
tion of soil fertility conditions of degraded systems (Nigussie et al.,
2017a; Wondie and Mekuria, 2018). The taungya system also con-
tributes to income generation and can potentially serve as a develop-
ment pathway out of poverty, but it may also put stress on liquidity and
cash needs, and thereby impose risks on poor and/or liquidity-con-
strained farmers. It may also skew the feasibility of investment and its
profitability toward wealthier farmers and existing land owners. These
factors are likely to weaken the potential of the acacia-based system to
enhance rural livelihoods.
Moreover, sensitivity analysis shows that in particular price shocks
could switch the profitability advantage back to annual crops, although
such shocks have to be quite significant to induce changes in the model
results. Possible solutions could be to support disadvantaged social
groups through policy measures. These could include provision of assets
such as affordable credits for liquidity-constrained farmers, which in
many cases, are not readily available to poor farmers. Other income
maintenance programs for poor farmers could cover either their in-
vestment capital needs or replace the cash they could have earned
through cultivation of annual crops. This type of finance could be
beneficial not only in stabilizing farmers’ overall annual cash needs, but
also help them optimally benefit from investments in more efficient
land use systems (Nigussie et al., 2017a; Ruben and Clercx, 2003;
Sharma et al., 2016). Rural credit utilization by small-scale farmers,
however, is also subject to a number of constraints that should be
considered before establishing such systems (Lin et al., 2019).
Because land owners are almost always better off than the landless,
improving the access to private land also has to be considered. Given
the growing demand for land under the pressures of an expanding rural
population in Ethiopia, one possibility that could be considered is the
allocation of degraded hillsides to landless farmers to ensure their li-
velihood gains, in particular, to guarantee a more equitable benefit
distribution from cultivation of acacia plantations. Given the docu-
mented ecological benefits of the taungya system, the above-re-
commended measures would not only lead to an increase in and more
equal distribution of rural incomes, but also incentivize investments in
the ecological restoration of degraded areas, and hence provide both
private and public benefits.
Acknowledgements
The authors are grateful to all respondents for their willingness to
Z. Nigussie, et al.
provide data, and to Nigus Tadesse, Fentahun Ferede and Anteneh
Wubet for their field assistance. The research was funded by the Science
and Technology Research Partnership for Sustainable Development
(SATREPS)—Development of a Next-Generation Sustainable Land
Management (SLM) Framework to Combat Desertification project,
Grant Number JPMJSA1601, Japan Science and Technology Agency
(JST)/Japan International Cooperation Agency (JICA).
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