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Agroforestry Economics

Photo taken by AGFORWARD project

Economics in agroforestry

It is well known that agroforestry is a land-use system that provides many environmental benefits both to the farmers and to the society as a whole [1]. However, the economic side of agroforestry isn't so well understood. Some people claim that agroforestry is not a financially viable option for farmers while others argue that agroforestry will always lead to a higher profitability in the long term. In reality, whether a farm will become more profitable or not depends on several factors, most of which are context dependent. 

In this page, you will learn about some of the most important principles about economics in agroforestry:

  1. Why can agroforestry be a smart financial decision?

  2. The economic differences between agroforestry and farming

  3. How to budget for a future agroforestry system  

Alley-cropping system with 14 year old walnut trees in France

Source: Ploughing in between 14 year old walnut trees, Domaine de Restinclières, Montpellier, France. AGFORWARD project

Why can agroforestry be a smart financial decision?

1. Improved ecosystem services on the farm

Agroforestry improves many of the ecosystem services on the farm, such as increased carbon sequestration, higher biodiversity, decreased erosion, and improved soil quality. These ecosystem services create a more stable and resilient agroecosystem (agricultural ecosystem) which in turn creates a more stable and resilient farm-enterprise.  

Improved ecosystem services on the farm also contribute to the society as a whole by providing clean air, reducing pollution, mitigating climate change, etc. Nowadays, there are many programs and companies that are paying farmers for improving the ecosystem services on their farms, for example carbon sequestration programs. These kinds of funds and the possibility to market the produced goods as “regenerative/environmentally friendly” provide additional financial opportunities for farmers. 

2. Higher yield/hectare (land-equivalent ratio)

Agroforestry systems produce a higher yield per hectare compared to monocultural systems due to the symbiotic relationship between the trees and the crops or animals [2]. In agroforestry, trees usually have a wider distance between each other compared to trees in forests or orchards. Thus, trees have less competition with each other and each tree can therefore grow better. At the same time, trees provide shelter and improve the microclimate for the crops and animals, which increases their yield compared to monoculture systems.  

3. Extra income by selling the products from the trees

The most evident economic advantage in agroforestry is the extra revenues that trees generate. Products from trees that have well established markets are fruits, nuts, berries, timber or bioenergy. There are other products from trees that have more niched markets, such as foliage for floristry, biochar or products for the christmas market, e.g. holly, mistletoe or christmas trees. The benefit of selling products from trees is that these products can usually be sold for higher prices compared to annual crops. 

Agroforestry system with oak trees and lavender in the south of France

Source: Oak trees and lavender in Drôme, South of France. AGFORWARD project

The economic differences between agroforestry and farming

The economy of “tree-based” production systems is quite different from the one in annual crops. Trees usually require a big investment in the establishment phase without generating any profits during the first years. However, once the trees start producing they tend to generate more valuable products compared to annual crops, for example fruits, berries, nuts, or high quality timber.

Another big difference between “tree-based” production systems and annual crops or livestock, is that the yields from the trees will vary over their lifetime. Trees produce low yields during the first years, then they reach their maximum yield capacity and keep it high for some some decades (depending on the tree species), until they finally reach a point where their yields start to decrease (see table below). Fruit trees can take about 5 years to start producing their maximum annual yield that they can keep for about a decade, while walnuts can take around 15 years before they start producing their maximum annual yield that they keep for several decades, and for timber you may have to wait up to 50 years to harvest the wood.

Another aspect that will impact a farm's economy is the way you establish and manage your trees. There are different management strategies you can choose from. Which management measures fit best for each farm will vary depending on the chosen tree species, what you want to produce, your financial goals, and the machinery and infrastructure already present in your farm. Below, I listed 5 of the most important areas of management that will influence a farm's economy. You need to plan your agroforestry system by taking into consideration how these management-areas will impact your economy.

The 5 areas of management that will greatly influence a farmers economy are:

  1. 💧 Water management 💧

  2. 🌱 Weed control 🌱

  3. 🐗 Protection from wild animals 🐗

  4. 👩‍🌾 Harvesting 👩‍🌾

  5. 🕒 Time needed for managing the trees 🕒

*In future blog posts I will cover each of the 5 management areas in more detail.

How to budget for a future agroforestry system?

If you want to make sure you are making the right financial decision, then you should do a financial analysis. A financial analysis will forecast how your current economic situation will change with the proposed agroforestry system. 

The easiest way to budget for a future agroforestry system is to start with the current farm enterprise as the basis. How many hectares of crops or livestock will be kept and how many hectares of agroforestry will be planted? Once you have decided how many hectares of agroforestry you will plant, then it is time to calculate how your finances will change over time.

In order to do these financial calculations, you should divide your farm into different enterprises. A farm´s enterprise is any products or services that generate sales, for example potatoes, oats, milk, and fruit or timber from agroforestry. Once the farm is divided into different enterprises, you should follow the steps below to make a proper financial analysis.

Overview of how to budget in agroforestry

Figure showing an overview of how to budget in agroforestry

Figure 34 from UKs agroforestry handbook, written by Ian Knight, shows how to budget the gross margin of different enterprises and the net profit in agroforestry. 

Step 1 – calculate the yearly yields of your trees 

Write how many years after the establishment of your trees you expect them to produce their maximum yield. Afterwards, you should write the expected yield of the trees before and after they produce their maximum yield. You can write these yields as a percentage of the maximum yield. You can see an example of this on the table below.

Step 2 – expected revenues

List the expected revenues generated from the crop and/or livestock for each year. Afterwards, write down the expected yields from your trees for each year and at what price you expect to sell these products (e.g. $ per tons of apple, $ per cubic meter of wood). Multiply the predicted yields with the price you plan to sell your products for to get the expected revenues from your trees.

Step 3 – variable costs

List the variable costs for each enterprise in your farm. List these variable costs year by year. For an arable enterprise, fertilizer, seed and pesticides are considered as variable costs. 

Afterwards, write down the variable costs for your agroforestry enterprise. Typical variable costs in agroforestry would include tree establishment, stakes & ties, tree guards, pruning, pest & disease control, and harvesting. Preferably, write the variable costs per tree or hectare. Then, write the year in which the variable costs occur, for example year one: establishment costs, stakes & ties, tree guards, year three: pruning, year five: pesticides, harvesting.

Step 4 – gross margins

Calculate the gross margin of each enterprise by subtracting the variable costs from the revenues.

Step 5 – your farm´s net profit

Add all the gross margins for each enterprise to get your whole farm´s gross margin. Afterwards, subtract fixed costs, labor, machinery and rent to get the net profit for the entire farm.

A financial analysis of a winter wheat-apple alley cropping system in UK

A financial analysis of a winter wheat-apple alley cropping system in UK
A financial analysis of a winter wheat-apple alley cropping system in UK

Table 12 from UKs agroforestry handbook, written by Stephen Briggs, showing the financial calculations of an apple-winter wheat alley cropping system in year 6, 100% production.

A more comprehensive financial analysis would also include the following aspects: 

  • a cash flow analysis

  • grants or changes in subventions due to the new farming practices

  • forecasting how the interaction between the trees and crops or livestock influences the yields (both positive and negative aspects)

I will cover these topics and more in coming posts! 

Comment below on what you think about the economic principles discussed above? What are your experiences with budgeting in agroforestry?



[1] Schievano A. et. al. (2022) The benefits of Agroforestry for the environment, climate change mitigation and agricultural production – a global synthesis. EURAF 2022

[2] Dupraz, C. et. Al. (2005) Synthesis of the Silvoarable Agroforestry For Europe project


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