Economics of Groundwater Use in the Beryl-Enterprise Area

1
Economics of Groundwater Usein the
Beryl-Enterprise Area
2
Land Value

• Compound interest
• 1,000 deposited at 5 for 20 years
• 1,000 1,000(1.05) 1,000(1.05)(1.05).
• 1,000 (1.05)20
• Future value 2,653 at the end of 20 years.
• What would I have to deposit to have 2,653 at
  the end of 20 years?
• Present Value 2,653 / (1.05)(1.05)(1.05)..
• Present Value 2,653 / (1.05)20
• Present Value 1,000

3
Land Value

• Suppose I deposit 1,000 every year for 20 years
  at 5. What is the future value?
• 1,000(1.05)20 1,000(1.05)19
  1,000(1.05)18 .. 1,000 (1.05)
• 24,831 (future value of 1,000 per period)

4
Land Value

• Suppose I want to know what the 1,000 per year
  at 5 for 20 years is worth today (Present Value
  of 1,000 per period)
• sum of each years future value divided by
  (1.05)20 or (1,000(1.05)20 / (1.05)20
  (1,000(1.05)19 / (1.05)20
• 12,821
• If I deposit 12,821 today at 5, it will give me
  1,000 per year for 20 years.
• What would you be willing to pay for an income
  stream that guaranteed you 1,000 per year for 20
  years? Not more than 12,821 if your interest
  rate is 5.

5
Land Value

• Suppose I or my offspring were to deposit 1,000
  per year from now to eternity.
• The Present Value of that stream (1,000 in
  perpetuity) at 5 is 1,000 / (0.05)
• 20,000
• What would you be willing to pay to get an income
  stream of 1,000 per year forever? Not more than
  20,000.

6
Land Value

• So what does this have to do with land value?
• An acre of irrigated land produces a certain net
  return (gross receipts less costs) every year
  (AVERAGE?)
• The present value of that net return for t
  years is the asset value of the land (assuming no
  other effects on land value).

7
Land Value

• We can look at the present value of that stream
  of net returns over some period of time maybe
  50 years (the working life of a farmer) or maybe
  forever (in perpetuity)
• That present value should be reflected in the
  price someone is willing to pay for the land.

8
Land Value

• For example, suppose that an acre of irrigated
  alfalfa produces a net return of 170 per year.
• The Present Value of the stream of net returns of
  170 at 5 for 50 years is 3,103.
• The Present Value of the stream of net returns of
  170 at 5 per year in perpetuity is 3,400

9
Land Value

• SO?
• Data from the Utah State University Extension
  Service indicates that an acre of alfalfa will
  produce a net return (after current pumping
  costs) of about 170 in the Beryl-Enterprise area
  after pumping costs.
• The same data base indicates that the average
  irrigated acre yields about 134 per acre in net
  return.

10
Costs and Returns per acre from growing alfalfa hay, 2006 Costs and Returns per acre from growing alfalfa hay, 2006 Costs and Returns per acre from growing alfalfa hay, 2006 Costs and Returns per acre from growing alfalfa hay, 2006 Costs and Returns per acre from growing alfalfa hay, 2006 Costs and Returns per acre from growing alfalfa hay, 2006
Western Iron County Western Iron County Western Iron County
Quantity per acre Unit Price/cost per unit Value/cost per acre Base Value
Receipts Receipts Receipts Quantity per acre Unit Price/cost per unit Value/cost per acre Base Value
Alfalfa hay Alfalfa hay 5.5 tons 88.57 487.12 487.12
Residue Residue 0.25 AUM 11.53 2.88 2.88
Subtotal 490.00 490.00
Operating costs Operating costs Operating costs
Fertilization Fertilization
Phosphate (11-52-0) 96 pounds 0.18 17.14 17.14
Custom application 1 acre 7.82 7.82 7.82
Pesticides/herbicides Pesticides/herbicides
Mustang Max 2.25 oz 1.87 4.20 4.20
Lorsban 0.75 pint 4.85 3.64 3.64
Velpar 2 quart 16.50 33.00 33.00
Select 7 ounce 1.52 10.61 10.61
Pursuit 4.50 fluid ounce 4.46 20.07 20.07
Custom application 1 acre 7.82 7.82 7.82
Irrigation (center pivot) Irrigation (center pivot) 5 irrigations
Labor 1.67 hours 10.00 16.67 16.67
Water assessment 1 share 10.00 10.00 10.00
Repairs/maintenance 1 acre 2.30 2.30 2.30
Pumping 43 acre inch 0.00 0.00 0.00
Harvesting Harvesting
Swathing 3 acre 4.03 12.10 12.10
Turning/raking 3 acre 1.39 4.18 4.18
Baling 5.50 tons 4.79 26.35 26.35
Hauling/stacking 5.50 tons 3.63 19.97 19.97
Interest on operating capital Interest on operating capital 7.61 5.71 5.40
Subtotal 201.56 184.97

Ownership costs (excludes cost of land) Ownership costs (excludes cost of land) Ownership costs (excludes cost of land) 63.50 63.50
Farm insurance Farm insurance 1 acre 2.00 2.00 2.00
Machinery ownership costs Machinery ownership costs 1 acre 53.25 53.25 53.25
Irrigation equipment costs Irrigation equipment costs 1 acre 8.25 8.25 8.25
Total costs 265.06 248.47

Net returns to owner for unpaid labor, management, equity and risk Net returns to owner for unpaid labor, management, equity and risk Net returns to owner for unpaid labor, management, equity and risk Net returns to owner for unpaid labor, management, equity and risk Net returns to owner for unpaid labor, management, equity and risk
Above operating costs Above operating costs 288.44 305.03
Above total listed costs Above total listed costs 224.94 241.53
11
Net Returns per Acre

• Here is a table of consumptive water use, current
  percentage of the irrigated crops in the region,
  gross sales, net returns without pumping costs
  and net returns including current pumping costs
  (http//extension.usu.edu/agribusiness/htm/finance
  )

12
Returns to Irrigated Crops
Crop Consumptive Water Use in acre feet per acre Water Duty (acre feet per acre Gross Sales/acre area Proportional Gross Sales/acre for current crop patterns Net return per acre without pumping costs Net return per acre with pumping costs
Alfalfa 2.49 3.4 490 86 421 242 170
Grain (Barley) 1.66 2.27 202 08 16 -68 -115
Corn 1.38 1.89 625 02 13 125 95
Grass Hay 2.25 3.01 233 04 9.50 -50 -113
Average current 134
Potatoes 1.41 1.93 1,615 138 98
Canola 1.30 1.78 300 36 1
13
Pumping costs

• Pumping costs are estimated at 70 per acre at
  present. However, as pumping continues, lifts
  are estimated to increase an average of about
  1.12 feet per year. The increased pumping cost
  is approximately 0.32 per acre per foot of lift
  for alfalfa, and about 0.22 per acre per acre
  foot of lift for corn.
• Water duty Consumptive use requirement divided
  by irrigation efficiency (assumed to be 73)

14
Land Value Again

• The net return for alfalfa is 170 per acre minus
  the increased pumping cost.
• The Present Value of that stream of net income
  for 50 years is 3,022, and for 100 years is
  about 3,250.
• Local lending agencies indicate that their
  appraisals of irrigated acreage in the
  Beryl-Enterprise region are 3,000 to 3,500 per
  acre.

15
Land Value

• The difference (if any) between the present value
  of the irrigation returns and land price is
  probably due to
• Speculation about future profitability of corn
  and alfalfa, and
• Speculation about the future development of
  non-agricultural uses (ranchettes, for example)

16
Land Value Change

• Lenders also say that an acre of dry land in the
  Beryl-Enterprise region ranges from 250 to 500
  per acre
• That means that the loss of water would result in
  a loss of value of around 3,000 per acre, (sale
  price of 3,500 less the 500 value of dry land)
  which is consistent with our calculations.

17
Land Value Change

• What is the Present Value of the loss of 3,000
  over time at 5?
• The answer represents the Present Value of
  removing water from the land at t years in the
  future, or
• The price a producer would pay now for land that
  will have water removed t years in the future.

18
Present Value of Loss of Land Value
Time Period Present Value of 3,000 at 5
10 years 1,842
20 years 1,130
30 years 694
40 years 426
50 years 261
60 years 160
70 years 99
19
Land Value Again

• What does this mean for the farmer? It means
  that the value of his land depends on how many
  years elapses before he can no longer pump
  groundwater.

20
Land Value Today if Water is Removed t Years
from Now
Time Period 3,500 per acre less Present Value of 3,000 at 5
10 years 1,648
20 years 2,370
30 years 2,806
40 years 3,074
50 years 3,239
60 years 3,340
70 years 3,401
100 years 3,487
21
Conclusion

• Beyond 70 years, the cost to the farmer in terms
  of reduced land value, or price, today is very
  small.

22
Impact of Losses

• Washington-Iron County Region
• Data limit the detail of the analysis to
  county-level
• Most local input purchases occur in the two
  counties
• Most purchases by households are in the two
  counties
• Annual losses assume that production will be
  reduced by the same amount each year over a
  20-year period

23
Impact of Losses

• Assume that 90 of hay, 70 of corn and grain,
  and 50 of pasture is exported
• Assume a 20-year period over which production is
  reduced by the same amount (5) each year.
• The total value of reduced exports from the
  Beryl-Enterprise area would be about 3.9 million
• The annual value of reduced exports from the area
  would be about 195,000.

24
Direct Changes in Region

• Job s Household income RGO
• Annual 0.5 46,133 194,812
• Total 10 922,656 3,896,247
• Most of these changes will occur in the
  Beryl-Enterprise area.

25
Projected Total Impact of LossesWashington-Iron
County Region Using the IMPLAN Model

• Job s Household income RGO State and
  local taxes
• Annual 1.5 67,410 266,342 11,926
• Total 29.6 1,348,198 5,326,837 238,512