Economy
Irrigation development in a transition area By George Oamek, PhD
My farm and residence is in the Loess Hills of southwest Iowa, near Omaha, Nebraska. It’s a transition area where the Corn Belt meets the Great Plains. It rains fairly reliably, with a few exceptions, and irrigation has usually been limited to the sandier soils near the Missouri River. However, during a couple of recent dry years, most notably 2012, there was a significant increase in center pivot sprinklers in bottomlands and in the gentle rolling hills east of the river. At the time, corn was in the $7 per bushel range, and a center pivot was viewed as a long-term investment in crop insurance. A somewhat unintended benefit of the increased irrigation capability has been enabling double-cropping, or getting three crops in two years. Many producers in the area are planting triticale and other small grains following corn, harvesting as forage or grain in June, and planting soybeans near the end of the month or as late as July 4. The ability to put a few inches of water on the late-planted soybeans makes for a better harvest most years.
With $7 per bushel corn and $14 per bushel soybeans, the economics behind investing in irrigation probably wasn’t difficult, as long as a grower had an adequate water supply underneath (which I don’t) and suitable land. However, with 2017 shaping up to be pretty dry and with corn and soybeans at $3.30 and $9.50, respectively, does installing a center pivot still work out? To answer this question, I took the decidedly nonscientific approach of talking to a couple of my neighbors; one is a cattle feeder who has been irrigating for some time, and the other is a cash grain producer who installed his first pivot in 2013. Both individuals have good credit and cash flow and tend to give straight answers, so economics rather than other complications tend to drive their decisions.
Both irrigators made essentially the same observations: the yield benefits of irrigation are nonexistent in some years because the systems may not be used at all, but they could be as much as 50 to 75 bushels per acre for corn in those infrequent dry years. On an annual average basis, both farmers seemed to feel that an average of 10 – 15 bushels per acre could be attributable to irrigation. For soybeans, they seemed to see a consistent annual increase of about 5 – 10 bushels or more per acre in a double crop situation due to the ability to ensure adequate moisture in midsummer. Based on the low crop prices and these expectations about yields, the benefit in the first year is about $33 – $50 per acre for corn and, in the second year, about $50 – $100 for soybeans.
The cost of irrigating in this transition area is estimated (by me) to be about $75 per acre per year for the center pivot and well, and about $10 per acre per year for pumping and other operating costs, totaling about $85 per acre. Capital costs are based on $70,000 for the pivot and well, amortized over 10 years at 6 percent interest. Pumping costs are based on an annual water application averaging about 4 acre-inches.
Based on the above back-of-the-envelope calculations, it costs about $85 per acre per year to own and operate a center pivot here in southwest Iowa, and one can expect about $50 – $100 in expected crop value. Based on traditional cropping, a center pivot is a marginal investment under current crop prices. However, complicating the arithmetic is how to value the winter grain crop, sandwiched in the rotation between the corn and beans, which usually doesn’t get irrigated at all. Both neighbors agreed that they would not plant a winter crop if not for the potential to irrigate the following crop, even knowing that in some years it may not need irrigation. Therefore, for these producers, most of the value of the winter crop is attributable to their ability to irrigate.
So, what’s the value of the winter crop? Typically, not as much as corn or soybeans, but it doesn’t have to be as valuable to make irrigation economically feasible. The traditional corn-soybean rotation pretty well covers fixed costs, so the winter crop only has to cover variable costs like seed, fertilizer, chemicals and fuel. My cattle feeder neighbor strongly believes he nets at least $50 or more per acre with the winter crop in terms of chopped forage or spring grazing, depending how he utilizes it. My cash crop neighbor is similarly supportive for about the same reasons. He sells his winter crop as forage to the other neighbor. In conclusion, it appears irrigation development in the transition area of western Iowa and eastern Nebraska may be economically feasible under currently low crop prices, if one has suitable land and water available.
George Oamek, PhD, is an economist with Headwaters Corporation and is also on the staff of
the Platte River Recovery Implementation Program’s executive director’s office. His 30-year career has focused on agriculture economics, including irrigation water leases, municipal water supply
planning and methods for managing risks. He received his undergraduate education at Colorado State University and his graduate degree from Iowa State University. He also operates his family’s Century Farm in southwest Iowa. Oamek will be the Economy contributor for all issues in volume 2 of Irrigation Today.
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