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Economics of Groundwater Use in the Beryl- Enterprise Area

Economics of Groundwater Use in the Beryl-Enterprise Area

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Economics of Groundwater Usein the Beryl-Enterprise Area

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

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)

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 year’s 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%.

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.

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).

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.

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

Land Value

Costs and Returns per acre from growing alfalfa hay, 2006

Western Iron County

Quantity per acre Unit Price/cost per unitValue/cost

per acre Base ValueReceipts

Alfalfa hay 5.5 tons $88.57 $487.12 $487.12

Residue 0.25 AUM $11.53 $2.88 $2.88

Subtotal $490.00 $490.00

Operating costs

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

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) 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

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 7.61% $5.71 $5.40

Subtotal $201.56 $184.97

Ownership costs (excludes cost of land) $63.50 $63.50

Farm insurance 1 acre $2.00 $2.00 $2.00

Machinery ownership costs 1 acre $53.25 $53.25 $53.25

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

Above operating costs $288.44 $305.03

Above total listed costs $224.94 $241.53

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)

Returns to Irrigated Crops

CropConsumptive 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

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%)

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.

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)

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.

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.

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

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.

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

Conclusion

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

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

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.

Direct Changes in Region

Job s Household income RGO

Annual 0.5 $ 46,133 $ 194,812Total 10 $ 922,656 $3,896,247

• Most of these changes will occur in the Beryl-Enterprise area.

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 $ 11,926Total 29.6 $1,348,198 $5,326,837 $238,512