Is Irrigation Profitable in an Era of Higher Corn Prices?
Farm Business Management Update, December 2007 - January 2008
Eric Eberly (firstname.lastname@example.org), Extension Agent, Farm Business Management, Central District
Irrigation allows producers to sustain their crops during dry periods of weather. It can be viewed as a type of insurance policy by growers by reducing yield swings from year to year, and by ensuring that a crop is unlikely to be completely lost to a drought. In order for irrigation to be profitable, it is essential that the benefits in crop production are large enough to offset the added costs.
This study of irrigation costs applies to corn, but it could easily be applied to any crop that can be irrigated by overhead irrigation systems. It is based on the use of a traveling irrigation reel, paired with a diesel engine and pump to supply water from creeks or ponds. This study is based on a traveling irrigation reel with 4.1' diameter, 1250' long hose supplying one inch of water per acre per hour supplied by 1320' of 6 inch lock-ring pipe to reach water supplies.
A full pull of the reel can cover 10 acres in about 9.7 hours, but an average day in Southern Virginia would more likely consist of two smaller pulls, of about six hours each, covering roughly six acres each. Covering 12 acres a day for six days allows a producer to cover 72 acres in a week. This six day irrigation period would require 1 foot of water depth of a 6 acre pond or almost 2 million gallons of water. In a worst case scenario, four of these irrigation cycles spread throughout the peak growing periods may be required to sustain a crop through severe drought conditions.
Total fixed costs for this irrigation system are $60,567 (Table 1), which is equal to $841 per acre when 72 acres are covered. Running 5 days a week, as opposed to six days figured above, would limit a producer to covering about 60 acres, thereby increasing investment costs per acre to $1009. However, running seven days a week would allow the producer to cover approximately 84 acres with the same machinery, thereby lowering investment costs per acre to $721.
Another alternative to reduce fixed costs is to extend the irrigation cycle to 14 days reducing the investment cost by half to $421. Critical water needs of crops could be spread over a longer period of time by using varieties with different maturities and multiple planting dates. This 14 day cycle will not meet all of the water needs all the time resulting in a reduced yield on 18 percent (52 out of 290) of the observations.
It should be noted that these investment costs could vary considerably depending on the brand of machinery purchased, the size and model of the machinery, and the number of options added to the irrigation system. It is also important to note that the investment cost is figured on the assumption that the irrigation system’s water supply (in the form of a creek or pond) is already established and accessible. Building irrigation ponds will increase investment costs significantly.
Annual fixed costs of the system are presented in Table 2. For simplicity, costs are not discounted so a dollars in year 18 have the same value as they do in year one. Depreciation is figured on the useful life of the irrigation system components, considering a salvage value of 20% of the original value can be obtained at the end of the useful life. All of the components are estimated to have an average life span of 5,000 hours. The irrigation equipment will have a useful life span of 18 years if a producer averages 288 hours of use per year on this system. Insurance costs were figured at 0.8% of the total initial investment costs. Interest on the system was figured at an 8% rate using the system’s average value through its life span, for an interest cost of $2,423 per year.
Variable costs (Table 3) of fuel, labor, tractor use and repairs for one year are $8,074.11 or $28.03 per acre inch based on 288 hours of annual usage. Limiting irrigation to two applications cycles per year, the system could cover 144 acres at a cost of $56.06 per acre. Keep in mind, however, that up to four irrigation cycles could be required in a very dry year resulting in variable costs of $112.12 per acre.
Weekly labor costs, as described above, would require two people working 3 hours per day, six days a week, at $12.00 an hour. This would mainly involve moving the reel system in between pulls, laying the aluminum pipe needed to reach the water source, and ensuring that the diesel engine is fueled. Fuel costs for the diesel engine and pump are calculated using fuel consumption of 4.9 gallons per hour at $3.00 gallon, running 12 hours per day, and six days per week. Tractor use for moving the reel and pump from one pull to the next is figured at $29 per hour, 2 hours per day, and six days per week. Total repair cost of $908.51 per season is calculated to be 1.5% of the initial investment costs.
The variable cost of irrigation per bushel is calculated by dividing the cost of irrigation by the increased yield. Table 4 shows the variable cost of irrigation per bushel with varying yield increases and number of irrigation applications. To simplify calculations, it is assumed that the system operates for 288 hours annually with no adjustments made for actual equipment usage. The $28.03 operating cost per application becomes a constant in all tables that follow this text.
Irrigated corn requires additional fertilizer inputs to cover the increased production over non-irrigated corn. Based on the 2008 Virginia Crop Production Budgets, the marginal cost of an additional bushel of corn is $1.29, which includes increased costs of fertilizer and hauling. Tables 5 and 6 show the breakeven price of corn needed to cover irrigation cost and marginal production costs based on increased yields over a non-irrigated crop. The breakeven price is calculated by multiplying the increased production times the marginal cost of production plus the irrigation cost (Table 4) and then dividing the total by the increased yield.
Table 6 shows the breakeven corn price needed to cover both fixed and variable costs of irrigation when the system is designed to keep the corn crop out of moisture stress. The system would meet all irrigation needs on 72 acres. Breakeven corn prices range from $20 per bushel with a low yield response to four irrigations but could decline to as little as $2.15 per bushel in years where no irrigation is required and the corn is fertilized for maximum production of 90 additional bushels of corn. In years where no irrigation is required, the corn crop must still pay fixed costs of 77.76 per acre. If irrigated corn has a 50 bushel average yield increase over non-irrigated corn, then the system as designed would cost from $2.85 to $5.09 per bushel depending on the number of irrigations required in a season.
Table 7 shows the breakeven corn price to cover both fixed and variable cost of irrigation when the system is designed for maximize economic yield response. A maximum of two irrigations could be applied to 144 acres over a 14 day period. In years where no irrigation is required, the corn crop must still pay fixed costs of $38.88 per acre. If irrigated corn has a 50 bushel average yield increase over non-irrigated corn, then the system as designed would cost from $2.07 to $3.19 per bushel depending on the number of irrigations required in a season.
Irrigation can be a powerful management tool if used properly and efficiently. This study shows that it takes an increase of 40 to 65 bushels of corn per acre at $3.00 per bushel to justify irrigation on corn. The traveling irrigation reel would be a good system to use, assuming that there is a good supply of water and that a producer can be assured of at least some yield increase from irrigation. However, if steps must be taken to acquire a water supply, the cost and benefits will be greatly affected. A lack of water is one of the most common constraints for corn producers when it comes to irrigation decisions.
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